STMicroelectronics warns of further problems ahead

The world's fourth-biggest maker of semiconductors, STMicroelectronics, has reported a 24 per cent decline in second-quarter net income and said a delay in an expected turnaround in the global economy would lead to a further drop in profitability in the current quarter.
The Malta STMicroelectronics plant is the country’s single largest industrial producer and fills a substantial part of Malta’s export figures. Apart from Malta, the company has factories in France, Italy, the United States, Singapore, Malaysia, and China.
ST’s profits had slumped to USD79.5 million from USD104.7 million in the second quarter of last year. ST, which is based in Geneva, said that by the end of October it would present a plan to increase competitiveness by increasing capacity and cutting costs. The plan will also say when some restructuring charges will be taken.
Increased competition in the quarter forced ST to cut prices, eating into profit margins, the company said.
Profitability was also hurt by a strengthening of the euro against the dollar and other currencies.
Most of ST's research and development, which consumes about 17 per cent of total revenue, is denominated in euros, making that part of the company's budget relatively more expensive than last year.
"Since there has been no broad recovery in the semiconductor industry and based on the results released from some of ST's customers, we can expect the current quarter to be another difficult one," said Michael Hollfelder, an analyst with HVB Group in Munich who attended an ST presentation in Milan.
"Overall, the picture is dismal, especially in the consumer electronics and mobile-phone sectors," he said.
Acquisitions helped ST, created in 1987 from the merger of Italian and French state-owned semiconductor makers, lift sales by 11 per cent in the second quarter to USD1.7 billion. The company forecast that revenue in the current quarter would be between USD1.7 billion and USD1.78 billion.
Gross profit margin, a closely watched measure of profitability, was 35.7 per cent in the second quarter and will be about 35 per cent this quarter.
In the last three months of the year the gross profit margin is expected to rise to between 36 per cent and 37 per cent.
"With the economic situation as poor as it is, our customers keep asking us to lower prices and that cuts into margins," Pasquale Pistorio, ST's chief executive, said at the Milan presentation. "Every sector is feeling the price pressures and that will continue for the time being."
While profit fell at ST, the company has recently outperformed money-losing European rivals, including the Netherlands' Philips Electronics.
ST's varied product line has helped it better weather the slump that has hit the semiconductor market in the past two years. ST derives one-third of sales from chips used in cellular phones, with its biggest client being the mobile-phone maker Nokia. Nineteen per cent of sales comes from orders made by consumer electronics companies and 18 per cent from computer makers.
STMicroelectronics said it would take time to work down excess inventories that were built up in the early part of the year to ensure that the company could deliver its products on time, even in the face of the SARS outbreak that hit some Asian countries.