意法半導體 (STM) 2001 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the ST Microelectronics 2001 first quarter conference call. At this time, our participants are in a listen-only mode. Later we will conduct a question and answer session and instructions for European callers and US will follow at that time. As a remainder, ladies and gentlemen, today's conference is being recorded and cannot be reproduced without written permission from ST Microelectronics. I would now like to introduce your host for today's conference, Wilma Morgan of STMicroelectronics. Go ahead, ma'am.

Thank you, operator. P. Pistorio, Chief Executive Officer and President of ST Microelectronics will host today's call. He is joined around the table this afternoon in Geneva by A. Dutheil, Corporate Vice President for Strategic Planning, M. Ghirga, Corporate Vice President and Chief Financial Officer, and __00:47__ Group Vice President for __00:50__ and Investor relations. Before we begin the call, I would like to remind you that today's call is convened under the safe harbor regulations and subject to the statements contained in today's press release that covers forward-looking statements. And now, Pistorio, would you begin?

Thank you, and good morning and good afternoon, ladies and gentlemen and thank you for your participation in today's conference call. If you can see from our news release, ST produces the solid results in Q1. Revenues increased at 12.9% on a year-over-year basis to over 1.9 billion. While that does not mean that it is in fact our company's steal to report. I believe that it is safe to say that ST's Q1 2001 topline growth would be significantly above the industry average. Even on a sequential basis, our Q1 2001 revenues while 12.3% below Q4 2000 levels compare favorably to the industry, which is expected to report a 15%- 20% of sequential decline. Gross profit for the period increased in the 19.3% from the 2000 first quarter on a year-over-year revenue gain of the 12.9% attributable to the saturation of all our major reliving agent funds and the stronger growth in flush and memory devices, we had the positive effect for the level for that mix. Gross amounts involves 44.5% down from the very strong Q4 2000, showing over 47.4%,, but up nicely from the 42.1% reported in last year's first quarter. Operating income increased at 41.2% over Q1 2000, to $ 412 million after reserve being a 15.7% rise in R&D expenses. Q1 2001 operating income benefited from other income over $5.4 million. This compares to a negative of $30.5 million in last year's first quarter primarily attributable to starter's costs relating to the ramp up of new 8-inch margins in Rousset and Agarte, which are now in volume production. Operating margin was 21.5% in Q1 reflecting available profitability, which I believe will positively distinguish ST in this reporting period. Net income and earnings, which contributed to the share, were up 43% and 46.2% respectively on a year over year basis. We benefited from our lower usual than usual tax rate of a 17.9% in Q1 due to our reduction in the German corporate tax rate and advantageous locations of the main overall production facilities. The tax rate in Q2 is likely to be similar, but then could increase to the 20% range in the second part of this year. Our earnings release contains the details regarding the breakdown of revenues by product family, application, and geography. I believe that the consistency of our Q1 performance is noteworthy. On a year over year basis, the only product family that did declined was the standard and converted ICs due to combination of the lower unit demand in pricing pressures. The only application segment that was found was consumer, which as you will recall, posted a sequential revenue decrease in Q4. This end market has been hurt by both of existing and excess inventory on this shown of a divide and the sharp declining consumer confidence, particularly in the US, which was in fact the only geographical region where ST's Q1 2001 revenues were down on a year over year basis. The consistency in finance and operating Cash and marketable securities totalled $2.3 billion; this remained unchanged from the year-end 2000. Convertible debentures comprises the $2.3 billion of our $2.7 billion long-term debt, laying on the leverage of shareholder's equity over $6.2 billion. Net operating cash flow, which was 4.6 million in Q1 would increased significantly in the second half with the currently anticipated decline in capital expenditure. This should result in a solid positive cash flow position for the year 2001.

Now let me share with you our best thinking from the market outlook and ST's plans within this context. As we noted in today's news release, industry correction is likely to continue for much of the 2001. Certainly they are signs for the inventory levels of ST's applications has it been largely were cut down. On the other end, we expect our capacity situation to continue and pricing pressure to increase. Whether or not these conditions persisted throughout all of 2001 is largely a function of the microeconomic environment. Speaking now from ST's perspective, I believe that the outlook is more positive. As you know, we are positioned very well in the high-growth applications that we have targeted. Revenues of our strategic customer alliances were up 20% in Q1 of 2001 from last year's first quarter. The relationships we have adopted with these and other key customers give ST a significant advantage in the market place. Of course, current business conditions are tough and we are responding accordingly. We expect to achieve a reasonable reduction in the head count to our ____ and are taking the measures to avoid the major layoffs, which we believe we cannot be counter-productive, acting individually much so over the business. Rather, we are keeping close control over valuable escalating costs and reducing capital expenditure in a modular fashion. This gives us the flexibility for profitable response to the changing industry dynamics. In terms of ST's chip performance, with what we know today, we expect our revenues to be in the range of $1.65 billion to $1.8 billion. This estimate is based on computed year over year revenue growth in telecom, automative, and flash in memory products and the assumption that digital consumer revenues will stabilize at the current levels. Growth margins for 2001 should be between the 40% and 42%, which takes into account lower overall utilization of rates and price declines. I should add here, that the depth and breadth of the ST's total portfolio make it highly unlikely that dollar gross margin would be fall more below 50% during the market correction. This contrast is to our position during the cyclical downturn over 96 to 98, when our gross margin fall was 38%.

In summary, although our visibility has also been the best of the most, it is prudent that we attempt to project out to more than one-fourth within today's industry environment. Key ingredients to succeed in this environment are innovation, responsiveness, and flexibility, and we believe that the three is an outstanding intra curricular in those respects. Our commitment to innovation is clear by our label warrant spending, we just never been in an area where we have a cut, in order to increase one or two quarters' profits. Market share gains, annual rate of designed and the value of our intellectual profitability portfolio all are tested to the benefits of this strategic priority. In terms of the responsiveness, the company's credo has been to be customer driven and market oriented. We have always been precise in both financial and operating flexibility. The former, we achieve by the marginal capital investment programs and conservative financial policies, which has given ST the strongest balance sheet it has today. Finally operating balance, we have a standard in terms of our products, applications, strategic customer alliances and geography enabled ST to navigate the too difficult business environment. All of those elements give us confidence in ST's company abilities to outperform the industry by a meaningful margin. At this point, ladies and gentlemen, my colleagues and I will be glad to respond to your questions. Operator?

Again, at this time if you are calling from the US and would like to ask a question, please press the #1 on your touchtone phone. You may withdraw your question by pressing the pound key. Once again, if you are calling from the US, and would like to ask a question, please press the #1 on your touchtone phone. You may withdraw your question by pressing the pound key. If you are calling from a European location and would like to ask a question, please press #14 on your touchtone phone. You may withdraw your question by pressing #15. Once again, if you are calling from a European location and would like to ask a question, please press #14 on your touchtone phone. You may withdraw your question by pressing #15. And our first question is from Han Mosseman from Prudential Securities

thank you, can you give us a sense of the inventory situation and the channel for your product and perhaps their OEM and the potential for write down when you set the price for your customers and even at ST. Thank you.

Well, first of all there is no risk of write down in ST's inventory. I think that this same fact that we have dedicated products, strategic alliance and long term contracts put us in a situation to build colorful in what we built when we built. In terms of some of the products, some of the products are steel, pretty well in line and they do not see any risk write down envisaging as mention at all. As far as the market is concerned, I think the inventory situation has been largely assured for some areas, looks like the PC and the consumer segments after two quarters, Q4 and Q1 of adjusting inventories should be in a way of good situation. There is a steel sector like the networking area, like some area in the data communication market where steel inventory are going through a correction. So, we believe that the overall market would go for correction again will compute to do our corrections for Q1 by the end of Q2, this correction should be completed and this should be not significantly impact, particularly our own inventory, neither our own sales to our key customers.

Right, thank you.

We will take our next question from Terry Wagosell of Goldman Sachs.

Hi, can you just talk about any specific signs of stabilization that you may or may not have seen so far by end market or whatever else might be relevant. Is it too early to be even asking the question?

Well, I think that for example, the consumer digital that was particularly down during the Q4 and Q1, we are seeing now that we are getting back the demand for the Q2 and further quarters. So there is clear signs that the little correction may have reached to the bottom. The automative has never been basically attributable to __13:27__ this ____ to go is on base, which is field fixed drawings, because as you know, India Automative, ______, and Federal Electronics make this continuity, even the car may not be booming, so we see that there are those areas the computer peripherals could be in a way bottom out and probably going up with the PC market. So there are signs of this kind, but I think that the Q2 environment is going to be still very tough.

Are there signs largely the elimination of inventory drags and you actually think there are signs of demand improvement and demand?

Well, there are some cases in which the demand does look to be dramatically down, for example if I take the shutter box, looks like a description of a computer even for the tough times was larger inventory corrections, so once the inventory correction is over, this market should rebound gradually, but again, there is no question that overall, the softening over the American economy has created some change in the demand part in many areas. In this respect, I do not think it is evident any difference of trend.

Okay, and then one last one. Can you give us a little help on how you think about your operating expenses over the next couple of quarters and sort of maybe in dollar terms?

Well, we are trying to maintain our operating expenses at the lowest possible with two different suggestions, if you want. We tend to be down in SGNA and we tend not to be down in R&D. So, the operating expenses as a combination continues to tend to be flat.

Okay, thank you.

We will take our next question from Marissa Boulder of ST Securities. Go ahead.

Yes, good afternoon. I just want to come back on the operating expenses guidance. You just said that you are expecting flat expenses. Were you talking in terms of year over year comparison or were you talking in terms of sequential comparison

Sequential.

Okay, now the other question, I had regarding the capacity utilization rate. Could you precise how the utilization rate evolved during the quarter for the leading edge fab.

Well, during the quarter, our leading edge fab was a bit saturated. I think that when we think of new 8-inch fab, we namely address the 18-inch digital micro fab. We are five of those, the Catania, and the five Rousset, Agrate Brianza, the new 8-inch, the Crolles and Phoenix. All those fabs during Q1, we are maintaining a very high degree of saturation, particularly the one related to the flash, which is Catania's tool and also 8-inch Crolles is always saturated because these all have been new products needing introduction. So I think that all our new 8-inch fabs are somewhat pretty saturated. In terms of our 16-inch fabs, no! We had several of our 6-inch fabs that were fully saturated during Q1 and we probably soften during Q2. But, I repeat in terms of our leading edge 18-inch digital Micro, the saturation rate was very good during Q1 and will remain very good during Q2. You must have seen that also, we would like to put these in the right perspective that during the boom of last year, we used extensively __17:08__. Evidently, when the market boom was down, looks abrupt, but you cut sensibly the boundaries before remaining unsaturated. Therefore, we have done as anybody else would have done. So the strategic effect is that we started in 1999 heading to our objective to have 10-15% in the inventories is looking forward. The advantage is giving us the crux that should be retained that we need also in terms of saturation or leading edge fabs.

We will take our next question from Mark Adelstone of Morgan Stanley Dean Witter. Go ahead, sir.

Thanks, that is great. This is a followup on another question as well. What is the current utilization rate that you have now, for the per pound rate, what percent of revenues in the in the quarter came from pound raise and a question on flash, can you give us, kind of, overview of what you are seeing in the market there now, and what price trends look like as you go into the second quarter?

Okay, the first question is the factories where we dropped down to about 5-6% over total in the first quarter, while last year had gone as high as 14-16%. So clearly we made this unchanged. The second question was related to flash?

Yes, this year your sense on the flash demand inventories and then what pricing trends look like during the second quarter.

Okay. The flash demand has remained very strong. We have a still pretty good backlog and the pricing situation has been relatively good. There is some downtrend, but nothing dramatic. Of course, with the many suppliers coming can stream load more capacity. We expect the situation in Q2 to present more price pressure due to fact that there will be more capacity available, but we believe that our strong position in cash will continue and we are extremely in a good position to be very, very responsive to our competitive microenvironment because we think that we have the perfect technology, the right chip site, and in my opinion, an unbeatable cost structure, both in manufacturing and operative.

Thank you.

We will take our next question from Andrew Griffin of Merrill Lynch & Co. Go ahead.

Hello, can you hear me, okay?

Yup.

Hi! Say, I am sorry about that. Just a follow up on that flash question, and another question on wireless as well. Can you give me any details on what percent of your sales were flash in the quarter or what was the number one for flash revenue.

Yeah, with flash revenue we landed up for $200 million, in fact it was 100 in 1999 in liquid status.

Great, thanks and then I wanted to know if you would talk a little this flashing from your telecom numbers. How your wireless business went into the quarter and what is their position is in Q2

In the quarter compared to Q4, our wireless business was marginally declined, but strong increase compared to Q1, in fact in Q1-Q1, we had 22% increase on wireless, which I think is not as bad as you see in this amrket environment and we are expecting from some slight increase in Q2.

Ah, thanks very much.

We will again take our next question from Vadeem VanNichols of Sanford Bernstein.

Yeah, could you talk a little bit about the sequential growth in Europe, specifically, whether any application in particular that drove that, and also given that some of the companies have seen a recent slowdown in Europe, does that reflect your view, or do you see things very differently?

Well, first of all, I should say that our market is global. We do not ship essentially to origin ship to customer and our customer basis is worldwide. So it depends on the economic environment, the major customers operate in a worthwhile base that we should ship them whatever they decide that we should ship, the Nokia, the Alcatel, the Bosch, the Seagate, and the Nortel independent over their respective positions. If you take the domestic origin, they manufacture worldwide and we ship them worldwide. So the regional sales are depending how they structure their way. In addition of this, however, there is what we call the master market, the distribution and the larger base of a small medium industrial customers and in this case, indeed Europe was performing much better because of the economic environment in Europe was much stronger and therefore, overall, the European Q1 was better than the rest of the geography. Now in Q2, this regional performance, we do not know what it would be, because by definition, the one, which is less predictable, is this master market. But we think that in the European environment remains very strong in terms of an overall economy. The European economy is still doing very well, so we believe that the European market will still be good to do.

We will take our next question from Justin __23:03__ of Goldman Sachs. Go ahead.

Thanks. You mentioned that you guys did, outperform the industry by a meaningful margin and this quarter sequentially, you already said that you have done 12.3% while the industry has done 15-20%. Most of your peers seems to be, I think 20-30% decline for the year. Does that mean that you will go down by some more amounts for the year?

First of all, this seems to be very, very big decline. First of all, let me specify in a precise way. In Q1, we speak with a history. Our sales were 12.9% more than Q1 of the last year. We all listen and read this as a report from the semiconductor industry. I will need to mention to you the major competitor products is enough to look at those relative reported to see that our 12.9% of growth year over year is so far quite exceptional compared to the average of the major competitor reported. This for me is out performing. If you look at our total expectation, the analysts and the experts believe that Q1 versus Q1 of the last year would be something like to 4-6% 5 or say in anything, in the range of 5-7% below Q1 last year. Well if the industry declines to 5% and the ST grows 20.9, I think this is very strong out performance. __24:45__ with 21.5% of operating margin decline over this year, I do not think you will need our many large corporations in semiconductor reporting a 21.5% operating margin. I think this is by far something that we will be comparing very well. So this is for

This is history. Let us look at the total year. This total year, I am not so pessimistic as you were mentioning, I think you said the 20% decline 2001, towards 2000, I do not know. What we perceived is that the decline, if we get a decline, would be in the range of 10-15% maximum. Probably something 12% of the decline, but it is easy to follow number, say anything in between 10 and 15%, it looks like it is the best of the best for 2001 versus 2000. Well, we think we will do significantly better than this in the sense that we have shown we are ahead of the best and we think we are show this year again. In fact, I would like to recall that in the downturn of the 96-97-98, in those three long, prolonged downturn cycle, the industry declined by compounded 4.4% yearly while ST increased by a compound of a 5% yearly. Therefore, I think we did out perform significantly the industry average. So this year, we will see what would be the actual _26:26__ that thanks to our portfolio, the association with our strategic customers, and our modular flexibility to respond will give us the opportunity to show again our ability to perform better in the market.

Okay, one quick last question. How did your sales of EPROM, EEPROM and SRAM do this quarter?

In fact EPROM sales increased again, the rate is increasing and in fact we had a 6% sequential growth and now I am afraid that it is going to be flat.

Well, thank you.

We will take the next question from Nirmal Valikram with Dresdner Kleinwort. Go ahead.

Yeah, this is Nirmal. A couple of questions, Pistorio. Number one is that you seem to be the only company who has so far given a guidance saying that the inventory correction would probably last through the end of 2001 and though that might seem somewhat more reasonable because most of the other companies have given guidance just for the second quarter and I have read the second...

The operator has been recalled. Please continue with your conference.

...as the second half is going to be up in the air, can you give us some guidance from your experience in the industry that what you thinking out there and that makes the guidance?

By the way, I think that, you read this right of our, I do not know where you have taken this number because I have not said that the inventory correction would go forward to the year. What I said and I repeat, in case it was not clear, most of the inventory correction, particularly in segmented consumer and PC, and we probably already gone through in Q4 and Q1. I also said that most the inventory correction would be completed by the end of the Q2. That is what I said, not through the end of the year. However, the environment will continue to become better through the rest of the year or through most of the year because it is within our capacity and does not clear when the demand would pick up depending on the situation of the microeconomic situation. In other words, inventory correction phase should be basically over through the end of Q2, but our capacity remain until microeconomic environmental will favor the pick up in the market.

A couple of more questions if I may. One of them is that if your sale of flash was about 11% of your total sales last quarter. It looks like it is fair to say that the net income line in the flash probably contributed around 15-16%. If that is correct, can you give us some idea, given the pricing environment, and the kind of contract you have with your largest customers? What kind of risks do you have for the net income because of the expected competitive pricing for flash going forward?

Well, in respect of the flash there would be a competitive environment and by the way, this is the way we have lasted in industry. The secret is not to lose margin, it is to improve the cost, and of course, we are doing whatever it takes to migrate it, in final technology for example today we have already a big channel where we are shipments in flash and DVD micron and by the end of the year, we plan to have 100% of all our flash shipments in DVD micron plus a portion in _______00:30:07 micron. This is the way you respond to the price pressure, so indeed there will be a deterioration in margin, we have already given the guidelines for first Q2, we see our margins to go down in 40-42% range from the 44.5% over the first quarter. However, we are not going to, let us say, not counter the price pressure. We are going to counter the price pressure through implementing our margins due to the smaller chip size and better manufacturing efficiency. However, we will have some impact as we indicated before in the margin.

All right, thanks a lot.

We will take our next from Remy Thomas of Schroders. Go ahead

This is Remy Thomas from Schroders. Just a quick question, if I may. In ADSL and chip set, could you give us an idea of what the sequential change within Q1 over Q4, and how do you see that going into the next quarter?

Thanks Remy. Sequentially, there was, let us say, a significant decline in the ongoing activity, in Q1, of last year there was a cut off so, as we mentioned already, during our conference call remarks, we see that these risks, are selling down, given in Q1 and Q2, and nobody is talking to _______00:31:38 issue.

Okay, great. I would like to come back on the flash memory if I can. You said on the hand, your backlog was quite strong, but on the other hand, you are seeing some pricing pressure. Can you tell us whether you expect sequential growth or slight decline in the Q2 versus Q1?

We should not develop any decline in the Q2 versus Q1. In other words, we expect that it would be around the same level or a modest growth, as a combination of all those things.

Great. Could I ask a question to M.Ghirga in terms of the overall expectations for the depreciation in 2001 like you mentioned something like $1.4 billion at the next fall. Did this go through today, given that since then you have reduced your capital expenses?

Yeah, at this position, we would be something lesser than $1.4 billion and the progression is manageable to an increase in our position and option. As you know, we did some acquisition around that position being goodwill, we are more prized and this is a profit in total number. There is some idea on the total year combined depreciation and amortization would be in the range of $1380 million, combined.

And then a final question is if I may, during the conference call in _______00:33:22 they stated that their inventory at the end of Q1 was rather low, and was based on significant orders not necessarily from Direct TV, but other cable TV operators in the ____ 00:33:31, have you already felt an increase in the order sometimes, not in media so far in this quarter?

Well, we will not comment on anything of customers. Of course, but, I have really commented on the floor that in the consumer digital the inventory situation had been pretty much worked out during Q4 and Q1 and that we were seeing signs of all of these coming back. I would like to also add that the very strong situation appears to be in the DVD in particular.

Right, thanks a lot.

Once again, at this time if you are calling from the US and would like to ask your question, please press the #1 on your touchtone phone. You may withdraw your question by pressing the pound key. Again, to ask your question in the US, press the #1 on your touchtone phone, and to withdraw your question, press the pound key. Again, if you are calling from a European location and would like to ask a question, please press #14 on your touchtone phone. If you would like to withdraw your question, press the #15. Once again, if you are calling from a European location and would like to ask a question, please press #14 on your touchtone phone. You may withdraw your question by pressing #15. We will take our next question from David Venhoitema of ABN AMRO. Go ahead.

Hi. First of all, there is a small question on flash. Could you give us an update on your density mix?

Yeah. Today, we are moving completely on a combination of different application and different mix of products. In the telecom area and particularly in the wireless, we are entering the league from the 60 to 72 megabyte and most of the products is 64 now, as we move to the next year, starting _______00:35:18 this year. On the new cellular 00:35:21 licenses for the incoming DVD or digital boxes we are moving _______00:35:28 8 mega byte position. So there is _______00:35:31 towards high density for ST. It is therefore, anything else in your question?

Could you give some sort of a percentage or refer... Pistorio. Yeah, 50 and 72, it ends at about 50% of our sales today. On flash, we need to compliment, we are also getting new customers in some way that we have been designing in last year, which are now, let us say, starting to move to user, lets say of, William shipment from ST. Therefore, we launched four additional flash products.

Okay and then, maybe sort of more close to this question. Has your visibility improved since your last call in March? Is it the conclusion that we should draw? Also because you are talking of more pricing pressure, is that a function of actually picking up of the market and price that it is specifically taking in?

I would not say that our visibility has improved in March. I think about in one month the environment does not change so much. What I shall say whatever, is that always our visibility tended to be relatively better than most competitors because of our association with the key customers. You should remember the fact that our _____00:37:03 customers represent some 65% of the total turnover, and our strategic partners represent some 45%. Of course, this close association with a limited number of leaders, leaders assuming in their ability to have a relatively better visibility but since the environment remains quite __37:25__, particularly because of the microeconomic environment, this is not clear. Then we have this purpose so that in the Fed Move of yesterday. I think this might sound good news because this should accelerate the PC and the new expansion recovery in the US, and therefore bring good, better, microeconomic environment not only in US, but also in Asia and all over the world. So, if we say there is something positive for the second half of the year. But today, the visibility is about the same that we had one month ago.

Okay and thank you very much. When do you reckon switching back to flash memories business? Are you seeing your customers getting, well, in the contract that you have with them, are they getting more aggressive or more eager to cut prices? How do you see that, I mean, it that real function of price pressure that you see or is it more a new complex that you are doing?

Right, is this more complex or is it new complex, what do you expect as price pressure?

And then we will take our next question from Peter Tusto of One Investments. Go ahead.

Hi. I do not know whether that last question was answered.

Well, let us see if we can find out.

Hello, do you know if the last question was answered, if you want to answer that, that would be fine, but in addition, I was also just going to ask on visibility ...

Hello, can you hear me? Hello? Can you hear me?

We would like to announce to all placed on hold that we are experiencing some technical difficulties at this time. You will be hearing music until the conference resumes.

We have been rejoined by the signal five.

Hello?

Hello? Ah, can you hear me now?

Yeah, sorry, sorry, we were cut off.

Yeah, okay, no problem. I do not know about the last question, not sure that you had an opportunity to answer that. So, if you want to answer that first, but in addition, I wanted to ask about the visibility question. Given, you are saying the visibility is not substantially improved, but your guidance is changed. Just to try to understand what you are hearing to give you more confidence in this guidance are you offering the guidance of some sequential growth that you offered in the last call?

Please repeat the first question. I am sorry, but in last quarter we did announce that those are going to be made in the earning of March, but we adjusted, spoke of it in Q1. We did not speak of Q2.

Right, okay.

So, there was smoke coming out of the bucket in the market. Okay, that is a different story.

But in terms of your _______00:40:43 question of what is your confidence in the guidance, you have given, given that the visibility of flash has not improved? What are you hearing from your strategic partners, for example, which is giving you confidence in that timing?

Well, of course, we tried to be as much as possible of _______00:41:01 to the market, and as much as possible accurate, but of course we must accept the fact that the market is on uncertain favor ability including our partners, and therefore, these degrees are obviously adjusted to, but we tended to be quite, how shall I say, trying to be not only transparent, but also quite responsible in giving the guidance.

Okay, do you have to say that your strategic partners are giving you this, sort of, guidance, and reflecting actually to the market, and that you are dependent on their guidance if, you know, customer is to be dependent on their own cause are saying they have no real visibility on the market.

Well, again, the total environment is clearly uncertain and of course, each one has a real visibility that you can get from the partners. Now, to have our strategic partners, which are leaders, a lot of much has been to look clever strategic partners or have strategic partners that are leaders. Therefore, in this respect, I think that the ST has a better visibility, as I have been always saying, compared to most of all our competitors of the industry, but the environment cannot be changed a bit.

No. Okay, but the fact that they are telling the market that they have little visibility means that this can change at short notice, you know, even based on the information we are getting, as a strategic partner.

The track record of some of these strategic partners are pretty good, by the way. Even in terms of their visibility, I must give a credit to the several and all of our strategic partners that are treated with the track record probably be that the _______00:42:54, but also in understanding of the market.

Right, okay, and the other thing I was trying to ask is on your gross margin. You mentioned you felt you had a flow now of 40% growth margin. Just to what extent, we had significant or sufficient visibility of our price that your products would be selling at, to be able to give some credence to that flow?

Well, of course, again we are speaking of forecast and again, the forecast is always difficult for the future. It is always easy for the past. We believe the environment is not clear, we believe that there is going to be price pressure, we have in fact dreamed what kind of price decline we can expect, and at the same time, what kind of a cost structure we can do to counter this, for example_______ 00:43:49, it will be an improvement trying to position our manufacturing machine where it is more competitive. All these taken into account, we will become in this range. We believe this is a realistic range and we are very, and once more, we are very transparent in giving you this guidance. But again, we operate in an environment that is not certain and therefore, could be the situation could develop better or worse, but with the visibility that we are in today, and with the kind of action that we have taken, we think we can maintain that flow.

Okay, thank you very much.

Thank you.

And with that we will turn our next question from Dan Miles of Lehman Brothers. Go ahead, please.

Thank you. I do not know if this question has been asked, you know I got dropped on the call a little earlier, but can we go through bu end markets between telecom networking and computer hardware panel, where you are seeing, you know, inventories and you know where you got the most issues in terms of order visibility, if there is some differentiation you can draw between those.

Actually, if you look at the market-based segment, you may remember that the two segments which we have the first one to literally fall down, and then I am sure our other inventory was the PC and the consumer. It looks like the PC inventory situation is improving as well by the way of the consumer. It looks like the set above inventory or inventory situation will be all right in Q2, and we started seeing some first positive sign. As far as the wireless is concerned, while we see some increase in our business, we know that totally in the market there are some varying inventories situations. We probably are willing to continue until the end of Q2. The wireless line is a bit recent, in fact, wire line was, the last one to show some over inventory and there we are rising in the middle of the correction, and we are seeing that this is the way that we finally agreeing to last out there until next Q3.

Right, thank you. 00:46.25

We will take our next question from Ben Minch of Deutsche Bank. Go head.

Yeah, hi, this is Ben Minch from Deutsche Bank. Just a few questions. First of all, which areas do you expect to slow down the most in Q2 and where is this, what do you think is the greatest factor in this swing between 1.65 and 1.8 billion, and that is my first question please.

Well, the range is such because it is not clear and if it was we would be more precise.

Well, I guess, for which areas are these kept?

Well, these are the bigger markets, the world is so called master market the way you look at the situation in the industrial distribution, their total business, basically the bulk of what we shipped in each quarter, and there you do not have a backlog, you do not have a same old industry, just to go out and respond to the moment situation. This is one area that is again a central kind of business. In the area of the bigger segments, our aim is that they become members, even prior year, all the recovery will be robust and safer in different sectors. So, we see continued correction in some areas, for e.g., the networking, internet access, and this is one area that you can think off correction, while we think of correction, and inventory should be over, in some other areas, and again I repeat what I said that the PC and the consumer, but again this means that we will not have a major computer correction, but still it is not clear if there is going to be a rebound. So....

Excuse me, I guess, we are talking about sequential transparency, say DVD, these are going to stabilize presumably and pick up in Q2 as with consumer wireless you are expecting it to be, maybe slight increase in Q2? If you are not sure expecting to interact in Q2?

It feels though our range of the sales in the given guidance is centered around 10% of the decline plus or minus few points. That is what we are saying. Therefore, if we consider that the flash, we already answered, would be basically flat or more decline is one among our major statements, I feel that amount would be in the 10 million situation would not be decline. I believe that probably, the consumer will not decline as much, may decline in fact should be stabilizing, so the decline is expected to enter the street, if you expect in front of the _______00:49:25, is expected in the other memory number flash _______00:49:32, so in the general purpose, where business, while the difference and the products for the telecom, I think this should be again a decline in there and we have to get it working, probably, there should not be a difficult situation in the wireless, and there should be no decline also in the computer peripheral, maybe a little bit. So, you see the differentiation.

Thanks. We are trying to expect a sort of a non-flash standard. Is that pretty balanced unit pricing or a bit more skewed towards pricing or financing?

I think it is going to more surprising and the combination we use for pricing, but I think the pricing will be felt.

Right. Jjust going back to gross margin's question, firm reutilization in Q2, how low do you think you will bring that in Q2, and therefore how do you think you conclude your 18-inch fab saturate within Q2, and therefore how do you think you conclude your 18-inch fab saturate within Q2? Is that sequence dropped...I think you are adding a capacity as well.

Yeah, but if you saw the kind of a description on this low, on the product would be more in fact you can immediately derive that those are the virtual plans and not the leading edge. When we are talking over the street or_______00:50:51 that no flash memories, you are talking about 16-inch clamps and 0.7-micron technology. So, this would impact not in our leading edge plans. So, in terms of our leading edge plans, we think we have maintained it pretty good in the situation, and we should not drop_____

.

One last question is on flash again. Again, AMT has said that they expecting flat flash memory revenue or market this year on a revenue basis. Do you have idea on that and what is your view on making this pricing trend this year, and making a ingrowth in the flash market?

You are asking for the total market or for a slice?

AMT has said their expectation is for the total market for flash memory this year.

I am surprised because I think that the total market will grow. Substantially, on a B-to-B base because there is an accelerated movement towards higher density. We will grow much less in terms of unit growth, but we still believe we are growing in it. As far as we are concerned, we will grow in unit in reap in dollar and we will growth significantly year by year in flash and in anything you want.

Okay, on pricing, what would you expect? Make it short.

I am not in a position because I am not even an expert and I do not know the market situation to say which price will lead to this or that particular part. But, price pressure will increase, no question and that is part of life. I mean we would be leaving it there, so there is an alteration that we will see an increase in price pressure in Q2 and Q1 and for the year. .... Excuse me?

00:52:54____ if you may be on that?

I do not have the more information on that ....

Okay, so more pricing pressure, you do not want to say or you do not know how much.

No, this is difficult to say that, but again, I believe that the issue of price pressure is not new to the semi conductor industry. There is indeed an explorating trend of the price pressure when you are bound between demand and supply, and we are developing an excess capacity in flash two, because we as it is are convinced that it is a lucrative investment. This is a normal environment. However, and this is very important, when you enter this environment, the components that they have are the best of portfolio, the best chip size, and the best cost structure, our position in such a way to gain market share more and to _______00:53:58. And that is what we think we are going to come out and we will come out with a good gain market share and with limited the duration, better duration in our bottom line for flash.

Great, thank you very much.

Thank you.

We will take our next question from Toyed Zomberg of Robertson Stephens. Go ahead please.

Yes, good afternoon, and good morning. Just a couple of questions, if I could. First of all, what was your level of returns in business during the March quarter, and what level do you need in terms in order to meet your reported guidance?

The return in business is different from business to business. Again, when you go in the standard products, the level of the business is high. I am speaking discrete as stand of the linear, in stand of logic and even memories. We are not compelled to tell, because if you take flash and most of them are really custom tailor made, but I associate them with the major contract, but I am also sensitive to the business. So, the view of our business that is associated with those products, as you know is in the range of one-third, the rest of our business. So, it is not huge, but is still important and in that respect so that this business in a market like this with a lead time of a very short capacity there, have boomed and tended to be a great proportion. Now, it is 40-50% of the total, I do not know, but I think in Q1, I do not remember this number, but I know could be within this area for those products. For the other products, I do not think that the turn of business are so important, because you have a concept and whatever we will be shipping there in Q2 has already been agreed, depends upon the customers and depends upon the factors that they would actually call, well they will ask us to be ready to ship and we are ready to ship, and we depend on their actual call. By the way, of course, we will respond to the customers. If we have got to ship them all, we will ship them all, and we will be delighted. And if we have to ship less, then we will be certainly willing to ship less. Then in the other kind of the _____00:56:13 products, then the business will under real pressure, as I am saying, that 50% could be a good number.

Thank you, and could you also comment more on your wireless business also divided into handsets and base stations, and how the environment is for both separately, and also what your strategic partners are telling about the outlook of 2.5 in third generation.

Well, first of all, we are mutually exposed to the handset terminal for the _______00:56:45 handsets than on the base station. That does not mean that we are not working on that, because we have some designed things in the base station today for the future, but rest majority of our design and the shipment today is for handsets. As far as it says is 2.5 in third generation, I think that this is involving a slower recession to our forecasting, when they say _______00:57:14 we have some key reporting software and hardware platform to some key customers and we are working then for 2001, and we believe that shipment of things will start in 2002.

All right thanks and great quarter.

Thank you.

Next question is from Yong Don Jew of CSFB. Go ahead.

Good afternoon this is Yong Don Jew from CSFB. I have the first question, a clarification on needs on consumer. Basically, you have been saying the inventory correction is over at the end of Q1, but at the same time you are mentioning that Q2 should reflect maybe a forward decline sequentially. You did not have the problem no longer inventory, but end market demand.

Okay, we do not have such newer customization in the precursor inventor correction is over. Once I said, I hope that I was clear. We believe that inventor correction is mostly over in this segment at the end of July and may somewhat convenient to do, so the degree seems to be different than and affect us. But, it has been different from customer to customer for some customers it is okay for some other it is not completely okay. Yeah, in many cases there is an oppression that we have to see how the macro economic environment will impact the demand. So, we drew them to anticipate the same stronger number correlation that was true Q3, Q4, and Q1. If there is a scale of completing an inventor correction in Q2, but again we have a demand is not clear yet.

Okay. I have a second question you were mentioning that ASTs were going to be increased by pressure second quarter. If we set aside this creates come down from logic etc, and flash memory, do you see over domains, wherever price pressure is increasing, and my question relates markedly to differentiate the product.

Well, in differentiating the products, a factor of the price projection when you work with customers. In other words, you took all products and once you work with the customer you develop a solution the needs of fact including economic performance as the speck of customer wall. So, there is the way did you feel this part of prices decline and the increase of the competitiveness of the environment puts pressure and that puts pressure on our customer, which means that we also have to work with them in a more aggressive way, but we have worked overnight, this is more trend of the function. So, one in the mood to socket the product you have a multiple suppliers and multi-sockets, and the price pressure is overnight that you want in the frangible products is along the time of the process, and therefore we are seeing more progress I believe, and we do not see abrupt change there.

Thanks a lot and then I have a last question on 300 mini matter, Could you update us on your plan regarding 300 main things that you have won, you are in a hurry to work with 300 mean? It is about an issue, is the industry able to move rapidly to 300 volume production, and I think that you give me about _____01:00:41 risk in the business where you are competing against fabulous companies

No, because first of all we must again recall that we are building right now our 12-inch lining fab. That is right now, the infrastructure is going up. Well, this is a bigger fine up line that we are speaking the fine up capable of 1500 per week. It is not so small quite fine up line. Also, we have fulfilled our lives project that we will announce at certain point in time for another major facility that could be per bench, and we believe that we are not going to rush, because our total portfolio does invariably _____01:01:32 on huge volume of repetitive parts, even in flash there is more differentiation. So, we have no such pressure. At certain point in time, this will be the general technology, but in the first year a new technology manufacturing efforts is more than the vital technology. Therefore, we believe that this is good that somebody else takes the blunt over the bay in bagging the new technology because we are fortunate by the repeating nature of their products. If you look for example, BRM or if you look _____01:02:04 repeating by the millions and millions of units, I think the 12-inch is more urgent than it is for us where we have a bigger value added to the technology and products. When we would be there, we would be there in time, and by the way you should remember this has been however decline in the position always. We want to be two years up there.

Okay thanks a lot.

Again our next question comes from Jonathan Joseph of Salomon Smith Barney. Go ahead please.

Probably, qualitatively could you compare this down turn with previous down turns?

Yeah, if I look the downturn over the year 96, 97, and 98 that one was the longest one that that I ever recalled. In terms of prolonged slow down and most of it caused by B excess capacitated was build up in the preceding year. If I look at this one, I do not think that are the same excess in build up capacitor, because during 1999 and 2000, the investment were not such to deal with such a huge persistent of our capacitors. So, I believe this is one is going to be much shorter even if it is slow, being probably the fastest I have ever seen, and this has been I believe accelerated by the mobile pools, people are capable with the e-business and reacting much faster, and therefore we have seen rate of the change much faster than possibly, but I think the duration would be much shorter.

Obviously, there are two sides in every downturn, first is the unit inventory correction, the second is the pricing, I think, in referring to the shortness of the down turn year, you are talking about the inventory correction. Well, on its way to being completed and you are now talking about pricing, but it is my sense in just listening to you respond to about a dozen questions on pricing is. Is that .... you do see pricing pressure, but it does not seem to concern you, perhaps is much as in previous turns.

Again, there are two reasons for that. One, because as I said I do not believe the excess capacity are so broad, and so large is they were in _____01:04:30. Where there was an accumulation of investment much larger than what could have been done during the 1999 and 2000. And therefore, I believe once the demand picks up again, once the macro economic environment improves, and the demand picks up again the end balance will be rapidly restored. The second thing is because again we believe our cost structure is very competitive and we think we have a mean to respond, to discard the pressure in two ways, one is because we added the flexibility _____01:05:03 down turn, and we are using that flexibility and second because I think we are moving in a rapidly particularly in the flash, but we have also added products into new technology generation accelerating because of introduction influencing to this motor chip size. So, I think it was verbalized to which we are prepared, the better I believe, than mostly in our industry.

Let me ask you a follow on question, if I might, leave behind a 200 mm platform for ten years aggressive strength strategy, starting in the last five years have allowed capital spending to may be below long-term growth rate, but now in transition to 300 mm what do you think that the major suppliers really should be looking at end. Do you think there is a chance for discontinuity either in the over supplier or under supply position, as we transition to the new major platform?

It is certain that with neutralization on a broader platform there is a little possibility over some discontinuing with it, but this will not be very much in the case of now, because in technology there is most of this discontinuity between 15 micro, which will be the basic technology that we launched like the 12-inch fabs. It is _____01:06:25-30 in the 18-inch so, in terms of technology we have noted at the same time it is on fission into the 12-inch and the new generation of technology. And in terms of the new generation, similar fabs everybody is keen how much we will give, therefore is making the investment proportionally. In other words, if you make a 12-inch fab you will think about 18-inch ____ 01:06:53. So, I think this we must be a major factor, if people behave properly in financial terms. The excess in the fab are not being generated because of the technology being generated, but because of excess financial spending there has been macro economic systems that we have been investing heavily. Once, was Japan and another time was the Koreans, and another time may be, the chinese I do not know, but usually it is not been in the technology generations. So, I think they can be monitored.

Do you obviously know and can predict the stock market, but do you think that the cost of capital generally has risen around the world particularly in the Asia that could prevent many moving into 300 mm of generation as rapidly as we moved in to 200 mm?

I do not know, I know that some nations companies don't take that in balance sheet in such position to accelerate their capital spending, I think it is probably more eligible to the financial strength of the some Asian countries and some Asian companies are mostly explained to them regarding in Japan and Korea, in particular so, if your balance sheet is not so solid. In this respect, I think that ST is at pretty good situation. I was recalling you before during our introduction that __________01:08:16 in cash and the long-term best of the 2.7 billion are mostly convertible ones. So, this is a good position, which you can afford to invest the aggressively, but if you have the ratio very high, it would be very difficult.

Right.

We will take our next question from Erick Rockhoe of Global Equity. Go ahead please.

Good afternoon. In last January, tele conference the analyst's conference obviously you talked about industry growth in 2001 of 8% and 15% for your segments. In your talk today with Ruiter, we have revised that downwards to - 10 and - 15% for the whole industry and - 5 to - 10% previous segments. Can you just quickly work us through the mega trend that have brought about that balance which is quite radical?

Al right. Okay. I can get the report, when you think on projecting world market this year, in fact we all underestimated, I think, the inventory which were happening in Q1 and to a certain extent extending to Q2 and therefore either and if in the second part of the year and the second half of year there is a recovery, and there is the consumer demand starting again. You are really starting from for a very low level, I think, nobody were expecting such low Q1 and such a low Q2. You know, there is no particular segment, I think, it is really the fact that 37% growth of last year was inducing from lot of low inventory almost everywhere. And usually we do not see it.

Okay. Last quarter, you mentioned that you outperformed your industries segments, could be a bit more specific, is that - 5 versus - 7, or are you going to be positive this year in terms of sales growth?

ST

Yeah.

Well, certainly this is our hope, but I will make a projection exactly the number I progress to make your reality on number. If the industry will grow - 5 then there would be possible, because a five-point differential is easy.

Yeah, okay. Can you look forward to 2002, are we still on the assumption that growth will return to the industry as a whole under 2002?

That is all we believe it. I believe that again, the two factors that are impacting the year 2001 will be cured by the end of the year, for sure. One is the macro economic environment. You have seen the steps that have been taken two basic points of interest cash has already been taken in US, and this will work out the second we do not know exactly when, but there is a 69 months of weights, and then the American Economy, this class is the best counter projected should work in favor over the environment in US. Europe is still doing pretty well, so I believe, that the macro economic environment in 2002 should be favorable. And second the over capacity should worked about, because we are figured a short decline in the new what you prepared to do in equipment in our industry. The shipment the rates in Q1 has declined the more of it because there is a, you know, the kind of a momentum, but if you take up all those because they have dropped sharply, so expect equipment and shipment to drastically be down during the remainder of the year, and this we will correct the embolizing capacitates. So, once you have been improved the macro economic environment, and once you have corrected embolic then the interest will go flat again again. So, we see 2002 now, in a positive way. Everything has been accelerative and one year ago everybody including our self was expecting the year 2001 to be again a year of growth, and then at the end of the year or sometime in the early of 2002, the collection phase started exactly one year earlier.

Can you give a quick look on growth margins; your guidance in January was 45% for the year. Are we still working on those numbers?

I do not think Erick that I have given anybody guidance for the year. The 45 was for the quarter.

Last time somebody asked that question and you said it probably is going to be that for the full year.

Okay, fine although I remember that is about if you say I probably said, but in any case the conditions are such that the need ______01:13:42 the quarter 45 is anymore valid.

Thank you very much.

Thank you.

Again, at this time if you are calling from the US if you would like to ask questions please press the 1 on your touchtone phone, now you try your question by pressing the pound key. Again, if you are calling from a European location, and you would like to ask a question please press 14 on your touchtone phone. You can withdraw your question by pressing 16. We will look at our next question from Mark McKechley of Bank of American Securities. Go ahead sir.

I just want to these declines, little bit more at the, it sounds like wireless is down a little in Q1 from Q4, and it had a slight increase in Q3. Are you picking up some new slots that were counseled later? Can you comment on dispense lay what things would be in a relatively be concerned that are given more what you are talking about on the inventory front?

Well, fine there are two reasons one is that the customers with whom we are associated are good customers, and we are in the particular would like to be associated with the same customer gaining the market share in many of the companies. And because these are good effects, we have been suppliers. You can figure out from the portions. And secondly, is that we are gaining in sockets a lots in favor of customers, because we are enlarging customs to our base solid we have extended our portfolio, so our combination of the two is making us over all gaining the market share in the bulk of wireless segment.

Okay, thanks that is all.

Okay, we will take our next question from Yon William Berquest with ____01:15:40. Go ahead.

Just a quick question; you mentioned it is highly impossible if margins were to drop below 40%. Is that, did you say that is during the whole correction?

Yes.

Okay thank you.

We will take our next question from Tim Mahon in CS First Boston. Please go ahead please.

Thank you. Can you give us an idea in aggregate for your internal way for ups? What they did sequentially Q1 over Q4?

We have additional way for us, __________01:16:24 before with them, so as I mentioned before that we have been the good level of saturation before our leading edge funds, but I also say that the _____01:16:32-36 were not fully saturated, but of course we have proven a lesser way for Q1 than Q4.

Okay. Can you give us an idea of the percentage?

I think it has told all should I say as 10%, less than 10% 70% below, but again this was different if I look at the 8-inch fab not below on the contrary they kept growing, if I look at the 6-inch fab below.

And this was just internal?

Yes this was internal. We maintained a situation with leading edge profit, on the contrary, they kept growing because of that _____01:17:12 ramping up while the 60-inch plant suppose we are doing it from the launching or from the linear or even, I do not know, from _____01:17:20 discrete. This is unfortunate, as we are not ably saturated. So, in fact over all our aim is just the calculation over 5% or down. 5% down in numbers produced in Q1 versus Q4 internally, and despite the same is more than accounted by the relativity in more actual trends compensate by not entire compensated by the 80 inch plants.

Can you give us an idea what your thoughts are for Q2, were you think way for us will be as far as the percentage down?

The trend should be much different, I think that they leading edge fabs would maintain their high level of saturation and on the contrary continuing with the ramp up for example we are competing with the ramp up, we are competing with the bagging for production with finger point inch, we are competing to ramp up our pioneer flash plant. The I got that the flash plant one of the promoted declines probably will be completely a slow down because we want to be sure that we do not be under suffering under.

Great and then one product specific question. You talked about the move to higher density in flash memory yet in Geneva back late in the year you announced last year, announced a 4-megabit fore most home products support PC bios applications. I am wondering how that product is going slowly, you know, as to the orders from the PC segment. Thank you.

It is going very well. I am just saying, in fact, these announcements was made as you say last quarter, if I remember, and we are not sustain _____01:19:08 and we have stated that with recovery of the PC the market _____01:19:15-19 opportunity there.

Great thank you very much.

Next question from Garry Cally of Robertson Stephens. Go ahead.

I wonder if you could give the split between the various end-market segments like TPA, SG, MPG, CMG, and others?

Obviously, were they drawn by you? Yeah sure. TPA were $900 million, SG was 275, MPG 473, and CMG 239

I wonder if you could show me how you got to the _____01:20:03 expense for an EPS figures, I want to get it to my calculation.

We missed the question can you please repeat?

On the diluted earnings per share on the quarter if I remarkably _____01:20:20?

I have taken your and I think I am divided upon AUDIO DISTURBANCE earnings per share_____ 01:20:24-28

You have to, to make a billion, the earnings per share if we put it in or add back some $19.1 million to deposits, then you can divide this with the shares spending, which amount to 890..._____01:20:47-58.

Okay and what the 19.1 million relates there?

Do you want the footnote on the table?

The 19.1 million was the interest we accrued for the _____01:21:18.

Okay, thank you.

Can you tell me with footnote, by the way, speaking on the press releases that .....AUDIO DISTURBANCE.

We will look at the next question from Nirmal Valikram.

Yeah this, Nirmal Valikram I just have a question if you do not want to answer it probably I can understand that. I am just curious about this that you have always maintained that your relationship with your strategic partners have been rather special, and the top ten customers account for 45% of your sales, and if you look back at that relationship in the last 2-3 years it might seems like the customers were probably the most beneficiary for the relationship because you allocated capacity, and the customers did not have to face upward price pressure on the component, but now of course the tables have turned, because of the largely the environment going forward, and I am not asking you to display your relationship in detail, but can you qualitatively give us some idea to what extent those relationships can help you during this competitive environment where you do not have to face the kind of pressure otherwise, you would face from the customers in a typical excess capacity situation.

I think that the relationship it works fantastically both ways and in every environment. In a good week of business positive cycles all the cost we get prior to excess to our capacity. And now we will refuse at the most of the capacity, design the source of management obtain from responsive times whatever is necessary, because we want to be absolutely providing them the service. We want to provide special attention to the customers, but we are now location at the resources, they get priority. In the periods of the downturn, of course, those customers paid their custom below in kind of most concern for you and, of course, we follow the kind of environment that they need. We can also demand need of course if their markets are down, but we have a tremendous respect for our relationship and the ability we have add from there part to our commitments in the need for our own environment. So, this gives us the opportunity to have a kind of solid base on which we can operate with a transparency into their action.

Thanks a lot.

We will take our next question from Carlson Austin, with West LB. Go ahead please

Just a note. There is one market on nets, can you comment on your plans moving into data service in addition to fourth service?

Right. We are continuing to the comments on the primary petition, but you see we have a little bit of flash going in the our new drawing business on the couple of different books as I was mentioning before, and you will see from what your ultimate applications as on visits. So, yes we did only driving this, we can reduce this and why you just want to give me trends is strongest in this quarter, but we figure it in your locality and is a pretty strong, in particular earlier, we are increasing it somewhat. Now, as you mentioned also the density is increasing. Of course, it is lower density than 2 years before.

I was thinking that you would compete against their technology directly.

Well, we have explained that in some of our conference that we still believe that we have dual way of storage and therefore a double density from way. We still has engineered the solution of its density, therefore, we have still proceed at the not, which, we will be as much competitive on the end of 9th. Can you claim the high density of 64 million believer.

Obviously, these several densities on structure and what lid are you targeting there?

Well, we are talking to some of the point only to your petition from this again and were there a book able device if you wish.

I think I will give you a number probably, how much of your total best way?

No.

Okay, thank you.

We will take our next question from Mohammed Wasim with Brown Brothers. Go ahead please.

Hello, can you talk a little bit about your guidance, give an idea given the weakness, the only guidance is a double on for this year. That is the first question. Secondly, on the capital expenditure break down for the rest of the year. You have given us guidance for Q2 at 500 million. Can you talk about your flexibility for capital expenditure going forward? And lastly, I will ask the last question after you answer the first two.

We will speak on this and ____ on capital. Regarding conservative sale, you may remember that we were having a sound forecast of increasing during 2001 compared to 2000. As I was mentioning, these markets has been more a bit difficult, and it has picked up during Q1 and may also remain difficult in Q2. But still we expect an increase soon. So, overall we went from the net increase as much as we wanted, we are still believing and we wonder if our target was to double our sales in 2001 compared to 2000, we may still have a strong increase, not that it will be doubling, but there may be an significant increase for our business for this year.

On capital, we have reduced the overall for the year to 1.9 billion, and as you mentioned we have reported over the course of first quarter, a couple of expenditure, as well as planned capital expenditure in Q2. I would say that Q2 is now pretty well defined, can be plus or minus, for relief, though. As far as the year competing, again critical issue for us is the knowledge flexibility. We work through our suppliers basically the same way we work with our key customers. There are same agreements that allow us to pull in and push out by a given amount a month, the equipment in chunks. So we have the infrastructure ready, therefore if the remarkable condition should directly change, we can accelerate the capital expenditure, while we are still at some flexibility if need to be reduced in Q3 or Q4. At the moment the 1.9 billion seems quite adequate for both this year and moving forward, but we are ready to accelerate if the environment required so.

Thanks the last question related to the orders, can you talk a little about sort of proportion of prime versus modems. What the evaluation has been like, or like are we still seeing an upturn out there.

Well, it is more and more now when we speak of our major customers, they all work a good frame, not even formalize a frame. There are basic contracts, so there is clear understanding so that we have to be ready to respond to their kind of request, which are of course, flexible. Flexibility is the key. You must be able to respond flexibly to your customers because they must respond flexibly to their markets. So ST is becoming particular about the mix of the products and the customers that we have, less and less an important portion. So, today I think that the frame and the detour are becoming prevalent on the long-term promoters.

Thanks. And lastly, on R&D, can you talk a little about flexibility, you talked about R&D being strategic, should you expect this to be ongoing with the demand turning, you know, on a quarterly basis.....

We do not expect to reduce R&D at all. I think R&D is very important. What we want to do is always to improve efficiency of R&D, because one must be careful also not to any R&D expenses. So focus is important, being to prioritize is important, but in an nutshell, the value of R&D expense will continue to increase quarter after quarter, slightly, but will continue to increase.

Thanks.

We will take our next question from Christine Stein with Daiwa. Go ahead please.

Hello, good evening, two questions please. In operating costs you have this one item, which you came in at 5.4 million. Can you talk us through that number what is it included in that, is there any relation with the drawings or is it simply used by your PNU for a, if I remember correctly, about 150 million or about something.

Your question is about how that income and expenses are supported.

That is right.

I should expect that is positive number for Q2 overall, though in the range of $10 million positive. In Q3 instead, we should have an impact of this tough up cost, in our Singapore plant 8-inch and probably also in Q4, we can have a negative impact so that Q3 will be positive in the range of 10, Q4 in the range of 10, Q3 should be negative in the range of $20-30 million, while in Q4 should be in the range of $10 million negative. This is present digit.

So, these numbers include these drawings from the European Market.

Absolutely is.

And with that we finish by the end of the year.

Yes. That is, it will begin to conserve in the range of $50-60 million positive. It included the number as I said before,

You have got 50 million per quarter.

No, no, no total year. It will be in the range of $50 million per quarter. Not at all.

Okay. Last, question, when you said the year-over-year growth with strategic partners was 20% up. Did you include the Highland Eye, because I believe Highland Eye was just dropped from 12.

Highland Eye has never been there. What by nature it is a period of down.

Right this 20% is on a delightful light base, is it?

Yes.

Right. Okay thank you very much.

Thank you.

Next question from Pierre Korislan of Evista Management. Go ahead please.

I just want a clarification. Is the cap ex position is at 1.9 billion. Can you give me the split between buildings and equipment, and I guess, this runs the core of adjustment by the for the rest of the year?

Well, expenditure on building is on the high, because we made lot of infrastructure, we feel that our facilities that are being completed, particularly in Singapore. But building is over. So basically is facilities and most of it by power equipments.

Okay. Could you use that marginal approach for most of the fabs now? So, essentially what you are saying is that 1.9 capital expenditure budget fabs for selling out the existing buildings that you have not tried?

No, the most building we have are facilitated. We are completing facilities in the expansion of Capani, which is not completed. We are still growing in the Rousset, where we have been seeing some facilities, and essentially in Singapore, which is now as I thought. But only our plant facilities are completed, the building, there is more constructions except to the ____ (01:33:56), and the M6 Cattani. So we will probably the leasing is because we have there is no capital and in Cattani, we are in the final stage, so there is no big amount, by far the bigger amount is at __1:34:09______

Okay thank you very much.

We will take our next question from Andrew Griffin of Merrill Lynch. Go ahead please.

I just had a followup on my earlier question on wireless. I think I heard you right. You said wireless IC growth of 22% year on year, you have presently said that telecom as a whole was up 35.8%. That implies that your non wireless business is growing faster or it is possible that you are excluding flash memory going into wireless without number.

Yeah it is true that when I gave you the number of wireless it was without flash, because we are considering flash as a different category. But when we talk about telecom, we took all the products we are selling in telecom. Yes, you are absolutely right. On the number I gave you on wireless, flash was excluded.

I have seen that although including flash than the wireless growth was higher than that 35.8%. Okay, I then just a followup question on R&D which very rarely declined sequentially, but did in the first quarter. What was the cause for that decline? I am assuming it will not be declining going forward.

Seasonal impact on the Q1 is more vacations and there is one week wasted basically because of vacation, but not cut.

Okay, so there was no particular lumpy raise in the Q4 or particular cover in Q1.

No.

Okay and just a final one. I know that this questions is also followup. You could clarify it again. I am just intrigued about the continued high utilization weightage, given both the decline in revenues and the increase in capacity. What looks like not much flexibility to confound this anymore. Can you just clarify that again?

Well, let us see what will our 8-inch fab do. If you take the Catania plant, the flash totally, basically there is some improvements by far and large, 90% + is flash. Flash demand is strong and we move into the final geometry in their density, which of a sort, are with us; the higher density. If you look at Agrate, the other 8-inch plant, this flash is in a bit of flash again, playing to the demand and some BCB 6, which is the new generation of high density mixed power, which again there is no demand question. If you look at the Rousset, we are doing leading edge of logic and flash and again, there is plenty of demand and we are moving that in _1:36:56___ micron and there is plenty of demand for that there. If you look at Crolles, it is the plant that where we do our basic innovation in logic and 1:37:06____ and the rest, so there is a lot of new products keeping coming, and is always in a permanent status of a hyper saturation and we will continue to do that. And finally Phoenix, which is the plant that does leading edge products for several markets where they might be some fluctuations, but relatively modest. So, this is the situation and we do not see this changing at all. Now, we have complemented our internal capacity with our foundries, and we have used that flexibility, we have this available again, but we do not see the need at this point to go below our where we are with the foundries, but if it will be necessary, we will do.

What did the set of box chips see, the Omega family, which I would have assumed, were there recently, with your new 8-inch fab, am I wrong there because that is one area where you said, will be weak in Q2.

The 8-inch fab still on board, chief proforma as the other. They do chips for everybody and yes, they do also chips for the set of boxes, no question. But we do the same chips in foundries. So, we can modulate again.

Okay thanks for that detail.

Thank you.

We will take our next question from Berthem Lostena of Exane. Go ahead please.

Hi. Good afternoon. Regarding the dedicated products, you mentioned you know, at the end of some flash memory, but can you tell out the figures available for flash memory. What will be the 62% without the flash memory?

Yeah. It is true. You may remember that, I think in Q3, as _1:38:52___ mentioned, when we announced the Q3 results we mentioned that, we will, in Q3 2000 results, ____ mentioned that we have a part of flash memory, which are dedicated and he said to _1:39:06___ to add it up, when we started the year 2001. And in fact, this is what we have done and the flash memory represent about 2%. So you should subtract 2% out of 62 and it comes to 60%.

Okay. Concerning the digital consumer, what you are saying is quite different from Siemens is saying about the market. Can you explain what could be different between your view and their view because there are one of your best customers and I wonder, why there is so much difference.

From which customer you said ....First of all, I do not know what comes to me as sales, I need to call and find out what the perspective of our customer is. He is a great customer we do great business with him. I can make the general comment. We know that the subscription on our set of box are increasing. But we know also that there are a lot of inventory. I do not know if he means, if it is in terms of our inventory, of course, I am not going to comment on that, but although there was a lot of inventory. So you can allow at the same time with the sales of our customers increasing and us not delivering to them because they have a lot of inventory.

Is it on the inventory front? You do not mean, it is a market share problem.

I do not know, we do not think it is a market share problem. Clearly it is another inventory problem, which started way in Q4. You may remember that in Q4, it was the only segment and the only group, which was suffering. Q1 saw a decrease in sales, and we are saying while this is going to go roughly across Q2 and probably we see a recovery in Q3.

Let me add, even though it is something we are now forgetting the new design, even with the difficult market that Allen was mentioning on the front end part of set of boxes, we are showing some business, developing in the DVD area, our report on the digital consumer is let us say promising in the future today. We are going to _1:41;29___ inventory production for, during Q4, Q1 with the beginning Q2. But we expect that by Q3, we should go back to say we have given bit of design weaning in most of the application in digital consumer.

Concerning the $3 billion contract, you add with Nortel last year? Can you give us more details about when you think, when you expect to start to deliver in volume to the contract?

Well, in fact these contracts were signed in May, let us say June 2000, and it was going on something on three years to a billion. So you see we made an excellent 2000 year. You can imagine that, obviously today, we see the situation of, let us say, the market is more difficult. So the first half will be more difficult as I was mentioning. But then, I must say, we expect to comeback as soon as possible on screen with the potential of this contract..

Okay last question. Can you give us an indication of which range of growth margin you seem to reach at the end of the year?

This is like answering what will be the market at the end of the year, because the gross margin will depend on the, of course on the situation of the environment of the price competitiveness of the saturation of the fabs. So, when we have already said that we believe that the ____ on the entire stock will be 40%, which means we do not anticipate it going below 40% in anyn moment during this year and rebounding as soon as the market will rebound. So, again this is the tied with the moment of the market rebound. Q4, should be in my opinion, substantially better than Q2.

Thank you very much.

We will take our next question from William Wilson of Deutsche Bank. Go ahead please.

Hi there. I just wanted to ask how are you during in this smartcard business on a relative basis. Because we have heard that you are losing to a grey market share.

If you say so.

I cannot say that.

We in fact ____(01:43:52) quarter in Q1. Fortunately, _1:43:50___ says that smartcard business is going to us from price pressures as was mentioned by _1:43:55___. In the quarter, Q2, Q3, and so on, will be some difficult time for smartcard, because of the price pressure with the unit up, we would say. But we have a mixture in Q1 and do not expect to stay the market share in Q1. Particularly, this one, which was exceptional for us.

I would like to say that our view is that we gained the market share in Q1.

Could you tell us, throughout the Q1, you and your guys in your business done?

Q1, Q1 was in smartcard 63%.

That is ____ right.

We heard that some people are saying that their growth rate rose to double.

May be. We can double on ours, at least sequentially we did even maintain 19%, so what you say Q1 versus Q4.

Anyway that gives the numbers and the pride or may be the feeling it gives me this sensation that those numbers we gain a market share, but the numbers are numbers, let us pick out the number. Q1 over Q1 increased to 63%, Q1 over Q4 we increased over 19% I think this is with the stronger performance.

Can you give some guidance on the evolution of your inventory break down at the end of Q1 relative to what is on Q4 in terms of products?

As far as our inventory is concerned, we have two different positions. The position of material, which is continuing declining and the position of finished products, which is flat and reducing in quarter of over quarter, while we have a die bank and work in process, which should be flat and declining there on the way.

On the finished product basis, is there any chance you could give us a guide to which product is increased, which is full?

No increase in Q1 basically. The finished products we have a flatter situation compared to the end of the last year.

Okay. There are any further specific products that has seen increase.

No.

Okay thank you. Just one last thing. Some irritating question. I just missed the TPIN discrete discreet standard product divisional numbers.

The sales?

Yeah. Sales numbers for the quarter.

TPA was 1, not the case was 9 under ____ dollars, 9 under and the DAG was 275..

That is great. Thank you very much.

By the way it is smartcard we are talking about. Smartcard show. We are giving our numbers, so we can leave you exact number we made and you can judge by your sales asking our competitors; who is gaining market share and who is losing. We did $125 million in Q1.

That is great thank you very much.

We have no further questions at this time. I would like to turn the call back to your speaker for anything concluding comments.

Okay thank you. I think that the industry is leading one of their down turn that has affected our business that we have been leaving it to many of our past years, particularly the person like me who has been long in this industry. What is important during those kind of situations, is to have the condition to respond better in the market. Those conditions are an high rate of innovation, moving as fast as possible in the new generation of products, the new generation of technology, and chip size. A competitive cost structure and good association with the customers, but the flux should be within capital investment, a lean organization, and a solid balance sheet. Those things exist all in ST Microelectronics. In Q1 we did outperform the industry on the basis of the results that have already been published - I would like to recall our 12.9% growth Q1 over Q1 and our more than 40% growth in our net profit, which I think is quite commendable for the first quarter in this environment - and, continuing forward, we believe that our structure is such that we will continue to outperform the market during this year. We have done it in the past and will continue to do it in the future. Thank you for being with us today.