MOUNTAIN VIEW, Calif.--French-Italian electronics manufacturer STMicroelectronics N.V. needs to act drastically if it is to halt its alarming profit slide and retreat into the periphery of the semiconductor space, according to financial analysts at Arete Research Services.
“In our view, the time has come for major changes among senior management, governance and the structure of the business,” said Arete in a note to investors this week, suggesting that only a demerger splitting the analog and industrial side of the business from the consumer/digital elements, coupled with more focus on efficiency would create value.
Arete said the first step was to deal decisively with ST-Ericsson which it said looks “terminally ill” and is estimated to be on track to burn through another $900 million in 2012.
Arete said it believed the division’s modem IP/team still had significant value and could be sold for around $1 billion to either Apple or Samsung who both lack modem expertise. In addition, Arete suggests transferring some application processor resources to ST's consumer business and shutting down the residual unit.
“We recognize ST-Ericsson has a deep pool of engineering talent (as there is elsewhere within ST) and that its problems stem largely from its customers, but persisting with the current strategy with yet more restructuring ignores how the market has changed,” said the report.
ST has 39 design centers, 78 sales offices spread across 36 countries and employs over 50,000 people. Revenue per employee, however, is half that of its nearest IDM peer Texas Instruments, and Arete maintains that though further restructuring would entail significant redundancies, acting sooner rather than later would at least minimize cash outflows.
“With over 6,500 employees and contractors, there is ample scope for cuts, particularly in legacy or Nokia/SonyEricsson customer support,” said Arete.
“In our view, unless ST can demonstrate it is ready to make these structural changes to unlock value across its portfolio, the next decade will be another one of underperformance and disappointment, for staff and shareholders alike,” said Arete’s report.
The ST-Ericsson's new CEO, Didier Lamouche, has already suggested making better use of internal manufacturing capabilities on 300mm and 28/32nm FDSOI technology for more sustainable differentiation, but it may not be enough.
Financially, the firm has been on the decline for a while already, with ST's revenues sinking six percent last year against the backdrop of a semiconductor industry which saw four percent growth. ST blamed its bad fortune on the unstable macro-economic climate, but Arete said the firm was suffering more from its overly heavy reliance on internal manufacturing, its over-investment in TVs, and failure to reduce exposure to Nokia, with Symbian still in decline.
ST has also seen its Compound Annual Growth Rate increase by just two percent over the last decade, while the semiconductor industry grew by a rather healthier 5.6 percent.
Arete is forecasting ST’s sales to slump a further 26 percent in 2012, predicting that this scenario would then cause ST-Ericsson to lose a further $1bn, sending its debt obligations soaring to $1.7bn by the end of the year.
Arete’s analysts go on to say that even if another round of restructuring goes ahead, the real problem rests with the lack of accountability at the top.
“Only six of ST's top 25 managers have worked outside the company in the last decade, and the average tenure at ST of 22 years is a potential reason for the lack of fresh ideas or dynamism,” said the report.
Thus, despite ST’s unarguable engineering prowess, especially in areas like MEMS, microphones, HV MOSFETs and automotive sensors, unless the firm takes drastic action, Arete’s analysts see little to be positive about.
STMicro causes financial analyst concerns
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