意法半導體 (STM) 2002 Q3 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the STMicro Lectronics third quarter conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer period. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star then the number two on your telephone keypad. Thank you. Ms. Morgan, you may begin your conference.

Thank you, operator, and on behalf of ST's management and investor relations team, I would like to thank you for joining us and welcome you to the call hosted by Pasquale Pastori, our President an Chief Executive Officer. We are having a number of people joining us today around the table. The Corporate Vice President for Future Planning, Maurizio Ghirga Corporate Vice President, Chief Financial Officer, and we have with us also the Corporate Vice President in Charge of the GPA groups and the Corporate Vice President in Charge of Consumer and Microcontroller groups. Now that I have pronounced everyone's name correctly after all of these year, I would like also say the same thing which is to remind everyone that certain of the remarks on this call are forward-looking and therefore subject to the risks and uncertainties compromised in the discussions in our press release that was issued last evening. At this point, I'd like to turn -- turn the call over.

Thank you. Good morning, good afternoon, ladies and gentlemen. And thank you for joining us to review ST 2002 results. I'm particularly pleased that this was once again to meet or exceed the guidance at the time of our future earnings on July 23rd. Our 7.5% sequential revenue increase was actually higher than we anticipated with incremental boost coming from primarily from capital at the end of the month from wireless. Serving most of the market segments was stronger in the month of Q3 and product integrity had a revenue increase and accounted for 69.5% over the quarter's net revenues. Revenues for strategic customer alliances, which as you know include both of the[inaudible] products, were $79 million in Q3, or 46.7% of the net to revenues for the period. Service to our fiber optic customers reached almost 1.1 billion industry or 64.7% of the net revenues, similar to the 65.7% of the account in Q2 this year. The stronger contribution over the products which are essential to the microchip solution and our top customer base which cuts across and diversified the market segments, combine to give us superior positioning in those areas that cover the growth potential due to the pervasiveness of the convergence. It was approximated of Q2 equaling 27%, compared to the 37.6% over the prior quarter. The key valuables here were pricing which continued to be soft in most of the product families and the effects of the seasonality and the ramp ups of new technologies.

The rates averages approximately 82% in the quarter. ST has consistently enjoyed SGA's ratio in the industry, and Q3 was no exception coming in at 9.9%. By contrast, strategical spending remains a priority. And while the Q3 R&D expenses appear flat to those of Q2, you may remember that Q2's included a special charge of approximately $7.5 million [inaudible] that we expensed as part of the microelectronics acquisition. By keeping a cost control over discretionary spending, we have been able to consistently generate leverage. In Q3, it's [inaudible] sequential increases of over 25%, generating income, net income, and earnings per diluted share, all on a 7.5% sales gain. Q3 revenue break it down by application, product family, geography and product growth are contained in our release.

Beginning in Q2 of this year, we have been reporting an operating income and to product group give additional insight into business trends. Therefore, I'd like to spend a few more minutes reviewing the Q3 performance and did Cusing the application drivers that were in the period. EPA was the leading product group in terms of Q3 sequential revenue growth, increasing 11.7%. Telecom, both wireless and wire line recorded sequential revenue gains. Over if course of the segment benefited from the acquisition microelectronics which constituted approximately $43 million to the Q3 sales. But the bulk of the revenues showed it was a substantial revenue growth. It was up modestly over Q2 with printing applications continuing, to offset the quarterly decline in data storage. The group's sequential performance reflected the additional costs of approximately 250 to sign in the application engineers from the [inaudible] tell microelectronics acquisition. We expected the team to approximate the newplans, particularly in wireless connectivity.

TMG's sequential revenue growth of 1.6% was affected by a sharper quarterly market decline in the overall business, particularly the cable portion, which must be a strong quarter to quarter gains in DVD, imaging and microprocessors and the modest increase in TV. Pricing was a pivotal factor in the performance, which posted a flat operating income on a 6% sequential revenue increase. The group's products, transister, other discretes, [inaudible] each turned into the sales that exceeded the growth of the prior quarter.

Now, to MPG, where we had 2.6% sequential revenue gain and operating loss of $8 million. As stated in the news release operating loss was attributable to ramp-up costs which was specific to the quarter. Last year, revenues totaled $146 million in Q3 at about 6% on Q2 levels.

Before moving to discuss our guidance for the matter of Q4, I will direct the review of Q2's performance in the context of a certain of the points beyond operating that we have been deciding in our community meetings. First, balance sheet strength. Which I believe is again clearly shown by our financial position at quarter end, and specifically by our substantial liquidity which gives us invaluable flexibility. At the end of September, ST's net debt rate ratio was 0.1. ST's cash generation, other barometer, was positive in Q3 be operating cash flow exceeding $160 million after the last payment on the alka tell microelectronics acquisition. This brings our operating push forward to $40 million, which we expect to significantly increase in Q4. Capital expenditure for the first of nine months of 2002 were $774 million. Putting us on track for full year cap ex in line with our previous estimate of about $1 billion. At this point, we expect to toss in the capital expenditure that approximated this level. This reflects our cautious posture as well as the flexibility that has been built into our planning process through partnerships and modular investment progress. That's where we feel comfortable that these assets, along with our projected level of capital investment with a lower ST rampage over the 2003 industry which most analysts are expecting to exceed the double digit threshold.

Now to the outlook to Q4. Even with these key advantages, industry conditions like these [inaudible] to visibility. Price pressure is a given and certain business units will face a seasonal slow downs. On the other hand, I get demand from wireless applications and the sequential rebound we anticipate in the memory products lead us to expect that this meet a single digit to revenue growth in Q4. We anticipate the reporting at Q4 for the gross margin in the 37 to 38% range, although we will of course will maximize at this level. From what we have seen so far is this Q4 expectations compare favorably with most of our industry competitors. At this point, ladies and gentlemen, my colleagues and I will be glad to take your questions.

At this time, I would like to remind everyone, if you would like to ask a question, press star, then the number one on your telephone keypad. We'll pause for just a moment to compile the Q&A roster.

Your first question comes [Vidiar Themama] from ABN Amro.

Good afternoon. Well done for this quarter. I have a few questions, can you expand a bit more into detail into guidance of Q4? Because you'll have impact from ACATEL. Can you tell if it's higher than $43 million you had already in Q3? In terms of organic growth into Q4, can you be a bit more specific where it comes from and is it due to market share gains or really due to your customer's seeing stronger end demand, please?

Well, ALCATEL was already in Q3 and when we compared the Q3 and Q4, we compared the same parameter. So the growth is all organic. Therefore, the factor and the values are already discounted because it's -- but in any case ALCATEL contribution would be the same in Q4 as in Q3. However, it is out over -- because it's included in Q4. So I believe that the gains that we are expecting in Q4 and I would like to say that these are based not only on -- how shall I say expectation, but on the facts of the books that we have entered, over our end and this ability of our customers grant us. So this growth will come from the different segments, particularly as we said from the sector of wireless, in net excess and ultima, therefore, it's quite spread. It is not singled out. It's a flush that is from Q3. Those sectors will be contributing.

In terms of the customers, we have a very broad customer base and indeed we are privileged to say to the customers that lead us in the field and maybe they would keep us gaining the market share. But in any case, our growth is not based on one or two customers but on a broad base of customers in the broad application of segments.

If you look at your wireless business, how much growth do you see for the company? In the single digital for the whole -- do you see that in the double digit level for wireless and flash next quarter?

Well, if I look at the flash, I see the double digit level. If I look at the wireless, my friend is here, a couple digits, he'll try. But Raul will correct me if I'm wrong, it would be better than the average growth of the company.

I expect so.

Can you talk about your flash business? Because your growth in the latter quarter has lagged a bit of Intel. I understand year you had a fantastic year, getting market share, but what has happened in the last two quarters where your growth was slightly below?

Yeah. We have said in our release in Q3, we had some negative impact over ramp-up of 5% over new technologies. This is a phenomenon that was related to this quarter only, and therefore we should recover our normal trend of growth and recover from Q3 moderated growth. So we think that the Q4 will have a significant growth and for the flash it would be in the double digit area.

Thanks very much.

Your next question comes from Hans Mosesman of Prudential Securities.

I have a couple of questions, Pasquale. What was the rate in Q2 and what do you expect it to be in Q4?

Overall in Q2, 82% -- in Q3, sorry. In Q3 we had an overall utilization of 82%, and we expect to increase in the 85% in Q4. So we're quite pleased with this rate.

Yeah. That's very good. But I wanted to know also Q2 was it below the 82% that you saw in Q3?

Yes. Yes. We have been growing quarter after quarter. In Q1, we were in the middle 60s. In Q2 N the middle 70s. In Q3, we were in the low 80s and in Q4 we'll be in the middle 80s, roughly. I'm trying to give a rough sequence.

One last question. What was head count at the end of the quarter?

42,000 people.

42,000. Thank you very much.

Your next question comes from Stewart Adrian of Morgan Stanley.

Hi, there. Just a quick question on the automotive side. This is the second sequential quarter seeing good growth in automotive. Could you give us an idea about products gaining traction, whether it's design wins you have ramping into high volume?

I would like to make one comment here. The automotive segment is served by basically all the product groups of the company, but over the course of the major contributor is EPA. So I will ask Aldo Romano, Corporate Vice President and General Manager to comment and maybe see if he can add to something on the microcontrollers.

Yeah, for what EPA is concern of the big growth is coming from two major applications which is our presence in power train. Our presence in [inaudible] and safety in general. Safety and in various regions of the world. That's a product I am pleased to remember that we are introducing more and more our imbedded flesh in the gross applications. So the growth is coming from let's say power traditional applications, as much power. This is the new microcontroller, particularly with this unique technology that we own. The technology of imbedded flesh.

Yeah. The trend of increased sales in market share in microcontrollers is really all across the board. We mentioned the micros which are in any dashboard apply [inaudible]. So we're starting now a strong effect on sales that we have been working on in the last two years.

Okay. And just as far as the wireless business goes in Q3, could you give us an idea of the split between units and pricing from that growth? And also could you give us an idea of GPRS, the total wireless business in the third quarter? Thanks very much.

Okay. Aldo?

The last question, he break even let's say between the GSM and GPSes in Q4. At the end of Q3, already in this quarter we can say that there is this similar month of shipments with GPS and GSM. Concerning the price, they were as low in Q3 as in Q2 I think I'm safe to say, so there has not been any significant change in this quarter. Okay, in this quarter.

So the growth was volume essentially?

Is volume, yes.

Yes. Your next question comes from Mark Edelstein from Morgan Stanley.

Good day, Pasquale and congratulations on doing so well in this environment. Question for you on the fourth quarter. First off, can you give us a sense of what percentage of the fourth quarter is already booked relative to your plan versus how that appeared in Q3? And then I had a follow-up.

We are ending the Q4 with a higher back log than we ended the Q3. I think this was the question, am I right?

Yes, I'm trying to get the -- just wanted to get the backlog coverage.

So -- yes. So the back log coverage is from operating group to operating group. In the case of differentiated products, the coverage is extremely high, because these are in the business. In the case of flash and memory it is still high, but not as high as the others. In the case of the standard, usually it's quite low because a lot is still in the business, including the distribution. All in all, the coverage for the company is always in the rate above 90%. So we believe it's pretty good, considering the wait of the products, that they bring into the back log of the company, considering the fact that they have already and I -- a high percentage of coverage I think is pretty good.

Okay, great, as a follow-up I realize that visibility is relatively limited, but I want to get your general sense, given the fact that the fourth quarter is appearing to have less than a normal seasonal uptick in shipments for you, what are your thoughts on what kind of seasonal weakness we might see in Q1? Would you also expect that that would be somewhat muted?

Well, this is like -- we think -- we think kind of a lottery. Well, what do we think is in Q1? Usually is a seasonal partial slow down. This has been like this historically. We don't want to wager to see what it would be now, but I'd rather prefer to address the whole year, 2003. For 2003, we think that the industry will be in a significant upturn. All kind of analysts forecasts speak about double digit, even 20%, some 18%, somebody else. We as a company tend to agree that the upturn next year will be above double digit threshold, up to the -- it will be in the second half in line with the economic recovery. We think anyway that 2003 should be a good year for our industry in the sense that the turn around -- the real turn around is going to happen next year.

Great. Thank you very much.

Your next question comes from Nicholas Goduea, Deutsche Bank.

Hi. Could you please break down the revenues for microelectronics between Telecoms and other applications in Q3? I have another question.

The Telecom, I think the question was between the wireless --

No --

Oh, all Telecom.

There was no contribution left in storm as it was in the past?

No, because we didn't acquire this segment. We acquired only the Telecom team. So it was about 250 people between the applications that will be used in the other application. But mainly Telecom. And by Telecom, I mean both Internet access and wireless conductivity. So we have a big team of people and I'm pleased to report that this team of people is not been important effect on PNL, which is our vision, Pasquale. But they will contribute in the future a lot, because there are valuable -- valuable people. Valuable people with a lot of experience and not beginners. So we count a lot on their contribution on our future.

You may remember that we acquired the total and we sold the non-Telecom business to AMI. So, of course what's left now ends today is our Telecom.

Thank you. And a follow-up is on capital spending. Can you tell us how much is -- was for spending in Q3 and is there any more to spend, if you recall any plans for 2003, or this between you and Motorola?

Well, you know in Crolle we have a joint agreement in the corporation with both Motorola and [inaudible]. So the costs are shared by the three companies. And in this case, the shares between the three companies and considering that we are in the case of implementing the cost of such a bigger way of the capital spending in the company. You see what I mean?

Yeah. Any more information on the exact amounts in Q3 and Q4?

Difficult to break it down this way because we are in partnership with our partner. So I think overall, the project would be very big, but to take a couple of years to be completed and again would be three partners participating.

Okay. Thank you.

Our next question comes from Adam Parker of Sanford Bernstein.

Hi. In your gross margin guidance for Q4 it is essentially equal to the Q2 guidance, despite you have a couple quarters in a row of healthy sequential revenue growth is that all due to pricing or is there any mix issues or cost issues that are contributing as well?

No. I think that the mix is improving. And the costs are improving. We had some cost issues in Q3, but in general there is a positive tendency in our operation parameters of price pressure is pretty severe. So what we are doing, we are compensating the price in many families, particularly in the -- shall I say the commodity and the standard products. So the gross margin so far has been kind of flattish through this two different forces. One is the pressure on the pricing and the other one is improving the operation. But again, with the industry progressing, we have reached a reasonable saturation level. The industry is not reached a good saturation level, but the industry is progressing the our better saturation. And with us continuing to innovate and bring in new value to the products and improving the mix this will keep growing and eventually will turn up next year.

I'm just trying to understand, you know, from Q2 to Q1, you showed some nice, you know, margin improvement, and then that sort of slowed down here in Q3 and Q4. I'm trying to funs that's incremental pricing pressure here or another variable contributing to the sort of flattening margins?

I think we had a small effect coming from the acquisition of ALCATEL. The gross margin is under the same kind of margin that we have. Of course, we are correcting that. We are going to cut the cost that, you know, there was back then.

Okay. I'm with you. One last question. You mentioned that the wire line business was going to be strong or was strong? Is that inventories no longer an impediment there or seeing end market demand pick up there?

I don't think I say this.

Okay. I misheard that.

But that is true. I think it was a good quarter in Q3, which obviously, means a little in terms in -- of futures and continued growth. But the fourth quarter showing some in booking. This is a positive for us.

Thanks a lot, guys.

Your next question comes from Andrew Griffin of Merrill Lynch.

Hi, there. Just a follow up on the question. Can you give any more detail of the relative growth of the two businesses sequentially and the rough split between wireless and wire line in your total Telecom revenues was about $5 million?

Well, I don't know if we are giving normally this, but if we consider the wire line in this quarter, we had the contribution of ALCATEL. So in relative terms the growth is not infinite, but it's very high. So this is difficult to compare, you understand me?

Yeah, I do, but basically a good proportion, I guess a good chunk of that, the 12% in the Telecom came from the ALCATEL acquisition?

Absolutely. Yes. We are talking about a huge amount. You know the total --

$42 million.

The ALCATEL acquisition is in the range of $42 million. It was 800 plus million dollars.

Okay. So about 10% of the growth came from the acquisition, that leads 2% organic growth for the Telecom.

No, we didn't say that. No. No. We don't say that. So we had that 40% is the total contribution of ALCATEL which is split in wire line and wireless. And the majority is wire line is true. So compare just wire line that's a big growth. In wireless where we are much, much stronger -- [inaudible]

Marginal.

Okay. Great. Kind of a follow on the other question subject which is the old cost control in R&D and SG&A were roughly flat which implies ka reduction in the cost in the Euro denominated cost base. How -- is this going to be able to be counted on for going forward in the next few quarters or are you running on the bottom as far as these costs are concerned?

Let me say first of all that Q3 is seasonally low in expenses. You know, this is traditionally Europe vacation season, so there's a lot of operating expenses in the population that are not included because people are on vacation. And in Europe, the vacationers are quite high.

So I think the GNA in Q3 was particularly low. As a combination of cost cutting measure that will continue, but this was substantial application. R&D on the contrary, if you can guarantee versus Q2 and to eliminate the $7.5 million of the tool -- of Q2 which was in the rank of progress due to the acquisition of ALCATEL, R&D grew in Q2 versus Q3. We continue this by the size. So we expect to expect it to grow in Q4 and because of one factor we had in R&D and because the GNA was favorable to the application. But in any way any case, I think ST is very, very conservative in GNA expenses so I think we have been historically with a lesser GNA which is probably the lowest, but certainly one of the lowest in the industry. But we will continue to drive it that way.

Do you expect operating margins will be flat in Q4?

We are not giving guidance in operating margin, but we expect that the impact of all those factors should not be negative.

Got it. Thank you very much.

10Unknown Speaker*: Thank you.

Your next question comes from Vincent Gall of Citigroup Asset Management.

Hi. I have a question on the PC peripherals business. Can you remind us what was the break down between storage and printers? And also with printers, can you just remind us who were your customers and what were the business trends?

Okay. The strategy today is about 50% that we give them in our printer division. That's inside the peripherals. In the last quarter, we had nice growth on the printers. Which is totally pouf set -- offset with the kind that we had on the -- more of the kind that we had in others. In the case of the printer situation is not nearly totally which is factory for us. Because we saw some new generation of printer that worked. Therefore, the next future we don't see a demand on printers which is significantly not growing, in other words. So this is not an area where we can expect the next quarter a growth. I'm not talking dramatic, however. I'm talking about percentage points here.

And what were your guidance or expectations for storage in Q4? I know you said Q3 was weak, but Q4 are you expecting growth?

We don't expect to grow in the storage, specifically. We will be roughly flat in the storage which is in line with what we see of the forecast in the computer field which is not very positive at the moment.

Okay. Did you make any further progress on signing up customers for your SOC solution storage?

We have mentioned at least two certain events. One is we are reinforcing our presence in the markets so we gain in the markets here. The share will bring revenues in two or three quarters from now. And even more important is the new one that began in the enterprise so the higher range is in the storage. This is for us the first time that we are entering this market, this kind of area -- in this area. We are totally absent here for the process business, not for technicals. But we are entering a new area. And we are also working with our customer on the mobiles. The gain in the area where typically it was in the hand of Japanese competitors. If we look to the perspective that we have in the medium term, I am very positive on that.

And on the enterprise, was that an SOC solution or a controller solution?

It was an SOC. We are already present with the power stage, and now we are present with also the SOC.

Okay. One last question. With regard to your foundry usage, has that changed materially in Q3 or will that change going forward?

No, in Q3 it has not changed materially. In Q4, it may. But of course until we bring our internal market to the saturation, we will not push to grow. I would like to notice that with the agreements, strategic partnership agreements we have also with the foundries, as you know, we have built a very important flexibility in our company. In other words, before we have the flexibility of the investment, we keep in addition. We have the flexibility of aiding partners in the country so we can respond really very well to the market in any condition. At the moment, the level is pretty low. And in Q3 it was about the same level as Q2.

Okay. Actually, I had a follow-up. With regard to your -- to the Telecom business, did you give us a guidance on sequential growth rate in Q4, the wire line part?

I think it's very detailed question that would be too much, but nothing is special to mention, frankly. On the variations.

Your next question comes from Jinardin Manon of Dressner Kleinmore.

Hi. I have a couple of questions. One is on flash. I take it that your production problems and in the memory product area in the third quarter was a ramp up of your 1.3 process of flash is that correct?

It was the ramp up of the 1.3% in the [inaudible] geographic plant. The ramp up to the Italian plant, and it was running in the 13 -- we were ramping one technology in an area, another technology that was the saturation. That was forced into the summertime where, you know, you have seasonally summer jobs and not -- so there was a little bit of delay in the ramp ups. But these are over.

And so what percentage of flash can we expect at .13 in the fourth quarter and in first quarter of next year? Can you give some indication on how that will proceed in the next couple of quarters?

Oh, I think next year would be very strong. In the quarter it will still be a bigger portion. Because right now we are ramping that area. So we're a percent, two percentage points in Q4 and moving fast rapidly next year. I think that today still more than 80% over total production, or about 80% in the [inaudible] micron. [inaudible] 0.15 is the rest, by next year. 015 and below were more than 50% and growing rapidly would be the majority.

And just going back to an earlier point. Your revenues on just Telecom was about $499 million, and if you take off the ALCATEL $43 million the rest seems to have grown sequentially at 22%, just Telecom. I was just wondering into the fourth quarter, would you expect the sequential growth to be above that of the third quarter and not counting the ALCATEL business, but the existing ST communications business, would that be sequentially stronger in the third quarter or sequentially stronger in the fourth quarter?

In fact, when we talk about, you know, Telecom segment, of course we are including the product of GPA. We are including the flash. And we are including some discretes. So if you exclude the ALCATEL, the growth was a GGG growth. We didn't do in flash what we were expecting. So you understand that. The GPA product we're growing in double digits. So now next year -- you want to comment on this?

I was looking through the numbers because when you talk about Telecom communication, the figure we are giving here of 18,003 -- maybe you are right, yes. Just looking through your number. You're right. Yeah. Frankly, I'm expecting a growth mainly in wireless, in Q4. It is coming from let's say additional product.

Okay. Just another question.

While I'm on this subject, I like to mention that the on one customer and not just one big one that you all know. For example, we mentioned that we are now shipping our energy chips to four of the biggest five wireless -- cellular wireless manufacturer. So this is a new event for us. So four of the five of the biggest are using that. And our market share is very high here, very high also.

Just the last question for me, which is I think you introduced some optical storage products for the PC side in the third quarter. CD-ROM, CDRW kind of thing for first time. How is that product done in the market? I mean, would that see any kind of revenue growth going forward?

The revenue growth is not coming in this quarter. In this Q4. Except to say marginal orders. Marginal means [inaudible] low, so that's why we didn't mention it. We are still in the qualification phase. They are introducing the point micron version which will further increase our repetitiveness. We are the only one company where the single chip version in the -- in this area, so competitiveness here -- you're counting on the positive announcement to be done in the next future.

Okay. Thank you very much.

Our next question comes from Anish Goyle of Newberger Berman.

Could you talk about your outlook for the September market for fourth quarter, what kind of growth are you expecting there? I have a follow-up.

On the Q3 it was a difficult quarter. We had decrease mostly in the cable. Now, Q4 is looking better, so we're going to increase in Q4. Cable will increase. Some cable customers are rebounding, and also in satellite, we have a very good momentum. [inaudible]

And how do you feel about the inventories of the customers?

U2nknown Speaker*: Don't see -- we don't see any high inventory [inaudible] available. Now, the situation is sound.

The second question probably is more similar in the wireless market. What's your read of the chip inventories with the customers and how do you feel about the cell phone inventories with the wireless? Do you see any sort of an inventory that needs to be flushed out in the fourth quarter?

That is a very straight answer. For what we know, in the chips. And no inventory of cellular phone foe for what we know. It is a very healthy situation.

Great. Thank you.

Your next question comes from Nov Beakshir Solomon Smith Barney.

Hi. I wanted to ask you what proportion of CMG revenues were derived from set top box and markets? Also how has the rate of ASP declined for CMG products progressed basically from Q2 to Q3 and how do you envision it going into the fourth quarter? Thank you.

Unknown Speaker*: In CMG, we [inaudible] of about 70% of our sales from what we call digital consumer. The biggest portion being the set box and the soaked one being DVD. The [inaudible] is still marginal. In the product the prices do not fluctuate too much. So we continue to have a strong price pressure and particularly in the DVD. But we have a big increase of volumes in the DVD which has allowed us to frame to improve the yield. So that net result is that gross margin of the DVDs at this level.

Do you have any pressure from your customers to provide a single chip solution as of now? For DVD, that is.

Yes. Oh, yes. We have a [inaudible] pressure to produce lower cost solutions. So we have single chip or double chip, we see a lot of single chip DVD which are not single chip DVD. In fact, today there is -- the best you can do is two chip DVD and you get it -- and we see a lot of one-chip DVD that needs two additional chips to work.

Thank you for that. I just had one follow-up. Pasquale, would you mind just commenting out of the $1 billion you have potentially earmarked for cap ex in 2003, what's going to be the split between $200 mill or maintenance type cap ex or 300 mill future cap ex? Thank you.

Right now in the 300, we have only two projects. One is the big association with Motorola, which is both in R&D in the private line. The other one is just in the construction label, so the total 300 millimeters, considering in Crolle, we will be sharing the investment. I think the top share will be less than a quarter of the total. And the rest will be dedicated to the maintenance because you have the maintenance and the expansion of pit, in Singapore. And the rest, investing is a big portion of the investment. So I think that -- I think with $1 billion -- first of all, we are not tried to that. We are demonstrating our purpose. We can go up and down. We will guarantee the strategic programs anyway. And then with the infrastructure, we can accelerate if necessary or slow down if there is difficult conditions. And moreover and finally, with the contract we're able to get, we can rapidly come up on stream if we need the extra waivers. But the percentage in 12 inches as I said is less than 25%.

Thank you very much.

Our next question comes from William Conroy of Sanders Morris.

Good afternoon. A couple of quick follow-ups. First one is did you see any organic growth in the wire line business in the third quarter? You may have said that and if you did I missed it and I apologize.

Yes, I say that the third quarter was good. Particularly looking and from that single event we can extrapolate that the market is recovering, but I'm not so -- frankly, not so optimistic. So I wouldn't say that -- I wouldn't -- I don't extrapolate it to next quarter. It would result -- it wasn't the result that we saw in Q3.

And next question is, can you give us a sense of what we should be thinking other income and/or start-up costs in the fourth quarter?

That should be in the same dimension of Q3. Positive dimensions.

Thank you very much.

Your next question comes from Francois Collie of BNP Parabis.

[inaudible] you've managed to get a decent growth sequentially in the fourth quarter under margins. We know that that there's business where there's heavy price pressures, how did you get there, how did you manage to maintain quarter after quarter good results in this division?

Which division? We missed the beginning of the question. The audio -- which division were you addressing?

I was talking about BSG, Discrete [inaudible].

Oh, the discrete, okay. Well TBSG products as you know in a moment of, you know, bigger market pressure. Keep being subject to other pressure. In fact, in Q3, we reported the 6% sequential growth itself, but we reported a flat margin. Which means that the price pressure was compensated by the improvement in manufacturing, but did not contribute -- we were not able to contribute to an increase in the bottom line.

In any case, we keep doing things that are necessary. There is a high degree of innovation even in the DSG kind of products in the sense we're introducing new products. Manufacturing efficiency. We are moving in the high-end volume. We have a big, big volume in the products. Saturation is nearly excellent, I mean, and there are areas like Motorola and we should -- the -- they have a high margin and this is increasing. So all in all, in that particular product group, we have a kind of cost reference or good contribution to the bottom line and the cash flow generation without taking a faster growth kind of characteristics.

Okay. So in terms of a better margin, it was I think at 14% in Q3. It was at around 15% in Q2. You've said that the activity will continue to do well in the last quarter, therefore we can deduct from that that DST in terms of margin, despite the price pressure we continue to maintain the same kind of margin yields in the fourth quarter?

It should show significant changes.

Okay. Thank you.

Your next question comes from Alec Berman of Pentia Capital.

Hello. A couple things. Just want to get a sense of, you know, any progress in your market share opportunities, what you're doing as far as the wireless space band as opposed the RT RF, power management and the flash. Also, can you talk about some of the stuff you're doing on displays and how is that coming as far as LCD controllers and this nature? Thanks.

Unknown Speaker*: Okay. You have the floor, Philippe Geyres, Corporate Vice President and General Manager Consumer and Microcontroller Groups and Piero Martinotti, Corporate Vice President General Manager New Ventures Group. The question is about potential market share gains in the area of wireless, and then in the drivers. And then in the flash. And you mentioned the flash also?

Unknown Speaker*: No.

Unknown Speaker*: Sorry. Sorry. Okay. So you two gentlemen have the floor.

Okay. For broadband, again a straight answer. There is no change in our market share because where we're present we're still present. Where we are not present, which is unfortunately the majority, I'm not answering for the time being. So no changes here. For the time being, at least. We are doing other efforts in other areas in terms of digital application for the phones. But here will be probably more emphatic in the next meetings -- the next conference call. I'm mentioning obviously the media applications. I believe the -- I leave the word to Philippe.

Yeah. On flat panels, it's speaker and DVD. On the CD controllers, we are gaining share. On LCD and LCD controllers we're winning important sockets for the CD controller. But this market is -- and -- under very heavy price pressure. A lot of competition. Nevertheless, we're gaining share.

How are you getting share? What's allowing you to gain share? Can you compare what your [inaudible] is compared to the functionality issue?

It's -- we're gaining share on the panels. We have a product delivering superior image quality. But it is mostly functionality and quality.

Got it. And I'm not sure -- also, how are the offsets, how is the pricing demand, pressure? I had another question.

Allow me to finish answering your earlier question.

I wanted to make a comment on panels. We have a good business in the drivers which is one thing of -- one thing in Korea and Japan. Also to finish on the LCD, LCD TV's are now a reality and this is allowing us to design our digital TV solution. Overall P flat panels is a good growth.

Thank you on that.

You also asked about MOSFET, am I right?

Correct. Take the power by power and power MOS, we have the double digit growth, believe it or not. There's a negativity and of course power by power is much more powerful. So we are growing significantly and gaining market share for sure.

And the pricing on that?

The pricing is not particularly aggressive there. It's low, but it's in the low end.

Okay. How would you reconcile? Maybe the product difference or maybe you help -- it seems like some of the other players who I'm thinking of fairchild and international rectifier or others who seem like they have seen pricing pressure in that area and have had issues. So can you help me understand what about your business is different or, you know, why would you see be seeing somewhat different trends than they are? On semi- as well, of course. Can you help me --

Again, I think it's value added. For example, when we speak of the products for the model application, particularly with what we call VIP this is high value-added product, it's kind of a virtual intelligent power, and this is one area where we have the leadership the margin is pretty good. And the price could be much better. So I think the question again, the combination of -- the combination of the product and then value added. Moreover, we have an applications with the power MOS, plus the micro. It is an ideal solution and we exploit the synergy between the different products, that they conserve broad industrial market and those things increase by value added.

Thank you very much.

Your next question comes from Stefan Franco of ODDO.

Yes, hello. I can ask some more questions. About the Q1, I know it's very early to talk about it. But when you see your customer and talk about the prices for the next frame contracts for next year, for 2003, do you think you expect a strong price pressure entering into 2003 because of the renewal of the frame contracts?

This industry has been used to the price pressure and the trend will not change. If we are looking at all the degree of change that was in 2001-2002 it is mitigating. If we think of the price pressure, yes, it will continue.

Okay. So you don't expect a price pressure as high as of Q1, 2002?

Not the same kind of degree of change.

Okay. Thank you very much.

Your next question comes from David Woo of Webush Morgan.

Yes. I'm sorry, I was getting in the call late. Did you give any preliminary feel for 2003? I know it's a little early. But you are one of few companies that have come through with flying colors this year, and I wondered have you given any preliminary outlook for 2003?

No. What we have said is that if we look at the value of the analyst's expectations, everybody or most of them by far the larger majority indicates that our industry in 2003 will show double digit growth. We'd be above the threshold of the double digit. We're speaking in 20%. Of course we don't know exactly where we'll be, but we share the view that growth next year will be about -- above the threshold of 10%. We believe it's more important that it will be the market growth. We have the fundamentals in terms of customer base, in terms customer portfolio, in terms of customer base, in terms of application to continue to go in the market as we have been doing in the last 15 years. So we look at 2003 with a proven -- necessary proven approach we believe the growth will be above this threshold with a double digit for the industry. And we will do even better.

Would the operating rates be significantly high for some of your more commodity business to have -- to have less pricing pressure than you have currently?

I think in the industry utilization gets to the level of saturation in the price pressure eases. But in the area of the commodity it turns back. There are areas like, I don't know, standard logic operation. Those are going down rapidly, but that's going when the saturation occurs. But again those are things in which we are -- we are not counting on prices going up. We're counting on margins going up because we will have a new product selection with lower margin.

Thank you. Congratulations for a great quarter.

Thank you. Your next question comes Uchey Orgi from J.P. Morgan.

Right. A couple of -- can you hear me?

Yes.

Just a few follow-on questions. Can you talk about memory and tell us the split between flash, smart card and others? If you can also tell us what the related growth is for these businesses? And I have a it will follow on.

In fact, we gave this split between the flash and the other product, but we are not giving any on the rest of the those T memory business. And you may remember what we said about or flash business is $106 million. Yes, out of 252.

Thank you. Just in terms of the CMG, can you talk about a split is between the analog, and can you also tell us what the relative growth is for these two businesses?

Yeah. I mentioned that earlier we are doing about 70% of the business in digital. And of course we put the growth in digital that is still there. However, this year we have seen a good -- a good momentum on traditional analog because our customers were getting share, more than the market increase.

final question. Maybe to Pasquale. If you're talking about utilization rates going to 85 in Q4, it will be at the top end of the guidance?

That will be what we try. We will see the margin between 37, 38, but of course we are committed to push towards the other end. That is our commitment, then we'll see.

Thank you very much.

We have time for one last question. Your final question comes from Ben Dounout of X-sane.

Hello. Your release looks bullish on Asia. Can you split it by end market and you think it's sustainable into -- in 2003? Thank you.

When we speak of Asia, we really are speaking of one region that is counting more and more, the manufacturing area. There is a lot of action moving in Asia. China particularly. From American customer base and European customer base and Japanese customer base. So if you look in our report with our shipments, in the geographical area, you see that Asia represents the major region, but if you see what is the shipment of the customer base, well, by far you -- Europe and U.S. are the major regions.

We continue to be very optimistic because the competitive environment is such that we see more and more production moving in there, but also we see a very strong growth coming up and growing over a lot of customers. And this will be particularly strong in China.

We think that the Chinese will be a particular market, both manufacturing base for American, Japanese and European customers. But also for a new Chinese customers coming up and they're coming up very strongly and that's why we're addressing that market particularly with the manufacturing presence that we have seen in many, many years. But also we are spreading it in different centers and our application activities in several centers. Including of course in Shanghai, in the Beijing area, plus others. Plus we think this market is important and we think it will be such in the future.

Okay. Is it more related to the consumer or split across the board in terms of applications?

Across the board. You see a lot of -- and I'm speaking again of the manufacturing there. You see a lot of EMS manufacturers located in China. And they are serving customers that range from the computer, to the consumer to the telecommunication wireless, et cetera. And you see also [inaudible] activity in the manufacturing there. And consumer to the Telecom and computer in other areas, and again, you see the -- you see it coming up in a lot of companies, both in Exon sumer and Telecom. I think industrial, so very dynamic region in which we have a very elementary presence. We are present in the region in many years and we are going to reinforce this at the present.

All right. Thank you very much.

Well, thank you, ladies and gentlemen for being with us today. We are pleased with our third quarter results, which I think confirm the ability of the company to perform in a difficult environment. I think that our sequential growth and the leverage we got in our operating and net profit is an indication of the receivables of the company and the performance of the company on the base of their fundamentals. Looking ahead, we know that we still operate in a very tough environment. We see the interest of the competitiveness to remain, but we think that the more industry is tough, the more the competitiveness is tough the more companies with a stronger fundamentals are able to differentiate themselves. This is what we have been doing in the past, and this is what we are demonstrating in the present. We will continue to demonstrate in the future. So we're confident that ST will both outperform the industry average and to become more and more a bigger player in this industry. Thank you for being with us today.

Thank you, operator.

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