意法半導體 (STM) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the STMicroelectronics Q2 2002 conference call.

At this time, all participants are in a listen-only mode.

Later we will conduct a question-and-answer session. At that time if you have a question and have dialed a North American phone number, you will press the 1 followed by 4. If you have dialed the European phone number, you will press the star followed by the 1 on your phone.

This conference is being recorded.

Wednesday July 24th, 2002.

And now I will turn it over to Lynn Morgan of STM.

Please go ahead.

Thank you, Operator.

On behalf of the management and many of our members of our Investor Relations team here today, I would like to thank you all for joining us and welcome you to the call hosted by Pasquale Pistorio, President and CEO.

Joining us is Maurizio Ghirga, CFO, VP, and the Corporate Vice President of business planning and development.

At this point, I would like to remind everyone of the remarks on this phone may be forward-looking and subject to risks and uncertainties as described as in our press release issued today.

I will now turn it over to Pasquale Pistorio.

Good morning and good afternoon, ladies and gentlemen. Thanks for joining us to review the Q2 operating performance.

As you have seen, our Q2 results met and exceeded the guidance we provided when we released the Q1 for earnings.

We anticipated a 10% sequential revenue increase and, in fact, net revenues were up 13% over 2002, reaching $1.53 billion.

Sequential revenue gains were broad-based, achieved across the groups, microsegments and products reflecting a combination of supply chain replenishment and the market demand.

Summarizing Q2 results, I would like to make the following points. The 13% sequential revenue increase was driven by the units of the month as ASP's declined 3.5% from Q1 2002 levels.

The bases point increase in cross-margin resulted from a combination of higher revenues and significantly better rate of approximately 80%.

This is an average of 65% in Q1 2002.

Our rate has been increasing in 2002, reaching close it 75% in March of this year.

You may recall that we considered the optimal rate to be approximately 85%.

It went straight to the bottom line enabling us to report net income of $104.7 million compared to $32.9 million the previous quarter and earnings due to the share of 12% versus that earned in Q2.

Effective cost control over this is pending and it also contributed to our Q2 performance.

SG&A remained at 10.4% of net revenues, which is amongst the best ratios in our industry and the expenditures increased by almost $35 million sequentially, representing 16.9%. This includes 7.6 medium, one-time charge for process related to Alcatel electronics acquisition.

Excluding the Alcatel electronics acquisition which we completed the end of Q2, still reported positive operating cash flow of $93.6 million for the period.

We have begun reporting the operating profit as we believe this additional provided investors with important insight into trends in the products and market segments in which we are active.

As you have seen from our release, each of our product groups has been profitable in both of the Q1 and Q2 of this year.

This is no small achievement given the difficult industry environment over this year.

Even our product group, which has experienced significant price pressure, manages to stay marginally in the black ink too.

From a business perspective, strategic customer alliances continues to provide a solid foundation for revenue performance.

The products increase of 11.1% sequentially and accounted for 62.9% of net revenues in Q2, while revenues for strategic customer alliances were up over 11.5% and represented 6.8% of Q2's net revenues.

To comment on a few specific applications, the consumer was a strong performer in Q2. We saw relatively steady contribution in which we see the number one market share position, and in DVD revenues more than doubled in Q2 from Q1 levels, illustrating our continued penetration of this application. We also saw good sequential revenue growth in imaging due to recent assigned wins.

Overall, telecom revenues were up 12.6% on a sequential bases over which it was over 80% and wire line the remainder.

There was a 10.2% sequential revenue increase, but revenues from the products serving the wireless applications were up 12% sequentially, the difference primarily reflecting the steep declining pricing that has persisted through Q2.

Automotive applications increases 17.8% sequentially and printers were up almost 53% from Q1 to Q2 levels.

Our release contains the information by product group.

I would like to add some comments.

As you have seen, our discrete products was a strong performer in Q2.

Both from a profit point.

Demand and supply chain and vendor replenishment were the major contributors to top-line growth, while our ability as a low-cost producer created important operating leverage.

Of course, as most of you know, memory pricing continued its trend in Q2, declining by almost 10% from prior quarter.

That is why our sequential unit growth in this product was about 14%, capital sequential revenue increased to a little over 3%.

The spending has given us an advantage over suppliers and we enjoy a competitive cost structure on the manufacturing side.

Thus, we are able to weather the environment and be in a strong position.

In Q2, as we move ahead, with strategic initiatives that we believe will build positive long-term results.

The power of the technology partnership agreement is tremendous for two reasons.

First of all, this is not just a sharing, but state-of-the-art new technology and are being put together by three companies under the same roof and with the same equipment in our facilities.

Secondly, the three companies together represent the volume in excess of $15 billion, and our fire power in terms of research and development is as a percentage of sales is second only to and could be twice as much as any other major player.

With the continued use of our strategic components, we are announcing to build and operate a facility just an extra door to our site in Italy that will be a significant long-term plus.

The alliance includes a long-term supply agreement that makes DMP the primary leading edge and a supplier and the technology agreement under which the two partners were incorporated to ensure that DMP, there will be singlelessly supplied and a strong ability to offer its customers state-of-the-art products with leading edge technologies.

At the end of Q2 we completed the acquisition of STMicroelectronics and the sale of companies mixing business and fabrication business.

Our approach gives us a global leadership position in DSL and suppliers status with Alcatel.

This will be a contributor.

It has more important long-term implications in our ability to capture incremental market share as the Internet market takes over.

We have a stronger balance sheet which is essential to success in today's business environment.

Cash and marketable securities exceeded the $2.1 billion and our financial debt ratio was a healthy 0.12.

To further maximize our tools on investment and the current market conditions, we have decided to review the 2002 capital expenditures by approximately 17% heading back from $1 billion to $2 billion.

At the same time, we are accelerating the product qualification process at our factories so we can be ready to accommodate a significant upturn in market demand without a commence ratio increase.

We support this approach to be flexible in our capital location.

In Q3, our market segmen revenue, we believe, will show a more than sequential increase over Q2 levels despite seasonal factors.

We expect an upturn, a broad-based increase in several applications such as wireless, wire line, automotive, and DVD's.

Again, we are not counting on a meaningful change in the pricing landscape.

Although, we believe that there will be an improvement in the rate of decline in product pricing.

With that, our guidance for Q3 is to have a gross margin better than Q2 resulting from an increase in capacity rates and improve the manufacturing efficiencies.

To conclude, we believe that in today's challenging times, companies with stronger fundamentals can accelerate their differentiation within their industry, both in terms of growth and even more in terms of financial performances.

ST meets this criteria from technology to portfolio, from customer base to manufacturing capability, from financial strengths, therefore we are confident we will continue to outperform the industry in the markets we serve.

And now I will be glad to accept your questions.

Operator.

Thank you.

Ladies and gentlemen, we will now begin the question-and-answer, if you have a question and have dialed a North American phone number, you need to press the 1 followed bid the 4, if you dialed a European phone number, you will need to press the star followed by the 1.

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One moment, please, for the first question.

Our first question comes from Shane Danju. Please go ahead with your question.

Good afternoon.

I have just one simple question. Have you seen, during the course of Q2, some of your customers changing significantly their forecast for Q3 and Q4 shipments?

Well, every time you have a customers adjusting their expectation up or down, but there has been nothing dramatic in Q2.

Okay, on the DVD side you haven't seen any signs of this in China?

No.

Thank you.

Our next question comes from Jonathan Joseph from Salomon Smith Barney.

Please go ahead with your question.

Good afternoon.

With regard to your pretty impressive quarter over quarter shipments of DVD controller units, and I guess also decode, some of your Taiwan competitors are seeing a pretty meaningful slow down already in that market.

Do you think that you took market share or what are the other dynamics that might be able to explain how you had just really very strong shipments of DVD parts?

Thank you.

We believe we are gaining market share.

Absolutely.

I think we are getting market share.

And you were mentioning the set box or so, where there are two contrasted situations. One is the cable, and the other one is the satellite.

I think on satellite, we are gaining market share very strongly.

While on the cable, we are probably flat.

But, you know, one market is very depressed you probably know, which is the cable, but it is compensated as far as we are concerned by a good increase in penetration on the satelite.

And then with regard to your outlook for pricing in that market, is that a market that is priced on a quarterly basis or is it essentially a long-term pricing curve?

We don't understand the question.

I am trying to understand. Is there pricing pressure in that market and if that market has seen pricing pressures, is this something decided on a monthly or quarterly basis or was this anticipated by you?

Well, the price increase in this kind of market, but, you know, for example in DVD we don't see anything exceptional.

Okay, thank you very much.

Our next question comes from Remmy Thomas.

Please go ahead with your question.

Good afternoon, gentlemen. Impressive quarter in terms of sequential growth.

When you explained the growth that you reported last quarter, you insisted on the fact that it was both related to a pickup in demand and a number of specific segment as well as inventory replenishment.

As we go throughout the rest of the year, are you worried that now that inventory has been built up and demand in some areas is slowing down, you would suffer from a clearing of some of the inventories that could affect your volumes?

And secondly, I am quite surprised about what you were saying about the satellite setup box market because we just got off the conference call with TMM and they were saying year on year, their setup box deliveries are down 25% and they are the world leaders in this segment.

Are you expanding into the market or other operations in Asia?

Let me comment on the inventory. On the inventory, there is an operation that during Q1 there was some overshoot and going down, therefore; there has been during the Q2 some reestablishment.

But two comments.

First of all, I don't believe this has created any over inventory and second, it is more related, as I was trying to specify during our conversation here, during the discussion, much more to the standard products, because the standard products go more to the distribution channel, and therefore, it is there where you have those replenishment, while for where we don't see a (?) in the inventory position.

As far as your additional question on setup box, our sales are flat as I said before.

One compensating the other.

Of course I cannot comment on any customers, but it looks like we are getting market share, mainly on our definition.

Thank you very much.

Our next question comes from Hanns Moseyman with Prudential Securities.

Please go ahead.

It is Brett Pollock for Hanns.

Could you give more color on what you anticipate for unit growth in the next quarter given your slight growth in the quarter and if you could break it down with more granularity?

Well, this is difficult to make, even because it will be different from family to family.

Overall, I think that there will be a few percentage points differential between units and dollar growth.

In other words, the price erosion will be a few percentage points, 3, 4% overall price erosion.

More accentuated than the commodities rather than in the products.

So this kind of a differential will be reflected in the units growth.

Okay, great.

One last question, can you expand on your cap-x reduction, what you are scaling back from the $1.2 to the $1 billion?

Yeah, this is exactly in order to improve the utilization of our capital, and improve the return on investment capital, because we compensated this, with the manufacturing agreement with USC and with the agreement with TNC and because today the position that we have is quite low.

We have adjusted 3% because of (?) given to fulfill our profits.

So we feel this is the best way to maximize and use our capital to exploit the opportunity of a very good offer from the founderies in this moment of competitive environment and to capitalize on our agreement with those companies.

So we get to the same flexibility and a better organization of our capital, we are in a better position with the capital.

Thank you.

Your next question comes from James Harding with Bank of America.

Go ahead.

Good morning, I am sorry to say I have some boring questions to ask.

On the tax rate, the tax rate was lower than I expected.

Will that be carried forward?

And also research and development and SG&A charges came in ahead of my expectations, can you give us an indication of how you expect that to rise or fall through the rest of the year and possibly into next year as well if you care to tread there?

Thank you.

Okay, the income tax rate, as you know, we benefit in Q2, mainly due to a better situation in Singapore.

Singapore development decided to reduce income tax, so we added the benefits.

These benefits will come about for the next quarter.

And in fact, we can expect the tax rate to 16 to 18% maximum.

These are as a result of the income taxes.

Secondly on the expense side, we believe that through our action to control expenses, we will see the same range for SG&A and research and development, in percentage of revenue.

And that would be true going forward into 2003 as well, would it?

Hopefully we will go down in percent, because if the growth over Q3 is expected to be in the range of 23%, I think 22, whatever it is, then we are pretty comfortable we are going to grow in the same proportion our SG&A and research and development.

So when the recovery will restart with a double digit and strong pace, then we will even go down in percent.

Thanks very much.

Our next question comes from Mark Edelston with Morgan Stanley Dean Witter, please go ahead.

Caller: Good afternoon, very nice quarter.

A couple questions.

You gave us some input on what the ASP erosion was in the quarter, can you give us a sense as to what the ASP erosion, if any, looks like in the backlog that you have going into the Q3?

Well, the erosion that we have, the backlog is already factored in in our expectation for Q3 growth, and as I said before, we see a few percentage points differential between the growth in units and the growth in dollars.

Therefore, some percentage point of erosion is already factored in.

Okay, great.

And then can you give us a sense...I know we are just entering the Q3, but if you looked into the Q4 at the moment, based on the end markets that you are serving, and just the input that you are getting from your sales guys or from customers directly, do you have a general sense as to what your Q4 visibility looks like today versus what it has looked like in prior years?

Well. Well, first of all, we don't give guidance at this stage for Q4.

We would like to confirm that we are convinced that the recovery is continuing and will continue.

The bottom was hitting Q1, then we are hitting a recovery that is realized in Q2 and our expectation says in Q3, we are convinced this will continue in Q4.

The pace of this recovery will depend on the economic evolution.

But I think that for Q4, we should see a continued evolution of the recovery.

And the last question, Pasquale, what percentage of your Q3 plan at the moment is in backlog?

Nearly the total.

Great, thank you very much.

Your next question comes from (Unkown) with Ambro Inc..

Please go ahead.

I have a quick question to start with.

Where are you catching your cap-x, please? ?

We are always controlling capital in two ways.

One, we are (modular), we never sacrifice strategic investment.

There is no note at all in our spending.

The major research and development projects together with Phillips and Motorola and the other two, our research and development center for flush, there is a buildup of the plan we are building.

If we add the capacity, in traditional technology, standard technology, we can choose to do internal or external.

So we have delayed some of this expansion in high performance or standard technologies while whatever is proprietary or strategic, we will not touch it.

Could you just repeat the numbers you gave on wireless, how much is it sequentially and how much is it sequentially in telecoms, please?

And also on flash, because I am not sure I got all the numbers.

It is 10.2 in telecoms?

Here is the boss.

Okay.

In effect, our growth was in products of 12% in wireless.

All right.

This is products for our wireless application.

In total, Telecom was about 10 point something percent.

So this reflected a situation where the wireless is relatively healthy, while in the wireless technology, we are not seeing a real recovery, but the wire line is less and less important for us.

It represents only 20% of our total revenues in Telecom.

Okay.

Also a question on the memories business, you kindly disclosed your operating margin for division, I think it is great.

I would like to have a sense of your profitability in flash, it seems like Intel...are you losing money on smart cards and are you still profitable in flash?

Well, let me say that we won't go into too many details, but we are marginally profitable in the total memory group. I think there is some family that is suffering more than others.

Today, both flash is suffering more than other so while for example the (eeprom) and (dprom) are much better.

That is good, thank you very much.

Our next question comes from Tim Mahon with CS First Boston.

Nice quarter.

You mentioned utilization rates hit 75% but I think you were quoting the March quarter.

Maybe I missed it.

Where were utilization rates exiting in June?

What I said was that utilization operating Q1 was 65% ending during the months of March of 75%.

As far as the Q2 the utilization rate average in Q2 is up to the 80% level, with June being higher.

So we are moving towards the famous 85% which we consider optimal.

Great.

In Q3 we should be around that level.

Can you tell me, please, what your expectation would be, where utilization rates would have to be for ST or the industry in order to maybe get some pricing leverage back in on the supply side?

Well, within 5% utilization rate, we think it is optimal, in the sense that high utilization can create service issues, but during the big recovery, the big boom, utilization for us went well above 90%, so there is still room to grow.

In any case, the pricing issue and the gross margin are interdependent so as long as there is this overcapacity industry wide, it is difficult the price pressure will real lax.

So we try to compensate on one side increasing the utilization rate, in the other side, true innovation, adding value to our products, continuing to reduce chip side, so I think that those components are going to counter the pricing pressure and when the market is down, we will go back not totally to the prior level in gross margin, but I think the portfolio has increased the structure towards the products that we can go higher than the peaks we reached during the pre-boom.

Last question. Your 3% growth in flash suggests you probably lost market share in the quarter.

One quarter doesn't necessarily make a trend.

Have you decided to walk away from any business due to pricing or has there been fundamental shifts in any of your leading telecom customers that might lead to this market share loss?

About walking away, I don't know what that mean.

In flash, we are working to be, if not the number one, certainly among the leaders.

In flash, we have the ingredients, the technology, the portfolio, the cost structure, we have been gaining market share.

We gained market share this year for sure, so our financial performance, I believe, are much better compared to everybody.

I think that in flash we are well-positioned so we will continue to gain market share and work for leadership position.

Thank you.

Our next question comes from (Unknown Speaker) with J.P. Morgan.

Just a few questions.

The first is regarding the components of the sales growth. You told us about pricing pressure. Can you tell us how much came from the acquisition of Alcatel and how much came from currency?

Okay, so the answer is zero.

Zero for Alcatel.

Alcatel was, you know, we started...we signed the contract the end of June, and, therefore, there is no impact on that, while there is impact on inventory. As the currency is concerned, there is a big gap, a big difference, evaluation of the Euro versus the dollar in the last few weeks of June, and therefore there is none.

Can you just tell us about flash again? How much of your flash business comes from wireless and line?

Do you have that number?

Let's see, maybe...

We odd to speak between the two.

I mean say 50 to 55% is related to wireless activity, while the rest is spread between our drive system boxes and other applications.

All right.

Thank you very much.

Our next question comes from Adam Parker with Sanford Bernstein, please go ahead.

Incremental margins were about 71% for the Q1.

Is that the maximum flow-through or has revenues picked up further, can we expect incremental margins to be in the mid-70s sort of going into next year?

Incremental margins?

Right, so the gross margin on the additional revenue.

Oh, no, we don't...no, there is no gross margin additional revenue.

Additional revenue contributed to situate better the manufacturing machine and therefore with higher utilization rate, you have a better gross margin.

So...but this is one contributor, which was significant in Q2 versus Q1 moving our rate from 65% to 80%, roughly.

Now, this margin will continue, because it will move from 80 to 85 plus.

But we need to also to be more robust in the sense that the price erosion has to go back to the historical trend according to the learning curve, which work about.

By the way, I think that 2001 was a year where big inventory bubble was worked out.

2002 is the year during which the excess capacity is being worked out.

Industry capital investment are going down, while demand keeps going up, even at a slower pace because the economy is not exploding.

Every quarter that goes by, there is a crossing of the guard, not only for us but for the industry, so that when we will be entering 2003, I am convinced that we will have worked out both the inventory and overcapacity.

So we are going to a normal relationship between demand and supply.

Yeah, I...

Then the margin for real will come back.

I guess maybe my question was misunderstood.

If I compare the revenues and the gross margins in this quarter to last quarter and look at the change in revenue, and the margins you got on that new revenue, that it was about 70%, and so I am looking to sort of trying to figure out what the maximum sort of, you know, increment margins could be given your manufacturing structure, if utilization picks up a little bit more can you actually get gross margins of 75% on any new revenue you get above this current revenue level?

No, it doesn't work this way.

That is the point.

I wanted to...

Margin and additional revenue, addition alley revenue contributed to the manufacturing machine, but additional revenue come in with the same kind of intrinsic product margin, and then you have a better utilization of facility and, therefore, your cost of good sold goes down, because we have a better utilization of machine and, therefore, your gross margin improves.

Okay, all right, switching gears, one other question.

You mentioned your average utilization again was around 80 and a little bit higher at the end of the quarter and moving towards an optimal range and you recently had the announcements about founder usage, what percentage of your revenues do you anticipate from being made in founders at the next peak, 3% of your wafers come from founderies now, but what percent would happen at this next peak?

Can you anticipate a shortage in any areas by early next year?

Well, right now, our purpose is to have 15% as a leader from founderies but the important thing is we we have flexibility to do this.

If the sales will explode, we need more. We have the infrastructure to do so, but since we are very competitive in our manufacturing machine, we intend to maintain very strong in manufacturing and keep the... let's say the strategic better 15% from founderies.

Do you think increasing your foundery usage will help your margins sort of more at this peak coming up relative to last peak or more at the subsequent trough a couple years now versus this most recent trough?

No, the use of founderies increases our flexibility, thus increase our margin, because we are competitive in our manufacturing machine.

Clearly you want to increase your flexibility, you want to be also avoiding investing in a moment of uncertainty.

That is what we are going to do, and indeed, we will increase, particularly in this moment, the return on investor capital, which is for me the most important parameter of all, so since the foundery is competitive, and the premium you pay is relatively smaller than what traditionally was, it is good to average your own internal capacity with some external foundery, to improve the return on investor capital.

Great. Thank you.

Our next question comes from Murray Sabalda.

Please go ahead with your question.

Good afternoon.

I am from SG.

I have a question on inventories. They increased by 21% sequentially. Your revenues increased 13%. I didn't understand that Alcatel might have played a role on inventories. Is that why you have a discrepancy between the two?

Well, I reported we increased inventory for three reasons.

One reason is because of the acquisition of Alcatel, which bring into our assets the $26 million addition.

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One moment for the question.

Our first question comes from (Unknown Speaker). Please go ahead.

Hi.

This is (Unknown Speaker) from Neuberger.

I want to understand your revenue guidance.

Alcatel semi business will add $25 to $30 million in your revenues and your guiding for modestly higher revenues.

Why would you not see better growth in your consumer product areas and that could lead to, you know, 5 to 10% sequential growth?

We will not exclude, but we cannot confirm, what we see today from our customers, we will have a few percentage points, and in any case, the growth will be higher than the contribution of Alcatel. In other words, it will not be only Alcatel our growth.

Is it right to assume about $25 to $30 million in revenue from Alcatel or will that be much higher?

I think that we have always, excuse me, this is Lynn Morgan.

I believe that what we have said, we said around lunch presentation today was that we would give guidance for the second half of the year at this moment rather than by quarter.

And I think, you have guidance?

What we expect in the second half of this year is a positive contribution from additional Alcatel sales from $80 to $90 million?

That is during second half?

Second half of Q3 and Q4.

All right, thank you so much.

Okay.

Our next question comes from (Unknown Speker), please go ahead.

I have a question on this (?) that you are getting on, which is a good thing.

On the CMG division in particular I think we knew it was below the average, well below the average, 5% of passing margin in this division where we have had I would say a decent growth rate in terms of top line in the last two quarters.

Yeah,as you know, the consumer market is competitive.

Some of our competitors will see our performance in operating profits are better.

So you have to compare in the context of a competition.

I don't want to make the names of our competitors but you know who are the top competitors in the digital consumer area.

You can see that for the companies performing pretty well, comparatively in the industry performance.

There is room for improvement and we will continue to improve.

So, for example, do you think in the Q3 it will be improved versus the Q2 on this particular line?

We don't give guidance for the group, of course.

I have another question, you said there was no real impact of the U.S. dollar visible in the Q2, can you give us an idea on the impact in the Q2 because you are going to have, assuming it stays where it is, probably a negative impact on the quarter in terms of margin?

Yes, as you know, the changed situation can give in the PLM, primarily, because we had some structuring in the course so that the dollar was a structure of course would give us some impact in the G & L.

In this case it is probably negative but we are not sure.

The dollar is fluctuating daily so that we are not sure that this impact is there.

Could you shed some light on your hedging policy, what kind of hedging policy?

No, no, that is from the story, the hedging is based on the change of our structure, of course.

And not by financial hedging on the cost.

So we prefer to move as much as we can proportionally the structure, to mention the dollar denominated, so we are, let's say, risky in change of situation.

I think that you are referring to aspects of the dollar, Euro, I believe.

One is the financial impact due to currency exchange, and that, as we say, our policy is to be neutral as much as possible with financial instruments.

The other aspect is the fact that having...the structure that is relatively more weighted in Europe, the improvement of the Euro versus the dollar can create some extra costs to the company, which is true, but is not such that we can not manage with your normal tools.

We are very much worthwhile, so the impact would be, let's say, pretty manageable.

Okay, thank you.

Our next question is from Dresdner Kleinwort of Wasserstein.

Please go ahead with your question.

Hi.

We have seen a lot of your competitors in recently announce more outsourcing to the foundery partners.

Do you think everybody's requirements is going to be met at the leading edge?

Or is there risk as we see more of this that the founderies won't be preferred and we might see some impacts on the prices moving up in the leading edge.

It can have several motivations.

One is flexibility.

This is our motivation.

We want to have a 15% maximum from founderies, because this provides us flexibility both in the upturn and downturn.

We use this flexibility in 2001.

On the other end, there are companies that don't give a competitive manufacturing machine and therefore have no choice.

They must invest in the manufacturing machine.

Therefore, they are forced to do.

So what we do, we use the foundery for flexibility within the context of a long-term agreement with a strategic partner, but we are convinced with our cost structure, we will be and will remain forever an integrated manufacturer with our own founderies, with our own fabs.

Thanks.

Maybe just a follow-up.

Just going back to the earlier question on Thompson, we did see a significant decrease in the unit shipments.

Did you see the...towards the end of the quarter, any cancellations or order scaling back in terms of the setup boxes?

Nothing particular to report.

I think the normal activity.

Okay, thanks.

Our next question comes from Vincent Gow with City Group Asset Management.

Please go ahead.

Hi, gentlemen.

A couple of annoying financial questions.

I missed this part of the call.

On the research and development costs, did you talk about why it went up so much this quarter I guess as a percentage of seams as well as seeing absolute dollars, did you give guidance for the next quarter for research and development or maybe operating cost?

In this quarter, there was a $7.6 million that was washed due to the Alcatel acquisition and therefore we had to report to the research and development process.

So this amplified our growth in research and development in Q3.

We expect in the future quarters in terms of percent of sales to be above flat.

Okay.

And also how much does your revenue benefit from just the dollar impact?

How much was due to the dollar Euro?

On the sales?

Yes.

Nothing.

Very little.

First of all, because the change of the Euro dollar was much realized in the last part of the quarter.

You know, there is significant change in May and then accelerated in June, so the impact was relatively modest.

And then a lot of our sales have been in dollars anyway, even quite a bit of the seals in Europe, about one half of the sales in Europe are denominated in dollars so from the point of view of revenue, the change is relatively modest.

One last question, in the CPG division there is a well-documented slowdown in PC sales in Q2 and I think you grew 4.2% in Q2, how did that break out between printers and hard drives?

Which one was betterened maybe you can also tell us at the end of the quarter did you see any slowdown or was there a pickup?

Yes, that is a question for us.

It is different in terms of better storage division, and printer division.

The result of the quarters were, I would say, relatively good for most, but in terms of perspective, personally in development of storage we have less exciting division for the next quarters in the sense that the protracted growth that we have from some of our customer is not materialized.

So this probably reflects the overall situation of the PC market.

Instead it is different, it is surprising but it is different, totally different with printers, where our major customer are reporting significant growth.

And in addition we are introducing some new products, particularly what we call a digital engine, so our microcontroller in various application, various models, along with customers which was not the case before, where we are present mainly in our products, our stages and so on.

Now we are in the microcontroller, in the digital engine.

This is a totally new business for us, and therefore we have this excellent growth in the quarter, overall, in terms of what we mentioned, this was 30% growth in one quarter, and we foresee some further growing....

If...

In the quarter which is not so.

It was down this quarter and the outlook is for it to decline further?

I am talking about a few percent?

Let's be clear.

It is not a dramatic decline that I am mentioning but certainly a few percent, we are experiencing some few percent decline.

Very few percent decline.

Okay, great, thank you very much.

Okay.

Our next question comes from Nichlaus Gudwa with Deutsche Banc, Alex Brown Inc., please go ahead.

I have a couple of questions, if I may.

First, it was a good segment for you Q2 and you seem to have done better when the competition could give us some clarity with new design wins kicking off or pure market share gains at your customers, in your opinion, and secondly, could you give us some granularity on current pricing trends for Anna log and products? Thank you.

Okay, in automotive was another good segment.

As you know, we are reporting in automotive.

Both were up, the total segment for the product was up 19%.

By the way, it is also 10% better than last year.

The automotive segment is up 10% sequential.

Certainly, there is a general good situation of many European, except one, you can guess which one is it.

Overall our revenues are growing on product where we were already in.

Plus, there is a gain also here, a strong contribution from our microcontroller with embedded flash, where we are entering a new application, new products.

For example, engine management, we are serving Renault, Ford Europe, general motors, so we are present with our microcontroller with flash in engine management.

We are present in electronic power steering, we are growing our air brakes, with both power stages and MICRO.

Overall, the automotive is showing a good growth, that we expect to continue.

By the way, when we are talking about the segment it was mentioned that in audio we have performed extremely well, as I said before, and we reached the number three million power amplifier for normal audio application.

So it means one every two people around the world, is a big number.

We have three billion left to go.

We are helped also by the success of...not only involving the pure DVD digital products, but also audio, because they are typically for this application, six channel of audio and DVD.

So it is a nice market also for audio.

For analog, let me underline that in analog we didn't mention this point on our press release, but we view 12%.

In general, the company level is at a plus 12%.

The price pressure is here because this is accepting commodities where it is certainly well evident, it is not dramatic in those products, so we are talking about a few percent, very few percent in the standard. Not even in the dedicated products and the usual pressure on the commodities, even if in the Q2, we don't perceive any dramatic event, also in this product, was a decline in the Q1 but much less in the 2nd.

Thank you.

Our next question comes from Jane Price with Lehman, please go ahead.

Can we move on.

Once again, Jane Price, with Lehman, please go ahead with your question.

Our next question goes to Eddie Chung with Newman Berger, please go ahead with your question.

Once again, Eddie Chung, please go ahead with your question.

Operator, I think we are coming close to the end of the time allocated for our call.

So I think we will probably have maybe time for one more question.

Our next question comes from Aniche Goil with New Berger.

My question is answered, thank you.

We will spend a moment summarizing.

Yes, I think that our Q2 was pretty good quarter in the context of difficult-to-market environment in which we operate.

We reconfirm that the bottom of the negative cycle were reached in Q1.

We see continued recovery going on with the speed of course depending on the economic recovery.

The competitive environment continues to be strong but again, we are working out in the industry the excess capacity.

But the most important message to me is that when the industry becomes more difficult, when the environment becomes more competitive, the companies with the stronger fundamentals differentiated themselves even more from the rest of the industry.

And that is strong.

If you look at the financial performance of our company, in good time and bad time, if you look at our strength in terms of portfolio, technology, customer relationship, our ability to control costs, important direction in the market, I think it is an operation that the company is very well positioned to outperform the industry, in the markets we serve, and probably from a growth point of view but also and even more important from the financial point of view.

We are committed to continue to have growth, but also a more particular return on investor capital as our main objective.

We are convinced that we will have all the conditions improving in those area better than the industry we serve.

So we look to the future with the confidence we will continue to outperform our industry.

Thank you for everybody being with us tonight.

Thank you, Pasquale .

We apologize for the technical difficulties.

That concludes the call for today.

You may all disconnect.

Thank you for participating.