Q4 Earnings Conference Call Remarks – FINAL
Tuesday, January 24, 2012
Carlo Bozotti, President and Chief Executive Officer
Thank you for joining us on today’s conference call to discuss our 2011 business and financial results, 2012 first quarter outlook and our view on 2012 more broadly.
2011 turned out to be a very different year from the one we envisioned at the start. We all know well what changed – the natural disasters in Japan and Thailand, the semiconductor industry downturn, and the more volatile economic and market environment. In addition, we had to face the impact of major changes at one large customer which affected the Company, and in a very significant manner, our joint venture ST-Ericsson. As a result, 2011 was a quite difficult period for ST-Ericsson and frankly, the next several quarters will continue to be challenging for it.
All of these headwinds, in combination, have had a negative effect on our financial performance and even more on our stock price and we will be working hard and with a sense of urgency to regain the market’s confidence as we move through 2012.
One year ago I was speaking to you about our record 2010 revenue results, key product group milestones, such as crossing the $1 billion quarterly revenue threshold for both ACCI and IMS, market share gains, improved operating profitability and an enhanced capital position. So, what can we say about our progress during 2011?
First, for our wholly-owned businesses, I think we did a solid job of managing through all the headwinds. We ended the year with revenue of $8.2 billion, operating income of $933 million and an operating margin of 11.4% despite significantly lower volumes in H211.
Second, within this sales environment, we advanced our market position in our wholly-owned businesses. While we do not have final data for 2011, we estimate to gain market share with respect to our served markets excluding wireless.
Looking in greater detail, net revenues from our wholly-owned businesses increased about 1% in total for 2011. Sales growth was led by AMM where our MEMS sales more than doubled and drove both an increase in AMM revenue of 7.5% and in operating profitability to a 20.3% operating margin. Within ACCI, we saw strong growth in Automotive as well as Imaging. This was offset by particularly weak market conditions in Consumer and from our planned exit from the hard disk drive system-on-chip. In total, ACCI revenues were lower by a little over 1% and the operating margin was 8.9%. PDP had a tougher year due to a specific situation at one customer as we have discussed and softer industry conditions, especially in the second half, leading to a 6% decrease in its sales and a two point decrease in its operating income to 11.2%.
Third, we are benefiting from our investments in R&D and capacity additions. 2010 was a record year for our Automotive applications and MEMS. And 2011 was a year of record revenues for both our Automotive applications and MEMS products once again.
Fourth, we are advancing our product portfolio for the future. ST launched or started production of a number of breakthrough products during 2011.
In ACCI, we are now sampling with leading customers Orly - the most powerful 32-nanometer Set-Top Box System-on-Chip on the market - and it is receiving excellent reviews.
We have achieved several important design-ins with our advanced DisplayPort devices. One of these was for the world’s first high-definition, 3D, head-mount display being developed by a leading consumer electronics manufacturer in Japan, which uses our Vega chipset.
In the automotive industry, we were able to assist several major customers who were impacted by supply chain problems following the Japanese earthquake. In particular, our complex 32-bit Power-architecture microcontrollers for automotive applications, from our joint-development project (with Freescale), were used in powertrain and safety applications.
Turning to AMM, we continued to expand our extreme analog portfolio with an innovative new high-performance, low-power digital top-port MEMS microphone. And the benefits of this device are quite evident by the rapid acceptance by manufacturers of mobile devices and PCs. Some of our devices are already on the market and used by many of us.
We began customer evaluations of our new FingerTip touch-sensor technology, which combines ST’s know-how in analog front-end technology, DSPs, and MEMS to give users unprecedented finger-tip control of their applications.
We introduced a complete family of NFC-related devices that are now being deployed on popular mobile platforms such as Android, Windows 8 and others.
And, to build upon our continuous efforts in energy management and savings, we launched a new generation of Smart-Grid products: such as new smart-metering chips for next-generation smart meters, including a new Power Line Communication platform that has already been adopted as the “core” of major smart-metering infrastructure deployments in Europe, China, Japan and the US.
My fifth and final comment on the progress during 2011 relates to our capital structure which has been a major area of significant progress over the last several years. Let me remind you of the positive turn-around of $1.7 billion in our net financial position from a net debt position of $545 million at the end of 2008 to a net cash position of $1.15 billion at the end of 2010. We continued to maintain this strong level, finishing 2011 with a net financial position of $1.17 billion when taking into account the 50% share of ST-Ericsson’s debt. And our financial resources totaled $2.3 billion at December 31st. This was achieved while undertaking an exceptional high level of capex of ($1.26Bn) as well as ongoing investments in wireless through ST-Ericsson.
Now, let me share some comments on the 2011 fourth quarter, and then discuss our outlook going into the 2012 first quarter.
As our fourth quarter results indicate we executed in line with what we had anticipated and shared with the market in October. Fourth quarter revenue was $2.19 billion, within the range we provided of $2.15 billion to $2.30 billion.
In addition to revenue, our fourth quarter gross margin was aligned with the mid- point of our guidance coming in at 33.4%. Let me remind you that this figure includes about a 5 point impact from unsaturation charges.
We took aggressive actions to bring down our inventory levels. As you saw from our balance sheet figures, we reduced inventory by $170 million. And our inventory turns increased to 3.8x.
Similar to last quarter, our product families’ revenues and operating results were also consistent with our expectations.
Further, from a cash flow perspective, we had anticipated a very substantial sequential improvement in our free cash flow during the fourth quarter. And that was indeed the case, with a return to positive free cash flow of $47 million in the fourth quarter following several quarters of heavy demands on it.
And we had indicated that capital spending would be down sharply and that was the case, with capex of $79 million during the fourth quarter.
Turning now to our first quarter outlook and 2012 more broadly, let me share a few observations.
We believe that bookings bottomed in the fourth quarter. In the first quarter, when compared to the fourth quarter of FY11, we expect billings to also bottom as we see stronger than seasonal billings for our wholly-owned businesses offset by a very significantly weaker revenue performance from ST-Ericsson.
We believe there will be a recovery in the semiconductor market, but we want to remain cautious, given the uncertainty in the market, and the macro economic situation in Europe. Inventory has been substantially reduced, including in distribution, so once demand restarts we expect to see a return to growth.
Looking at ST’s first quarter outlook in greater detail, we anticipate that our wholly-owned businesses will see less seasonal impact. For our automotive business, we are encouraged so here we anticipate perhaps flat to slightly higher revenues sequentially. With respect to digital consumer, we would anticipate a normal seasonal decrease. Analog and microcontrollers may be stable to slightly up and for power and discrete products somewhat better than normal seasonality.
For ST-Ericsson, we expect a very significant sequential decline in net sales, resulting from a combination of higher inventory at some of their customers, further weakening of legacy product sales, the effect of first quarter seasonality as well as the reduction, in the short term, of new product sales with one of their largest customers.
With respect to our gross margin, our expected performance takes into account an improved but still high level of unsaturation charges as we want to continue to focus on maintaining appropriate inventory levels in light of the continued uncertainty in the marketplace. So our first quarter gross margin outlook of 33% at the mid-point assumes about 4 points of unsaturation charges. At our third quarter conference call we indicated we anticipated a high level of unsaturation for the first quarter to give you an advanced view.
With respect to capital spending, looking at 2012 in total, we anticipate that our investments will be focused on normal fab maintenance and on advancing our technology for 20 nanometer. Currently, we do not see the need for any significant capacity expansion. So overall, a much reduced level of capital spending for 2012 compared to last year.
Turning to our ST-Ericsson joint venture, we are clearly focused with Ericsson and the entire ST-Ericsson organization on seeing how to materially improve its performance. As you saw, Didier Lamouche, ST’s COO, assumed the position of CEO of the joint venture in late November. There are three main areas of focus at the joint venture. First is on improving execution and making sure everything is delivered on a timely basis and in sync with customer expectations. Second, the JV needs to take advantage of the new platform offerings, proliferating design wins and volume production levels. Third, they are currently evaluating what the break-even level needs to be based upon resizing the revenue ramp in order to ensure a financial model that can sustain profitability.
In summary, there are really two very different situations, with our wholly-owned businesses, representing 84% of our total revenue and creating value for all our stakeholders. We had anticipated that 2011 would be the turnaround year for the joint venture. That was not the case, and it is in fact taking away a good deal of ST’s market capitalization. We will not let this continue. Therefore, ST-Ericsson is in a crucial phase focusing on improving execution, lowering its break-even point and reviewing its roadmap to sustainable profitability. We are confident that the newly appointed Chief Executive Officer of ST-Ericsson is the appropriate leader to drive this turnaround.
And for ST more broadly, we will continue to focus on enhancing our market position and operating profitability. Even during 2011, a more difficult year, we delivered revenue growth, market share gains and higher operating profitability in product groups like MEMS, Automotive and Imaging and continued to invest in a number of selected areas. Our sharp focus on capital management allowed us to maintain a strong financial position.
We would be happy to take your questions now.