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Grim future for ST每Ericsson

Posted: 26 Jul 2011 ?? ?Print Version ?Bookmark and Share

Keywords:wireless? joint-venture? TD-SCDMA?

Times are tough right now for wireless chip joint venture ST-Ericsson. This is according to Gilles Delfassy, president and CEO of the company, in a telephone conference discussing ST每Ericsson's second quarter 2011 financial results. Though the company is still encouraged by the traction it is getting for its new products.

The rest of 2011 will be bumpy for ST-Ericsson and this will probably continue throughout 2012. The rate at which the company is generating losses begs the question how long STMicroelectronics and Ericsson can afford to wait for things to improve.

The company made a net loss of $221 million on sales revenue of $385 million in the second quarter. The third quarter, in which sales would normally see a sequential jump, is going to be flat.

The reason for the flat sales is because the so-called legacy products, those created before the formation of ST-Ericsson in February 2009 are declining rapidly, while the new chip designs and platforms have, in many cases, yet to reach volume. ST-Ericsson now reckons that new products are responsible for about 45 percent of the $385 million sales in 2Q11 but a large part of the problem is that ST-Ericsson was strongly coupled to Nokia, which is having its difficult year.

Even as Nokia turns to Microsoft and the WindowsPhone operating system for its future smartphones, Nokia is still turning to Qualcomm for those chipsets.

No breakeven target date given
ST-Ericsson had a breakeven target for the second quarter 2012. However, the company has pushed that out citing slower expected ramping of volume requirements at some customers. Delfassy did not mention when ST-Ericsson could breakeven but he noted that it will be "as soon as possible."

A loss of $221 million on revenue of $385 million is a 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每Ericsson owed its parents $445 million.

Cost savings plan, job cuts
ST-Ericsson is hoping for huge savings by cutting annualized costs of around $120 million in late 2012. The company expects the cost savings plan to affect up to 500 jobs in its current 6,700-strong workforce. Read more about ST-Ericsson's cost savings plan.

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. This means that 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.

CFO Tim Lucie-Smith agreed there would be "negative cash flow in the coming quarters" and added that the company is planning to get funds through 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.

The joint venture is suffering because Nokia is turning Windows with Qualcomm, while ST-Ericsson is still not yet qualified. The company's position in TD-SCDMA in China is also affected because of slow ramp up in the region. The company is caught in the middle between mobile chipset suppliers such as Qualcomm and Samsung and the agile fabless chip companies from China and Taiwan.

- Peter Clarke
??EE Times

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