ST's Q3 Results Signal Broader Market Problems

Weak demand and a drop in customer orders made for a disappointing quarter for STMicroelectronics NV (NYSE: STM).

Europe's largest chipmaker reported this week third quarter revenue of $2.4 billion, a decrease of 4.9 percent on a sequential basis. All regions were down except the Japan-Korea market, which was up 6.7 percent; sales in other key regions, including Europe, the Middle East, and Africa (EMEA), China and South Asia, and the Americas, dropped about 7 percent each. Compared to the year-ago quarter, total revenue fell 8.1 percent.

Quarterly net income came in at $71 million, or 8 cents per diluted share, compared to $198 million, or 22 cents per diluted share, a year ago, according to the company. Sequentially, income fell sharply from the second quarter's net income of $420 million, or 46 cents per diluted share. Analysts expected 10 cents a share in earnings.

"During the third quarter we have seen further deterioration in the semiconductor market environment amid macro-economic uncertainty and we are now experiencing a much weaker demand across a broader range of products," said Carlo Bozotti, president and CEO, in a statement.

Besides a general slowdown in demand that executives said goes beyond an inventory correction in the semiconductor sector, the Franco-Italian company's close ties to Finnish phone maker, Nokia, appears to be having a toll on the balance sheet. ST warned investors in July that sales were expected to drop because microchip orders from Nokia, one of its biggest customers, had slowed. But it's not only mobile phone chips taking a hit. Other segments, namely chips for cars, computers, cameras, and other machines, slipped as well this time around.

And then there's ST-Ericsson joint venture, which was also affected by losses and has struggled to make a profit since it was launched in 2009. Even so, Bozotti said during the earnings call that it was not looking to drop its stake in the venture and that it was encouraged that companies such mobile phone maker HTC have endorsed ST-Ericsson's products, Bloomberg Businessweek reported.

Ongoing global uncertainty also casts a shadow over the fourth quarter outlook. ST lowered its target for the current fourth quarter, saying it expected an 8 percent decline in sales.

What does this say about the broader semiconductor segment? Are we back in a nail-biting phase? The jury may still be out on that one as there are some mixed signals among the leading players. Intel Corp. (Nasdaq: INTC) last week beat Wall Street's expectations and hit new sales highs, but Texas Instruments this week reported a 30 percent drop-off in third-quarter profit stemming from a broad slump in demand.

Analysts at Gartner noted recently that semiconductor inventories are at worrisome levels, and the firm predicts that the industry will begin an inventory correction in late 2011. News about the deepening problems associated with the debt crisis plaguing Europe and the US won't help matters either, especially as the electronics markets looks to book more holiday sales.

Although there may be some bright spots coming out of the earnings season, it appears most companies will be strapping in their seatbelts and bracing for a bumpy ride.