意法半導體 (STM) 2003 Q1 法說會逐字稿

Good morning.

My name is Molly (ph), and I will be your conference facilitator.

At this time, I would like to welcome everyone to the STMicroelectronics 2003 first quarter conference call.

All lines have been placed on mute to prevent any background noise.

After the speakers' 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 would like to withdraw your question, press star then the number two on your telephone keypad.

I will now turn the call over to Miss Lynn Morgan (ph).

Miss Morgan, you may begin your conference.

Thank you operator.

And thank you for joining us everyone.

Today's call is hosted by Pasquale Pistorio, ST's President and Chief Executive Officer.

He is joined around the table here in Geneva this afternoon by Alain Dutheil, Corporate Vice President Strategic Planning, Maurizio Ghirga, Corporate Vice President, Chief Financial Officer, Arwell Sturo (ph), who will become our Chief Financial Officer effective May 1st, and we are also very fortunate to have our Senior Executives in charge of a number of our major product groups, including Mr. Aldo Romano, who runs TPA, Telecom, Peripherals and Automotive, Mr. Philippe Geyres, in charge of CMG, Consumer and Microcontroller Group, and Mr. Carlo Ferro, who runs our Memory Products Group.

At this point, I would just like to remind you that any forward-looking statements made in this call are covered by the risks factors enumerated in our release that was issued late last night.

So without further ado, I would like to turn the call over to Mr. Pistorio.

Pasquale?

Thank you Lynn (ph), and good morning and good afternoon ladies and gentlemen, and thank you for your participation today.

I will spend a few minutes providing additional insights into our first quarter 2003 results, review our outlook for Q2, and then we will open the call to your questions.

To summarize, Q1 2003 as you know, came in below our initial expectations, putting us about one-quarter behind where we had hoped to be at this time.

On the positive side however, we are seeing the signs of improved fundamentals, which validate our expectation of increasing by (ph) labor (ph) so the profitability for ST in 2003.

Seasonality was the major factor driving ST's Q1 2003's top line performance.

Net revenues for the period of 1.62b, were up 19.4 percent over last year's first quarter, but declined 9.4 percent on a sequential basis.

What put revenues at the low end of our initial guidance range were order push outs, oversaturating (ph) the markets that late in the quarter.

First quarter 2003 gross profit, over $566.3 million equated to a gross margin of 35 percent for the period, which was below the low end of our initial guidance of 36 percent.

This variance was caused by the combination of a more intense pricing environment than we had projected, and the effect of a further weakening of the U.S. dollar.

These factors masked (ph) the benefits over the manufacturing efficiencies that were achieved in the quarter.

Over those several quarters, we have a trueson (ph) to maintain the integrity of our organization, and that expanded R&D, true internal growth in the positions.

This trend continued in Q1 2003, when we increased our nom (ph) manufacturing, the engineering and the hound (ph) by about once (ph) people from Q4 2002 levels.

In spite of this, I believe we did a very good job in containing our major operating expenses, mainly R&D and SG&A.

These items totaled $457.1 million in Q1, basically flat on a sequential basis after absorbing the factor (ph) of a strengthened Europe.

Operating income and net income are $123.6 million, and $79 million respectively.

We are up significantly over last year's comparable period, but below the 1.9 (ph) million and 160.6 million respectively reported in the 2002 fourth quarter.

This year's first quarter, net income included a one-time charge of $8.4 million related to our pay back of about 429 million, or 19.8 percent on zero coupon convertible bonds due in 2010.

Thus ST earned nine cents per share in Q1.

This was four cents in last year's first quarter, and 18 cents in the prior quarter.

Our earnings' release contains much more financial detail, so I will only comment here on certain points, which I consider particularly noteworthy.

First of course is the breakdown of revenues and operating income by product growth.

On the plus side, EPA maintained a strong operating margin and DSG continued to hold its own despite significant pricing pressure.

Both groups experienced double-digit sequential earnings growth in automotive products as expected.

CMG was a positive sequential revenue performer, although its operating margin continued to depenalized (ph) by the intense competition in this space, where in fact many of our competitors are losing money.

MPG's performance reflected a very tough market environment for a number (ph) of high (ph) memory products, particularly flash, which accounted for about 60 percent that group's first quarter sales.

The MPG outlook is considerably better for the remainder of 2003 thanks to the ramp up of a 0.13 micron erlated (ph) technologies.

We expect MPG to significantly narrow its operating (inaudible) in Q2, and post operating profits in Q3, Q4 and for the year as a whole.

As you can see from our release, we made a certain modification to the breakdown of the quarter revenues by market segment.

Convergant (ph) as (ph) araged (ph), and that these increasingly more difficult for assign a customer application to a precise market segment.

We thought (ph) to strengthen our balance sheet in Q1, generating cost (ph) for (ph) from operating activities of $423.5 million.

Capital expenditures for the period were $255.7 million, of which approximately 60 percent was allocated to leading edge technologies and strategic R&D programs.

Net operating cash flow, is the cash operating activities net to investment for tangible and intangible assets before debts or purchases, was $154.3 million.

A cash flow analysis statement has been added to our release beginning this quarter.

Cash and marketable securities stood at $2.36 billion, and long-term debt was 2.6 billion at the end of the quarter.

Continuous cash generation that's worked (ph) to further reviews net the financial investments (ph) 279 million at the end of Q1 2003, from $398 million at the end of year 2002.

So, when we get or we generally expected a more robust one, we consider this credible performance in light of the pricing and current issues that we face.

Our short-term outlook is for difficult pricing conditions to continue in Q2.

The good news is that our current backlog data indicate a sequential pickup in demand use (ph) specific applications, including wireless, rainbus (ph), consumer and automotive, and the rebound in flash revenue.

This we vas (ph) anticipate Q2 revenues of between $1.68 billion and $1.72 billion, which equates for sequential increase of between 3.8 percent and 6.3 percent, and the year-over-year improvement in the range of 9.7 percent to 12.3 percent.

Gross margin should approximate 36 percent in Q2, as we expect a combination of higher revenues and manufacturing efficiencies to improve to more than offset the pricing pressures.

Our serve (ph) of the market is forecasted to experience solid growth in the second half of 2003, and we believe that this peaceful (ph) portfolio and strategic alliances will give us an important competitive edge.

This should translate into increased sales and gross margin, the latter moving back into the 38 to 40 percent range for the 2003 fourth quarter.

At this point my colleagues and I would be pleased to take your questions.

Operator?

Yes ma'am.

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, and we'll pause for just a moment to compile the Q&A roster.

And please continue to hold while we queue the roster.

Your first question comes from Remi Thomas (ph) of CAI Chevereux (ph).

Mr. Thomas (ph), you may go ahead.

Operator?

Maybe we can come back to Mr. Thomas.

OK.

Mr. Thomas, can you hear us now?

OK, we'll go on to the next question and come back to Mr. Thomas (ph) momentarily.

Your next question comes from Anish Goyle (ph) of Newberger Berman (ph).

Yes, hi Pasquale.

In your margin forecast for the second half of the year where you were calling for 38 percent to 40 percent type of gross margins, what are you assuming in your revenue growth?

And could you please comment on what should we expect in capital ex spending for the rest of the year and depreciation?

OK.

Well, we expect to the market overall this year to grow in the range of ten to 12 percent in line with the expectation of most families.

In fact, we have publicly put a forecast of 11 percent growth for the market.

We are convinced that our profit (ph) portfolio and customer base will allow us to outperform the growth of the market.

This gives you an idea of how we see the evolution in our growth.

But the thing that will be even more important in the margin is the fact that in top of the sales, there is the announcement of the leading edge technologies, and the coming on volume of the 0.13 micron in several product families.

This should improve our ability to deliver value to the customers, and give better margins.

And then finally the second half of the year should present a better overall economic outlook and less gap into the overcapacity.

In other words, the capacity situation overall should be better, particularly in the leading edge technology.

All this makes us believe that we will be in the range of 38 to 40 percent in the fourth quarter, not in the second half, in the fourth quarter.

OK.

And what about capital spending and depreciation?

Now about capital expenditure, the capital expenditure in the first half has been in the range of $1 billion total first half, which is perfectly (ph) in line with the indication we have of $1 billion.

However, as we had said many other times, the key of the company's the flexibility.

This flexibility allows us to accelerate or put on the brakes according to the evolution of the market.

So while we still have the same kind of general guideline of the billion dollar, we are in any case ready to accelerate if this will be demanded by the market.

So, if I ...

Depreciation -- excuse me?

Yes.

If I, if I read your comment correctly, do you, do you -- so you think that based on your revenue forecast for 13, 14, 15 percent growth this year, you think a billion dollar of capital spending will be enough for you to get there?

Oh this is for sure, but what we will spend in the second half in Q4, we much more related ...

For -- right.

... to what we perceive will be next year.

Right.

So we will let it, we will accelerate or not if we see this, a drop in the right direction.

In other words, our flexible modularity of investing will allow us to increase if this is what our, this build (ph) for next year will say.

Depreciation is running about a $350 million per quarter, and this should be in the second half flat.

My colleagues agree.

Right.

And what about depreciation?

... will comment.

Hi, good afternoon.

The depreciation for this quarter were 350 million.

We expect that to remain basically flat throughout (ph) of (ph) mines (ph) some (ph) million dollar for the next quarter.

In term of cash flow, on top of that we have some 25 million of amortization, as well at the quarter that we expect also to remain flat.

So overall depreciation flat, amortization for the, for the year I expect to be in the range 1.5 billion flat.

Thank you.

We will now take a question from Remi Thomas.

Mr. Thomas, go ahead.

Yes.

Sorry about earlier, we had a technical problem.

Just a couple of quick questions.

First, what was your cap ST utilization rate on average in Q1, and where do you see it going forward in Q2?

Second, you seem to have had a, quite a strong quarter in digital consumer.

Would you say that this is rather due to market share gains, or the sustained growth in freetoair (ph) set top box and DVD players?

I will ask Alain to comment on the capacity utilization, and Philippe to comment on consumer.

If we overlook (ph) capacity utilization last quarter was 82 percent, and you need to consider that it was different the eight inch from the six inch.

In fact, the eight inch was more than 85 percent, and the six inch was close to 80 percent.

So of course the capacity utilization decrease a little bit compared to Q4, but we are expecting that in Q1, we pull (ph) out in Q2 three we will probably exceed it, Q4.

It means that we will go around 85 to six percent.

And if I may ask a follow-up on that one, if you see your capacity utilization exceeding Q4, why then are you guiding for a gross margin which is lower?

Is that due to price pressure?

Yes, of course.

Of course.

It is mainly due to price pressure.

Great, thanks.

Your next question comes from Tori (ph) ...

...

... of USB Piper Jaffrey.

... the consumer portion.

Hold on operator (inaudible) Mr. Thomas (ph).

Thank you.

Indeed for consumer was a good quarter.

Usually it's a season, varies with seasonal decrease in Q1, and we enjoyed a seasonal, sequential increase this Q1.

It was due to several reasons.

We believe we continue to gain share in TV, and in set top box, combination of market share gain and a solid market continuing in freetwear (ph), while also U.S. cable for us recovered.

And finally, we had the real first big volume quarter for the cameras in the cellular phones.

So cameras in total, imaging in total did increase significantly in Q1.

Does that answer your question Remi (ph)?

I do apologize, I believe his line has been closed.

Would you like for us to open it back up?

...

I think no, I think that we answered his question.

OK, thank you.

Are you ready to proceed to the next question?

Yes operator.

Thank you.

Your next question comes from Tori Sondberg (ph) of USB Piper Jaffrey.

Good morning.

This is actually Jeremy Kline (ph) calling for Tori.

Going back a little bit to the capacity utilization question, can you perhaps provide a split by process technology, and where that is currently, and where you expect that to go in Q2?

Thank you.

You know, I mentioned that, in our eight inches wafer fab, which of course is a most advanced wafer fab, that's rated over 85 percent, therefore the most advanced technology close to what we can consider an ideal situation.

I just want to remind you that for us, 85 percent compared to the standard capacity is a kind of ideal situation.

It doesn't mean that we cannot increase the saturation, and by the way, the capacity utilization of a teachigree (ph) to increase more into two.

Probably we'll approach 88 to 85 percent.

As far as the six inch technology, when we talked about the six inch technology, it's a .35 micron and above.

There I'd say that the capacity utilization was close to 80 percent, and we are planning to increase by another four or five point there.

And this is a point of clarification, how much of the eight inch wafers are done in .13 micron?

.13 micron is a, is a very small part of our capacity today of our production.

We are just talking with flash, so it was a very small part.

Great.

Thank you.

Your next question comes from Adam Parker (ph) of Sanford Bernstein (ph).

Yes, hi.

Just a couple of questions.

You know, one is the midpoint of your revenue guidance, see around five percent, it appears to be in the normal historical Q2 sort of sequential revenue growth, yet you continue to mention that macro conditions are weak, and that they're -- there's difficult price, you know, pricing environment existing.

You know, what's the disconnect?

Is your inventory building at your customers and across the channel, or you know, why is your guidance in line with historic seasonality when such poor industry conditions exist?

Well, of course the five percent is not miserable, but is not gorgeous.

But I think that there has been period to where five percent is a good growth, considered in a good quarter, because Q1 is a down quarter usually, Q2 is a strong quarter.

So I don't consider five percent sequential net Q2 a boom, a booming situation.

I don't perceive -- we have been looking carefully for inventory status building up in our customers, and frankly from all the inputs that we have from our customer, there is no evidence of inventory buildup.

I think this has been a concern in the industry, we've been very carefully watching that.

We think that the growth is because of ended (ph) demand, not because of inventory.

OK.

Can you, just a follow-up or a separate question here.

Can you, you know, it appears that Texas Instruments is more optimistic about their conditions, they've guided to some sequential revenue growth for them that's better than their normal history.

And I'm just wondering if, you know, it seems that they're kind of, you know, more optimistic, and can you talk about how you're doing in businesses, you know, like hard disk drive or printer, or some of the wireless for consumer businesses, where you compete directly with TI?

And, you know, how you feel like you're faring versus them?

I will let Aldo commenting on well as in carritos (ph) but let me make a general comment.

OK.

I think we don't want to comment on competitors because this is their business.

What I can say is that we are dealing through the market transparently what we perceive as the situation with the data we have in our hands.

Second thing, we're looking at all market share and growth, one quarter is not seeing (ph) ebacadu (ph).

And if we look at the top of the year, I mentioned before that the industry's expected to grow in the (inaudible) range.

We are convinced that we will outpace the industry growth, whatever it would be.

And therefore we are committed, will continue to gain market share.

This was a jump (ph) comment, and Aldo can comment on the wireless and peripherals.

Concerning wireless, our revenues this quarter were increasing due to the seasonality factor, which is perfectly normal.

We would like to underline also that if we compare our wireless revenues with the same quarter of last year, we are in the 20 percent range up.

So depending on how you look at this, because you can be, can cry or be very satisfied.

Pasquale is not very satisfied, but not even myself.

So now what we, what we see for the next futile (ph) is another lowers (ph) that you will not.

There is nothing special to mention here.

Concerning the other segment, on printer we had another negative quarter, which has been let's say offset by the good performance in the hard disk drives.

So overall our revenues here are more or less flat in Q1, which is not bad.

While I'd like to underline the excellent result that we had in automotive, where we grew I think in a very satisfying way, both sequentially and on a yearly basis.

Sequentially for CPA (ph) products the growth was exceeding the ten percent volume by far.

So this is what they said last time, maybe you'd remember, in Q4 our result will not really satisfying in automotive, and I forecasted some grow in mid (ph) three (ph) pers (ph) going Q1, which has taken place by dology (ph) as planned.

So this is my overall picture.

Now if you compare with the last year every segment is showing excellent number.

On a sequential basis that is not the case, clearly.

But this is bizarre (ph).

OK.

All right, thanks a lot.

Your next question comes from Didier Scemama (ph) of ABN Amro (ph).

Good afternoon gentlemen.

I would like to just start with a question on TPA, so maybe it's a question for Aldo.

Your margins in TPA dip to 17.7 percent.

I was just wondering if the main reason compared to last year, which I think you were around 20 percent, the main reason between these two different margins is a difference in the mix, i.e., maybe more lower margin revenues coming from, let's say, wire (ph) line, which seems to have performed well by your regional competitors. and maybe lower revenues compared from wireless and maybe printers, which are maybe higher margins?

Or is it only due to pricing pressure?

Pricing pressure exists also in TPA.

Even if it's not as dramatic as in other segments.

But frankly this is not the main, is not the reason of this two percent decline on profitability.

Again the line that we are comparing with the fourth and last year, which was superb, and rate it against that, over 20 percent.

So is a good reference then.

Yes.

This almost 18 percent that we achieved is not bad being the first quarter.

The reason of this decline on the, on the yearly basis is just one, additional expenses in R&D.

OK.

Because we are doing a substantial effort in R&D in various segment.

This is coming out of also from the acquisition of Alcatel Microelectronic (ph) as an example.

We have increased, we have increased a bit our revenues, but the main positive side of the acquisition in my view is the position of a number of very good experienced designers that are working on various segment, including wireless, including notebooks (ph), including assets.

And the results of this effort will be, let's say evident in the future.

For the time being this is an R&D effort that we are pleased to pay in the ater (ph), in the P&L.

Do we have to assume that going forward these margins will be maybe around the 18 rather than 20 percent because of this continuous R&D efforts?

As long as the result of the R&D was not decrease of revenues, yes.

But obviously we can (ph) from some increase in the normal revenues during the year, and particularly at the end of the year as Pasquale was mentioning before.

But nobody for TPA the last quarter of the year is always very, very good.

And we have really counting on the, on the same this year.

OK, can I just -- I have a follow-on on wireless.

There is I think a lot of interest at the moment about CDMA.

I guess you make some CDMA cheap sets, eseek (ph) on the RF side for one of your top customers.

I was just wondering, do you have any plan to be maybe a bit more aggressive on this side of the, of the market?

Well we have interesting plans on CDMA, but is a bit too soon to mention it.

So very likely we will make some clarification of our strategy in the area in the next one to two months.

So sorry I cannot be more clear in this moment.

OK, can I ask then ...

... we are the, we are the shipping, both energy management and RF chips today for CDMA applications.

Then can I ask a question ...

Who are our major customers.

Just a last question then about your capacity utilization and your gross margin guidance for Q4.

I believe that your capacity utilization today, I mean at the moment in Singapore is rather low, I think around 20 percent.

And I was wondering if the improvement in manufacturing would come from the progressive, this increase in capacity utilization in Singapore in the next few quarters?

Can you explain us why filling up this Singapore factory could be a very significant in terms of gross margin progression?

OK, yes.

I think, you know, there are two parameters.

One is the plant themself, the infrastructure, the building and the facility, but when you are talking about our Singapore plant fluctuated (ph) at the 20 percent, it means that we have equipped with production equipment only 20 percent, 25 percent of the total building and total facilities.

OK.

When we talk about capacity utilization, we talk about capacity utilization of equipment ...

Right.

... not of the building.

Yes.

So the number I was giving before where the capacity utilization of the installed equipment.

Now we have a lot of space in our building in Singapore, where 75 percent of a building is empty.

It's true in alsay (ph) where 50 of a building is empty, and is going to be true in emsix (ph) in our fab in capanya (ph) which is, where the building is almost finished.

So today we've $1 billion of capital investment we are talking for this year, we are not planning to fill up all these empty buildings, but we have space if the market require it to increase our capacity quite rapidly.

So increasing when we talk about increasing our capacity utilization, it means increasing the capacity utilization of equipment we have in place.

That's clear.

Thanks very much.

I would like to remind everyone, if you would like to ask a question, press star then the number one on your telephone keypad.

Your next question comes from William Conroy (ph) of Sanders Moress (ph).

Good afternoon.

First, just almost a housekeeping item.

Can you tell me what amount of product or revenue was sourced from foundries?

Very, very little of it.

About the same as last quarter, four to five percent.

Great.

And secondly the additional R&D, and Pasquale, I may have missed some of the details that you gave in your opening comments, I thought you mentioned that you were up 200 people in the quarter.

Are those, can you give us a sense of are those more on the product side, the process side or the relative breakdown between the two?

And is my number correct?

More in the product, much more in the product, but also we are expanding also the technology side.

I think that the ration would be four to one.

It would be thought (ph) in there (ph), and before the products were on the R&D, the technology.

By product you should include the software development, because we increase our head count in India for example.

OK.

I appreciate that.

... yes and we increase also, we about 60 people coming from Alcatel.

Can I comment one second on this point, because I think this is very important because we acquired from Alcatel the software, the product goes (ph) back, and this will be our major advantage compare to any other producer of standard chipset.

It come to be in the ready before the end of this year, with our standard chipset, which will improve as an offer our software.

For software I mean the software that has been already tested, proven on hundreds of countries in the world.

So, it's a real production tested, valuable software.

This will be our major effort in terms of promotion of our chipset.

Right.

And lastly, could you detail a little bit what the manufacturing efficiencies that you expect through the year are?

You've mentioned the additional move to the tighter geometries, is there anything beyond that that we should be anticipating, or that we saw, or that you experienced in the first quarter?

One thing that we are doing, of course we are trying to accelerate the ramp of the Singapore so (ph) other areas.

Singapore is very cost protected manufacturing facilities, so in that side we are speeding up the ramp up of Singapore, and the other side we are moving to some mature technologies that we will succeed in Singapore.

In Singapore we are going both to the six inch and the eight inch, and clearly this improves the gross margin.

Right.

Thank you very much.

Your next question comes from Nadeep Sheera (ph) of Solomon Smith Barney.

Gentlemen, I think good afternoon to you.

Just a couple of questions with regards to flash memory and your strategy going on from here.

Just wanted to ask firstly why you are considering manned (ph) flash memory?

Secondly, whether it is more profitable in your opinion than your current nor (ph) manufacture.

And thirdly, your choice in partner with Heinick (ph) Semiconductors, to the reasons behind that.

Thank you.

OK.

Carlo?

Yes.

I think they have two main reasons for us to grow into manned (ph).

The first reason is that of course today the manned (ph) market is a significant portion of the overall flash market, and we want to participate.

I think it is today they range between 25 to 30 percent of the total flash market, so is significant.

The second reason is that this kind of memory will play an important role in new multimedia applications, cellular phone, as embedded products and embedded applications.

One of, one of the most important programs that we have in the company is our nomadic program, that is a multimedia platform for the cellular phone, and these kind of products will sell together with manned (ph), even the same package, skap (ph) between the same package.

So this for us of course is a deep (ph) value and we want to be independent in this approach.

I don't see any reason why manned (ph) should be different competitive nor (ph).

If we, if we take the nor (ph) profitability on a five year period, which is today two good years and three difficult years, including this year.

So the good years for over (ph) last is of course 1999 and the year 2000, and then the longer downturn period.

I think what will (ph) to provide is the same level of profitability as the other families, and this is the motivation and we are not too far from there.

So I think that there are financial motivations to be there.

There are strategic implications, like the nomadic program, and also of course the market size.

So we believe that Heinick (ph) is a good partner.

We are of course focusing on manned (ph).

We are exclusively working with them on manned (ph) products, in terms of product and technology for development.

And will manufacture some products with us, starting from the second half of this year.

Fine (ph) system, it is, I would believe is a good corporation, and we'll expand from there.

Thank you.

And just as a quick follow-up, could you just let (ph) us on what percentage of revenues is flash memory today, and what you would expect, say by year end 2003?

Yes, in the company the partner is very stable.

Our pattern is very stable.

We during several, last several quarters now we have been on different shipped (ph) products we have been ranging from 65 to 70 percent, and we believe this is a very good balance.

We do not want to change this balance, and the rest, which is 25 to 35 to 30 percent is several products, including flash.

The last quarter in Q1 we did $151 million in flash.

So this is likely below ten percent of our, of our sales.

We believe this is a good balance, and we want to grow as a company as in flash, I'd say following this pattern.

That's great.

Thank you.

Thank you.

Your next question comes from David Wu (ph) of Wedbush Morgan Securities.

Yes, I have two.

The first one is on flash memory, while we're on the subject.

Can you talk about how -- I thought the customer's reaction to Intel's attempt to raise prices on high density memory, flash earlier this year, resulted in market share loss by them, and I thought you would have picked up some in the cell phones side of the business.

And then not happen, and is -- when does it look like flash supply demand would be more in balance this year?

It doesn't sound like it's going to happen in Q2.

And the other question I have really regards to the situation of China, with SARS going on, if we have a problem, which we'll probably know in the next couple months, how would it affect your business in that country, and also manufacturing logistics?

I think I will respond on flash.

We do not believe that the balance between capacity and demand is something that we can address family by family.

It's as if you take a stee (ph), we do not add any specific thread (ph) dedicated to flash memories.

We are growing a lot in Singapore, but in Singapore we are growing on by see (ph) most (ph) time the technologies and flash memory technologies.

So I think that the balancing between demand and capacity is more a global phenomena rather than as specific to flash.

And we believe that, we believe that the balance in flash will happen at the same time we have a better balance in the overall semiconductor industry.

As far as SARS is concerned, I think that Pasquale wants to comment?

Yes.

I think that is more kind of a general issue.

First of all, let me say on the human aspect, we have about 12,000 people in Asia, including the 4,500 in Malaysia, which has not been impacted.

So far not one single case of infection has been reported by our people, and since the beginning this, we have been very, very proactive in trying to assist our people with all kinds of necessary tools, like immediately distributing to everybody one thermometer, asking people to measure their temperature before leaving their home and before entering the plant every morning, providing the masks for people that are in ambiance (ph) that are, that several people.

All kind of, let's say measures that I intend to prevent the problem.

And we work very closely with authorities and medical institutions so to make sure that we leave nothing neglected.

Once that's solved, I'd like to say that we believe that in terms of Singapore, where the biggest concentration of our population is, the problem is quite limited.

The authorities have been reacting very strongly, and we don't anticipate a severe problem.

But, in any case, ST never has a single source on major product family.

We try to have always double source, at least when the family is consolidated.

Maybe in the startup in the beginning years you have some single source, but then we try to have a double source in every picular (ph) family, both in the future (ph) and in assembly.

So we don't see any major problem developing overall in the area where are maximum concentration.

In Chinas too, we are one central location, in Shungzen (ph).

It's not one of our (inaudible) location.

But again, no single case has been reported there.

So frankly we keep monitoring the situation very quietly, we have no reasons to be, let's say concerned as this moment, but we don't take it easily and very, very cautious in our planning and our devis (ph) supplying production will double source.

And in any case providing all the assistance to our people.

Thank you.

We have the same policy for supplier now, so we are double sourcing, just in case.

Thank you.

Your next question comes from Nicholas Gaudois (ph) of Deutsche Bank.

Yes, hi there.

Can you hear me?

Yes.

Yes.

Yes, hi.

First question, and then I got a follow-up.

First one would be, could you comment on the expected linearity of the second quarter for your business, and also whether you have coverage provided by the current backlog you've got, vis-à-vis your midpoint garan (ph), so five percent growth in revenues?

And then I've got a follow-up.

Thank you.

Well you know, the linearity in the second quarter is not too much different from the first quarter.

In fact, you know, usually the first three months, our quarters are back loaded.

Always back loaded (inaudible) off of the third quarter, the third month of the quarter.

And when I say back loaded, for example March was a very early in the first quarter for us, and it going to be also the case in June.

But also you know that we are in the system, and most semiconductor companies are, four four five.

So the first two months are four weeks each, and the third month is five weeks, which increases the backlog end of the quarter.

OK.

And on the degree of coverage that your current backlog would provide to your current revenue guidance of five percent growth during Q (ph).

Of course.

You know when we, now you need to consider the firm background and the frame background.

And you know in our V-class (ph) today the Fran By Club (ph) is taking more and more importance, which means that of course we have the frame order that's solid but not as solid as the firm order.

So now if you add up firm backlog and frame backlog when we started the quarter, you know, the growth rate (ph) was between 85 and 90 percent.

OK, that's great.

And also could you comment a bit on your plans for both ramp off capacity and shrink.

And you already commented a bit on Singapore, I just want to clarify are we talking about bottleneck removals or are you effectively moving in new equipment to add capacity and can we expect this is over flash related locations.

And secondly both for flash and absolutely (ph) new press release you comment on the Virato 413 (ph) micron for flash wallets and PC peripherals (ph) related products, could you give us an idea of how you would execute on that in terms of firm line, the use of fundraisers in that and for flash how much of production you expect to get on Virato (ph) micron in the coming quarters?

If part of the breakthrough, the question is that with our leading edge technology of today.

Today we have 0.13, zero 13, the micron coupler (ph) capability for high performance logic in our coal one (ph) plant.

And of course in our coal two (ph) to each plant just started and we are installing this also in their Gusa 18 (ph).

We have zero 13 micro flash capability in our two (ph) plant in Grata (ph) and we are installing this is Singapore 18 (ph).

So we will have a deal to keep micron capability for logic in three deficient (ph) content and for flash into the future of content (ph).

Today as Elaina (ph) mentioned initially the available capacity with zero 13 micron is quite modest, but we can increase this as a new (ph) company into wait by, you know, after grading (ph) some of the zero 15 and zero 18 (ph) existing we have (inaudible) and then expanding the available space of that because we have a bulky (ph) zero set (ph) incron (ph) to and in Singapore.

So we would be there with the capacity needed during the second part of the year and in the possible future (ph).

OK, that's great.

Thank you very much.

Thank you.

I would again like to remind everyone if you would like to ask a question press star and then the number one on your telephone keypad.

Your next question comes from Matt Gable (ph) of Culet So Capital (ph).

Hi, thanks.

I just want to get clarity; did you say that you had 85 to 90 percent coverage in the current quarter with your backlog?

When we look, what Elaina (ph) said is that if you consider the backlog, the combination of the firm orders and frame orders, frame orders are -- how shall I say --

Formalized ...

... formalized from the forecast, right.

In this is a nice (ph), formalized in forecast of our customer, yes.

This is not necessarily firm orders backlog, yes?

And was there any -- I know you said about the end markets growing 10 to 20 percent year-over-year this year, and you'll grow faster than that.

Are you effectively saying that your revenue this year can grow year-over-year, you know, 15, 20 percent?

Well what I said was that the semiconductor industry is expected by most estimates, including ourselves, grow between 10 and 12, but our number is 11.

And I said that we are confident that we will beat that industry growth.

So if we do 11 with our customers be more than 11.

If it will be 10 we will be more than 10.

If it will be 12 we will be more than 12.

That's what is our confidence.

Right, I have flash revenue for the quarter at 151 million?

Right, yes.

And did you say anything about what your wireless revenue did sequentially and what it will do sequentially in the current quarter?

We have not released this information, and it will align (ph) us to give this number.

We release in wireless specifically (ph)?

Yes you can.

Yes.

OK.

OK.

For last we had about eight to nine percent decline in this quarter ...

Sequential.

Sequential, which is 20 percent more compared to last year.

Right, and what are you seeing ...

Obviously we can't (inaudible) grow in the next quarter if you count the contribution of some new products.

So we will have a moderate grow in the next quarter with that, hopefully, a big acceleration in the last, at the end of the year as usual.

So this decline has been mainly due to the seasonality (ph).

OK, great.

Thank you very much.

Your next question comes from Shawn Denju of CSSD (ph).

Good afternoon ladies and gentlemen.

I would like to come back to wireless because I'm very surprised also about your comment of the decline of eight, nine percent wireless (inaudible) because if you look at the previous comments, specifically if you look at PTA (ph) the signature decline was nine percent on average for PTA (ph).

Automotive was up.

PC peripheral (ph) was flat, so to me would look like this telecall mobile call (ph) was declining by 15 or 20 percent.

So how could it be that wireless is only declining eight to nine percent?

Obviously we must distinguish and be more precise concerning what we mean wireless.

There is wireless PTA (ph), there is also wireless non-PTA (ph).

For example we had a strong contribution from my colleagues here, Phillip Jeff (ph), concerning the (inaudible), so this is the new, a new product that is, has gained a lot of revenues in this quarter, so (inaudible) information what happened in this quarter and what is the perspective for this important feature in the next, during the progress of the year.

Q1 was the first real quarter of where we started the volume production really in December, but Q4 was the start.

Q1 is significant, and Q2 we'll continue to see some growth.

OK, but ...

...

... coming back to the PTA (ph), sorry ...

... comment on that, your comment on the pure PTA (ph) was correct.

Your evaluation was correct.

And you're not concerned that you're losing share with that kind of signature decline?

Well the concern is certainly there.

I don't have the precise number at the moment, but I was debating a few minutes ago with Carlo (ph) for example if he was smiling because of here, it is true that he has not lost the market share in flesh (ph) so we don't have to cite (ph) it on that.

Can I add one comment, that when we speak of growth, decline, and market share I think it's extremely important to follow quarter-to-quarter but it's not so significant in the other picture because you could have different factors affecting your customer base in a given quarter.

So what you are talking about is the sequential, is the year-on-year or the topo (ph) year.

And we -- I'm putting this for you Aldo (ph), I think that, I want to say that to we are comfortable that on a (inaudible) year base we will not lose and very likely gain the market share in the PTA (ph) wireless marketplace.

That's true.

But in addition I would like to remind you that our Q4 for morton amble (ph) is, and PTA (ph) wireless has been exceptional ...

That's why it makes sense ...

We are comparing of Q1 with this Q4, for me it is more reasonable to compare on a yearly basis.

As well the growth is 20 percent it's probably -- if we just consider Q1 on Q1 I am gaining share.

Q1 on Q4 probably there is some decline, probably.

I don't have data yet.

And maybe you expect some (inaudible) too because of some of (inaudible) are going to fall back into Q2 now?

In Q2 for the time being what we see is a modest growth, nothing exceptional.

This is what we see at the moment.

OK, thank you.

Your next question comes from Sumit Donda (ph) of Bank of America Securities.

Hi, I apologize if this has already been asked, within your CMG (ph) group what's your breakout of consumer versus micro-controller (ph) if you can break it out that way?

And could you actually talk about what growth you saw in the micro-controller (ph) part of the business?

Thank you.

Yes, the micro-controllers (ph) represent 15 percent of the total orders CMG (ph) so it's 85 percent consumer and 15 percent micro-controllers (ph) because here we're speaking of extended (ph) micro-controllers (ph), which are not application specific.

The only application specific micro-controller (ph) is within the application divisions.

So in fact if we would try to understand how much of the sales are micro-controllers for the company is much, much more, but here we're speaking of extended (ph) micro-controllers (ph).

Yes, for example the growing of the market that they mentioned before is mainly due to growth in the micro-controller (ph) floor (ph) of the market application.

Or motor control (ph) for certain multiple (ph) application.

Yes.

What we're saying and airbags (ph) and even EVS (ph).

OK, so if you were to either comment on the standard micro-controller or the overall micro-controller business do you think it's through quarter-over-quarter or give us some sense along those lines?

I think if we look at the overall micro-controller (ph) situation the sales are growing.

Yearly they are growing extended (ph) micro-controllers (ph).

I think last year in 2002 we grew 75 percent in growth standard micro-controllers (ph).

And in the micro-controller (ph) product in application division is clearly this is one of their areas, which is growing fast.

It is growing fast in automotive, but also in printers, in ...

...

... yes in the storage (ph), and also in wireless phones or digital consumer we have a lot of products with embedded micros (ph).

Now beyond that what is behind this growth in este (ph) is of course the white (ph) product for you, a (inaudible) discounting of the application, and also the micro-controllers (ph) with embedded flash (ph).

We are leveraging not only the micro-controller (ph) know-how (ph), but also the (inaudible) memory (ph) technology and we're fairly robust (ph) micro-line (ph) with embedded flash (ph) the best of two things, the footsteps we have in (inaudible) applications, which are the most demanding for quality and reliability.

OK.

And then finally have you seen, you're talked about good trends within the business, but any slowdown in the last quarter or so in that part of the business at all?

No, not really.

Not really.

OK, thank you very much.

Your next question comes from Stuart Adrian (ph) of Morgan Stanley.

Hi there.

Could you -- sorry, can you hear me?

Yes.

Yes.

Sorry, could you tell me what you think the breakeven level of the MPG (ph) group is going forward?

And secondly would I be right in thinking the flash part of MPG (ph) grew about 32 percent in Q4 and declined about 25 percent in Q1?

Is there anything, you know, other than seasonal pickup and then decline and just general pricing pressure happening within the flash part specifically over the last six months?

I think that in Q4 the flash grew 36, 37 percent comparing it to three, and this quarter it declined 24 percent, and of course this is a disappointing quarter, but this is after a big, big drop in Q4.

In terms of breakeven level we will not disclose these numbers, but I know that we have published our, let's say, profitability results, marginal profitability results in Q4 last year.

So you can, you can evaluate yourself, of course, this is in between the range of profitability.

OK, but in terms of the size of Q4 was that simply to do with timing of product ramp, market share gain do you think, or ...

Like he said, frankly this quarter we don't know yet.

What we know is the numbers of the figures of our western competitors, or major western competitors, and in relative terms in this small of package we are relatively flat in market share comparing with Q4, OK?

I think there was a very strong seasonal effect, positive seasonal effect in wireless in Q4 and in some unexpected push out (ph) in March disappointed us.

In fact I would say is most seasonal, it is most seasonal, was (inaudible) and somehow disappointing March.

If we take ...

Sure.

If we take it as a reference again, the Q1 was here, there is no question we have a gain in the market share.

So again, in the quarter the trends are a little bit too narrow to establish a market share, persistent market share evaluations.

Of course we monitor this carefully and today we are at 70 percent of the peak on flash, and the peak did happen, as you know, in Q4 2000.

We believe that some of our competitors or in general the market is more around 50 percent of the peak, so this is of course a good sign in terms of market share, market share gain.

In the north (ph).

In the north (ph), we're talking about the north (ph) of course.

OK, and maybe just a, an unrelated follow up question.

You couldn't just tell me what the start up costs in the first quarter were and what your expectation through the rest of 03 are?

They're pretty comparable (ph).

This is ...

Yes, I believe (inaudible) the question.

The start up cost of this quarter was in the range of eight million.

This is related to the starting of the 300 millimeter five lining (ph) cloud (ph).

And looking before the war it would be expected around (inaudible) in each of the next quarters.

OK, great.

Thanks very much.

I would like to remind everyone if you would like to ask a question press star then the number one on your telephone keypad.

Your next question comes from Mark Edelstone (ph) of Morgan Stanley.

Good afternoon gentlemen.

I had a question for you if I could on the end flash (ph).

I guess two questions there.

One is do you think there will be any intellectual property issues with sand disk (ph) which has quite a few of the nanned (ph) flash patents and has licensed a number of the nanned (ph) flash suppliers in the marketplace.

And then secondly do you view nanned (ph) as being applicable for code storage and handsets at some point in the future, or do you think that will continue to use Nor (ph)?

I would prefer not to comment on specific intellectual property of other suppliers because we do not fill (ph) you (ph) in that.

I would say for the embedded terms applications (ph) and applications from the seller of one (ph) I think that there is an interest of some of our customers in exploiting the performance of the nation in those applications where multi-media pictures are included.

So the nanned (ph) would be utilized in embedded applications together with multi-media processors in some seller (ph) forms, and as I said this one, this was one of the key motivations for us to go into that (ph).

And the record of synergy would be very important, and in some applications we believe that we'll be, let's say, selling the nanned (ph) products, expected (ph) with our microprocessors with litter (ph) processors in the same package.

Do you expect to also target the traditional data storage market for cameras and audio as well with the nanned (ph)?

Of course yes.

It's the same products.

Right, thank you very much.

Your next question comes from Matthew Gill (ph) of Goldman Sachs.

Yes, good afternoon.

Just a couple of questions related to your order guidance.

I think you had mentioned auto and consumer as two of the areas driving some of the sequential upside.

And you touched on quickly the area of debato (ph) where you were seeing some strength.

Given the slightly disappointing auto production numbers that have been coming out of late, could you give some color on whether it's because of market share gains and design ins (ph) over the past few quarters that's driving the upside you see in automotive, whether it's recent design ins (ph) that have done, or where exactly the upside is coming for you there.

And then on the consumer side you mentioned extreme pricing pressure in a lot of the segments which has ticked down your overall margins there in spite of an upside in the revenues, could you go into a little bit more detail as far as what exactly are the products we're seeing the most amount of pricing pressure?

And is there any prospects for an alleviation of this pricing pressure in Q2, so you see not only a revenue up tick in consumer, but also some type of up tick in the margins?

I can answer for at least automotive micro-controllers (ph) definitely we are dramatically gaining market share in this segment.

I would say in all through (ph) automotive applications so say on the group (ph) applications.

So first of all our training, our training.

Here the product is our extra ten (ph) with embedded flash is a technology that not many competitors have.

And we're taking advantage, in other words, also from the technology variety we have offered to our customers.

This kind of application is effective in the flash (ph).

It's embedded in technical (ph) and messages (ph).

Therefore our customers prefer to have embedded flash.

And we have a good product like our este 10 (ph).

If you wait tomorrow morning we will have the super 10 (ph), which is (inaudible) our product, and later on we're ready to use, we are already doing it by the way, the armor family (ph).

So we have a complete roadmap where we can easily predict the growth of our micro-controller in automotive applications at an extremely robust pace for, let's say, years to come.

You are used to work, let's say, on the quarterly basis when one we are talking about automotive you must change (ph) a bit looking to years.

So we know how much we will sell in the next year or three years from now, micro-controller (ph) for power train and (inaudible).

The other family is very important for micro is Ervac (ph), huh?

So we have the major micro is up (ph).

So the perspective in this area is good and clearly we are gaining share to the majority at least to some of our competitors.

And in terms of profitability I would say this is a family with a good level of profitability in spite of the price pressure that always exist in every segment of the marketing quarter here.

... consumer, so and was it profitable for us, but in spite of the strong price pressure, of course the price pressure is higher when the product is an all standard (ph).

So it is clear that we shield (ph) the most of price pressure, for instance, in DVD (ph).

While I deal (ph) the end of the spectrum you have sets of bolts, which is quite differentiated, fragmented between many suppliers and operators.

So Q1 continues to be the quarter with price pressure.

I would say in particular on DVD chip sets (ph).

Also Q1 with many customers we have a yearly contract that starts January 1st.

So Q1 is usually a stronger quarter than the others for price decline.

But I would say that from Q1 we're going to see, what we're seeing currently is normal price pressure.

OK.

Thank you.

And just one follow up question, more on your cap ex.

Could you give an update on where you stand with the Krull (ph) facility with Phillips (ph) and Motorola as far as the ramp plans there and when you see additional equipment being moved in?

OK, (inaudible) program is absolutely on schedule, so we have a lot of equipment there, and then we have stuff (ph) to produce the first (inaudible), so we've got the first (inaudible) out couple of weeks ago.

And you know, it looks like the process is in line with what we were expecting.

And we keep entering (ph) equipment.

Just in case (ph) you go to quality with your other equipment on the floor and a lot coming in.

And (inaudible) coming out, which is also very important.

Thank you very much.

Your next question comes from Andrew Griffin (ph) of Merrill Lynch.

Mr. Griffin (ph) you may go ahead.

Can you hear me?

Yes.

Yes.

Thank you.

The question on flash memory again, and back to Nor Flash (ph).

We're seeing Samsung entering the market this year and Infinity (ph) is talking about doing so next year.

I just wondered if you could give us again your (inaudible) in this market and just lay fears that it might become more commoditized and de-ram like (ph).

Well I think our strategy is simple.

We believe there are three good reasons to be in flash memories, OK?

The first is from a connection point of view, or as I said before order (ph) (inaudible) action (ph) performance have been and should be the same as many of our (ph) profitable families (ph).

I think this is our motivation for the future to repeat what we have done in the last five years.

A company that we believe that believes and that is getting more and more differentiation in terms of products and we believe that particular the Nor (ph) technology flash are becoming more and more application driving and application oriented with a lot of litigation (ph) to the applications.

Certain products that can sell some applications you cannot tell for other applications.

And I think it's good with our (ph) customers to other portfolio (ph) products, of course micro-controllers, asec discreet (ph), thunder linear (ph) and flash memory to offer a solution to those calculus (ph).

Number three I think that as we discussed already on a few occasions this afternoon the flash products are Acadian (ph) basic ingredients for embedded flash, and embedded flash is of course vital for us in several areas particularly in the auto market.

Now this was our strategy.

This is our strategy, and we do not see any different parts (ph) in the future.

The flash memory there have been during the last few quarters, for years I would say around 10 percent of our revenues.

We believe this is a good balance, and this is very important for us.

Could you comment at all on the apparent increased number of competitors in the market, or what do you think about that?

The fact that Samsung didn't (inaudible), Samsung is very (inaudible) American (ph).

Well fine, this is competition.

Competition is where we're at (ph).

I think that there will be competitors coming and there will competitors checking out.

I think in the next five years you will see more competitors getting out than getting in it.

There is, the tougher the competitive environment eventually the stronger the selection like ...

OK, thank you very much.

Ladies and gentlemen we have reached the end of the allotted time for questions-and-answers.

Miss Morgan are there any closing remarks?

Well thank you.

I just would like to say that Q1 has been another tough quarter.

We have discussed about that.

But I believe that the company has demonstrated that we can adjust flexibly and respond and more (inaudible) we can push the accelerator in the innovation to come out of the crisis (ph).

I think that with the year progressing the economic environment will get better.

We moving into the final geometry practical and ramping up (ph) the deals (ph) of the micron (ph).

I believe the company will be once more able to demonstrate that we an out perform the market in the markets we serve as we have been doing so far.

Thank you for being with us today.

Thank you operator.

That will be the end of our call for this afternoon.

Thank you.

This does conclude today's STMicroelectronics first quarter conference call.

You may now disconnect.