STMicroelectronics Beats, Guides Down

The chipmaker bests estimates by 3 cents but says weak demand will weigh on sales.
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STMicroelectronics (STM) - Get Report, the top European chipmaker, beat earnings expectations for the third quarter, according to a release issued Wednesday after the bell.

But on a less-happy note, the company also predicted weaker-than-expected sales in the quarter underway and said it would curtail its capital spending in the final quarter. ST revealed plans to reduce capital expenditures next year by 25% from 2004 levels, to around $1.5 billion.

The Geneva-based semiconductor company delivered third-quarter net income of $189 million, or 20 cents a share, up from a loss of $50 million a year ago.

Analysts were looking for earnings per share of 17 cents, according to Thomson Financial.

Net revenue totaled $2.23 billion, in line with estimates. Revenue was up 24% from last year's levels and

up 3% from the prior quarter.

Gross margins stood at 37.9%, above the prior quarter's 37.4% and the 35.1% reported a year ago.

In a statement, Chief Executive Officer Pasquale Pistorio touted ST's improving profit levels. "Despite a progressive decline in market demand that was characterized by shortened lead times and backlog adjustments, our revenues came in within the guidance parameters we provided at the time of our 2004 second-quarter earnings announcement," he said.

"We are especially pleased that gross margins reached 37.9% for the period, the high end of our guidance range, benefiting from sequential improvements in product mix and manufacturing efficiencies," the CEO added.

Pistorio said that sequential revenue growth mostly resulted from digital consumer products, as well as application-specific integrated circuits sold into the wireless, data-storage and auto markets.

Flash-memory revenue was about flat with the prior quarter, at $306 million.

By end-market, revenue for the quarter broke down as follows: 14% from automotive, 23% from consumer, 16% from computer, 31% from telecom and 16% from industrial.

Commenting on the outlook, Pistorio said, "We share the view expressed by many analysts that the 2004 fourth quarter will be a period of relatively modest growth for the semiconductor industry, resulting from lower-than-anticipated growth in end-market demand, which has caused inventory buildups in certain market segments and has constrained pricing power."

ST expects fourth-quarter revenue to range from flat to up 5% from the prior quarter, implying a sales range of $2.23 billion to $2.34 billion -- below the consensus estimate for $2.44 billion. Pistorio acknowledged that the outlook is "below our earlier expectations and historical seasonal trends."

Gross margins should range between 38% and 39%.

In light of the shortfall, ST said it has cut its 2004 capital expenditure to about $2 billion, 10% below its earlier plan. The company plans to reduce spending further next year, to around $1.5 billion.

ST shares rose 18 cents, or 1%, after hours to $17.88. In regular trading the stock gained 25 cents, or 1.4%, to $17.70.