ST Microelectronics - Financials

Friday, May 23, 2008

[Originally for Sramana Mitra's site]

In the introduction to this series, I reviewed the company’s history and businesses. Let us now review the company’s financials from a more holistic perspective.

For the year 2007, STM reported net revenues of $10 billion at a gross margin of 35.36% and an operating loss of 5.45%. The revenues increased a modest 1.5% over the $9.854 billion that the company earned in 2006 at an operating profit of 6.87%. During the same period, the semiconductor industry sales grew about 3%. It is also worth noting that the industry’s gross margin average is at 50.5% while the operating margin average is at 18.6%.

Nokia is STM’s largest customer accounting for 21.1% of the company’s revenues for 2007. STM’s top-10 OEMs accounted for 49% of its revenues. On the basis of location of order shipment, Europe accounted for around 1/3rd of the revenues while Greater China accounted for 27.5%.

For Q108, STM declared revenues of $2.18 billion (excluding the divested FMG). This is an increase of 11.6% y-o-y. ASG revenues increased 14.2% y-o-y driven by wireless, consumer and automotive products. IMS grew at 7.1% y-o-y helped by the MEMS, microcontrollers and advanced analog businesses. Q208 revenues are expected to increase between 5 and 11% q-o-q and 10-16% y-o-y at a gross margin of about 37%.

It is clear that STM has been struggling, not only to increase its sales but also to obtain industry average margins. The company’s prolonged struggle to achieve above-average sales has necessitated a review of the company’s strategy. STM has already set the wheel in motion. Among other strategic initiatives, it has divested its FMG while aggressively acquiring scale in its wireless business.

The low gross margin, however, questions the prudence of STM’s commitment to continue as an integrated device manufacturing company. With the fabless model gaining ground, STM will find it increasingly difficult to compete favorably if it continues to exercise control over its advanced proprietary manufacturing technologies. The company spent over a billion dollars in related Capital Expenditure for 2007. Besides, to make ends meet, it is constantly looking for alliances to share costs. A good example is the current agreement with IBM to develop 32-nm and 22-nm CMOS process technology. While it perhaps makes political sense to retain control over much of the value chain, the IDM model can turn out to be a deterrent to STM’s profitability.

In summary, while STM’s broad range of products guarantees a steady revenue-stream, its margins are not impressive. The company is looking to keep its operating costs below 28%. As the competition becomes tougher, this needs to be complemented by higher gross margins for the company to have a sustained growth model.

Posted by Vijay Nagarajan at 5:00 AM  

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