STM slides 12% in pre-market as margins falter, outlook reduced

STMicroelectronics (STM) reported its Q2 earnings, revealing mixed results compared to analyst expectations. The company posted net revenues of $3.23 billion, a year-over-year decrease of 25.3%, but slightly above the analyst estimate of $3.2 billion. The gross margin came in at 40.1%, in line with expectations but significantly lower than the 49% reported in the same quarter last year. Net income was $353 million, surpassing the estimate of $313.4 million but representing a sharp decline of 65% year-over-year. Operating income also dropped by 67% to $375 million, slightly above the forecasted $360 million. EPS was $0.38, better than the expected $0.34, but down from $1.06 a year ago.

Segment performance showed notable disparities. The Analog, Power & Discrete, MEMS and Sensors (APMS) Product Group generated revenues of $1.91 billion, slightly exceeding the estimate of $1.89 billion. However, the segment's operating income fell by 51% to $254 million, though this was better than the expected $235.1 million. The Microcontrollers, Digital ICs, and RF products (MDRF) segment reported revenues of $1.32 billion, just below the $1.33 billion estimate. Its operating income decreased by 70% to $222 million, missing the $273.9 million estimate.

For Q3, STM's guidance indicates continued challenges. The company expects net revenues of $3.25 billion, below the analyst estimate of $3.56 billion, and a gross margin of 38%, compared to the expected 40.9%. This outlook reflects ongoing pressure from weak industrial orders and reduced automotive chip demand. The company also revised its full-year guidance, now anticipating revenues between $13.2 billion and $13.7 billion, down from the previous forecast of $14 billion to $15 billion. The expected gross margin is around 40%, reduced from the "low 40s" previously guided.

The reduction in full-year guidance and the Q3 outlook highlight significant headwinds. STM's shares fell 12% premarket following these announcements, signaling investor disappointment. Other semiconductor companies, including Teradyne (TER) and Magnachip (MX), also experienced declines due to weak guidance and results, reflecting broader sector challenges.

During Q2, STM's net revenues slightly exceeded the midpoint of the company's business outlook, driven by higher revenues in Personal Electronics, despite lower-than-expected revenues in Automotive. The first half of the year saw a 21.9% decline in net revenues, mainly due to decreased performance in the Microcontrollers and Power and Discrete segments. The company noted that contrary to prior expectations, customer orders in the Industrial segment did not improve, and demand in the Automotive segment declined.

Despite these challenges, STM managed to control expenses effectively. R&D expenses were $535 million, below the estimate of $548.3 million, and capital expenditures totaled $546 million, under the projected $590.4 million. The company's strong cash flow performance, with free cash flow reaching $2.61 billion, a 24% year-over-year increase, demonstrates efficient operations and strategic investments.

Looking ahead, STM plans to manage its operations based on the revised full-year revenue guidance range of $13.2 billion to $13.7 billion, with an expected gross margin of around 40%. This cautious yet realistic outlook reflects the company's efforts to navigate current market conditions and adjust to the evolving demand landscape. The focus will remain on optimizing capacity and managing costs to sustain financial health and support future growth.