Semiconductor Market Recovering

Guest author Nalini Kumar Muppala recently finished his in-depth analysis of STMicroelectronics’ JV, ST-Ericsson. Today’s Tech Stocks post reviews STM’s (NYSE:STM) recent results in the context of Nalini’s assessment and also takes a look at the results of another major semiconductor player, Texas Instruments (NYSE:TXN). Sequential growth for some divisions at both companies may indicate that a semiconductor recovery is underway.

Last year, guest author Vijay Nagarajan published an extensive analysis on semiconductor companies including STMicroelectronics. Nalini recently updated the series with a deep down on STM’s joint venture with Ericsson, ST-Ericsson, which was formed in August of last year. In A New Force in Wireless Semiconductors, Nalini looks at ST-Ericsson’s new organization structure and its overall market position. He believes that it is already a force to be reckoned with in the market and is expected to overtake TI to be the No.2 in the cell phone semiconductor market.

In Diverse Offering, Nalini looks at ST-Ericsson’s diverse offerings and its market position in each. Following TI’s winding down of its merchant baseband business, ST-Ericsson stands to gain more market share. Earlier, Nokia had selected ST-Ercisson as its 3G baseband supplier. With the ST-Ericsson JV, it stands to be the dominant supplier to Sony-Ericsson and LG. In the standalone application processor market, it is at No.4 with 9.4% share. Next, Nalini looks at the company’s innovative products. In September, ST-Ericsson announced the world’s first 45nm single-chip solution for Bluetooth, FM and GPS: the CG2900. It also delivered the time division industry’s first TD-HSPA modem chip samples in 65nm.

In his final post, Nalini looked at the JV’s strategy: ST-Ericsson is targeting China and the United States for growth. While it has made inroads into China with design wins from China Mobile and Samsung, the U.S. market and the high-growth smartphone market have remained for the most part elusive. But in June 2009, STM’s accelerometer found its way into the iPhone 3GS. Nalini says that while most of the overlaps in the JV have been sorted out, the convergence of three different 3G stacks into one 3G roadmap remains, and improvement in profitability is inevitable but not imminent.

Let’s now take a look at STM’s latest financials reported its third quarter results on Tuesday. Q3 revenue was $2.28 billion, down 16% y-o-y and up 14% q-o-q. Net loss narrowed to $201 million or $0.23 per share from a loss of $289 million or $0.32 per share. This is the company’s seventh straight quarterly loss. Analysts expected revenue of $2.26 billion. Q2 analysis is available here.

Gross margin was 31.3% versus 26.1% last quarter. STM ended the quarter with $2.95 in cash and total debt of $2.7 billion. The net financial position was net cash of $266 million.

All market segments grew sequentially but declined on a y-o-y basis, with Computer up 21% q-o-q and down 5% y-o-y; Automotive up 18% q-o-q and down 19% y-o-y; Telecom up 14% q-o-q and down 8% y-o-y; Consumer up 11% q-o-q and down 28% y-o-y; and Industrial up 9% q-o-q and down 35% y-o-y. Wireless segment revenue, which includes the results of ST-Ericsson, was up 8% q-o-q to $704 million, driven by strong performance in China.

For the fourth quarter, STM expects a sequential net revenue growth between about 5% and 12%. Gross margin is expected to be about 36.5%, plus or minus 1.5 percentage points. The CEO said that the industry recovery is gaining momentum and that the worst of the economic crisis is over. The company is currently trading around $9 with market cap of about $8 billion. It hit a 52-week high of $10.28 on October 14 as Intel’s strong outlook pushed the sector up.

Texas Instruments reported a better than expected third quarter on Monday, led by a second consecutive quarter of 20% growth in Analog. Q3 revenue was down 15% y-o-y and up 17% q-o-q to $2.88 billion. Net income was $538 million or $0.42 per share. Q2 analysis is available here.

Gross margin increased to 51.4% from 45.7% last quarter as a result of an improving product portfolio for analog and embedded processing and more efficient manufacturing operations. The company generated $834 million cash from operations and ended the quarter with $2.83 billion in cash. Capital expenditure was $226 million, up from $47 million last quarter. TI bought back shares for $251 million and paid dividends of $138 million.

Analog revenue in the quarter was down 8% y-o-y but up 20% q-o-q to $1.184 billion. Embedded Processing revenue declined 8% y-o-y and grew 12% q-o-q to $393 million. Baseband revenue was $450 million, up 10% q-o-q and down 33% from a year ago. By 2012, TI should be winding down its baseband business, which is currently about 16% of its business. Excluding baseband, wireless segment grew 18% q-o-q and declined 7% y-o-y. Wireless business revenue was down 26% y-o-y and up 12% q-o-q to $675 million. Other revenue from products, including calculators, was down 17% y-o-y and up 20% q-o-q to $628 million. TI recently took some flak for issuing legal threats to calculator hackers. Calculators are still much in use in schools where smartphones are banned, and there are some people who try to tweak the calulator software to acheive features unimaginable in a calculator like playing Nintendo games.

TI orders in the quarter were $3.11 billion, up 11% sequentially. Based on its performance, TI expects fourth-quarter earnings of $0.42 to $0.50 on revenue between $2.78 billion and $3.02 billion, or negative 3% to positive 5% sequential growth. Analysts estimated Q4 earnings of $0.40 on revenue of $2.78 billion. The stock is currently trading around $23 with market cap of about $29 billion. It hit a 52-week high of $25.35 on September 10.