With the debts owed to its parents mounting rapidly Peter Clarke ask how long ST and Ericsson will continue to bankroll their wireless chip joint venture.
ST-Ericsson had a breakeven target of the second quarter 2012 but, citing slower expected ramping of volume requirements at some customers, the company has pushed that out and on the call Delfassy gave no indication as to when ST-Ericsson could breakeven except to say "as soon as possible."
Making a loss of $221 million on revenue of $385 million is, for me, a frightening financial statistic roughly akin to being in free-fall. At the end of 2Q10 ST-Ericsson had $43 million in the bank and owed nothing to its parent companies. At the end of 1Q11 ST-Ericsson owed $234 million and at the end of the 2Q11 ST-Ericsson owed its parents $445 million.
On the conference call ST-Ericsson executives did not disagree with an analyst who estimated the company's loss rate as being about the same in the second half of the year as it was in the first half so ST-Ericsson could be close to owing $900 million by the end of the year.
The company has said it will restructure to lose about 500 jobs and cut $120 million of annualized costs by the end of 2012 but it seems this can only slow things down.
Chief financial officer Tim Lucie-Smith agreed there would be "negative cash flow in the coming quarters" and said the company's plan was for the company to be funded by loans from its shareholders. There are no plans to change that, he said. The shareholders are monitoring this on a quarterly basis, Lucie-Smith said.
ST-Ericsson is suffering because Nokia is turning to Windows with Qualcomm, and STE is not yet qualified, ST-Ericsson is suffering because they are well placed in TD-SCDMA in China which is suffering a slow ramp. The company is being squeezed in the middle between mobile chipset suppliers such as Qualcomm and Samsung and the agile fabless chip companies coming out of China and Taiwan
How many quarters of ramping debt will STMicroelectronics and Ericsson tolerate as they themselves come under shareholder pressure?
Background: I worked for an associated company for many years.
Good comments all. Having at first succeeded in the cellular “protocol wars” of the early 90s, Ericsson acquired an over confidence. Her international handset divisions reported North American and Asian market development towards big screen and battery models even before the advent of smart phones. Their opinion was that in the coming battle between computers and cell phones, the “computer first but also a cell phone” approach was right. Ericsson thought those few to be Smartphones would be well served by Symbian…the exact opposite idea of their subsidiaries. They also missed the importance of data while insisting they had an early lead.
This all resulted in a merger of the handset business with Sony and splitting off Ericsson Mobile ICs…platforms. Regretfully nothing changed until Sony was very irritated threatening that, “Something must change or the relationship will terminate.” How did this involve Ericsson now Ericsson-ST? Sony-Ericsson was a captive (and by far the largest) customer. They were insulated from the market delivery chronically late and over price IC and SW stacks. The mobile chip set was also slow and provided limited graphics. Eventually that didn’t matter because the “computer part” of the phone came to dominate but Ericsson-ST had no good offering. Sony saw this (not admitted publicly) as at least a hindrance and worse possibly a way for Ericsson to reach into the venture and take more than their fair share. All that the Sony Ericsson subsidiaries feared came true and this fell through to punish Ericsson-ST. So much for this kind of vertical integration!
Well 2012 will be a bumper year with a new product offering in the smartphone market with a number of major handset providers, beyond that it becomes murky, if they dont break even by end of 2012 i think they will exit
In my opinion, the core of the problem is the CEO of ST-Ericsson. The company is indeed facing difficult times, but to create a game changing event, you need more than just a medium to good CEO, you need a brilliant CEO (a visionnary would be even better, but there is shortage of them - dixit AMD :-)).
ST-Ericsson is competing in a field where the brightest companies of today are fighting a war to death: Apple, Samsung, Qualcomm, Texas Instruments, Intel, Broadcom, Nvidia. The current product line of ST-Ericsson is just good, nothing really innovative. No strong differentiator in the smartphone/tablet market. To make a come back, you need a ground breaking innovation, something that will make your customer win over their competition. ST-Ericsson does have that today, so no real come back to be expected.
My message to Carlo Bazotti and Hans Vestberg:
- either urgently move Delfassy to a VP position, and get yourself some very agressive CEO
- or sell ST-Ericsson to Nvidia, AMD or Intel (Ottelini sure would look into buying it) at the best price you can get, and see the shares of your respective companies double in a few months.