Even the weather and the foreign exchange market lined up in Carlo Bozotti’s favor as he presented what amounted to a positive outlook for semiconductor vendor STMicroelectronics N.V. on a “gorgeous” uncharacteristically sunny London morning Thursday, June 3, 2010.
Inventories at OEM customers and across the distribution channel are “lean and mean,” demand is robust and likely to remain so through the third quarter and possibly even in the fourth quarter, factory utilization has risen significantly to satisfy market needs with new capacity being added “at minimal cost” and new products are being introduced at a healthy clip, according to the president and CEO of ST.
Add to this mix the weak Euro, which has fallen against the U.S. dollar about 17 percent since the beginning of the year, with the potential for further declines in the months ahead, and ST—which reports results in U.S. dollars but has 50 percent of its costs in Euro—could be looking at a bumper harvest in sales and gross profit margins, according to company executives speaking at a meeting with investors last week.
“Demand is strong for the third quarter and the fourth quarter is building up normally [and] rift in Euro-U.S. dollar exchange rate is growing in our favor. The variation in the Euro-dollar exchange rate was material when the Euro was appreciating against the dollar and now that it is weakening against the dollar” Bozotti said.
“We are reshaping the structure of the company by exiting the flash memory business and through the joint venture with the Ericsson group and we are accelerating the introduction of a wave of new products in areas like power application, multi-media convergence for anywhere, anytime products,” Bozotti added. “We are also improving the potentials of the company by reducing costs. These are the first steps.”
These initial actions have helped to reshape ST over the last several years and since Bozotti took over from founding CEO Pasquale Pistorio in 2005. The new ST is still focused on a multi-product strategy but it is being forced to respond to changes in the entire market and has taken steps to exit certain markets while embracing opportunities in other areas.
Bozotti and his executive team are hoping that the structural changes ST has implemented—aided now by the positive impact of a resurgent semiconductor market—can finally be better appreciated by the investment public, suppliers and customers.
Ambushed by a recession
Bozotti wanted to unveil the “new” ST one year earlier in New York. It was not to be. Instead, the company faced a somewhat skeptical audience at the company’s Investors’ Day event May 15, 2009. ST, Bozotti told an initially lukewarm audience, had morphed into “a leaner, younger, more innovative, faster and yet powerful” chip company.
Reeling at the time from the U.S. financial and real estate crisis and the “worst economic downturn” since the depression, investors were clearly in no mood to give Bozotti a cheerful hearing. Furthermore, ST’s figures were less than stellar; first quarter sales had tumbled 33 percent from the prior year to $1.7 billion and the company, like many of its semiconductor peers, was on its way to a dismal full year performance.
That was then. One year later, ST’s sales—like many of its industry competitors—are rebounding, up 40 percent in the first quarter to $2.3 billion from $1.7 billion in the year-ago quarter while gross profit margins shot up to 37 percent from 26 percent in the first quarter of 2009. Analysts expect ST’s sales during the second quarter would be approximately $2.52 billion, up strongly sequentially and up 26 percent from second quarter of 2009.
“We have been working for about four years to set the foundation for higher return on investment,” said Carlo Ferro, chief financial officer at ST. “2009 was very difficult to navigate but we are on track for 6 to 12 percent sequential sales growth for the second quarter.”
ST executives said they are convinced the company’s strong sales improvement and the general industry resurgence are not merely the result of inventory replenishment as some observers have suggested. They insist the strong growth witnessed across the industry and at ST is based on actual consumption-driven demand with the possibility for further expansion in the rest of the year.
“We do not have any evidence of inventory buildup at customers and distributors,” Bozotti said. In fact, “we know that our distributors are working with low inventories.”
The dramatic turnaround—for an industry that stared at the abyss of double-digit sales decline and capacity utilization levels as low as 30 to 35 percent only one year ago—is enough to make anyone call for a glass of Europe’s best champagne. However, ST executives while delighted with the company’s overall performance were not in a celebratory mood during their presentation.
Here’s why. First, an industry wide recovery is in process with most of the major chip vendors reporting double-digit sales improvements. ST executives believe the company would exceed the expected average industry growth in 2010 but declined to provide specific figures.
Also, while ST is clearly improving its performance, executives insist they have not completed their multi-year reorganization and see further opportunities for improvement and market share gains.
“We have accomplished a lot but this is a long journey,” said Carlo Ferro, ST’s CFO in an interview. “Much has been done and there’s still a lot to be done. In my profession, caution is always good and ST will continue to be prudent.”
One ST executive who unhesitating trumpets the gains made by his division is Carmelo Papa, general manager of ST’s industrial and multi-segment (IMS) business. The famously ever-bubbly Papa warmed up the investment crowd first by pointing out the two video clips showed by his boss Bozotti focused heavily on new products recently introduced with great success by the IMS division.
“We have a wide breadth of products and we are able to deliver boards with complete solutions, which saves costs and makes everyone happy. Not every company can do this,” Papa said in an interview. “At IMS we are concentrating on richer markets with capacity for growth and our goal is to become the No. 1 vendor in our segments.”
Papa’s bullishness is understandable. IMS is barreling through the industry average growth rate and introducing five new products daily. Twenty percent of the division’s sales come from products that are less than two years old and demand for IMS’ newly introduced MEMS gyroscopes is so hot that Papa is betting revenue for the product will clock more than $100 million in 2010 from zero at the beginning of the year.