iPhone’s Component Ecosystem: ST Micro

One of the coolest features of the iPhone is the orientation sensor that detects whether you are holding the phone vertically or horizontally and automatically changes the display to portrait or landscape. ST Micro is the supplier for this orientation sensor, also known as the LIS302 accelerometer. Considering the estimated price of $2.95 per unit, the ST Micro accelerometer accounts for around 1.3% of iPhone’s component price.

ST Microelectronics N.V. (NYSE: STM) with net revenues of US$9.85 billion in 2006 is the world’s fifth largest semiconductor company. Based in Geneva, the company is the largest semiconductor supplier in Europe and the 3rd largest in China.

The company offers a wide range of products organized in Application Specific Products group, Industrial and Multi-segment group, and the Flash Memory group. It is worth noticing that earlier this year ST Micro and Intel (NASDAQ: INTC) decided to spin-off their NOR and NAND Flash businesses into a stand-alone company in collaboration with Private Equity firm Francisco Partners. iPhone’s Flash memory, however, is supplied by Samsung, as we discussed earlier in the series. Nonetheless, the demand for Flash memory is going to continue to rise due to the advent of miniaturized, flash-based MP3 players and music phones, and I suspect, Francisco Partners’ investment thesis is based on this assessment.

On the financial front, in Q1 2007, the company reported revenues of $2.28 billion, an year-over-year decline of 3.7% compared to 2006 figures of $2.36 billion. Net income at $72 million was down 45% from $132 million. The EPS, which was $0.30 per share in Q4 2006, nose-dived to $0.08 in Q1 2007.

While the Application Specific Products group just about managed to break even, the Flash Memory group’s revenues declined by 27.5% year-on-year. The Industrial and Multi-segment group however grew at 14%. The slump in performance was attributed partly to a general decline in average prices in the semiconductor industry and to a weak US dollar.

As a measure to reduce costs and improve productivity, ST Micro recently announced measures to move manufacturing bases in the US to cost effective and technologically superior facilities in countries such as Singapore and China. While this will involve substantial restructuring charges, ST Micro believes that upgrading the US facilities will be a costlier proposition.

Proactive steps like creating a new company for Flash memory products and relocating manufacturing facilities should impact the company’s performance positively in the long run. ST Micro also increased its R&D expenditure as a percentage of revenues to 19% in Q1 2007 from 17% in Q1 2006, another indicator that the company is looking positively at the future.

iPhone’s accelerator design win will certainly help the company in securing more business, as the orientation sensor starts to become standard fare in future handsets. It also helps in maintaining its image as one of the best innovators in the industry.

Despite less than impressive financial results, STMicro’s stock has more or less held steady between the $18-$20 price band in the last 6 months. It is currently trading at $19.95.

This segment is a part in the series : iPhone’s Component Ecosystem