STMicroelectronics ( STM ) shares experienced a sharp decline on Thursday, as investor anxieties over compressed margins and a guarded outlook overshadowed the semiconductor firm’s better-than-expected third-quarter 2025 financial results.

The company, a supplier to major industry players including Apple Inc. ( AAPL ) and Tesla, Inc. ( TSLA ) , reported quarterly net revenues of $3.19 billion.

While this marked a 2.0% year-over-year decline, it successfully edged past the analyst consensus estimate of $3.16 billion and landed slightly above the midpoint of the company’s own business outlook range of $3.17 billion.

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Strength in Personal Electronics was cited as a key driver, with Automotive and Industrial segments performing as anticipated, and CECP broadly in line with expectations.

Margin Compression and Profitability Headwinds

Adjusted earnings per share (EPS) of 29 cents decisively topped the analyst consensus estimate of 23 cents. However, the positive top-line performance was undercut by a significant deterioration in profitability.

The gross margin contracted by 460 basis points (bps) to 33.2%, falling short of the company’s outlook midpoint of 33.5% (plus or minus 200 bps).

This margin erosion was primarily attributed to lower manufacturing efficiencies, negative currency effect, lower level of capacity reservation fees and, to a lesser extent, the combination of sale price and product mix.

Consequently, the operating margin fell by a substantial 610 bps to 5.6%. The company reported a net income of $267 million on an operating income of $217 million for the quarter.

The reported operating income included $37 million in impairment, restructuring charges and other related phase-out costs, predominantly associated with the previously announced company-wide program to reshape its manufacturing footprint and resize its global cost base. Excluding these one-time items, adjusted operating income stood at $217 million.

Segment Performance

Segmental results painted a mixed picture of market demand. The Analog Products, MEMS, and Sensors (AM&S) segment grew revenue by 7.0% to $1.43 billion, and the Embedded Processing (EMP) segment rose by 8.7% to $976 million.

Conversely, the Power and Discrete products (P&D) segment saw a sharp revenue decrease of 34.3% to $429 million, and the RF & Optical Communications (RF&OC) segment’s revenue dipped by 3.4% to $345 million.

Sales to OEMs dropped by 5.1%, yet Distribution sales increased by 7.6%. Positively, the company noted that its book-to-bill ratio remained above one, with Automotive above parity and Industrial at parity, signaling resilience in future demand for key products.

Management’s Strategy

To address the prevailing weak industry conditions, exacerbated by mounting geopolitical tensions, including U.S.-China trade friction and restrictions on chip and mineral exports, and to better navigate the resulting customer order pullbacks that have also impacted peers like Texas Instruments Inc. ( TXN ) , STMicroelectronics ( STM ) has cut its fiscal 2025 net capital expenditure to just below $2 billion.

Chief Financial Officer Lorenzo Grandi explained, as reported by Bloomberg on Thursday, that the profit margins suffered from manufacturing inefficiencies stemming from lower production levels earlier in the year.

He expressed confidence that profitability will recover as revenues rise and the company’s factories become more utilized. CEO Jean-Marc Chery confirmed the company is cutting capital spending plans for the year to optimize investments in response to the challenging market.

Liquidity And Outlook

From a cash flow perspective, quarterly operating cash flow was $549 million, a decrease from $723 million in the year-ago quarter, while free cash flow was $130 million, down from $136 million in the prior year.

Despite this, the firm maintained a solid net financial position of $2.61 billion as of September 27, 2025, with total liquidity of $4.78 billion against total financial debt of $2.17 billion.

Looking ahead, STMicroelectronics ( STM ) projected its fiscal fourth-quarter net revenues to be $3.28 billion at the midpoint, representing a sequential increase of 2.9% (with a potential variance of plus or minus 350 bps).

This guidance fell below the analyst consensus estimate of $3.35 billion. The gross margin for the quarter is projected to recover to 35.0%, plus or minus 200 bps.

Price Action: STM stock was trading lower by 9.10% to $26.47 premarket at last check Thursday.

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