Business Context and Reporting Period
This Form 6-K, filed by STMicroelectronics N.V. on July 18, 2012, reports the second-quarter 2012 financial results (ended June 30, 2012) of ST-Ericsson, a 50/50 joint venture between STMicroelectronics and Ericsson. ST-Ericsson is a supplier of mobile platforms and wireless semiconductor solutions. The filing notes that these results do not fully reflect the Wireless Segment of STMicroelectronics, which includes other activities outside the joint venture.
Key Financial Metrics
| Metric ($ million) | Q2 2012 | Q1 2012 | Q2 2011 |
|---|---|---|---|
| Net Sales | 344 | 290 | 385 |
| Adjusted Operating Loss | (235) | (297) | (181) |
| Operating Loss (as reported) | (309) | (326) | (222) |
| Net Loss | (318) | (312) | (221) |
| Net Financial Position | (1,205) | (956) | (427) |
| Net Operating Cash Flow | (249) | (159) | (233) |
| Inventory | 171 | 209 | N/A |
Note: The Net Financial Position is heavily influenced by parent companies' short-term debt of $1,238 million. Cash and cash equivalents stood at $33 million.
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 19% sequentially from Q1 2012, driven by volume ramps of NovaThor platforms to major customers including Samsung and Sony Mobile Communications.
- Loss Reduction: The adjusted operating loss improved by $62 million sequentially to $235 million, attributed to volume increases, margin improvements from new platforms, and initial operating expense reductions.
- Inventory Management: Inventory decreased by $38 million sequentially to $171 million.
- Strategic Restructuring: On July 1, 2012, the transfer of the application processor development organization to STMicroelectronics was finalized to build a world-class partnership.
Guidance, Outlook, and Risks
Outlook: ST-Ericsson expects net sales to be approximately flat sequentially for the third quarter of 2012, balancing substantial Q2 revenue growth against the macro-economic and industry environment.
Management Commentary: CEO Didier Lamouche highlighted progress in ramping NovaThor ModAp platforms and executing a new strategic plan to reposition the business model. While all profit and loss metrics showed sequential improvement, management emphasized the need for further execution improvements to reach sustainable profitability and reduce the breakeven point.
Risks and Contingencies: The company operates in a dynamic, fast-changing, and highly competitive market. Forward-looking statements are subject to inherent risks and uncertainties, including factors detailed in the latest Form 20-F filings of STMicroelectronics and Ericsson.
Investor Verification Checklist
- Verify the extent to which ST-Ericsson's results are consolidated into STMicroelectronics' Wireless Segment versus reported separately.
- Monitor the execution of the strategic plan to reduce the breakeven point and achieve sustainable profitability.
- Track the impact of the application processor development team transfer on future R&D costs and product roadmaps.
- Assess the sustainability of the 19% sequential revenue growth given the flat Q3 2012 sales guidance.
- Review the liquidity position, specifically the reliance on parent companies' short-term bridge credit facilities ($1,238 million) versus the joint venture's own cash ($33 million).