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Analysis: NXP strives to survive lashes of economic downfall

Posted: 24 Oct 2008 ?? ?Print Version ?Bookmark and Share

Keywords:automotive? IC vendor?

NXP Semiconductors officials would be the first to admit that the automotive and multimarket IC vendor is in rather poor shape. They'd also be open to say they have an aggressive plan to improve the company's status. They may have only one shot.

NXP is in a troubled state, and some analysts are even asking its ability to overcome the current economic environment. Even the management is saying it is racing against time to fix the company's problems, which have now been compounded by the ongoing global financial meltdown and the resulting downturn in corporate and consumer IT equipment spending.

The company's hope rests on a complex reorganization program released Sept. 12, which would include a total overhaul of manufacturing, R&D as well as other support functions, many of which the company hopes to outsource to cut expenses by as much as $550 million.

Initial innovation
The program, dubbed Redesign NXP, is in full swing with talks taking place between NXP and other stakeholders, along with employees, European government officials and customers, according to NXP executives. However, the market has worsened dramatically in a month since NXP introduced the restructuring program. The company might be forced back to the drawing board to fine tune the plan.

"It is clear that the operating environment could become even more challenging and NXP has to be well prepared for this," said Frans van Houten, president and CEO, NXP during a conference call. "We have taken several action plans to better manage our costs, improve our cash position and also redesign our business to improve the strength of the company and return to profitability," he added.

Race to keep going
NXP's management is racing against time and the negative economic developments could severely limit its ability to successfully reposition the company for revenue growth. All this comes at a time when NXP needs to offset factory underutilization that drove down gross profit margin in the September quarter.

Furthermore, even though the sale of its wireless unit to STMicroelectronics NV improved NXP's cash position considerably, the situation could also easily decline if sales weaken further and cash flow turns negative, or if it cannot lower operating costs sufficiently to lift depressed margins.

Positive forecast
Van Houten and his fellow NXP officials tried to sound optimistic during their conference call even as they recognized the tough economic environment that clipped Q3 sales growth. A total of $960 million in one-time charges like asset impairments and write-downs raised the company's net loss for the period.

NXP's sales slid in Q3 as demand for its products cooled and as its profitability worsened dramatically caused by pressures on gross and operating margins despite major efforts recently introduced by the company to lower expenses.

The outlook for the rest of 2008 is equally grim. NXP said sales for Q4 will go down and it forecast 8 percent to 14 percent sequential revenue decline for the period.

"The financial crisis and IC market conditions have caused a rapid deterioration of demand toward the end of Q3, especially in the automotive and consumer sectors," van Houten said in a statement.

NXP's losses
NXP's revenue declined in the September quarter to $1.37 billion, down 16 percent from the comparable quarter of 2007, although the company attributed part of the decline to the sale of its wireless IC division to fellow European chip maker ST.

The Dutch company also said its net loss widened to $2.55 billion from $12 million in the year-ago comparable quarter, adding that gross profit margins slid to -2 percent, or $31 million, from 37 percent, or $608 million, in Q3 07.

On a non-generally accepted accounting principles basis, NXP's net loss before interest and taxes increased to $1.9 billion from $3 million in Q3 07. NXP said its cash position improved during the most recent quarter to $1.54 billion after accounting for the net receipt of $1.45 billion from the sale of its wireless business to ST and the repayment of a $450-million revolving loan. The company also paid $108 million for Conexant's broadband media processing business during the quarter.

Factory utilization fell to 68 percent in Q3, from 85 percent in the year-ago quarter and 78 percent in Q2 08. In September, NXP announced plans to rationalize its manufacturing and R&D operations to reduce costs by as much as $550 million on an annualized basis.

Analysts said they believe those actions, while positive, might not be enough to get the company out of the recent mess. Standard & Poor's, for example, maintained its negative outlook on NXP despite its better cash position, according to Patrice Cochelin, an analyst with the ratings firm.

"The operating prospects remain bleak for the next few quarters," he said.

Van Houten isn't as negative on the company's outlook, however. "We believe our plans are adequate given the current environment," he said. "Our cash position is sufficient to handle the redesign, even if we move forward in a challenging market," he stressed.

- Bolaji Ojo
EE Times





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