STMicroelectronics NV (NYSE:STM)
Company Conference Call
November 17, 2011 10:30 am ET
Didier Lamouche – Chief Operating Officer
Tait Sorensen – Investor Relations
Gareth Jenkins – UBS
Okay, we’ll make a start. For those of you that don’t know me, I’m Gareth Jenkins, the European Hardware Analyst here at UBS. It’s my great pleasure to introduce Didier Lamouche, who is the COO of STMicro, as well as Tait Sorensen, IR. Without further ado, Didier, over to you. Thank you.
Okay, thank you. Good morning everybody. I’m very proud and happy to be with you. I’m with ST. If you allow me to spend 30 seconds introducing myself. I joined ST a little bit less than a year ago as the Chief Operating Officer. Actually I was coming from a different industry but I spent before that 20 years in the semiconductor industry in companies like IBM, where I was running worldwide operations out of Somers here for a while, Motorola, Infineon and Philips. I quit that industry in 2003. I was offered to turn around a company that maybe some of you know called Bull, Honeywell Bull, which I did and sold the company to a new shareholder in 2010. And in the meantime, I joined the supervisory board of ST between 2006 and 2010, and this is one of the reasons why, because I knew the company already a bit, this is one of the reasons why Carlo Bozotti offered me to take the role of Chief Operating Officer, which I’m glad to have now since 10 months. And when I tell you I’m glad to take it and to be in this role since 10 months, it’s not exactly true because I have never seen such a rough time, even in the semiconductor business, as in the last 10 months when you accumulate what happened in Japan, what happened in North Africa – I remind you we have a factory over there; what happened in Libya – we have two factories close to Libya, what happened to one of our main customers – I won’t mention the name. It has been a rough—and now in Thailand even, it has been a rough year. So to a point, my wife sometimes tells me what have you done wrong since 10 months? Everything was nice before and now everything goes under. So, anyway.
Just to cut a long story short, I will not present anything more than two charts just to give you the overall picture of what is ST today. I’m sure you very well know, so I will not comment these charts. You know that last year we did $10.35 billion revenue, 53,000 people, et cetera. So I think you know. Maybe more interesting is this one, just to launch the questions and debate. This is the revenue profile of the company for the nine first months of 2010, so the way we report our reserves is this one. Automotive now for the first nine months is representing 18% of our revenues, strongly helped you will see what we call CCI, our computer and communication infrastructure business is representing 10%. Our HDD business, which is essentially consumer plus displays, imaging devices that we mostly sell to cell phone makers, is representing 14%, and then the biggest chunk of our business is composed of analog MEMS and microcontroller product business, representing 30%. The power and discrete product segment represents 13% and the wireless segment is now only, I should say quote-unquote, 15% of our business. And the last introductory chart is showing you in fact the growth that we are registering since the first nine months of the year. On this perimeter, the automotive business, despite the fact that we see a severe slowdown today, is still recording pretty strong and healthy growth of plus-28%. Where we suffer the most besides wireless is actually the CCI business – minus 8% in the first nine months which is in fact responding to the fact that we are getting out of the SOC business of the disc drive industry. We were having two big customers that we were providing historically with SOC, and we retained the business consisting of developing the motor controlled chips, and we are getting out of the SOC business. This is why we are registering now minus-8% performance year-to-year.
Minus 3% for the HDD part of our business. I should say this one is actually composed to two elements. The consumer part of our business has decreased much deeper than minus 3%, but the volume and the revenue we sustained by significant growth and healthy situation in the display part, the imaging part of this business; and the blended average makes minus 3% for the first nine months of the year.
Healthy enough, the analog and MEMS and microcontroller part of our business for the first nine months – plus 19%, which is a remarkable performance driven mostly by MEMS but not only, also by micros and analog. The power discrete, the PDP business is plus 4; and of course just to finish with this one, our wireless business which is essentially composed of ST business plus all products we sell—ST products we sell to the wireless customer is decreasing sharply year-to-year to minus 31%. The wholly owned business revenue trend, which means everything except wireless, is growing 9.3% on the first nine months of the year, and this has be compared roughly to 2 to 3% growth for the year for the sum, okay? So clearly on that part of our business, we are taking market share for the first nine months of the year pretty significantly.
That’s what I had to introduce the debate, and I think we can go to questions now.
Question and Answer Session
Thanks Didier. I’ll maybe just start with a few and then we can throw it over to the audience. I just want to—going back to your presentation that you gave in Asia fairly recently, you talked about the benefits of having the manufacturing capability on CMOS discrete and MEMS, so I’m just wondering whether you can talk to what the benefits of multiple technology on the manufacturing side, you know, you actually feel that that’s a big benefit to your company. And then just secondly on the photovoltaic side of things, you opened this year—I think you have around 160 megawatt kind of capacity. I just wonder whether you feel that capacity will be filled over the next kind of year, and the path to 480 megawatt capacity, how that will fill out? Thank you.
Well maybe I will answer the second part of your question. On this one, we are really—I mean, yes, you are talking about the three-share joint venture that we have in Catania with Enel and Sharp. We are not at all actively involved in the management of the venture. That was really an industrial solution that we found in order to recycle, if you will, the facility that we had over there, so I’m not really the most competent person to tell you how this business is going to develop, okay? So allow me not to answer to this one.
On the first part of your question, the benefit of having multiple technology manufacturing sites, I think it’s—I mean, ST has a very interesting—that’s what I found coming into the company, a very interesting manufacturing strategy in the sense that we have four main sites which are at the same time dedicated with two key attributes. First, each manufacturing site is dedicated to one type of product and business; for example, Crolles is dedicated to the VSI high end and serving basically CCI and HDD. We have Catania and two of which are clearly focusing on the discrete products. We have Agrate, which is dedicated mostly – not uniquely, but mostly – to power integrated circuits and serving mostly the automotive business, and the fourth one is Rousset which is dedicated to the security business. And in the middle of that, we have a big, huge facility in Singapore which is in fact our internal foundry. This site is used to offload all the high volume products, cost-sensitive products that ST is building, and we use it basically as an internal foundry. So this is the manufacturing setup and the way manufacturing ST is organized.
The second key attribute which I found interesting joining ST in our manufacturing strategy is that each of the sites is accumulating at the same time the three key functions necessary to make a business successful – of course the manufacturing function but also the R&D function, and this is key. This is one of the reasons why very often I’m asked the question, why do you keep factories in Europe? One of the reasons is that it’s not only factories. Those are R&D centers, and it’s maybe easy to move factories; it’s not that easy to move R&D and all the engineers that go with this type of activity. And the third function, which is residence on each of those sites, is a business function, the business development and the product development function. So very quickly we can develop product, identify product on the market, put the R&D effort in order to develop the appropriate technology, and then ramp in manufacturing.
So best example of success that we have achieved is the MEMS. We wouldn’t have been able to achieve such a fast ramp-up for the key customers we have today – you know, we are number one in the MEMS world clearly by far in the consumer application. The key customers are the ones you know – the cell phone customers, smart phone customers, consumer customers, games customers. We wouldn’t have been able to ramp, which we did in less than one year, to such high volume without those three components present on the same site, I mean R&D, manufacturing, and product development. And that’s the reason why we maintain this strategy. So of course, I wish we would have even more successes in MEMS, in every area, but I think that’s a good recipe for success.
While we’re on MEMS, can you just talk about what you see in competition in the course of the next year? It seems like everyone seems to have a MEM strategy for next year, and maybe just talk to some of the new products – so the Freeman and the U8500 or the NovaThor platform, and how you see those ramping during the course of the next 12 months.
Yes, so on MEMS, clearly we are the leader by far on the consumer market. We will this year—we said we would and we will double the business, the level of business we were doing in 2010. We will double in 2011. I don’t know if we can give any numbers today, but I think we said that last year we were north of 300 million—
300 million, correct.
--so this year we will double that, clearly. Do we plan to do even more than? Yes. Entering into the year, we were even adding more aggressive ramp-up in MEMS, but we committed to more than double, which we will do. Next year, we still plan—we don’t give any numbers yet, but we still plan to grow significantly in MEMS because I think we will put our product in many more phones, many more smart phones that we have done today already, simply because we have the best product on the market. Second, the second underlying competitor is far smaller than we are, and third we have many more products coming online. Today, the success of our business is mostly driven by the gyroscopes, which is equipped being the most advanced smart phone on the market. We are putting now on the market pressure sensors, so you might ask why do you need a pressure sensor in a cell phone? It’s not necessarily to measure the pressure but to measure the altitude to which you are That helps you to, for example in your GPS in your car, in countries where you have multiple crossover of highways, to know exactly where you are when you need to exit at one point when you have multiple levels of highways. It gives a more precise indication, so we will put that product in those types of devices. It helps you to identify where you are in a shopping mall, at which floor, so that companies like Google can send you advertising in real time. So that’s the usage of the pressure sensor, but we will also put on the market microphones based on MEMS, very small, that enables to cut the noise—the surround noise when you are in airports or noisy environments. We will put many different applications – optical image stabilization systems also, which are now getting very popular in cell phones when you want to take a short—record a short movie with a cell phone, it’s not easy to be static, so if you put a very small MEMS next to the camera, you can virtually eliminate all the movements, the vibration, the noise. So we have many, many products coming and in various markets.
We have, as I said, established an undisputed leadership position in the consumer environment. We will enter now—we have decided to enter in the automotive segment. As you see from this chart, we have a strong penetration already with other products on the automotive segments, so bringing at the same time our leadership in products and our strong penetration and knowledge of this sector should clearly be a recipe for success.
And the third sector where we will invest strongly is the health and wellness sector. There is many prospects, many customers who want to put MEMS everywhere – in shoes, in clothes, in health. For example, a customer came to us to tell us that they are interested to have portable devices MEMS recording real-time your heartbeat and transmitting information to your cell phone, for example, directed to your doctor if you need, if you want. So those are the types of applications that we are working on that will fuel the growth next year on the MEMS.
Okay. Before we come on to some of the shorter term questions, I was just wondering whether you could give us an update on the 300 million development in Crolles and where we’re at?
So we are—to recall, the main manufacturing node at Crolles is 40 nanometer. We are, as you know, engaged deeply with our friends in IBM from here in Fishkill – IBM global foundry, Samsung to developing the next generation node. We will introduce in 2012 28 nanometer. The first chip that we will put on the market will be designed for ST-Ericsson, advanced processor and advanced modem in 28 nanometer, and we are working to get qualified and start to ramp in 20 nanometer end of next year, okay, also on those type of products. On 28 nanometer, we have other of our customer also interested by our technology in the communication infrastructure customers. A big customer from the U.S. west coast interested to our product that we will ramp out of Crolles, but not only out of Crolles – also at our foundry partners. The strategy we have on the advanced DLSI technology manufacturing is basically to manufacture one-third internally out of Crolles and two-thirds at foundry partners, and of course our preferred foundry partners are the ones who are together with us developing the base technology with IBM in Fishkill, so Samsung and Global Foundry. So that’s where we are at the moment.
Second, another key vehicle for the loading and the manufacturing in Crolles is our also imaging technology and products, which is pretty healthy at the moment.
Great. And maybe if we can just come on to some of the shorter term concerns or otherwise that I would imagine people have in the audience about – you know, fab loading and kind of what you’re seeing from Thailand. I guess, you know, CCI is probably the most impacted. What are the challenges that you’re facing? Are you seeing any big impact in other areas as well, and when do you expect your utilization to kind of trough?
Yeah, so fab loading—clearly, yes, as you know our manufacturing model so far was for the fab calling for 80% internal manufacturing, 20% outside at foundries. In fact, the reason why we see under-loading at the moment – pretty severe, by the way since now Q3 and Q4—Q4 would probably be the lowest point of the loading, or the highest point of the under-loading. The reason is the—the story is first, I think we still need to increase our level of outsourcing, and we will do. It’s directly under my responsibility so we will work on that. We need to increase to, I would say, 30%. Why? Just to get enough cash and flexibility to repatriate what we need to repatriate in case of downturn. What we see at the moment is repatriation of manufacturing which is done outside, you cannot do overnight. It takes some time. It can take three months to requalify product, up to six months, so if you don’t start from a higher offload base it’s going to impact our internal loading. And the second reason why to increase the level is simply because by definition, you cannot—even if you offload 20% of your production outside, you cannot repatriate 20%, first because you need to work in a partnership mode with the foundry to which you offload, so you cannot take them down to zero, otherwise you lose your flexibility potential for the next cycle. And second, simply physically it’s not easy. So that’s one key action we will take for the future.
The second key action, we will also increase our flexibility in the back end every year of our manufacturing. Our back end manufacturing is very competitive. I think in the past we have not enough invested in establishing, I would say, sufficient outsourcing strategy. We outsource a significant amount of module fabrication to subcontractors, but not enough—we have not built enough flexibility, if you will, vis-à-vis that.
Thailand – so Thailand, we are not—I mean, first, we have no factory in Thailand. Second, so far as we know, we have only one part of our business, which is not directly because we have no facility, but one of our customers—some of our customers being impacted by Thailand is obviously the disc drive business, yes? We have already factored in some impact in the forecast that we gave for Q4, so that’s inside already. I think it’s going to be—now, independently of ST, (inaudible) ST, I think what’s happening there is pretty severe. It’s pretty severe. We should not expect a recovery fast for the companies who are impacted. I know some companies have factories; I don’t see how they could recover fast. When you have water in your basement for weeks, I don’t—the machines are destroyed first, and second you know how sensitive the semiconductor technologies and processes are to humidity, so even if you put you machine on the first floor or second floor, I don’t see how this could be immune. So I think this is a severe impact. Not to us – cross your fingers – we are pretty much preserved so far, but our competitors who have factories there or a lot of customers there, I think they will suffer.
Great, thanks. I will throw it out there for anyone who would like to ask a question.
Hi there. ST-Ericsson, I often get a lot of questions on this in terms of the underperformance. Is there a time frame in the Board’s mind about sort of when it has to achieve a turnaround within the business before a different strategic view is taken of it?
Okay, thank you for the question. I got the question a hundred times already. No, I mean, you know our strategy and our difficulties in ST-Ericsson. I’m not going to repeat again. This is a company first, the difficulty is that it’s a merger of three companies, you have to remember, that we started in 2008; and I think it was visionary at the time because we needed to create some scale and we needed to go from a model where one company was basically serving one customer to a model where we are serving multiple customers with one platform. And I’m glad to see that many of our competitors are following that path today when you see – not to name them – but Intel acquiring Infineon and Broadcom acquiring modem company—I mean—
Yes. So clearly, we have done it before, so we were at that point ahead of the curve, let’s say. And it’s not easy to integrate companies together, I tell you, and essentially to streamline and form a product portfolio, and going from an ASIC to a platform model. It’s not easy. So I’m not saying we are smarter than anybody, but certainly I don’t think it will be easier for anybody else to integrate. So that’s one.
Second, clearly we were expecting to turn around faster. We’ve since now a few months we have taken additional burden in the fact that our main customer, as you know, has really lost ground rapidly in the market share – not to name them, Nokia – we don’t even report their—starting last quarter, they fell obviously below 10% of our revenue because we don’t report their share anymore of our revenue, so that tells a lot. So that has increased our level of pain, and that explains a bit why clearly it is taking much longer than what we planned.
Now going specifically to your questions, we are not ready to accept to lose $200 million a quarter for an additional five, six, seven, eight quarters. We are not. We are not. But at the same time, we have not set a date by which we say, okay, by—I don’t know, such a date we pull the plug or we do anything brutal if things are not—no. We are not in that mindset. We are in the mindset where we have a plan in place and we trigger each action of the plan depending on what is the situation. For example, last June we have decided to put in place an additional restructuring plan that was not even foreseen three months before. Why we did that? Simply because we felt that we were not meeting the roadmap that we had set to ourselves and we need to do something else. Second example is the IP licensing that we advertise in Q3, I mean last month; so we licensed some of our technology to a player on the market. That was not planned three months ago, and we decided to do that simply because we felt we needed to bring more cash in the company. So we have a series of actions – I’m not going to tell you which ones, you will see – potential actions in place that we are going to trigger, but clearly to be a bit more precise in my answer, 2012 will be a crucial year for ST-Ericsson. 2012 is the year where it needs to happen.
Any last questions before we move on to the breakout? Maybe I’ll just ask one then. It’s, again, a bit of a short-term one, but on the last call I think Carlo mentioned that orders had just started to turn in the few weeks before, but it was a bit early to say that there was a more meaningful turnaround. I just wonder whether you can give us any sense of whether you’ve seen a continuation of the improvement through this quarter and into next.
I wouldn’t use the word improvement. I think—yes, we have seen some form of stabilization since now, I would say, mid-October; but we are not seeing yet a stronger recovery. We are clearly burning off inventory, but the end demand is still soft. It’s still soft, so I think we are in a stabilization phase, and probably the bottom is in between now, Q4 and beginning Q1, clearly. It’s too early to say that we are getting out of this trough. If I want to be very positive, I would say yes, Q2 is going to be recovering strongly; but you know, you never know – it could also be our customers pushing ahead of us, I would say, the bubble and the recovery. It’s a bit early to say. Clearly, stabilization, yes. Are we seeing the recovery? Not yet.
Didier, thanks very much. We’ll take it to the breakout session. It’s downstairs in the (inaudible) room.
Great, thank you very much.