ST ready to shed off old image(2)

Will ST deliver?
However, ST may find it still has to convince many in the industry that it is evolving into a better competitor that has finally put behind it the image of a company that promises more than it can deliver, according to analysts. While the company has indeed put in place mechanisms for reducing costs and improving operational performance, it still has to deal with the legacy of unfulfilled expectations.

"The trouble is that analysts and investors have heard a lot of promises from ST over the years that the company has not met. On the surface this looks like a pretty good company. If you strip out restructuring and other exceptional items the operating margin (ex-memory) has averaged 9.1 percent over the last 10 years. So, the 9-12 percent [target] does not seem unrealistic," said S&P's Crawshaw."

Added Crawshaw: "However, the exceptional items are more recurring in nature than ST would like to suggest. Laying-off staff and writing off obsolete inventory are par for the course in the intensely competitive and fast-moving semiconductor industry. And if you include these costs ST's operating margins have averaged 5.5 percent over the last 10 years, well below its goal and below the level necessary to cover its cost of capital."

Aside from its prior history of missed execution that resulted in exceptional charges, ST may again find itself hampered by events beyond its control. The company is making many operational changes in a relatively short time and must integrate several new business additions at a time of great stress in the worldwide economy.

In addition, ST is now committed to an outsourced manufacturing strategy that will make it harder for the company to call all the shots even as it cuts back capital expenditure sharply. The company's goal is to take capex down to "between 5 and 7 percent of revenues," according to Bozotti.

The decision was applauded by analysts but it is not without risks—again in terms of creating expectations that may not be easily met. Take the example ST repeatedly gives that its 2008 capex will come down 50 percent in 2008. That's only in nominal amount.

As a portion of sales, 2009 capex will drop to about 7 percent based on analysts' average revenue forecast of $7.5 billion for 2009. If sales shoot up, the capex-to-sales ratio will look better but if the market worsens, capex this year could come in closer to the 10 percent of sales reported in 2008 and 11.4 percent in 2007.

Also, in the process of taking down capex and transferring production to external providers, ST will have to close more of its own existing fabs, a process that will involve additional costs that could drain existing cash and negotiations with workers' unions that will probably be drawn out due to Europe's tough labor laws.

The toughest challenge facing ST is, however, the fickle economic environment in which the company and competitors now operate. During its 2008 Annual Day held in London, Bozotti promised ST would be in a much stronger position by the 2009 event.

That was not to be. The bottom fell out of the market; ST's fourth quarter 2009 sales tumbled 17 percent from the prior quarter and first quarter 2009 sales fell 33 percent.

"We had not anticipated—by the way, who did?—that the financial crisis would have infected the world economy and evolved into the worst global economic crisis since the great depression of 1929," Bozotti said.

Such unanticipated events could keep analysts worrying whether the "new" ST can finally put to rest the less flattering image of the old ST.

- Bolaji Ojo
EE Times