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STMicro Profit Turnaround Eclipsed by Optimistic Rivals

STMicroelectronics NV CEO Carlo Ferro
STMicroelectronics NV Chief Executive Officer Carlo Ferro said, “We anticipate further improvement in our operating margin in the third quarter, as we continue to progress step-by-step toward reaching our target financial model.” Photographer: Simon Dawson/Bloomberg

STMicroelectronics NV’s first profit in 11 quarters, showing Europe’s largest semiconductor maker rebounding from its phone-chip troubles, was eclipsed by rivals’ more optimistic predictions for rising demand.

The chipmaker’s shares fell as much as 4.5 percent after its forecast for the current quarter lined up with analysts’ projections. In contrast, forecasts from Intel Corp. and Texas Instruments Inc. topped estimates, fueling expectations that the smartphone and personal-computer markets are picking up.

“It’s disappointing relative to peers,” said Janardan Menon, an analyst at Liberum Capital Ltd. in London. “ST’s quarter is broadly in line, but many companies in the sector are coming ahead of expectations.”

STMicro is reducing its reliance on the wireless business after shutting down its unprofitable phone-chip unit with Ericsson AB, focusing instead on the more lucrative power-management products, microcontrollers and sensors sold to the likes of Samsung Electronics Co. and Volkswagen AG. The shift is starting to pay off, with costs falling and margins recovering.

The company still faces challenges. Free cash flow was negative $99 million last quarter and the return to profit -- net income was $38 million -- was helped by $100 million of public funding as part of France’s project to aid the development of nanoelectronics technologies. Revenue fell 8.9 percent to $1.86 billion, Geneva-based STMicro said.

‘Realistic Numbers’

STMicro forecast sales will increase about 3 percent in the current quarter from the second, plus or minus 3.5 percentage points, and gross margin will be about 34.4 percent, plus or minus 2 percentage points. Gross margin last quarter was 34 percent, topping the 33.6 percent analysts predicted.

“The outlook is a result of many things -- growth, transition from legacy products,” Chief Executive Officer Carlo Bozotti said on a conference call. “We gave realistic numbers. What’s important for us is making sure we have the right trajectory.”

The shares fell 4 percent to 6.68 euros at 12:48 p.m. in Paris, giving the company a market value of 6.1 billion euros ($8.2 billion). The stock had jumped 19 percent this year through yesterday.

Intel, Texas

Chipmakers are well-positioned to benefit from an economic recovery. The 18-nation euro-area has returned to growth, though modest, and U.S. expansion is set to accelerate.

“We begin with a favorable macroeconomic backdrop and there are areas where there is strong traction, in automotive and industrial for example,” STMicro’s Bozotti said. “In other areas like wireless, it’s more customer specific.”

Shares of Intel, the world’s largest chipmaker, rose to a 10-year high on July 16 after it forecast sales that indicate demand for PCs is starting to recover among consumers.

Texas Instruments, the biggest maker of analog semiconductors, this week forecast third-quarter profit that may top analysts’ estimates on demand for chips used in industrial machinery, cars and mobile-phone systems. ARM Holdings Plc, the chip designer whose products power Apple Inc.’s iPhone and iPad, said its revenue growth will accelerate.

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