ST, Qimonda Post Significant Net Losses

Begging the question as to whether the worst is over, two of the semiconductor industry's biggest players have reported dismal financial results for the quarter ended June 30.

Geneva-based STMicroelectronics reported that while its Q2 revenues grew 6.2 percent sequentially, and 6.8 percent year-over-year, the chip giant still posted a net loss of $758 million for its Q2 ended June 30.

Late yesterday, ST said it will join IBM's ecosystem to share the costs of semiconductor development down to 22nm and possibly beyond. ST had been the big holdout from the Crolles2 alliance that once included Philips Semiconductor (now NXP) and Freescale. In the past year, both NXP and Freescale left Crolles and Freescale has moved into IBM's circle of cooperating companies. Whether ST joins the Common Platform partnership in the IBM ecosystem remains to be seen.

ST President and CEO Carlo Bozotti said of the partnership with IBM that the two companies will have teams at both the East Fishkill site in the U.S. as well as Crolles in France working together for core and value-added derivative applications, respectively.

Based on the company's financial results, it begs the question as to how quickly the industry's largest chipmakers will move to outsource or partner more and more pieces of their offerings. Early this year, Texas Instruments pulled back its entire process development, and is instead leveraging the work from its foundry partners on the march to 32nm and below.

It's been a year filled with big changes at ST. In May, the company announced that it would create, in conjunction with Intel and Francisco Partners, an independent semiconductor company, with ST contributing its Flash Memories Group, to be named Numonyx.

Bozotti said in a statement regarding the results: "From the operational point of view, ST's sequential revenue results, led by recovery in wireless and digital consumer, concretely demonstrate our ability to increase sales and, we believe, gain market share."

"Strategically, the recent resolution of important initiatives allows ST to focus efforts and resources on leadership in multimedia convergence applications and power solutions, advance a lighter asset business model, drive towards a higher RONA and enhance cash generation from operations," he continued.

"Additionally, advancing our commitment to a lighter asset structure, following careful evaluation of further opportunities to optimize our asset utilization, we reached the recently announced decision to rationalize three of our manufacturing operations," Bozotti added.

And earlier this month, ST announced that it will close three of its manufacturing operations over the next two to three years.

In connection with the anticipated financial deconsolidation of ST's flash business, Q2 net results included approximately $857 million of primarily non-cash impairment charges. Additional charges taken in Q2 included about $40 million in connection with the July 10 announcement to further optimize asset utilization and $9 million of costs from previous plans. These charges totaled $906 million.

Due to the impairment and restructuring costs, ST reported an operating loss of $772 million, and a net loss of $758 million or negative 84 cents per share. Excluding $906 million of impairment, restructuring charges and other related closure costs during Q2, operating income was $134 million, operating margin was 5.5 percent and net income was $139 million or 15 cents per diluted share.

Looking ahead to Q3, Bozotti said: "Based on current order visibility for the third quarter, we see sequential sales growth continuing for ST in the range between 2 and 7 percent. Despite the further weakening of the U.S. dollar, we expect the gross margin for the quarter to expand to about 35.5 percent plus or minus one percentage point."

Next, the Munich, Germany-based memory chipmaker Qimonda AG today announced net sales for its fiscal Q3 ended June 30 of $1.01 billion (740 million Euros), down 24 percent from $1.34 billion (977 million Euros) in fiscal Q3 2006, and down 25 percent sequentially from $1.35 billion (984 million Euros) in fiscal Q2.

Q3 EBIT was a loss of $442.7 million (323 million Euros) compared to positive EBIT of $137.1 million (100 million Euros) in fiscal Q3 2006 and positive EBIT of $116.5 million (85 million Euros) in fiscal Q2.

Q3 net loss was $298.8 million (218 million Euros) or a loss per share (basic and diluted) of 88 cents (0.64 Euro) compared to net income of $74 million (54 million Euros) in fiscal Q3 2006 or earnings per share of 25 cents (0.18 Euro). In fiscal Q2, net income was $78.1 million (57 million Euros) and earnings per share of 23 cents (0.17 Euro).

"In the June quarter, the industry saw a sharp price decline for standard DRAM products, where PC contract prices dropped almost 60 percent quarter over quarter," noted Kin Wah Loh, President and CEO of Qimonda, in a statement.

"Our diversified DRAM product portfolio helped limit our average selling price decline to 40 percent quarter over quarter. Although we have seen some price improvement in July, as we enter the typically stronger second half of the calendar year, we are taking several actions to improve our financial performance," he continued.

"For the current financial year, we are limiting our capital spending and expect to be around $1.2 billion (900 million Euros), at the low end of our previously announced range. For the next financial year, we are significantly cutting capital spending plans down to a range of $891 million to $1 billion (650 to 750 million Euros)," Loh explained.

"We are focusing on productivity improvements and expect to convert more than 50 percent of our capacities to 80nm and 75nm by the end of calendar year 2007 while growing our 300mm share to 80 percent. In addition, we are curtailing our operating expenses for the current financial year and expect to save about $41.1 million (30 million Euros) compared to our previous plans," he added.

On a year-over-year basis, Qimonda said its quarterly net sales decreased due mostly to a strong decline in average selling prices as well as a weaker U.S. dollar. These effects were not entirely offset by the 56 percent growth in bit-shipments. Quarter over quarter, net sales decreased mainly due to a 40 percent decline in average selling prices and a weaker U.S. dollar. This decrease, however, was only partially offset by the strong 28 percent growth in bit-shipments and a fairly stable shipment share to non-PC applications of almost 50 percent.

In fiscal Q3, Qimonda generated 33 percent of its net sales in North America, 16 percent in Europe, 31 percent in Asia Pacific and 20 percent in Japan.

Gross margin and net income year over year and quarter over quarter were negatively affected by the DRAM price development and a weaker U.S. dollar. These effects could not be offset by higher bit-shipments and improved manufacturing productivity. The sharp decline in prices for standard DRAM products resulted in inventory write-downs of $90.5 million (66 million Euros) in the quarter, which further negatively impacted gross margin and profitability.

Looking ahead to fiscal Q4, Qimonda said it expects its bit production to grow by 15 to 20 percent, mainly based on increased in-house and partner capacities and continued productivity improvements from the ongoing conversion to 80nm and 75nm technologies. The company targets a share of bit-shipments to non-PC applications of around 50 percent for Q4, and expects the trend of strong demand for PC-related products in particular to continue.

For the full financial year, Qimonda said it expects bit demand for DRAM to be driven by the continued strong growth in graphics, consumer and communication applications and the move to higher density modules in the PC market, and continues to estimate an increase in its bit production of between 60 and 70 percent. Qimonda continues to expect its share of bit-shipments to non-PC applications to be more than 50 percent for the full financial year.