Earlier this week European Commissioner Neelie Kroes spoke in platitudes about how the EU would be putting more effort into kick-starting the region’s hardware industry — to create the ‘Airbus of chips.’ Her words seem particularly ironic (and possibly more empty) today, as the world’s largest telecoms company, Ericsson, admitted it would have to take a writedown of $1.2 billion (8 billion Swedish crowns) related to the decline of its European chip JV ST-Ericsson, as it tries to figure out what to do next with the loss-making business.
In a statement, Ericsson also said that it would not acquire the 50% of ST-Ericsson that it does not already own. “To acquire the full majority of ST-Ericsson is…not an option,” it said. That will, however, mean some $458 million more to keep propping up the company anyway in the next year. “Ericsson’s current best estimate is that the implementation of the strategic options at hand will require approximately SEK 3 b. of Ericsson funding, of which the majority in 2013,” it said.
Ericsson and STMicroelectronics first entered into their JV in 2009 with the aim of using their combined size to lead the market in wireless equipment chips. The aim was to be “fabless” — that is, designing the chips but outsourcing the making to other foundry companies — to beat down some capex and opex. But earlier this month, STMicro said that it would divest itself of its stake after ST-Ericsson failed to achieve break-even.
Ericsson said that it will take the non-cash charge in its Q4 earnings, and that there would be no tax effect. The charge will include asset write-downs, as well as “additional charges related to the available strategic options for the future of the ST- Ericsson assets.” That will inevitably mean layoffs and other cuts, as well as a possible sale of the business.
ST-Ericsson has been one of the companies making chips for next-generation mobile devices using LTE. That’s a business that is currently booming, with shipments of LTE devices poised to grow threefold in the next year to 275 million units, according to a report yesterday from Strategy Analytics. But ST-Ericsson has not been among those reaping the rewards. As Reuters points out, one of  ST-Ericsson’s biggest customers is also one of the most troubled in the handset business today: Nokia.
Today’s news should not be too much of a surprise. ST-Ericsson has been trying to turn its operations around since April 2012 and today said it is still “in the middle of executing on company transformation aiming at lowering its break-even point and introducing new technologies.” That was complemented by a further strategic review in October 2012, although STMicro’s announcement earlier this month that it would pull out of the JV will certainly precipitate more drastic measures.
Still, the Swedish company is trying to keep a brave face and focus on the positive: “Ericsson continues to believe that the modem technology, which it originally contributed to the JV, has a strategic value for the wireless industry,” it writes. “For Ericsson, a key priority in this process is a successful market introduction of the new LTE modems which Ericsson is certain will be very competitive and needed in the market.”
It will have to do some convincing in the market, though. There’s no doubt that LTE is firmly on the roadmap as a key technology in the mobile world, but with very strong competition from the likes of Samsung (vertically integrated with its own LTE devices, and still growing with a $3.9-billion investment in chipmaking in Texas), the big question is what role Ericsson, and ST-Ericsson, will have to play in it.
release below
Ericsson : Ericsson’s Q4 results negatively impacted by non-cash charge related to ST-Ericsson
STOCKHOLM, SWEDEN–(Marketwire – Dec 20, 2012) –
* Decision to not acquire full majority of ST-Ericsson.* Non-cash charge of approximately SEK 8 b. in Q4, 2012 related to its 50% stake in ST-Ericsson, including approximately SEK 3 b. cash out of which the majority in 2013.
Ericsson (NASDAQ:Â ERIC) today announced that it will take a non-cash charge of approximately SEK 8 b. in Q4, 2012 related to its 50% stake in ST-Ericsson. The total effect on Ericsson Group Net Income Q4, 2012, is approximately SEK -8 b. (non-cash), with no tax effect.
The charge includes write down of assets to reflect the current best estimate of Ericsson’s share of the fair market value of the JV, as well as additional charges related to the available strategic options for the future of the ST- Ericsson assets.
ST-Ericsson announced its strategic plan in April 2012 and is in the middle of executing on company transformation aiming at lowering its break-even point and introducing new technologies. On October 9, 2012, the two parent companies announced a strategic review of the business plan and the future ownership structure. On December 10, 2012, STMicroelectronics (NYSE:Â STM) announced its intention to exit as a shareholder in ST-Ericsson.
Ericsson continues to believe that the modem technology, which it originally contributed to the JV, has a strategic value for the wireless industry. For Ericsson, a key priority in this process is a successful market introduction of the new LTE modems which Ericsson is certain will be very competitive and needed in the market.
Ericsson will continue to explore various strategic options for the future of ST-Ericsson assets. To acquire the full majority of ST-Ericsson is, however, not an option. Ericsson’s current best estimate is that the implementation of the strategic options at hand will require approximately SEK 3 b. of Ericsson funding, of which the majority in 2013.
Ericsson will provide any additional financial information in conjunction with the Q4 report 2012.
During the process of exploring options Ericsson will not speculate on the possible outcomes, timelines, and future strategic alternatives for ST- Ericsson assets.
Conference call for analysts, investors and media
Ericsson invites media, investors and analysts to a conference call with President and CEO Hans Vestberg and Jan Frykhammar, CFO, at 14.00 (CET) on December 20, 2012.
A replay of the conference call will be available after the scheduled end time. The playback will be available from approx. 16.30 CET on December 20, 2012, until 23.59 CET on December 27, 2012.