STMicroelectronics N.V. (STM)

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STMicroelectronics NV (STM)

Q3 2013 Earnings Call

October 23, 2013 9:00 am ET

Executives

Tait Sorensen - Group Vice President of Investor Relations

Carlo Bozotti - Chairman of Management Board, Chief Executive Officer and President

Carlo Ferro - Chief Financial Officer

Jean-Marc Chery - Chief Manufacturing & Technology Officer, Executive Vice President, General Manager of The Embedded Processing Solutions Segment and Vice Chairman of Corporate Strategic Committee

Carmelo Papa - Executive Vice President, General Manager of Industrial & Multisegment Sector and Member of Corporate Strategic Committee

Analysts

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Stephane Houri - Natixis S.A., Research Division

Francois Meunier - Morgan Stanley, Research Division

Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division

Didier Scemama - BofA Merrill Lynch, Research Division

Gareth Jenkins - UBS Investment Bank, Research Division

Andrew M. Gardiner - Barclays Capital, Research Division

Jerome Ramel - Exane BNP Paribas, Research Division

Janardan Menon - Liberum Capital Limited, Research Division

Amit B. Harchandani - Citigroup Inc, Research Division

Bernd Laux - CA Cheuvreux, Research Division

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the STMicroelectronics Third Quarter 2013 and 9 Months Earnings Results Conference Call and Live Webcast. I'm Goran, the Chorus Call operator. [Operator Instructions]. The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Tait Sorensen, Group's Vice President, Investor Relations. Please go ahead, sir.

Tait Sorensen

Thank you to all for joining our third quarter and 9 months 2013 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining Carlo on the call today are Carlo Ferro, Chief Financial Officer, Executive Vice President, Finance, Legal, Infrastructure and Services; Georges Penalver, Chief Strategy Officer and Executive Vice President of Strategy, Communication, Human Resources and Quality; Jean-Marc Chery, Executive Vice President, General Manager of Embedded Processing Solutions; and Carmelo Papa, Executive Vice President, General Manager of Industrial and Power Group.

This call is being broadcast live over the web and can be accessed through ST's website. A replay will be available shortly after the conclusion of this call.

This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the results last night and also in ST's most recent regulatory filings for a full description of these risk factors. [Operator Instructions]

And now, I'd like to turn the call over to Carlo Bozotti, ST's President and CEO. Carlo?

Carlo Bozotti

Well, thank you, Tait. I would like to thank everyone for joining today's call. But before I start, I would like to welcome back Carlo Ferro. He has rejoined the company at the beginning of August after his service in ST-Ericsson, first as the COO and then as a CEO of the company. And as you know, we have now completed the pickup of the ST-Ericsson activity.

Carlo Ferro

Thank you, Carlo.

Carlo Bozotti

So our financial performance in the third quarter was mixed, and there was a direct reflection of the changing demand in the semiconductor market, which has clearly slowed. We posted progress in the third quarter towards our business and financial goals, although somewhat less than what we had envisioned.

So let me first discuss the changes we saw in the semiconductor market environment, and then move to our third quarter financial results in more detail.

In the market, on one hand, we experienced a few negative developments in the third quarter. In Asia, there was a softening of demand, specifically impacting the mass market and across many applications with the exception of Automotives. In addition, within the Asian cellular phone market, feature phones and the mid-tier smartphones outpaced the high-end leading to a much less favorable product mix. And finally, in India, the demand for our cable set-top box solution was reduced due to the postponement of the country's Cable Digitalization Program.

On the other hand, point of sales in distribution remained solid in all the regions, and our inventory position in the channel is healthy. Furthermore, Automotive products demand continues to be strong across the portfolio in powertrain, body, safety and infotainment and in all regions.

Let's move now to our sales results, where third quarter revenues were to $2.013 billion, and net revenues, excluding Wireless product line, totaled $1.88 billion. Based upon available WSTS market data, we believe our year-over-year growth of 3.9%, excluding ST-Ericsson products, will outperform our served markets, thanks to growth in Imaging, Microcontrollers, MEMS and Automotive. On a sequential basis, net revenues, excluding ST-Ericsson products, also slightly increased, driven by the performance of the same key product families I just mentioned.

Operating income before impairment and restructuring charges in the third quarter was a $54 million profit, improving by $118 million on a sequential basis. This was due in large part to the sale of ST-Ericsson's Global Navigation Satellite System business along with significantly lower operating expenses.

Now let me move to our 2 product segments. Within our Sense & Power and Automotive product segments, net revenues were stable quarter-to-quarter. Automotive and MEMS increased slightly, and we anticipate further strength in the fourth quarter, benefiting from both increased volume and the penetration of our products. Industrial and power products experienced lower volumes than expected due to the current market dynamics. Importantly, overall, in Sense & Power and Automotive, we saw a progression in the operating margin to 6.2% from 3.5% in the previous quarter on higher gross margin and lower operating expenses.

Turning to our Embedded Processing Solutions segment. Revenues decreased sequentially. The decline in Wireless was significant, but lower than expected. In Set-top box, sales decreased as well. However, we are encouraged by the traction at our customers and design wins with our new products and technologies. The growth in Imaging and in Microcontrollers was significant. Embedded Processing Solutions' operating loss was negative $18 million. Excluding the $75 million gain from the sales of the assets, mainly the ST-Ericsson GNSS business, EPS operating margin improved 130 basis points to negative 11.5% on reduced operating expenses.

Turning to the gross margin, we had a sequential decrease of 40 basis points to 32.4%. This decline principally relates to a negative mix effect with a higher weight of legacy ST-Ericsson products, combined with lower-than-expected sales of products from our core businesses.

Moving to our inventory, the total stood at $1.32 billion, a decrease of about $20 million from the second quarter. Our inventory turns remained at a good level of 4.1 turns or 88 days, so stable quarter to quarter.

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