Business Context and Reporting Period
STMicroelectronics N.V. (NYSE: STM) reported financial results for the third quarter and nine months ended September 29, 2007. The company is in the process of divesting its Flash Memories Group (FMG) to form an independent semiconductor company, Numonyx, in conjunction with Intel and Francisco Partners. Financial results are presented for the total company and on a pro-forma basis excluding FMG.
Key Financial Metrics
Third Quarter 2007 (Q3)
- Net Revenues: $2,565 million (up 6.1% sequentially; up 2.1% year-over-year). Excluding FMG: $2,213 million.
- Gross Profit: $902 million (35.2% margin). Excluding FMG: $865 million (39.1% margin).
- Operating Income: $181 million (7.0% margin). Excluding one-time charges: $233 million (9.1% margin).
- Net Income: $187 million ($0.20 per diluted share). Excluding one-time charges: $0.24 per share.
- Cash Flow: Net cash from operating activities was $511 million. Net operating cash flow (non-GAAP) was $255 million.
- Capital Expenditures: $228 million.
Nine Months 2007 (YTD)
- Net Revenues: $7,258 million (down 1.5% year-over-year). Excluding FMG: $6,252 million (up 1.3% year-over-year).
- Gross Profit: $2,525 million (34.8% margin).
- Operating Loss: $(529) million, driven by $949 million in impairment, restructuring, and closure costs related to the FMG divestiture.
- Net Loss: $(496) million ($-0.55 per diluted share).
- Cash Flow: Net cash from operating activities was $1,451 million. Net operating cash flow (non-GAAP) was $652 million.
- Capital Expenditures: $735 million.
Liquidity and Balance Sheet (as of Sept 29, 2007)
- Cash and Equivalents: $3.3 billion (including marketable securities and restricted cash).
- Total Debt: $2.2 billion.
- Net Financial Position: $1.1 billion (non-GAAP).
- Shareholders' Equity: $9.3 billion.
Material Changes vs. Prior Period
- Sequential Revenue Growth: Q3 revenues increased 6.1% sequentially, driven by application-specific wireless and computer products. The Telecom segment grew 10% sequentially, while Automotive declined 3%.
- Margin Improvement: Gross margin improved sequentially to 35.2% (39.1% excluding FMG) due to better product mix and manufacturing performance, partially offset by exchange rate degradation.
- One-Time Charges: The company recorded a $21 million non-cash pre-tax charge in Q3 related to a revision in accounting for a seniority award program. Additionally, Q2 included a massive $906 million impairment charge related to the FMG divestiture, which skewed YTD results significantly compared to the prior year.
- Cost Control: Combined SG&A and R&D expenses as a percentage of revenue decreased to 27.8% in Q3 from 29.6% in Q2.
Guidance, Outlook, and Risks
Outlook
- Q4 2007 Revenue: Expected sequential growth between 4% and 9%.
- Q4 2007 Gross Margin: Expected to be approximately 36.5% (+/- 1 percentage point), assuming an exchange rate of $1.41 to €1.00.
- 2008 Capex: Targeting a capital expenditure to sales ratio below 10% following the FMG separation.
- Numonyx Closing: Anticipated to close in Q4 2007.
- Divestiture Execution: Risks associated with the closing of the Numonyx transaction and potential changes in the estimated $857 million loss related to the Flash memory business.
- Market Volatility: Exposure to cyclical semiconductor demand, pricing pressures, and inventory obsolescence.
- Currency Fluctuations: Significant exposure to exchange rate variations between the US dollar and Euro.
- Intellectual Property: Risks related to IP claims and the ability to secure licenses.
- Verify the final closing date and terms of the Numonyx joint venture with Intel.
- Monitor the impact of the seniority program accounting change on future quarters.
- Assess the sustainability of the 39.1% gross margin in the Application Specific Groups (ASG) excluding the Flash segment.
- Review the progress of the Nokia 3G digital-baseband sourcing agreement and its expected contribution in Q4.
- Confirm the company's ability to maintain the targeted sub-10% capex-to-sales ratio in 2008.