On October 23, STMicroelectronics CEO and Chairman Jean-Marc Chery held a company earnings conference call to announce the third quarter earnings report to the outside world and investors. A careful search of it reveals a lot about the company's recent performance changes, as well as its focus on coping with market fluctuations and specific plans for the future.
It is necessary to mention here that the financial reports of STMicroelectronics, NXP and Infineon, the three major European semiconductor giants, are basically released simultaneously, and the fiscal year and natural year are completely consistent. Infineon is relatively special. They released their third-quarter financial report at the end of July and the beginning of August. It can be said that their fiscal year is almost one quarter earlier than the natural year.
STMicroelectronics (STMicroelectronics, hereinafter referred to as ST), the third quarter financial report is generally quite impressive, continuing the second quarter's gradual recovery from the new coronavirus epidemic, with net income of US$2.67 billion, almost US$600 million more than the second quarter, a month-on-month growth rate of 27.8%, and a year-on-year increase of 4.4%. Net profit was US$959 million, a month-on-month increase of 31.5%, but still a decrease of 0.8% compared with the same period last year. The operating gross margin of the difference between cost and selling price was 12.3%, 720 basis points higher than the previous quarter, as shown below:
However, looking at the main sub-items of ST's third-quarter financial report, such as net income, net profit, gross profit, gross profit margin, revenue profit margin, etc., all have declined to varying degrees compared with the same period in 2019. Therefore, for the company's entire unfortunate 2020, the real "turnaround" will indeed have to wait until the fourth quarter.
The rise of RF communications
If the entire financial report is specifically assigned to each business department, the numbers may not seem so cold and boring.
As we all know, ST has three main departments: Automotive and Discrete Group (ADG); Analog, MEMS and Sensors Group (AMS); Microcontrollers and Digital ICs Group (MDG). In addition to the ADG department, AMS and MDG have been fine-tuned but the overall framework is relatively fixed.
In the third quarter, the net revenue of the ADG department was US$851 million. Although the upward trend was obvious, it was still 4.9 percentage points lower than the same period last year. The AMS department rebounded strongly, contributing almost US$1 billion in revenue to the entire company in one quarter. The MDG department was stable and rising, with a net revenue of US$815 million, which was close to the ADG department, as shown in the following figure:
In general, among all departments, ADG is still the only one with a year-on-year decline. AMS fluctuates, while MDG is quite stable. The performance is satisfactory both year-on-year and month-on-month.
Moreover, from the overall growth trend in the first quarter of 2020, the MDG sector is likely to surpass ADG and become ST's second largest revenue group after AMS. We can also confirm this from ST's CEO Jean-Marc Chery's interview with Bloomberg TV on October 21: "Due to the release of Apple's new iPhone 12, ST's financial situation in the third and fourth quarters will improve a lot." So we can conclude that the most promising revenue growth link for ST in the fourth quarter is Digital ICs, that is, the digital consumer electronics field.
ST emphasized in its financial report that digital electronic consumption has greatly helped corporate profits.
Based on this, ST also made an outlook for the fourth quarter, predicting that net revenue will reach US$2.99 billion, a 12% increase from the third quarter, with a gross profit margin of 38.5%, floating around 200 basis points (based on the exchange rate of US$1.15 = 1 euro), as shown below:
For ST's total financial report status, you can view the specific live broadcast and replay of the online conference on the official website. The video will be available until November 6.
In the 12-page financial report, when mentioning the financial report of the MDG sub-forum, we see an intriguing statement: "RF Communications (former "digital" sub-group")", which shows that ST has upgraded RF communications from the digital sub-classification to become a department that the company focuses on supporting and developing. However, when looking forward to the fourth quarter, the company's CEO Jean-Marc Chery said: "(In the fourth quarter) the company's product revenues in all departments will increase, except for RF Communiations."
As mentioned in the previous article, RF communications made a significant contribution to the company's third-quarter financial report and has been characterized as a "blue ocean strategy." Why is it so special in the fourth-quarter financial outlook, and is it very likely to be the company's only product department that cannot achieve positive growth?
At this point, some readers will definitely speculate that ST's module is related to the Huawei ban.
This conjecture is not completely unfounded. When the U.S. Department of Commerce (BIS) tightened restrictions on Huawei in May this year, ST's reaction was quite strong. Jiwei.com also reported on this. Terry Blanchard, a lawyer for STMicroelectronics (ST), wrote to Matthew Borman, Deputy Director of Export Administration of the U.S. BIS, hoping that the United States would relax the Huawei ban to the 28nm node, that is, only restrict the supply of advanced process products below 28nm. In addition, ST's CEO further revealed in an interview with Bloomberg that ST's revenue from Huawei in the third quarter dropped to less than 10 percentage points, and this figure will become zero in the fourth quarter. It can be said that it has greatly affected the business conditions of ST's MDG and AMS. Even the release of the new iPhone 12 cannot offset this part of the loss caused by the Huawei ban, but ST's consistent principle is not to comment on specific customers. It is currently impossible to judge what the specific direction of cooperation between Huawei and STMicroelectronics is.
But when it comes to mobile phone sales, there are solid facts to support the analysis of the problem. According to Jiwei.com's disassembly of Huawei P40 pro, the RF front-end module of this phone still uses components and technologies from American companies such as Skyworks, Qorvo, and Qualcomm. Moreover, according to the feedback from Huawei's user community, the localization of the RF part of the latest flagship mate40 is unprecedented. Historically, Huawei's mobile phone RF has not used ST technology and components. Therefore, Huawei's mobile phone business does not involve cooperation with ST in RF communication, and the suppliers of RF modules for Huawei's 5G Tiangang chip are Murata and Sumitomo Electric Industries of Japan. In short, judging from the overall structure of ST's RF communication industry, the ups and downs of its performance have little to do with the Huawei ban.
Huawei's flagship phones previously used products from Skyworks, Qorvo, Qualcomm, and other companies for their RF front ends.
Therefore, to solve the mystery of the lack of flexibility in the growth and decline of the communication RF revenue in ST's third-quarter financial report, we need to explain it from the reorganization of ST's own business structure and the entire market environment of RF communications.
As mentioned above, RF communication is very likely to become the main breakthrough area of ST's three sectors in the fourth quarter, so as to separate from telecommunications and consumer Digital ICs to a certain extent, and then strengthen integration with MEMS micro-electromechanical. We can also get a glimpse of this from the "footnotes" of product news released on ST's official website: all news related to RF are signed with the French and Italian flags, representing the joint research and development of the two centers in Grenoble, France and Catania, Italy. On this basis, we can also see more clearly the deep intention of ST's acquisition of France's SOMOS Semiconductor half a month ago.
Acquisition of SOMOS
Over the past two months, the semiconductor industry has seen a series of super-heavyweight mergers and acquisitions, such as Nvidia's acquisition of Arm and AMD's acquisition of FPGA giant Xilinx. But at the same time, some smaller undercurrents in many of the major trends still serve as industry guiding lights.
ST's announcement of the acquisition of SOMOS in mid-October was very low-key and the transaction amount was not disclosed. Jiwei.com immediately contacted ST's market media department to inquire about the details of the transaction. However, as of press time, ST has not yet responded.
SOMOS, headquartered in France, is a fabless semiconductor company with a history of only about two years. It specializes in the development of silicon-based power amplifiers and RF front-end module products. After the acquisition was completed, it was Claude Dardanne, president of the MDG department, who spoke to the media. He said: "The consumer electronics and industrial markets expect more and better network connection solutions. STMicroelectronics is committed to providing and enabling solutions to meet these needs and overcome technical challenges."
ST's corporate propaganda also highlights a "low-key"
It can be seen that after SOMOS is acquired, it should be absorbed by ST into the MDG department. The purpose of this move is very clear, that is, through this acquisition, it will play an important role in the booming IoT market for RF front-end modules and strengthen the development of 5G RF front-end products.
However, the M&A integration process is included in the financial report for presentation, and the entire procedure takes at least several to three fiscal quarters. Take Infineon's acquisition of Cypress, a manufacturer of microcontrollers, connectivity components, software systems and high-performance memory, for US$9.8 billion in June 2019 as an example. Although Infineon has always emphasized that the company's power semiconductors, automotive microcontrollers, sensors and security solutions can form a high degree of complementary advantages after the acquisition of Cypress, it was not until the financial reports after April 2020 that Cypress's contribution to Infineon's head office turnover and net profit was gradually mentioned. Therefore, the expected profit value after the merger and acquisition is generally lowered, which is also a common practice in the industry, as shown in the following figure:
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