Q2 2011 Earnings Conference Call Remarks
Tuesday, July 26, 2011
Carlo Bozotti - President and Chief Executive Officer
I want to thank you for your interest in STMicroelectronics and for joining us on this call today to discuss our second quarter results, and our outlook for the third quarter.
Let’s begin with a brief overview.
Overall, second quarter total revenues and gross margin were substantially in line with the outlook we shared with you in April despite entering the second quarter with a few, but important headwinds.
Total revenues increased 1.3% sequentially and 1.4% year over year. Automotive was a key driver of our growth in comparison to the first quarter as well as year over year. From a regional perspective, Americas led the results sequentially and in comparison to the year-ago second quarter the Americas and Greater China-South Asia performed the best. The situation in Japan, which we saw as a headwind entering the second quarter, is no longer a significant concern. In fact, due to the changes underway at certain companies ST is now well positioned to capture market share.
Looking at our wholly-owned businesses, the sequential and year over year progress was much stronger with sequential revenue growth of 3.2% and year over year growth of 11%. In total, net revenues for ACCI, AMM and PDP were $2.22 billion and accounted for 86% of our total sales in the second quarter.
ST’s gross margin came in at 38.1%, in the lower half of our range, reflecting unfavorable currency, a less favorable product mix and the impact on manufacturing of a change in demand by a major customer.
Our operating margin before restructuring attributable to ST was 9.1% in the second quarter, decreasing from 9.9% in the first quarter primarily due to higher losses at ST-Ericsson. However, year over year the 9.1% figure represents an improvement of 140 basis points coming from higher revenues and stronger profitability at ACCI, AMM and PDP.
With respect to our capital investments, we have largely completed selective important capacity additions that we were making, particularly for our automotive business, MEMS and wireless new products. These additions temporarily elevated our capital expenditure level and were part of the reason for the negative cash flow that we had anticipated for this past quarter. Our capex during the first half of 2011 totaled $798 million. We expect to have a much lower level of capital expenditures in the second half.
At the end of June, our net financial position at $1.1 billion continues to be strong and is similar to where it was at the end of April and significantly above last year at this time.
We received a $357 million cash payment from Credit Suisse in the second quarter. While it took some time, litigation with Credit Suisse with respect to certain auction rate securities has finally ended making ST whole by recovering an amount slightly higher than the full amount initially invested plus lost interest and expenses.
Talking about the key facts of the past quarter I wanted to briefly highlight that in June, we began to have some challenges impacting our business and our manufacturing as a result of weaker demand and a much weaker than planned outlook for wireless products from one major customer. This change in demand has and will in the near term negatively affect sales in power discrete, imaging and in the wireless JV as well as our manufacturing as I will discuss later. Additionally, we saw signs of softening demand in some of our businesses, such as digital consumer and microcontrollers.
Turning now to ST-Ericsson there are several points I would like to make and they fall into three blocks – legacy sales, new product traction and the timeline of the anticipated new product ramps.
First, with respect to legacy sales the situation with a major customer of the legacy product portfolio is making the transition quite challenging: with Q2 sales down 10% sequentially and 34% year over year, and first half sales also down 34%. Taking into account the joint ownership, our wireless operating loss, excluding non-controlling interest, was $102 million in the second quarter.
Second, the quality of ST-Ericsson’s product roadmap to develop innovative solutions has enabled the Company to gain traction with existing customers and to expand its customer base. So the focus is on execution: delivering its new products to customers in the targeted high growth smartphone and tablet applications they are addressing. We continuously monitor how design-wins will evolve with the existing and new targeted customers.
With respect to the third block, product ramp, ST-Ericsson’s new product momentum continues in the second quarter as they outlined, however, the initial volumes in the second half of the year for their NovaThor U8500 platform will be lower than initially expected due to reduced demand at certain customers.
So, to conclude, we are firmly committed to support the execution of ST-Ericsson’s business plan and we continue to believe in the Company’s future recovery to profitability and positive operating cash flows. At the same time, being conscious of our responsibility to our shareholders, we will continuously monitor ST-Ericsson’s business evolution and we will value the situation on a regular basis.
Now let’s turn to further details on the second quarter.
ST’s sequential revenue growth was driven by better than expected results in ACCI, specifically Automotive and Imaging. ACCI had another solid quarter with revenue growing 6% sequentially and 9% year over year, quarterly net revenues above $1 billion and a double-digit operating margin.
Our Analog, MEMS and Microcontrollers business came in slightly below our expectations principally reflecting customer demand changes and adjustments related to the supply chain disruption due to the situation in Japan. Nonetheless, this is an area of significant opportunity for ST, both from a market share and profitability perspective and we anticipate revenue returning to a growth mode from this quarter onwards.
Our Power Discrete Products net sales were in line with our expectations. We did see continued good momentum for power MOSFETs and IGBTs. However, growth and profitability were negatively impacted by lower demand largely due to a major wireless customer. This lack of revenue from this major customer will continue in the second half and requires us to reduce production significantly in one specific fab which is largely dedicated to these affected products.
Looking at the first half, ST’s net revenues increased 5% in total, however, net revenues from our wholly-owned businesses increased 17%, reflecting an improved product portfolio and continued strength in Automotive, MEMS, Microcontrollers and Imaging applications. Based on these results it is quite clear that we have increased our market share in these areas.
ACCI’s first half revenues were $2.2 billion, up 13% compared to the year ago period. ACCI posted a 60% improvement in its operating income. AMM’s first half revenues increased 27% to $1.5 billion and its operating profit has nearly doubled to $325 million. PDP posted first half revenue growth of 9% and a 43% increase in its operating profitability. In the aggregate, operating income for our wholly-owned product portfolio was $587 million for the 2011 first half, representing a year over year increase of 81%. It is clear that all of our wholly-owned businesses have been delivering on plan.
With respect to our marketing programs, our progress is significant. In the first half, revenue from our new 20 key accounts increased 35% compared to the year-ago period. In the mass market, net revenues were higher by 26% for the same period.
This strong progress is thanks to the advances we are making with our product portfolio and marketing initiatives. We are strengthening our opportunities for the mid-term with important new products and design wins in our targeted growth applications. For instance, (i) in automotive we earned a key design win for a dual-clutch transmission controller that will help auto companies to reduce fuel consumption; (ii) in CCI, we have collected multiple design wins, including one with Ciena for an ASIC manufactured in 32nm process technology for a metropolitan area network application; (iii) in energy management and saving, we started production of a solar battery charger for mobile phones and other small portable devices based on an innovative technique, for collecting the maximum possible energy from solar cells.
Turning now to our outlook for the third quarter:
Looking at the semiconductor market environment more broadly, we believe there has been some sort of inventory build in the first half following the Japanese natural disasters. We saw adjustments to the supply chain but it seems that the industry is returning to more normal conditions. However, when we look at the overall economic situation in different countries and regions we think some caution is appropriate as visibility is reduced.
As I discussed earlier, we did see in June a much weaker than planned outlook for wireless products from a major customer concerning ST and ST-Ericsson and we have moved without delay to lower production levels for the related products. These actions will result in a high level of unsaturation at a few of our fabs during the third quarter as we reduce production output.
Overall, we anticipate net revenues to evolve sequentially about negative 5% to positive 2%. The more material effect falls on our gross margin, due to the temporary high level of unsaturation, leading to a gross margin outlook of about 35.5%, plus or minus 1 percentage point.
So to summarize, both the second quarter and first half demonstrate the progress ST is making with its wholly-owned businesses. Our marketing initiatives have broadened our customer base, regional presence and industry diversification and we will continue to focus our efforts in these areas.
As a consequence of the recent change with a major customer and a softening of demand, we face increased challenges over the near-term which we are dealing with aggressively.
Beyond the near term we remain optimistic as we are confident in the product leadership potential for ST-Ericsson on top of the improving positioning of our wholly-owned businesses.
Now, my colleagues and I would be happy to take your questions.
President and Chief Executive Officer