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Freescale will beat the blues away

Posted: 06 Feb 2009 ?? ?Print Version ?Bookmark and Share

Keywords:Freescale Beyer? downturn emerge? interview CEO?

Beyer: I feel comfortable that we are taking the right steps to protect ourselves through this economic downturn and we will come out of it stronger than we went into it.

Rich Beyer was by no means a freshly minted CEO when he was named in March 2008 to the top position at Freescale Semiconductor Inc. Beyer's current post is proving to be the most challenging for the veteran chip industry executive.

Freescale already had a boatload of problems when Beyer joined the company, and the former senior executive at Intersil, Elantec, VLSI Technology and National Semiconductor!where he was either CEO or chief operating officer!expected a tough slog as the company grappled with the challenge of emerging from under the shadow of former parent Motorola Inc.

The already difficult job of helping Freescale work down its debts, exit the challenged wireless IC business and refocus resources on the automotive and communications infrastructure sectors quickly became even more complicated as the high-tech industry slipped into what Beyer describes as a "miserable" downturn.

On Jan. 29, Freescale announced that Q4 net loss widened to a staggering $4.2 billion!boosted by a hefty $3.6 billion impairment charge!from a net loss of $595 million in the comparable 2007 quarter. Revenue slipped 39 percent to $940 million from $1.5 billion, although the company's cash position improved to $1.6 billion, including a drawdown of approximately $200 million from a line of credit.

Despite the flurry of bad news, Beyer believes Freescale is well-positioned to emerge from the downturn with a stronger position in its two key markets and said it has enough liquidity to weather the downturn. Freescale, he said, is aiming for breakeven cash flow even as it takes further steps to reduce operating expenses.

"If you want to be in the semiconductor industry, you have to expect cycles. There was a really miserable one in 2000-2001, and this one is even more miserable. But the best companies with the best leadership find a way to manage through these kinds of downturns and prosper," Beyer said in an interview.

"We are confident we are going to manage through this. We are able to service our debt, make modest investment and even do modest acquisitions."

Beyer also addressed the issue of liquidity at Freescale and talked about the company's plans to sell its cellular IC business, a strategy the company says it is committed to but which it is having to fine tune because the tight credit market is making it difficult finding buyers willing or able to purchase the entire division.

Below are excerpts from an interview:

The market appears to have deteriorated very sharply in Q4 08. It's not very typical for companies in this industry to be reporting Q4 sales fell from Q3.
Beyer: That's correct. What we saw was the dramatic impact of the housing and financial industries on high tech. Many high-tech executives said "Oh my gosh, this could impact us. I am going to take action immediately and also dramatically."

In the past, this would sort of trickle down but this time businesses in North America and other regions see this as a big deal and realize they need to take action to scale back production, to scale back inventories immediately and that cascades all the way through the supply chain back to semiconductors.

How is Freescale managing through this and how will the company emerge at the other end?
We saw the beginning of this problem with automotive in June/July, and we immediately put on the brakes associated with spending. In Q3, as it progressed, we said we needed to address this thing aggressively and by the end of September when some companies were just beginning to feel the impact we already had a plan in place to change the company's overall cost structure.

We revisited numerous programs, identified what the potential shortfall could be and put in place a plan to scale back expenses. The situation was worst than we anticipated in Q4, so we further took painful steps like cutting executive pay and benefits, and asking people to take unpaid vacation. In addition to these series of steps to scale back the cost structure, we are focused on investing in the things that are going to make us successful.

We looked carefully at our product development programs to make sure that we are not scaling back and damaging programs that are very critical. We are balancing scaling back the cost structure and making sure that we are investing in products and the activities associated with supporting customers and winning designs that could lead to future revenue growth.

I feel comfortable that we are taking the right steps to protect ourselves through this economic downturn and we will come out of it stronger than we went into it and hopefully stronger than many of our competitors.

Many of the semiconductor companies that have announced Q4 results have also announced additional cost-cutting actions. Is Freescale planning to further reduce costs this year?
We originally said we expect to reduce costs by $400 million on an annualized basis. In Q4, we said we needed to do more so we increased it by an additional cost-saving of $200 million and those are well underway. Others are saying 'we had a bad Q4 and so we are taking these series of actions.' We knew that the situation was deteriorating and so we took these actions in Q4.

Do you have an optimal revenue goal for Freescale that would match the cost-structure you are aiming for?
We have several scenarios. These are very uncertain times, and so we have a series of scenarios in mind. There is the pessimistic scenario, which is how we are modeling the cost of the company to generate the right amount of cash. But we also have a more aggressive scenario, which is the one we would like to push ourselves to achieve, and which we think is the right way to motivate the organization.

There are people in the marketplace who question Freescale's ability to survival considering its debt load and the weakness of the market. What would you say to them?
My answer to that is we just ended the year with $1.4 billion of cash and we drew down another part of the revolving credit that we have. That afforded us a little bit more than $180 million in addition. So, we have approximately $1.6 billion.

Our pessimistic scenario gives us confidence!and we hope they don't come to pass but that the situation gets better!but our pessimistic scenario suggests we will be able to weather this storm even if the market is terrible for the next several years.

By the time we get through that period, even if things don't get better we would have ourselves at cash flow breakeven. So we are confident we are going to manage through this. We are able to service our debt, continue to make modest investment and even do modest acquisitions.

You mentioned earlier that the company is focused on the right market segments. How challenged are those markets and how strong is Freescale in these sectors?
We are the undisputed leader in two markets: the automotive and the network communications infrastructure markets. We believe this leadership position will afford us the opportunity to grow very nicely when we come out of this economic downturn. Clearly, automotive is a major problem today but the fact of the matter is the world wants automobiles and when this economic crisis ends the automotive industry will bounce back.

Also, as the leader in the communication infrastructure market, we are well positioned to continue to take advantage of the growth in those markets. Those are the two foundations of the company. The other two areas that we have been investing in that we think represent opportunities for market share gains on our part are industrial/medical!very broad, but uses the kind of products we have in microcontrollers, analog, power, sensors and so forth!and then finally, selected consumer market.

We are not a broad line supplier to all consumer markets. There are some very attractive ones; for instance, handset devices where we have applications processors, sensors and power circuitry; and LCD panel where we have analog capability. We did a very broad study of all of our businesses soon after I joined early last year and concluded those areas are really good for us, and we can win in those areas. We concluded at the same time that the cellular product was not appropriate for us and that's why we made the decision to exit that market.

What's the status of the plan to sell the cellular IC business?
Circumstances are really very difficult for any kind of significant acquisitions at the moment while companies are weighing how far down the market is going to go. The conditions for the sale of the entire cellular chip business have deteriorated and I am not optimistic that we are going to be able to sell it in total. We are pursuing some opportunity to sell more modest parts of the business potentially to more than one buyer.

You became CEO of Freescale about one year ago at one of the toughest times in the history of the industry. What has the experience been like?
The company had its own set of challenges, the cellular business being a case in point that I and the management needed to wrestle with, and I think we are doing that. The situation has been further exacerbated by the macro economic climate but I can say with confidence that his has not caused me to despair.

If you want to be in the semiconductor industry, you have to expect cycles and there was a really miserable one in 2000/2001 and this one is even more miserable. But the best companies with the best leadership find a way to manage through those kinds of downturns and prosper. I continue to feel good about our prospects. I am very happy with the leadership position. I am delighted by the people I work with, and I am delighted by the customers and the support they give to us.

I am not in any way demoralized by the downturn in the marketplace. As they say, what goes down will come back up and what goes up will come down. We will come out of this thing. It's not crystal clear when, but when we do I believe Freescale will come out of it very sound.

- Bolaji Ojo
EE Times

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