Telefonaktiebolaget LM Ericsson (ERIC) 2011 Q3 法說會逐字稿

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  • Operator

  • Good morning or good afternoon.

  • I'm Dino, the Chorus Call operator for this conference.

  • Welcome to the ST-Ericsson third-quarter 2011 financial results conference call.

  • Please note that for the duration of the presentation, all participants will be in listen-only mode and the conference is being recorded.

  • (Operator Instructions).

  • At this time, I would like to turn the conference over to Ms.

  • Streitberger Brighton, Senior Vice President of Global Communications.

  • Please go ahead, madame.

  • Carol Streitberger Brighton - SVP, Global Communications

  • Thank you, Dino.

  • Good morning and afternoon to everyone.

  • Thank you for joining our third-quarter 2011 conference call.

  • Hosting the call today is Gilles Delfassy, ST-Ericsson's President and Chief Executive Officer.

  • Also joining him on the call today are Jorgen Lantto, Executive Vice President and Chief Technology Officer; Tim Lucie-Smith, Chief Financial Officer; Marc Cetto, Senior Vice President and head of the Smartphone and Tablet Solutions Division; Thierry Tingaud, Senior Vice President and head of the Entry and Connectivity Division; Philippe Berger, Senior Vice President and head of Operations and Quality; and Fabrizio Rossini, our head of Investor Relations.

  • This call is being broadcast live over the Web and can be accessed through the ST-Ericsson Investor website.

  • A replay will be available shortly after the conclusion of the call until Friday, October 28.

  • During the call today, we will be making forward-looking statements.

  • These statements are based on our current expectations and certain planning assumptions which are subject to risks and uncertainties.

  • The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

  • We encourage you to review the Safe Harbor statement contained in the press release that we issued with the results last night.

  • As the usual reminder, please limit yourself to one question and a brief follow-up.

  • Now I would like to turn over the call to Gilles Delfassy, ST-Ericsson's President and Chief Executive Officer.

  • Gilles, please go ahead.

  • Gilles Delfassy - President and CEO

  • Thank you, Karen.

  • Good morning and good afternoon to everyone.

  • Before we start, I would like to mention that actually Tim Lucie-Smith, our CFO, is joining us from remotely, actually.

  • He had a minor surgery this morning and -- but he would not miss that event for anything.

  • So of course he insisted on participating on the phone, and now he is awake or I hope he is awake at least.

  • I hope that we will not be surprised by the answer that he will give to financial questions.

  • Anyway, this being said, thank you very much, Tim, for making it just in time on the phone.

  • And thank you, everyone, for joining us today.

  • I will take a few minutes to briefly go over the key points of our third-quarter results and then take your questions.

  • Sales -- sales of $412 million in the quarter came in slightly ahead of expectations, even when excluding the $20 million of revenue that we received from an IP licensing deal to a third-party.

  • However, our third-quarter operating loss was greater than in the second quarter.

  • This was due mostly to the positive contribution of R&D services sales that we had in the second quarter and we didn't have in third quarter.

  • Also, we have started to see results from the actions we have taken to reduce working capital.

  • For example, we reduced our inventory by $37 million in the quarter.

  • And regarding the cost-saving measures that we announced in June, we are on plan, having realized $6 million of savings in the third quarter, making a total savings of $8 million so far.

  • We also continued to make improvements within our organization to achieve further alignment and greater efficiency.

  • Moving back to sales, in the third quarter, revenue from new products continued to grow, making up about 55% of our total sales.

  • As you may remember during last quarter's call, we said that we expected sales of new products to cross the 50% threshold by the end of the year of 2011.

  • And in fact, we got there a little ahead of schedule as our new product sales grew faster than our legacy product sales declined.

  • Along those lines, we continued to see more and more devices in the market with ST-Ericsson inside.

  • I am pleased to say that the first smartphone using one of our NovaThor platforms, the Nova A9500 and the Thor M6718, had ramped in the market with HTC for China Mobile.

  • And actually it's quite interesting because you can do upper to uppers or HTC to HTC compression in this case with the smartphone because there's a very similar one that has a competitor's chipset product with a dual core as well inside.

  • And when you can -- what you can see when you come compare them side to side is that there is a significant advantage with ST-Ericsson in terms of CPU performance, graphics, Web browsing, and power consumption, all important contributors to the overall user experience.

  • Our technology is clearly the differentiator for our customers.

  • This HTC smartphone is contributing to the overall ramp of our NovaThor U8500 and A9500 platforms, where we have announced seven customers, including five tier 1 players.

  • We will continue to ramp these platforms in the coming quarters, albeit as we have discussed, at a slower pace initially due to changes in customer plans.

  • Moving to our full family of products, there are several new smartphones models in the market based on our Thor modem technology.

  • You may have seen in our press release highlights that we have added Panasonic during third quarter.

  • And just last week, we have added Motorola to the list as we are the 21 megabit per second modem in their new and actually award-winning Atrix 2 phone.

  • Actually that one, we didn't have the authorization in time to put it in the script, so I thought it would be a scoop in the press release.

  • I thought it would be a scoop, but you guys are so sharp that you caught it and actually have seen a couple of you -- at least one of you -- announcing it yesterday, stealing my thunder, but it's okay.

  • On our LTE platform, we continue to be engaged with many leading device manufacturers.

  • The important point here in my opinion is that we are continuing to make noticeable progress in diversifying our customer base.

  • You know, HTC, Motorola, Panasonic, these are new names for us.

  • And we are doing so with market leaders.

  • And we hope to publicly announce even more soon.

  • This past quarter, we also announced our NovaThor Technology Center in Silicon Valley.

  • We are growing our presence and building our ecosystem in northern California, the center of the action and innovation in this industry.

  • We have also announced an extended partnership in augmented reality with metaio, the worldwide leader in this field.

  • The goal here is to use the power of our technology to create more vibrant experiences for end users.

  • Some of the augmented reality apps are pretty amazing, in my opinion.

  • Now, moving to fourth quarter, we see sales up slightly sequentially as we expect revenue from new products to grow and legacy product sales to decline.

  • As our platforms are starting to ramp in volume, we look forward to seeing more and more of the benefits as we go into production in the coming quarters with several of the world's largest smartphone and tablet makers.

  • Thank you.

  • And now we will take your questions.

  • Operator

  • Gunnar Plagge, Citi.

  • Gunnar Plagge - Analyst

  • I was wondering if you could elaborate a little bit more on the Q4 guidance, to what extent is that seasonal or what are the underlying structural trends?

  • And on seasonality, could you also give us a little bit of view, what you think what Q1 normal seasonality was -- would be.

  • And secondly, I was wondering whether you could give us an update on the topic that we had on many calls here and the topic of breakeven, where you said you are not ready.

  • Could you give us an update whether you have now a number?

  • Thank you.

  • Gilles Delfassy - President and CEO

  • Yes.

  • Well on Q4, again, we have -- no I guess we are announcing that we will continue to grow a little bit at least our revenue, and that's mostly due to continuation of the ramp of new -- some new programs, ad again, compensated by the continued decline of legacy products.

  • So nothing more remarkable to mention here, although I think it's good.

  • In terms of seasonality, well, you know, third quarter and fourth quarter are typically good quarters.

  • First quarter is seasonally typically low.

  • Again, we are typically not commenting on any quarter except the one to come, but I would not expect that seasonality per term to change significantly or at least have no reason to believe it.

  • In the breakeven point, I'm afraid I'll have to stick to what I have told you last time, which is that we will continue to review it and to give you more precise information when we have more visibility.

  • Of course, it is our ambition to (inaudible) as soon as possible, but I think we're not ready to give you more precise indications at this point.

  • Gunnar Plagge - Analyst

  • Thank you.

  • Operator

  • Francois Meunier, Morgan Stanley.

  • Francois Meunier - Analyst

  • Thanks for taking my question and good afternoon, Gilles.

  • First question, you mentioned this new R&D center in north Carolina -- California, sorry.

  • But is there also a chance that you could tell us if you have many [genials] as well working in Canada development with the local big manufacturer of smartphones and how do you think it's going to evolve?

  • Because they've changed again their strategy in terms of operating system.

  • And I know you are quite bullish on RIM at the beginning of this year.

  • Is it still something which could ramp up this year or next year at some point?

  • Gilles Delfassy - President and CEO

  • Thank you.

  • How are you doing?

  • Thank you for your question.

  • Well, actually, we love all customers, and especially those who are kind enough to work with us.

  • So of course, we like them all.

  • I -- and of course it's our ambition to -- it's our ambition to work with all the leaders in the smartphones and tablets.

  • And certainly it is our ambition to work with them as with any other leader here in Canada, a beautiful country, as everybody knows.

  • Francois Meunier - Analyst

  • Okay.

  • In terms of Nokia, obviously, given the results today on Symbian shipments were flat quarter on quarter.

  • Has it kind of helped that the legacy product over there was not declining too much for your revenues in Q3?

  • Gilles Delfassy - President and CEO

  • Yes.

  • Well, actually, as you mentioned, there was Symbian -- their smartphone numbers have been flat -- about flat quarter on quarter.

  • So you can expect that that has not been the reason why we have gone up obviously.

  • And yes, I guess that's what I can say at this point.

  • Yes, that's why we have gone up.

  • And of course, yes, that's probably -- I don't think we can be more specific.

  • Francois Meunier - Analyst

  • Okay.

  • Now the U8500, obviously is a design win you've announced with HTC is for two separate chips.

  • Is there anything ramping at the moment like insignificant volume with the U8500 with the big ones?

  • Gilles Delfassy - President and CEO

  • Well, I see a very big one in my opinion, so actually that's really one of the very important leaders in the smartphone industry.

  • So your qualification was because it's such a cheap solution or was that the reason (multiple speakers)?

  • Francois Meunier - Analyst

  • Yes, basically, yes.

  • No, no, you know I understand HTC is very big and it's kind of a chipset if you want, but is there anything ramping other than that with the full integrated U8500?

  • Gilles Delfassy - President and CEO

  • Yes.

  • The answer is yes.

  • Francois Meunier - Analyst

  • Okay.

  • And have we seen this phone?

  • Or have you seen this phone?

  • Is it on (multiple speakers), no?

  • Gilles Delfassy - President and CEO

  • No, I have seen these phones, yes, but you have not.

  • You will see phones -- if your question is are we going to see phones built on U8500, but we got the TDA CDMA modem between the modem which is integrated with the 8500, the answer is yes and it's in the coming quarter.

  • Francois Meunier - Analyst

  • Okay.

  • So we'll see it for Christmas?

  • Gilles Delfassy - President and CEO

  • Yes.

  • Well, I think so, yes.

  • Francois Meunier - Analyst

  • Okay.

  • Thank you.

  • Carol Streitberger Brighton - SVP, Global Communications

  • Thank you, Francois.

  • Operator

  • Didier Scemama, RBS.

  • Didier Scemama - Analyst

  • Good afternoon, everyone, and thanks for taking my question.

  • Gilles, maybe a couple of questions.

  • Can you talk about the operational leverage?

  • Because I think it was really good to see some beat on top line, but at the same time, the operational losses were -- beat was -- I mean you had already said last time that losses would be greater because of the decline of the platform sales, but with the IP revenues that you got this quarter, I would have hoped that your operational losses would've been a bit better.

  • I was wondering if you could talk about if there was any gross margin pressures or any additional OpEx that we should be aware of in Q3 and in Q4?

  • That's my first question.

  • And then secondly, obviously, we talk a lot about that we've seen 3G modems and application processes.

  • I was wondering, can you talk about your 2G solution as well?

  • Because Nokia has got huge volumes that at the moment they've got two suppliers, but their discussions of them using a different platform going forward.

  • I was just wondering maybe not with that customer particularly, but what you saw as key drivers for this 2G chipset business over the coming quarters, please.

  • Gilles Delfassy - President and CEO

  • Okay.

  • Thank you for your question.

  • On the losses, I can assure you, I'm exactly like you.

  • I would have hoped that the loss would've been smaller.

  • So we agree totally on that point.

  • No, I mean the fact is, as you know, we had -- I think we had mentioned that we had about $40 million of very high margin on the services business that would not reappear in third quarter, at least.

  • We hope that they will appear later.

  • So that was a huge handicap in the quarter and we had warned against that.

  • Then, of course, we had the [goody] of the $20 million IP licensing deal, which is also at very high margin, of course, but $40 million being far greater than $20 million, unfortunately that was not -- that's the reason why the losses have extended.

  • If you look at it, basically yes, we've got -- assuming that they are the same margin, we've got $20 million left of goodies in third quarter compared with second.

  • And our losses did not increase by $20 million, but by $13 million.

  • So we actually recovered part of the handicap, but unfortunately not all of it.

  • But do not look for hidden gross margin or OpEx swings to explain that.

  • It's about as simple as I just described it.

  • And Tim, if you are still awake and can -- want to say something, feel free.

  • Otherwise, in the meantime, in terms of 2G solution, yes, we are still very present in 2G.

  • That's a family where we even have actually a pretty good momentum as well.

  • Of course, we don't -- it's less sexy.

  • We don't brag about as much.

  • But it's still a good business.

  • So actually I will ask Thierry Tingaud, who is in charge of the NT solutions to comment a little bit on that maybe.

  • Thierry Tingaud - SVP, Entry Solutions & Connectivity

  • I think regarding 2G, we have still a PoP for you which is very strong.

  • So far, we grew sequentially during Q3 on 2G.

  • And thanks to the PoP for you we have now, which is supporting dual seam solutions, and with [lius] integration, so we are also moving into the value chains on 2G with EDGE solutions, much more integrated.

  • It's much better with your quality and (inaudible) capabilities.

  • And so far the portfolio and the revenue of 2G is still very strong.

  • Didier Scemama - Analyst

  • Do you expect to add new customers?

  • I think that was basically my question.

  • Thierry Tingaud - SVP, Entry Solutions & Connectivity

  • On 2G, we are very focused on leveraging the current portfolio product.

  • And so far, the entry barrier to develop new solutions is very high.

  • So we are highly leveraging (inaudible) off of your product.

  • Gilles Delfassy - President and CEO

  • I guess we have nothing to announce in terms of new customers at this point.

  • Didier Scemama - Analyst

  • All right.

  • Thanks.

  • Operator

  • Peter Knox, Societe Generale.

  • Peter Knox - Analyst

  • Thanks for taking the question.

  • Could I just ask about the IP royalty sales?

  • Is any portion of that actually likely to be repeatable?

  • Gilles Delfassy - President and CEO

  • Yes, it's actually not royalties.

  • It's an IP licensing deal which is very good deal.

  • We are happy to have read it, and if your question is, are we ready to do more of that or similar things in the future, the answer is, yes, absolutely.

  • If we see other opportunities, we will grab them.

  • And we are working on some, but nothing to announce at this point.

  • Peter Knox - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Simon Schafer, Goldman Sachs.

  • Simon Schafer - Analyst

  • Yes, thanks so much.

  • Just on the parent credit facilities, I think you stand at just north of $600 million now and I think the ceiling is $800 million.

  • So presuming that your loss isn't really narrowing all that much in the next couple of quarters, maybe just an update as to how you are looking at contingencies.

  • Thanks.

  • Gilles Delfassy - President and CEO

  • Yes, sure.

  • I guess for that we will check the (inaudible) and Tim Lucie-Smith.

  • Tim Lucie-Smith - SVP and CFO

  • Yes.

  • I think the answer to that is basically that we are increasing our credit facilities with our parents step-by-step, quarter by quarter.

  • So as we need more credit facilities, they will be increased accordingly.

  • Simon Schafer - Analyst

  • Does that also mean you are now mostly done with your -- with the factoring amounts that you can do on the balance sheet?

  • Tim Lucie-Smith - SVP and CFO

  • Well, the factoring is limited by the amount of receivables we have.

  • So there could be some small increases in the level of factoring as we increase the level of sales, but not a major change.

  • Simon Schafer - Analyst

  • I see.

  • And maybe any more color as to what sort of magnitude of change you are looking at?

  • Tim Lucie-Smith - SVP and CFO

  • Well, we're not really giving guidance on our future cash flows.

  • Simon Schafer - Analyst

  • Okay.

  • Thanks so much.

  • Operator

  • Sandeep Deshpande, J.

  • P.

  • Morgan.

  • Sandeep Deshpande - Analyst

  • Can you talk about Windows on your -- whether it's U8500, U9500 or the future platforms, when will you have Windows ported to your platforms?

  • And when do you expect to be able to ship Windows-based phones?

  • Gilles Delfassy - President and CEO

  • I guess at this point, we want to ship.

  • We have an ambition to as we have announced to cover the major operating systems.

  • We have an ambition to be shipping Windows.

  • As you can guess, that ambition only applies to Windows Phone 8 because clearly, Windows Phone 7 is probably a lost opportunity -- I mean it's too late now.

  • And it's still our ambition.

  • We are working with both Nokia and Microsoft to that effect, but we have nothing more precise to announce at this point.

  • Sandeep Deshpande - Analyst

  • If you may, in terms of -- there was an earlier question on break-even, which you didn't necessarily answer.

  • But do you count on this large customer to come back into your equation to be able to reach that whenever -- whatever that break-even point is?

  • Or would this be possible without that happening?

  • Gilles Delfassy - President and CEO

  • One of our key ambitions in this transition is also to extend our customer base.

  • So we do not -- you know that in the past, ST-Ericsson has been depending on a very, very small number of customers.

  • And, therefore, any [ancedent] on any of their basically less than a handful, couple or three major customers was provoking a big problem.

  • So we are diversifying our customer base actively.

  • We have mentioned several new big names that we didn't have before.

  • And of course, we are counting on continuing our relationship with all of our big customers of the past and of today.

  • But we are also counting on establishing very big businesses with new customers.

  • So that's the way we see our future.

  • Sandeep Deshpande - Analyst

  • Thank you.

  • Operator

  • Kai Korschelt, Deutsche Bank.

  • Kai Korschelt - Analyst

  • Good afternoon.

  • I have two questions.

  • The first one was just to go back to the current operating loss, so if you assume a revenue run rate of sort of $400 million, $420 million for the next couple of quarters, I'm just wondering when exactly could we expect an improvement in the EBITDA loss, particularly around the OpEx savings that you announced.

  • Is that still second half of next year?

  • Or could we already see some improvement maybe in Q1?

  • And then my second question was just really on -- to come back on Windows and Nokia, it sounds like Microsoft has pretty much committed or stated today that QUALCOMM will remain the sole supplier for Windows mobile 7 or Mango or the other variant of that.

  • When, in your view, when could we potentially expect Windows mobile 8?

  • According to the roadmap, is that sort of Q1 2013, that sort of timeframe?

  • Or could we expect something earlier here?

  • Thank you.

  • Gilles Delfassy - President and CEO

  • Yes.

  • On your second question first, I think I made it pretty clear; the next window of -- no pun intended, but the next window of opportunity for us is clearly WP 8, not 7.

  • So that's what we are working on.

  • About when that is going to happen, of course I hope that you know that there is a much better source than me to give you more indication than that.

  • It's my [cause] after Nokia actually.

  • The Nokia call is ongoing now.

  • So maybe there will be more announcements made about the exact timing of Windows 8.

  • And on your first question, we do not have such a long-term horizon, so we do not comment on what will be our position in terms of personal income in -- I mean horizon more -- longer than next quarter.

  • Except if Tim is -- because of the drugs of the surgery, wants to give you more, I doubt that.

  • Kai Korschelt - Analyst

  • Thanks.

  • Sorry, could I just maybe follow-up then?

  • When you announced the latest round of restructuring, I think you did provide a potential timeframe when those savings would kick in.

  • I just want to confirm whether that is first half or second half of next year.

  • (multiple speakers) savings (multiple speakers) without -- with the guidance here.

  • Gilles Delfassy - President and CEO

  • No, no, no, actually it's already started.

  • As we mentioned, the goal of that cost action was to save $120 million on an annual basis.

  • And as I mentioned in the script, so far we have realized $8 million savings to -- per quarter, quarterly on this plan.

  • So we are on an annual -- we have already achieved if you want an annualized basis of $32 million, so we still have the rest to go.

  • But again, as we mentioned, this cost savings exercise, the target is to realize $120 million on an annual basis by the end of next year.

  • Kai Korschelt - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Andrew Gardiner, Barclays.

  • Andrew Gardiner - Analyst

  • I was just wondering, on the customer side, I know you don't want to give any more detail in terms of specifics, but if we go back to prior conference calls, you'd mentioned that you were in discussions or negotiations with seven of the top nine smartphone vendors, following the new product portfolio that you announced at mobile world Congress.

  • I'm just wondering if you can give any indication as to whether those discussions with those seven have moved on, and whether you've been able to convert more of those to actual wins for the new platform.

  • And sort of how many of those are you now hitting?

  • Gilles Delfassy - President and CEO

  • Yes; no, we are not announcing any new number now, but you have noticed that progressively the seven out of nine are being disclosed one after the other.

  • For example, nobody knew about this -- at least I think nobody knew about HTC before this quarter.

  • So and -- and Motorola, right?

  • So again, no, we are not updating the number, but we are giving you progressively more visibility into who they are.

  • Andrew Gardiner - Analyst

  • And in terms of one product in particular, the U4500 that you talked a bit about on the last conference call as well, you said you're hoping for that to ramp in mid-2012.

  • So can we be expecting design win announcements on that in the not-too-distant future as well?

  • Gilles Delfassy - President and CEO

  • Mark, do you want to answer that question?

  • Marc Cetto - SVP, Smartphone & Tablet Solutions

  • Yes, I can answer that one.

  • We will not announce design-ins before the products will ramp unless our customer wants to do that.

  • So we confirm that we are still on the schedule for these products to ramp middle of next year.

  • Gilles Delfassy - President and CEO

  • Again, we don't want to announce design wins of our customers, but we still believe that we will ramp in volumes by mid next year.

  • That's what --

  • Marc Cetto - SVP, Smartphone & Tablet Solutions

  • And again, the strategy for those products is there is a lot of compatibility from a software point of view between the platforms.

  • You can guess which products you're targeting.

  • By the way the name of the product is U5500.

  • Andrew Gardiner - Analyst

  • Thanks very much.

  • Operator

  • Francesco Previtera, Bloomberg.

  • Francesco Previtera - Analyst

  • Francesco Previtera, Banca Akros.

  • Just a quick question -- is there any fact that could justify the cost of your restructuring going into the P&L with a different timing compared to the cash flow, the negative cash flow in the balance sheet?

  • Gilles Delfassy - President and CEO

  • Tim, do you want to answer that?

  • Tim Lucie-Smith - SVP and CFO

  • Yes.

  • Normally we have a leadtime, a lag, between when we booked the restructuring costs in our P&L and when we actually pay out the cash.

  • And that can be anywhere between three and nine months.

  • It's quite normal in our circumstances.

  • Hope that answers.

  • Francesco Previtera - Analyst

  • So currently you are charging the costs that go into the P&L and [do] not the price your debt position.

  • Tim Lucie-Smith - SVP and CFO

  • Exactly.

  • Francesco Previtera - Analyst

  • Okay.

  • Thank you.

  • Operator

  • Bernd Laux, Cheuvreux.

  • Bernd Laux - Analyst

  • My first question is a follow-up on what we discussed or you discussed with Francois Meunier at the beginning.

  • It's HTC design win.

  • Would you agree that typically, a handset manufacturer would not choose a platform provider just for one single technology while using different component vendors for the rest of its portfolio?

  • And the second question was regarding your introductory comment on the leading performance of ST-Ericsson's platforms.

  • Could you let us know who of your competition you regard as the closest behind your product in terms of performance please?

  • Thank you.

  • Gilles Delfassy - President and CEO

  • Yes.

  • On your first question, of course, it makes total sense normally for a smartphone manufacturer to not make a big investment on the very -- on the platform which takes a lot of development, several months if not really more months.

  • It really doesn't make sense to invest all of that energy for only one phone.

  • So I guess I'll leave it at that, and you make your own conclusion.

  • For the second one, maybe Marc will answer.

  • Bernd Laux - Analyst

  • That was clear enough.

  • Thank you.

  • Marc Cetto - SVP, Smartphone & Tablet Solutions

  • On your second question, there is only one competitor today doing dual core application process that are integrated with modems, so that's how we are comparing ourselves.

  • Bernd Laux - Analyst

  • Okay.

  • Thank you.

  • Gilles Delfassy - President and CEO

  • And if you want I mean -- (inaudible) to be -- I mean again, we have an HTC Sensation which has our platform, our dual core 9 [inside] etc.

  • And again, there are very, very -- if you see what I mean they are very similar modems, even with very similar names which exist with a different chipset.

  • So actually really same everything.

  • So you can do a lot of side-by-side comparisons, and that's very enlightening.

  • Bernd Laux - Analyst

  • Thank you.

  • Operator

  • Tristan Gerra, Robert W.

  • Baird.

  • Tristan Gerra - Analyst

  • Good afternoon.

  • Do you have a target for new product as a percent of total revenues for next year post the 55% that you have posted this quarter?

  • Gilles Delfassy - President and CEO

  • I'm sorry, is your question do we have a target for the percentage of new products for next year?

  • Tristan Gerra - Analyst

  • Correct -- similar to the 50% target you had for this year for which (multiple speakers)?

  • Gilles Delfassy - President and CEO

  • Yes; you know actually now we really wanted to sort of transition from legacy to new product because that was the key -- we believe that that was the key indicator of our trajectory.

  • So that's why we have updated every quarter.

  • Now that we have already the majority, we are probably not going to track that, that precisely because it will be the vast majority, but that becomes -- next year that becomes, in our opinion, less of an important driver.

  • The more important driver is how we drive volume out of these new products and multiplying, so that's at least my impression as of today.

  • Tristan Gerra - Analyst

  • And maybe another way of gauging that, what is the pace of revenue decline for the -- what is not new product.

  • We're just trying to assess the drag at the top line given that 45% is still sizable as part of your business.

  • Gilles Delfassy - President and CEO

  • I think I can tell you with some confidence that we expect the proportion of new product to be even higher in fourth quarter than it is -- significantly higher in fourth quarter than it is in third.

  • That will make the 45% much less.

  • And we will tell you.

  • Tristan Gerra - Analyst

  • Okay.

  • That helps.

  • And then just quick questions on potential plans you have to integrate connectivity with the baseband at some point in the future.

  • Gilles Delfassy - President and CEO

  • You know, I mean we can do that if we need to, but to be honest with you, as of today, that doesn't seem to be the trend.

  • The trend is really, from what we see, and again, we will see if it changes, but -- and I'm sorry, Thierry.

  • I should ask you to answer that.

  • But the trend is more to have connectivity combos as the separate chips outside the business.

  • It's not a [micro] (inaudible), Thierry?

  • Thierry Tingaud - SVP, Entry Solutions & Connectivity

  • (inaudible).

  • Tristan Gerra - Analyst

  • And is it fair to assume that this is because you are targeting more the high end where you wouldn't see this type of combo chip versus the lower end?

  • Gilles Delfassy - President and CEO

  • Thierry will answer that question.

  • Thierry Tingaud - SVP, Entry Solutions & Connectivity

  • No, no, we are starting also to see connectivity moving to entry-level phones more and more, particularly on WiFi, Bluetooth, and SM radio.

  • But also GPS now is a market moving to smartphones significantly.

  • I think such connectivity IP will definitively growing -- is going to definitely growing.

  • But the key point is that we are developing in parallel different platforms.

  • And we are absolutely fine-tuning the best [specimens] and the most cost optimized solutions with a standalone connectivity approach, which is today in 40 nanometer technology, which includes analog, digital base [phone] and radio frequency, so it's a very complex device that needs really to be tailored to the connectivity needs, and that's why it's more efficient today to do it like this.

  • Tristan Gerra - Analyst

  • Great.

  • Thank you.

  • Operator

  • Guenther Hollfelder, UniCredit.

  • Guenther Hollfelder - Analyst

  • I had a question on the analog part of your business.

  • You -- recently, there are -- in some cases, you see your power management ICs as standalone chips, maybe even as customized standalone chips in other phones.

  • So I was wondering is your main target here to sell it with your platforms?

  • Or is this like a second business model here also for drive it forward as a stand-alone business?

  • Gilles Delfassy - President and CEO

  • Marc, maybe you can answer this question.

  • Marc Cetto - SVP, Smartphone & Tablet Solutions

  • Yes, I can answer that one.

  • So we arguably have a very good analog mixed signal for wireless technology and IP and ability to systems -- subsystems out of it.

  • The -- our key strategy is to do it for our platform, so that our platforms are very differentiated also by that aspect.

  • But clearly, we also have some very large opportunities for what you just mentioned for some custom AMS subsystems in some platforms.

  • And we will take those as well.

  • We will be very pragmatic.

  • And I think it's also proof that we have -- we have very good analog mixed signal technology because people want to use it outside of our platforms.

  • Gilles Delfassy - President and CEO

  • But that's the exception not the rule.

  • Marc Cetto - SVP, Smartphone & Tablet Solutions

  • It's an exception, not the rule.

  • Gilles Delfassy - President and CEO

  • Only for very nice opportunities and great customers if they like us.

  • Guenther Hollfelder - Analyst

  • Yes, great.

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Francois Meunier, Morgan Stanley.

  • Francois Meunier - Analyst

  • 'Its' Francois again.

  • I was about to ask about this IPR income you had in Q2, Q3.

  • Could you please tell us a bit more what is it?

  • Because actually $20 million, $40 million, that's a big check to receive from a customer.

  • Gilles Delfassy - President and CEO

  • Well again, it's not exactly the same thing.

  • In second quarter, we had -- that's R&D services.

  • And you know, that's R&D work that we perform because we are experts in some domains and some companies want us to perform that work for them.

  • Even on the deal in third quarter, that's different.

  • That's actually a piece of IP that another company actually I can even tell you it is a competitor.

  • It's a semiconductor company competing with us, but in that case we thought that it was not a problem because we are not exactly in the same space at this time, so we thought it would not be a strategic problem to give to that company access to that piece of IP of ours that they wanted.

  • And we like the cash, to be honest, so that's not exactly the -- again, that's what happened.

  • Francois Meunier - Analyst

  • Okay.

  • So it's more -- it should really be classified as a one-off -- to some extent.

  • Gilles Delfassy - President and CEO

  • Well, yes, on that one, that particular deal again is not -- probably not recurrent.

  • But again, if one company has had the idea that they like that idea of ours, maybe others will have the same idea, and we will look at it with a lot of sympathy.

  • Francois Meunier - Analyst

  • Okay.

  • Interesting new business model.

  • Gilles Delfassy - President and CEO

  • And actually, again, the reality that we mentioned, one, because it has -- it's by far the largest of that total amount of money.

  • But to completely honest with you, there is another one which is very similar, but much smaller deal with a different company.

  • So we start to see that maybe -- let's be clear that this is not going to become our core business anytime soon.

  • But again, we will probably be very sympathetic and maybe even more alert in pursuing these kinds of one-offs.

  • And many one-offs can do maybe several offs, if you see what I mean.

  • Francois Meunier - Analyst

  • Is it IP which is held directly by ST-Ericsson?

  • Or is it in some form of like the holdings above with Ericsson or something?

  • Gilles Delfassy - President and CEO

  • No, no, let me be clear here.

  • If it was not owned by us we would not be able to sell it, no.

  • We only can sell what we own.

  • Francois Meunier - Analyst

  • Okay.

  • Very good.

  • Operator

  • Jerome Ramel, Exane BNP Paribas.

  • Jerome Ramel - Analyst

  • Good afternoon.

  • Just a quick question, Gilles.

  • We talk about that during the last GSM Congress in Barcelona.

  • It's concerning (multiple speakers)

  • Gilles Delfassy - President and CEO

  • The last one was in 2005.

  • Jerome Ramel - Analyst

  • Yes, sorry -- (multiple speakers).

  • Gilles Delfassy - President and CEO

  • No, no, no, I'm joking, I'm joking.

  • I'm sorry.

  • Jerome Ramel - Analyst

  • There's more and more concern or I don't know if it's a concern, but it could be a concern for you, is as Samsung will enter the modem game going forward, that they could come to the market with a single chip application processor plus 4G modem compatible 3G and other interfaces.

  • So, from what it seemed to be just a kind of first silicon together grip on the run map, it seems that these guys are becoming more and more serious about having their own modem going forward.

  • So I'm just -- wanted to check with you if you seen the competitive landscape could change in two years from now?

  • And not only the traditional semi-vendors that we know could be there, but also some of your clients could come into the market?

  • Gilles Delfassy - President and CEO

  • No, that's a very good question.

  • Again, I'm not the best person to talk about the plans of another company, right?

  • You should ask them directly.

  • But I can still give you my general opinion on that topic, which is that it's not a new phenomenon, as you know, that vertically integrated companies develop modem solutions for various reasons.

  • One would be time-to-market.

  • Another would be keeping the dominant but little abusive -- I don't know how to say that -- chipset supplier at bay and keeping them honest by keeping some possibility of competing, having talent competition, if you see what I mean.

  • For several reasons, a lot of vertically integrated companies have developed that.

  • And so far, very few have tried and nobody has succeeded to sell that to the open market outside of their Internet captive customer.

  • And, will that change?

  • Well again, who am I to guess?

  • I'm not sure why it would really change because the dynamics in this industry are such that it's very difficult to see how a handset company could really become very serious in selling chips to its competitors.

  • By the way, if you just look at what happened in -- as recently as the ramp of LTE, actually, all the first LTE solutions that ramped in the market for the first 12 months were not based on general semiconductor vendor solutions.

  • They were based on (inaudible) vertical solutions.

  • But then, very quickly, most of these solutions have been replaced or are being replaced with the industry what -- the solutions coming from normal chipset vendors.

  • It's not a secret.

  • Even very nice and very important LTE smartphones just introduced -- I think this week where it's based on an internal modem, right?

  • So it is still happening.

  • But again, it's -- I think it's more for time-to-market and keeping dominant suppliers at bay.

  • So again, we'll see if this changes, but I'm not sure.

  • I do not see any evidence that it's going to change drastically soon.

  • Jerome Ramel - Analyst

  • Okay.

  • And maybe just a follow-up.

  • Do you see [Renifass] becoming more aggressive?

  • Gilles Delfassy - President and CEO

  • Again, hard for me to comment on competitors.

  • Yes.

  • You know that they made the acquisitions of important -- they changed their business model.

  • They changed their key IP supplier.

  • They changed -- well we'll see.

  • That's an interesting company to follow.

  • We respect all of our competitors, as you know.

  • Jerome Ramel - Analyst

  • Okay, so maybe just a final question -- your guess in four years from now how many semi-vendors do you think will be supplying 3G and LTE?

  • Gilles Delfassy - President and CEO

  • Oh my God.

  • I will venture to answer that question.

  • Less than now.

  • A smaller number than today would be my guess.

  • Jerome Ramel - Analyst

  • Okay.

  • Thank you.

  • Operator

  • (Operator Instructions).

  • Didier Scemama, RBS.

  • Didier Scemama - Analyst

  • Thanks very much.

  • One maybe a little follow-up with the Motorola design win.

  • I think you know very well Motorola and you know a lot of people out there.

  • Currently there are two major chipset suppliers for the baseband at Motorola -- one for CDMA and low-end smartphones.

  • The other one is more of a custom engagement.

  • Do you think you are replacing the custom engagement with this [socket]?

  • That's my first question.

  • And just quickly also, can you comment maybe about whether you think you may be impacted in any shape or form by the floods in Thailand?

  • Gilles Delfassy - President and CEO

  • Okay.

  • So on Motorola, I'm not very familiar with the solutions that they are using.

  • You are saying that they're using custom-made solutions.

  • Do you have evidence of that, Didier?

  • Why would I know that?

  • Didier Scemama - Analyst

  • (laughter).

  • Gilles Delfassy - President and CEO

  • No, seriously.

  • The fact is, we -- no, we have by the way, contacts with Motorola.

  • It's a great company.

  • We like them.

  • We have very good contacts.

  • I mean -- but at many, many different levels.

  • If -- the funny thing, I hope that he will not mind me saying that, but I can say that in spite of having competed with him for about 15 years, I have a lot of respect and a great -- and an excellent relationship with Dr.

  • Sanjay Jha, who is the CEO of Motorola Mobility -- so and -- at again, at many, many levels in Motorola.

  • And our ambition is clearly to meet more and more of their needs.

  • Again, that is in line with the discussion we just had on vertically integrated solutions.

  • Clearly, yes, there are companies that have been developing modem solutions internally.

  • And it seems that they do not consider that as their core competency moving forward.

  • So of course our ambition is to sell their needs in this case.

  • On the second question, we -- again that's -- of course we are following the situation in Thailand.

  • It seems again, it's very preliminary, but it seems from what we hear is that our exposure seems to be very minor in terms of supply chain here, so that's not a very important part of our supply chain.

  • Also, when it is a part, we have extremely good and very -- and long multiyear, multisourcing strategy, so we believe that this is probably not going to be a huge issue for us.

  • Of course, we still feel very bad and we have -- we want to express all our support to the people there impacted by this natural catastrophe.

  • Didier Scemama - Analyst

  • Just one quick follow-up -- the California development center that you've announced, is it to go after the likes or the local customers?

  • Or is it because you already have an engagement with big OS companies out there or hardware manufacturers based locally?

  • Gilles Delfassy - President and CEO

  • Again, if we had engagements that we could mention, we would have mentioned them.

  • So, but clearly, the rationale of that is I'm sure it's pretty clear to you, the center of gravity of wireless Internet is clearly closer to the Silicon Valley than to the beautiful mountains of Alps, and we want to be in the middle of the action.

  • There are a lot of very key players there.

  • Of course, very important operating system vendors.

  • Very important hardware manufacturers are close by.

  • So we want to be there to support them better and to be more present in the ecosystem.

  • You know, that's a place where a lot of decisions are made in the diners or very global places where people have power breakfasts and they meet all the time there.

  • And we could not -- we could not have the ambition to play the role that we want to play in this industry and being so far away.

  • So it's a strategic location for us.

  • Didier Scemama - Analyst

  • Thank you so much.

  • Carol Streitberger Brighton - SVP, Global Communications

  • Thank you, Didier.

  • And Gilles, I will turn it over to you for your closing comments.

  • Gilles Delfassy - President and CEO

  • Okay.

  • Yes, so thank you for spending some time with us today.

  • So as we said, this quarter was actually quite significant for us for three important reasons.

  • One is that we have seen our first smartphone with our NovaThor platforms introduced into the market.

  • And you know how long a time it has taken and how much pain and agony it has been to go through all the steps of development of our first middleware stack and application solution.

  • And now we can say that we have an android solution, an android stack which is fully working, fully validated and proven and in the market.

  • And that's actually -- we believe it's a pretty important milestone for us because until now, we didn't have the proof of that.

  • Everybody could tell us, well yes, I will believe it when I see it.

  • So now people see it.

  • So they cannot -- so I hope that they believe it.

  • The second one is that, again, we have new and important customers, again, HTC, Motorola, and Panasonic are three very, very important leaders in the smartphone market that we were not working with before.

  • So we have added them to our diversifying customer base and I think it's great.

  • And the third one is that it seems that now we can start to prove that smartphones using ST-Ericsson chips are demonstrating real competitive advantage for our customers.

  • And again, before we could only use slides or paper to try to prove that point.

  • Now we can, again, do side-by-side comparisons of phones with our chipsets inside.

  • So, these are three significant items that I want to recognize for the quarter.

  • But the other item which is very significant is that our losses are still at an acceptable level.

  • So clearly, as we look ahead, our focus remains more than ever to continue delivering more and more of these great products to the market, and consequently, to improve our financial results.

  • Thanks a lot.

  • Operator

  • Ladies and gentlemen, the conference is now over.

  • Thank you for choosing the Chorus Call facility and thank you for participating in the conference.

  • You may now disconnect your lines.

  • Good bye.