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ST-Ericsson to pass off application processor business to STM, cut 1,700 jobs

ST-Ericsson to pass off application processor business to STM, cut 1,700 jobs
Sarah Silbert
Sarah Silbert|April 23, 2012 10:49 PM

It's not every day that ST-Ericsson crosses our radar twice, but in addition to reportedly signing a deal with HTC for developing low-end handset chips, the company just announced its plans for a turnaround. The message? A heavier focus on SoCs for smartphones and tablets, along with a push for even more partnerships to develop those products. While that all sounds rosy, ST-Ericsson is also ceding its application processor business -- employees, R&D and all -- to STMicroelectronics. All told, between the loss of its application processor business and other reshuffling, the company expects to shed around 1,700 jobs -- and save about $320 million annually. Those bittersweet details and more await you in the press release after the break.

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ST-Ericsson announces new strategic direction and partnership

Focused R&D effort to deliver leading-edge integrated systems
Partnership to create a world-class development organization for application processors
Additional measures to accelerate time-to-market and lower breakeven point
Geneva, April 23, 2012 – ST-Ericsson, a world leader in wireless platforms and semiconductors, announced today the guidelines of its new strategic direction, the signature of an agreement to transfer to STMicroelectronics its stand-alone application processor activities, and additional measures to accelerate time-to-market and lower the breakeven point.

The new strategic direction builds on four main pillars:

Strategic Focus
The Company re-affirms its vision to be a leader in smartphone and tablet platforms and unveiled a new strategy based on repositioning the whole business model. The new strategic direction leverages on ST-Ericsson's unique capability to deliver complete system solutions for smartphones and tablets; competitive integrated modem plus application processor solutions (ModAp) will be the key differentiating offering through a combined approach of development and alliances.

The key building blocks of the complete system solution – application processors, modems, connectivity as well as power, RF, analog and mixed signal – will be developed either directly or through partnerships and alliances to limit and optimize the R&D effort, while enabling highly compelling solutions for its customers to bring innovative devices to the market in a timely manner. The Company will continue to develop modem IP, a key competitive enabler, sell thin modems and possibly license modem IP to third parties.

Partnership already signed: application processor
As a first step of this new strategy, ST-Ericsson has announced that it will partner with STMicroelectronics in the development of future application processors. The combination of the ST-Ericsson and STMicroelectronics teams will create a world-class organization, having the appropriate size, skills and strength to win in the growing multi-segment application processor market.

Under the terms of the agreement, ST-Ericsson, at closing date, will transfer its application processor R&D activity and employees to STMicroelectronics and will then integrate the application processor in ModAp platforms for smartphones and tablets under a license agreement from ST. In addition to this, the two companies have entered into a commercial agreement to jointly promote and offer stand-alone processors and thin modems, respectively, to a broader range of customers and applications.
The entire ST-Ericsson application processor R&D team will continue, under a transitional cost sharing model, the development of the current product generation, ensuring full continuity of ST-Ericsson's product roadmap and full service to customers.

Accelerate time-to-market
In addition to this strategy change, the company will focus on improving R&D execution and accelerating time-to-market, while reducing the overall operating expenses. The activities will be consolidated into a significantly smaller number of sites, which will be specialized by technology as "centers of excellence." The larger ones will also integrate a wider portion of the smartphone platform value chain, with a view to optimizing time-to-market and delivery efficiency. This comprehensive site transformation is aimed at enhancing the effectiveness of operations and will significantly reduce the number of sites. Additionally the Company aims at reducing its SG&A expenses by about 25 percent versus 2011 by streamlining the general and administrative activities and substantially reducing positions within the top paid management.

Lower the breakeven point
As a result of all the above initiatives, the Company – subject to negotiations with work councils and employee representatives as required – foresees a global workforce reduction of 1,700 employees worldwide, including the employees that would be transferred to ST as part of the partnership announced today.

Annual savings of about $320 million are expected from the new and from the on-going restructuring plans, upon completion by the end of 2013. Total restructuring costs are estimated to be approximately $130 to 150 million through completion. Specific impact on country or site level related to the plan will depend on local negotiations based on applicable legislation.

"In the fast-moving wireless industry, we announced today the change of our whole business model to lead the company towards excellence in execution, leadership and sustainable profitability," said Didier Lamouche, president and CEO of ST-Ericsson. "ST-Ericsson has a unique ability to develop and integrate complete mobile platforms for mainstream smartphones and tablets. This will be our strategic focus moving forward, while continuing to master leading-edge modem IPs. We believe this is the best way to deliver those world-class technologies and services that our customers are expecting in order to shape tomorrow's mobility and connected world. The Company's ambition so far to directly develop too broad a portfolio of IP required for complete platforms has not delivered the results I want to see. By concentrating our efforts on our differentiators and partnering where appropriate, ST-Ericsson can deliver the products our customers want, while ensuring full continuity of our existing roadmap. Today's announcement of our partnership with STMicroelectronics on application processors will create a world-class development organization enabling both partners to meet the needs of all devices in tomorrow's multiscreen society."

"The industry is changing and our customers are looking for a single application processor platform that can be used across multiple segments," said Carlo Bozotti, president and CEO of STMicroelectronics. "Through this partnership, we can expand our offer beyond our traditional product families and reach a wider customer base in multiple digital segments, further boosting ST's multimedia convergence business towards leadership and improved financial return. We welcome ST-Ericsson's new strategy."

"ST-Ericsson's strategic shift is a key step in ensuring that the company can reach sustainable profitability and cash generation. With the focus on ModAps for smartphones and tablets it will allow device manufacturers to rapidly bring best-of-breed devices to the market," said Hans Vestberg, president and CEO of Ericsson and Chairman of ST-Ericsson Board of Directors.

Note to Editors
An analyst conference call, hosted by Didier Lamouche of ST-Ericsson, will be held on April 23, 2012 at 06:00 pm Central European Time (CET) / 12:00 pm Eastern Daylight Time (EDT). Call-in numbers as well as supporting slides, will be available at HYPERLINK "http://www.stericsson.com/investors/investors.jsp" www.stericsson.com/investors/investors.jsp.

Technical note to editors
An application processor is a complex system-on-a-chip (SoC) for smartphones and tablets that supports applications and software running on mobile devices. In a similar way that a traditional general purpose microprocessor in a computer performs all processing and control functions, an application processor powers complex mobile devices efficiently processing functions such as user interface, graphics processing, phone calls, audio and video recording and playback and web browsing.