Is ST Anticipating Massive Revenue Drop?

About the only solid fact in ST’s restructuring plan is that it plans to reduce quarterly opex to $600-650 million by 2014 when it plans to be achieving a 10% operating margin compared to today’s 2-3% operating margin.

Since ST’s current quarterly opex is $900 million, a one third cut in opex represents a big cut in what ST does, and conventional wisdom says you can’t cut opex too much without affecting what you do. And what you do determines your revenues.

ST expects revenues of $8.5bn this year. If there’s a direct relation between opex and revenues – and a one third cut in opex results in a one third drop in revenues – then ST is expecting its revenues to be $5.6bn in 2014.

That scale of decline would not be unprecedented – ST had revenues of $9.73 bn in 2011.

On the other hand, if opex includes all the costs of doing business – like materials and services bought in as well as internal operating expenses – then an annual opex of $2.6bn ($650m x 4) plus a 10% operating margin suggests anticipated 2014 revenues of under $3bn.

I asked ST if it was anticipating such a precipitous drop in revenues only to be told: “We’re not giving guidance on revenues.”

Not surprisingly, ST and its CEO Carlo Bozotti are keeping their cards very close to their chests.

Asked if he anticipates any more cost-cutting on top of ST’s current job-cutting programme to save $150m a year, Bozotti says he can’t comment. But how else can he find $300m of opex cuts?

Asked if would estimate the worst case scenario cost of shutting down STE if he can’t find a buyer, Bozotti says he can’t comment

Asked if he ascribes any value at all to the 50% holding ST has in STE, Bozotti says he can’t comment.

I suppose keeping your mouth shut when you’re in a jam is a good strategy – but it must be unnerving for employees, suppliers, customers and investors.