STMicro Slumps by Most in Decade on Forecast of Drop in Sales to Nokia

STMicroelectronics NV (STM) fell the most in a decade in Paris trading after Chief Executive Officer Carlo Bozotti said there will be a “correction” in sales and gross margin in the third quarter because of difficulties at customer Nokia Oyj. (NOK1V)

STMicroelectronics, Europe’s largest semiconductor maker, expects “some glitches at our major wireless customer,”Bozotti said in a Bloomberg Television interview today. Nokia, the Finnish mobile-phone maker that’s ceding market share to Apple Inc., is STMicro’s top client.

The CEO predicted a “significant reduction in the demand outlook from a major customer compared to previous expectations.” The Geneva-based company expects “to absorb this important, negative bubble from our major customer in the third quarter,” he said, adding that the correction may take two quarters to adjust.

STMicroelectronics has been hit by the performance of Nokia, which is turning to Microsoft Corp. for smartphone software as it struggles to keep up the pace with rivals’ products based on Google Inc.’s Android. STMicroelectronics has also been affected by losses at ST-Ericsson, its chip joint venture with Ericsson AB, which has struggled to turn profitable since being formed in 2009.

STMicroelectronics shares declined 11 percent, their biggest drop since September 2001, to 5.67 euros, in Paris. The chipmaker has a market value of 5.17 billion euros ($7.49 billion).

STMicro’s revenue generated from Nokia fell below 10 percent of total sales in the second quarter compared to about 10.5 percent in the first three months of this year and about 14 percent in 2010, Bozotti said in a conference call. “One of our major initiatives is the diversification of our customer base” to counter the declines at Nokia, he added.

ST-Ericsson

The company is “committed to” ST-Ericsson, Bozotti said in a conference call today. He predicted a “significant increase” in revenue at the venture next year and added that the financial performance “must improve.”

“Nokia has had a major impact on the outlook,” said Saverio Papagno, an analyst at AZ Fund Management in Luxembourg. “Visibility is very low and in this phase it’s difficult to say whether the lower demand will affect only the third quarter or last longer.”

Nokia, the world’s largest maker of mobile phones, on July 21 reported its first quarterly loss since 2009 after handset sales slumped following an accord to shift to Microsoft software. Nokia expects the handset unit to deliver an adjusted operating margin of “slightly above breakeven” in the third quarter.

Global Forecast

Exane BNP Paribas downgraded STMicro to “underperform” from “neutral” today. Analyst Jerome Ramel cited the “ugly” third-quarter guidance and the “collapse” in the gross margin. Banca Akros cut its recommendation on the shares to “reduce” from “hold,” citing an outlook “projecting revenues quite below expectations.”

ST-Ericsson said July 20 that its second-quarter net loss widened to $221 million from a year earlier as sales fell. ST- Ericsson, whose clients include Nokia and Samsung Electronics Co., expects net sales “to be about flat sequentially,” in the third quarter.

ST-Ericsson last month announced cost cuts aimed at saving $120 million a year and pushed back the date at which it expects to become profitable. The cuts will “affect up to 500 employees worldwide,” the company said.

STMicroelectronics said late yesterday that second-quarter net income rose 18 percent to $420 million on increased demand for chips used in cars and a settlement payment from Credit Suisse. Net revenue advanced 1.4 percent to $2.57 billion.

STMicroelectronics said June 9 that it received $356.8 million from Credit Suisse as “full and final” payment to settle outstanding litigation concerning auction-rate securities. The chipmaker projected pretax profit of about $329 million in the second quarter as a result.

Chip sales for the industry will be between flat and 5 percent higher this year, Bozotti said today.

To contact the reporter on this story: Chiara Remondini in Milan at cremondini@bloomberg.net

To contact the editor responsible for this story: Kenneth Wong at kwong11@bloomberg.net

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