STMicro Makes Plans to Get Leaner as Chip Demand Is Weak

STMicroelectronics NV (STM), Europe’s largest chipmaker, said it’s cutting costs amid weakened demand and will explain its plan for a “leaner” business in December.

“End-demand has weakened in the second half of this year, and not only in Europe,” Chief Executive Officer Carlo Bozotti said on a conference call today. “We want to take into account the change in market environment and some specific customer dynamics, and will announce a plan that will cover our vision, our strategy, the structure of the company and the key future drivers of our business.”

The company is evaluating a reorganization as rapid swings in demand and stiff competition from Asia roil the semiconductor industry. Bozotti is putting chips in cars, health and fitness machines to make up for the decline of phone-maker Nokia Oyj (NOK1V), one of its biggest customers. Intel Corp. (INTC), the world’s biggest chipmaker, last week forecast fourth-quarter profit margins below estimates amid slumping demand for personal computers.

STMicroelectronics, based in Geneva, plans to cut costs by $150 million a year by the end of 2013 with initiatives related to its “unified processing platform” and from other moves, such as efficiencies in its “process technology development model” and expenses related to design outsourcing. As many as 500 jobs may be affected, it said in a statement yesterday. The chipmaker said it will also temporarily close plants.

STMicroelectronics shares gained 3.2 percent to 4.80 euros at 11:37 a.m. in Paris trading.

“I think the market was already expecting weak results and guidance, and is now focusing on potential upside from the upcoming strategic review,” said Saverio Papagno, an analyst at AZ Fund Management in Luxembourg.

‘One STM’

The company’s fourth-quarter revenue may range from a decline of about 5 percent to an increase of about 2 percent, compared with third-quarter sales of $2.17 billion, it said yesterday. That indicates a range of about $2.06 billion to $2.21 billion and compares with the average analyst estimate of $2.26 billion, according to data compiled by Bloomberg.

The chipmaker may split its analog business, which makes chips for cars and video-game consoles, from slower-growing digital assets, people familiar with its deliberations said this month. The chipmaker will remain unified and there are no plans to split the company, Bozotti said again today.

“We will have one STM and it will be a leaner company,” Bozotti said, though he declined to detail the plan or comment on possible assets sales. “We will go through the roadmap of our financial model in a shorter timeframe.”

Wireless Loss

The chip company posted a net loss of $478 million in the third quarter compared with net income of $71 million a year earlier, because of a non-cash charge of $690 million to write down the value of its wireless business.

STMicroelectronics has felt the heat as Nokia lost market share in the mobile-phone business. Last week, Nokia posted its sixth straight loss since adopting Microsoft Corp.’s Windows software and projected another “transition” quarter as it revamps its handset lineup to challenge Apple Inc.’s iPhone.

Even as STMicroelectronics’s wireless unit posted “strong progress” in the third quarter, the segment’s operating loss and negative cash flows “remain significant,” the company said.

The gross margin, the percentage of revenue left after subtracting manufacturing costs, widened to 34.8 percent in the third quarter from 34.3 percent in the previous period. STMicroelectronics forecast fourth-quarter gross margin will be 32 percent, plus or minus 2 percentage points.

‘Flat’ Sales

The chipmaker has been affected by losses at ST-Ericsson, its chip joint venture with Ericsson AB (ERICB), which hasn’t turned profitable since being formed in 2009. ST-Ericsson said yesterday that its third-quarter net loss, on a pro-forma basis, narrowed to $190 million from $318 million in the previous quarter. Net sales rose to $359 million from $344 million in the previous quarter.

ST-Ericsson, which competes with San Diego-based market leader Qualcomm Inc. (QCOM), projected fourth-quarter sales to be “approximately flat” from the previous quarter.

STMicroelectronics has said it is working with an adviser to define a strategy for ST-Ericsson after announcing in April plans to eliminate 1,700 jobs at the unit and transfer some product development to trim costs.

To contact the reporters on this story: Chiara Remondini in Milan at cremondini@bloomberg.net; Marie Mawad in Paris at mmawad1@bloomberg.net

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

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