STMicro Joins Chipmakers Hit by High-End Smartphone Drop

STMicroelectronics NV (STM), Europe’s biggest semiconductor maker, said chip demand is taking a hit as smartphone manufacturers trim orders, adding to testimony of weakening appetite for high-end handsets.

Fewer orders and slower demand have dominated third-quarter reports in the chip industry, which caters to phonemakers from Apple Inc. to BlackBerry Ltd. Taiwan Semiconductor Manufacturing Co. (2230), the world’s largest contract maker of chips, as well as the likes of Texas Instruments Inc. (TXN), Qualcomm Inc. and Broadcom Corp. reported earnings or forecasts missing analyst estimates.

STMicroelectronics has tallied more than $1.6 billion in losses over the past eight quarters as it strove to restructure -- then shutter -- its wireless venture with Ericsson AB. The Geneva-based company yesterday pushed back when it expects to hit its 10 percent profit-margin target, citing “softness” in demand for high-end smartphones in Asia. The stock fell as much as 7.3 percent in Paris today.

“It’s not just us, you’ll see it also from our competitors,” Chief Executive Officer Carlo Bozotti said in a conference call today. He said the slowing demand is temporary.

A shift in demand toward lower-priced smartphones will drive handset shipments this year, according to a report this week by researcher Gartner Inc. While fancy devices will grab people’s attention, they won’t necessarily buy them, according to consumer analyst Carolina Milanesi. The year-end shopping season will “be all about smaller tablets as even the long-term holiday favorite — the smartphone — loses its appeal,” she said in the statement.

Photographer: Simon Dawson/Bloomberg

An STMicroelectronics NV microprocessor chip sits on display at the Mobile World Congress in Barcelona. Close

An STMicroelectronics NV microprocessor chip sits on display at the Mobile World Congress in Barcelona.

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Photographer: Simon Dawson/Bloomberg

An STMicroelectronics NV microprocessor chip sits on display at the Mobile World Congress in Barcelona.

‘Low-End’ Focus

Shares of the Franco-Italian chipmaker dropped 7 percent to 5.93 euros at 3:20 p.m. They gained 19 percent this year through yesterday, valuing the company at 5.8 billion euros.

STMicroelectronics reported a net loss of $142 million in the third quarter, equivalent to 16 cents a share, compared with a $478 million loss, or 54 cents, a year earlier. Net revenue fell 7.1 percent to $2.01 billion, falling short of the $2.05 billion average of analysts’ estimates compiled by Bloomberg.

“Volumes are there, but they’re more focused on lower-end phones than higher-end phones,” Bozotti said on the call. “We can’t name any customers, but higher-end smartphones were lower than what we expected.”

STMicroelectronics didn’t break out the impact of slowing demand for high-end smartphones in the report.

The company now forecasts it will reach its operating margin target in mid-2015, about six months later than planned. STMicroelectronics had an operating loss of $66 million in the third quarter and said its operating margin was 2.7 percent, excluding some charges for a $120 million impairment and restructuring.

‘Wishful Thinking’

“The margin target at this stage includes a lot of wishful thinking,” Bernd Laux, an analyst at Kepler Cheuvreux, said in a phone interview. “The company requires a recovery in demand in orders to be able to achieve a 10 percent margin, otherwise it will be impossible.”

Bozotti has yet to prove that STMicroelectronics can reinvent itself by focusing on industries such as cars, game consoles and high-end smartphones. Earlier this year, STMicroelectronics and Ericsson dissolved their partnership, which designed chips for handsets, as customers such as Nokia Oyj (NOK1V) grappled with shrinking sales as they lost market share to Apple and Samsung Electronics Co.

Revenue Forecast

About 10 percent of STMicroelectronics sales come from Nokia, BlackBerry and HTC Corp. (2498), which “continue to underperform their market,” according to estimates by Pierre Ferragu, an analyst at Sanford C. Bernstein. Bozotti said today the company’s exposure to BlackBerry, the Canadian smartphone maker that put itself up for sale in August after years of shrinking market share, is “very limited.”

Since the venture’s split was completed in August, 1,800 employees have joined Stockholm-based Ericsson, which took on the modem business. STMicroelectronics absorbed much of the rest, along with about 1,000 workers. The Global Navigation Satellite System group was sold off.

Taiwan’s TSMC last week deemed the semiconductor-demand decline episodic and unlikely to prove lasting.

“The timing for us to achieve our operating margin target will depend greatly on sales and demand,” Bozotti said. “For now we have a short-term correction.”

To contact the reporters on this story: Marie Mawad in Paris at mmawad1@bloomberg.net; Daniele Lepido in Milan at dlepido1@bloomberg.net

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

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