STMicro sees solid 2017 start; analysts say may supply iPhone 8

[January 26, 2017]  By Eric Auchard and Gwénaëlle Barzic

FRANKFURT/PARIS (Reuters) - Franco-Italian chipmaker STMicroelectronics posted in-line 2016 results on Thursday, driven by solid phone and car part sales and improved factory utilization, while setting out a plan to boost plant capacity that could fuel revenue later in 2017.

Europe's third largest semiconductor company said it had won a deal with an unnamed customer that can generate "substantial revenues" in the second half of the year, which analysts believe are tied to parts for upcoming Apple iPhones.

The next generation iPhone 8 line is expected to be released by Apple in the back half of 2017.

Liberum analyst Janardan Menon said ST's latest results reflect demand from automakers and phones such as the Apple iPhone 7, including "time of flight" proximity sensors that also measure ranges between a phone camera and objects in its view.

"This is likely to be a new product in the iPhone 8, in addition to on-going shipments of the time-of-flight sensor," Menon advised clients. "We expect STM's strong revenue growth to convert into rising margins and further multiple expansion," he said, referring to factors justifying a higher stock price.

ST Chief Executive Carlo Bozotti declined to comment on who was behind the new customer contract. "We cannot say more," he told analysts on a conference call. "We cannot give more color." Apple demands suppliers never reveal its contracts.

STOCK SURGE

ST, long the sick man of European chipmakers due to erratic business performance, serial restructuring, high labor costs and relatively low margins, has seen its stock more than double from below 5 euros last July. On Thursday, shares jumped another 6.5 percent in Paris trading at 11.92 euros at 1200 GMT.

A logo is pictured on the factory of STMicroelectronics in Plan-les-Oautes near Geneva, Switzerland, December 6, 2016. REUTERS/Denis Balibouse

UBS, which rates ST shares as "neutral", said the stock is likely to hold on to recent gains thanks to its solid near-term outlook and expected second-half revenue ramp-up, which it believes could be tied to new image sensing components for Apple.

ST said it plans a major increase in capital spending on new plant capacity of up to $1.1 billion, nearly double the $607 million it spent last year and the $467 million in 2014. Chief Financial Officer Carlo Ferro said it was a one-off increase rather than a permanently higher level of plant investment.

It also forecast "better than normal seasonality" for the first quarter compared to the fourth quarter.

ST reported fourth-quarter net revenue of $1.86 billion, an 11.5 percent increase from the last quarter of 2015 and squarely in line with what analysts, on average, expected, according to a Thomson Reuters poll. Revenue should rise 12.5 percent in the first quarter compared to the first period a year ago, it said.

Gross margins marked their fifth consecutive quarterly increase by rising to 37.5 percent in the fourth quarter compared to the 37.1 percent, which analysts, on average, were expecting, according to Thomson Reuters data.

It forecast first-quarter gross margins of around 37 percent, plus or minus 2.0 percentage points.

(Reporting By Eric Auchard and Gwenaelle Barzic; Editing by Keith Weir and Adrian Croft)

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