STMicro Posts a Miss, Doesn't See a Recovery Near - TheStreet

STMicro Posts a Miss, Doesn't See a Recovery Near

The European chipmaker said sales were up, but profits fell and it doesn't see a big second half.
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European chipmaker

STMicroelectronics

(STM) - Get Report

saw profits take a tumble in its second quarter and retreated from its earlier forecast of a second-half rebound. In line with that bleak view, it issued September quarter sales guidance with a midpoint below the Wall Street estimate.

"The improved pricing conditions which we had expected to benefit the 2003 second half have not materialized, and the global economic recovery has been delayed," said CEO Pasquale Pistorio.

In January, the company's chief economist had predicted the third and fourth quarters would "blossom" with a return to meaningful growth, according to a news report.

Today STM posted June quarter net income of $79.5 million, 24% below last year's levels. Earnings per share of 9 cents fell 3 cents short of Wall Street expectations.

Sales of $1.70 billion were up 12% from the same quarter a year ago and a tad above the Wall Street consensus estimate for $1.69 billion.

However, the company's profit level slipped from year-ago levels, to 35.7% in the just-ended quarter from 37.6% in the second quarter of 2002.

Pistorio said margin "increased from the prior quarter, but was penalized by pricing pressure and the negative impact of the decline of the U.S. dollar in the second quarter."

Commenting on second-quarter performance, Pistorio said, "The $41 million sequential increase in gross profit did not translate into sequential increases in operating income and net income due to a confluence of several factors. Most significant among them was the rapid deterioration in the value of the U.S. dollar vs. the euro and certain other currencies during the period. This particularly affected R&D and SG&A costs, which are primarily euro-denominated."

STM said inventories were up from the prior quarter, due to both a buildup to ensure on-time deliveries in case of SARS disruptions and to the dampening of demand caused by the weakened U.S. dollar.

Industrywide, STM expects the semiconductor market to grow between 8% and 12% this year.

Its own third-quarter revenues should fall between $1.7 billion and $1.78 billion, reflecting year-on-year growth of 3% to 8%. On a sequential growth basis, sales will be flat to up in the midsingle digits.

The guidance range, with a midpoint of $1.74 billion, is tilted toward the low end of Wall Street's estimate for $1.76 billion in sales.

Going forward, STM said reducing SARS-related inventory levels will be a priority. The combination of inventory, tough pricing conditions and a weak dollar will depress gross margin to about 35% in the third quarter.

In the third quarter, Pistorio said STM will announce a cost-cutting plan that likely will be accompanied by impairment and restructuring charges.