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By Gwénaëlle Barzic and Harro Ten Wolde
PARIS/FRANKFURT (Reuters) - STMicroelectronics, Europe's largest semiconductor company, said on Wednesday it would cut costs to sustain higher margin targets in a softening market, but warned of weaker revenue and profits in near-term.
The lowered outlook for ST follows warnings of weakness ahead from several ST peers over the past month -- caution that has sparked a wave of selling in semiconductor stocks worldwide and cuts to analyst forecasts for ST itself.
Shares in ST, which reported a dip in third quarter revenues on Wednesday, were down 8.8 percent at 5.07 euros at 1300 GMT. The stock is down over 13 percent this year, compared with a decline of 5.1 percent among top European technology stocks.
Last month, rival Microchip Technology shocked investors when it warned of a slowdown in ordering by distributors who sell their products.
Analysts say similarly broad-based chipmakers such as ST, but also Freescale, Fairchild Semiconductor and Linear Technology are also exposed, as component distributors have pare back inventories amid worsening economic trends in China and Europe.
ST said fourth-quarter revenue was expected to be anywhere from flat to 7 percent below its third-quarter results.
"In the fourth quarter, due to the ongoing soft market conditions, we expect net revenues to decrease sequentially by about 3.5 percent," STMicro Chief Executive Carlo Bozotti said.
A 3.5 percent drop -- the midpoint in ST's expectations - would imply revenue of about $1.82 billion (1.12 billion pounds) in the final quarter. Analysts had forecast an average of $1.99 billion, according to Thomson Reuters.
A LITTLE BIT MORE CHALLENGING
ST said its fourth-quarter gross margin would fall to around 33.8 percent, plus or minus two percentage points.
STMicro margins had been on the mend in recent quarters, climbing up from around 31 percent. Analysts had been expecting gross margins to top 36 percent by the middle of next year.
The scaled back forecasts also raise doubts about ST's capacity to hit operating margin targets of 10 percent by the middle of 2015.
"Operating margins ambitions appear near-impossible to match in the near future," said Bernstein Research analyst Pierre Ferragu, who rates the stock "underperform".
STMicro said on Wednesday that by combining two units it planned to achieve $100 million in annual saving, which should help it hit its operating margin target.
"We are very determined," ST's Chief Bozotti told reporters and analysts on a conference call.
"Clearly the softening of the market is not helping and is making this a little bit more challenging."
ST's third-quarter gross margin was 34.3 percent, a tick down from the 34.4 percent it had targeted for the period.
Net revenue for the quarter dropped to $1.89 billion from $2.01 billion last year, reflecting ongoing restructuring moves. The latest quarter's revenue was 2 percent below average analyst estimates, according to Thomson Reuters data.
(Additional reporting by Eric Auchard in Frankfurt; Editing by David Goodman and Clara Ferreira Marques)