意法半導體 (STM) 2004 Q1 法說會逐字稿

Good morning ladies and gentlemen.

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

[OPERATOR INSTRUCTIONS].

It is now my pleasure to turn conference over to Ms. Lynn Morgen.

Ma'am, you may proceed.

Thank you, operator and thank you all for joining us today for our first quarter earnings conference call.

I'd like to introduce the participants in today's call.

Pasquale Pistorio, our President and Chief Executive Officer will host today's call.

He is joined around the table by Alain Dutheil, our Corporate Vice-President In-charge Strategy, Aldo Romano, Corporate Vice-President responsible for Telecom Peripherals and Automotive Group, Philippe Geyres, Corporate Vice-President responsible for the Consumer and Micro-controller Group, Carlo Bozotti, the Corporate Vice-President responsible for Memory products Group and Carlo Ferro, our Corporate Vice-President and Chief Financial Officer.

Before we begin I'd like to make a few comments.

First of all as you know the requirements to point out that some of the statements we'll make on today's call are forward-looking regarding future business and financial performance of STMicroelectronics and the semiconductor industry.

These statements involve the risks and uncertainty and actual results may vary materially.

Therefore, we refer you to our 20-F, our previous announcement and today's press release for important risk factors that you should consider in evaluating this information.

Secondly, in the interest of time and for the benefit of all the participants on the call we ask that you limit yourself to one question and a short follow-up during the Q&A session.

If you have other questions please get back in the queue we will be glad to answer them by this way we can maximize the opportunities for all of those participated.

And now at this point I'd like to turn over to Pasquale Pistorio

Good morning and good afternoon ladies and gentlemen and thank you for joining us today.

I will review first the quarter results, discuss our future Q2 guidance and business outlook and then my colleagues and I will take your questions.

As this first quarter performance was mixed.

On one side we were pleased with our gross margin performance vis-a-vis guidance, although working capital management and cash flow generation.

On the other hand, we had expected the revenues to be somewhat higher.

Our first quarter revenues did exceed the 2 billion mark for the first time in our history providing us with positive momentum for significant top-line growth in 2004.

Q1 revenues of 2 billion and 39 million were within our guidance range and up 25.4% from last year's levels.

At the lower end of our expectation due to some late quarter shipment delays, part toward customer related and part resulted from foretold bottleneck issues.

Our position as a broad-line supplier benefited the top line performance in Q1.

As a sequential growth in discreet and micros and memory offset a portion over that generally affects certain of our target markets, particularly telecom and consumer.

STs four major product groups continue to work together to provide the products and solutions for our key applications.

In wireless where we offer application specific and multi-socket products, our year-over-year growth was over 20%, although revenues declined 15% sequentially due to seasonal factors and some follow up in the month.

Digital consumer with the some (inaudible) is also an important factor, declined by mid-single digits sequentially, but was up over 55% year-over-year.

Automotive posted 10% sequential increase and was up over 20% on a year-over-year basis and within the telecom sector access in networking posted an 8% sequential increase and was up 30% on a year-over-year.

Also, on the positive side we saw some strengthening in two of the fundamental elements affecting gross margin, namely a better pricing environment than we anticipated and manufacturing efficiencies which enabled us to report the gross margin over 55.4%, somewhat above our initial expectation.

This was achieved in spite of lower than anticipated revenues and less than optimal product group mix and the without an increase in inventory levels and on this spending increased in absolute dollars and this percentage of revenues.

This accord is a result of our decision to accelerate the strategic programs, particularly relating to wireless and technology platforms, which included the addition of 415 engineers in Q1.

We also experienced the impact of the quarter increase in the value over the Euro versus the U.S. dollar.

SG&A expense of sales reflected similar currents, dynamics as well as the cost related to our new marketing initiatives.

As you will recall, in early 2003 we launched a major sales effort to expand our customer base.

While it is STs early phases, I can report to that in 2004 we again saw a solid increase in sales through a broader group of customers.

I believe this is a good indication that our fellow experts are meeting with success in the marketplace.

Of course we are opening the doors with the multi-socket devices, but are looking to build the cultivated this customer relationships with application-specifics product offerings.

Revenues for specific customers in 2004 first quarter were 786 million, 6% above the year-ago first quarter and 8.5% below Q4 2003 levels.

G&A and SG&A two major items contributed to operating expenses in Q1.

We incurred cost of 33 million associated with the restructuring plan that was announced in 2003, which was about $21 million above the charges we booked in Q4 2003.

And other expenses were $12 million, similar on a quarter-over-quarter basis and primarily related to stock up costs.

Net income for the 2004 first quarter of 77 million or 8 cents per diluted share did not reflect as STs revenue performance for the reasons I discussed and which are detailed in our earnings release.

The good news is that the market conditions combined with the company's-specific fundamentals should enable us to significantly improve the situation in the second periods.

Also, for our balance sheet perspective, we continue to strengthen our financial position.

Cash and marketable securities exceeded the total debt resulting in a positive net financial position of $131 million.

Inventory returns were 4.9 times, up from 4.8 in Q4 and very close to the top of our target range, which is 5 times.

Net cash from operating activities was $552 million for the period and net operating cash flow was 250 million.

This is the 10th consecutive quarter that the company generated net operating cash flow before acquisitions, which cumulatively amounted to more than $2 billion.

As we plan for the future and beyond all indications are that 2004 will be a year of a progressive and solid growth in revenue and profitability for ST.

In the opening of our guidance for Q2 we have assumed another euro dollar exchange rate of 1.20.

For the second quarter our backlog endorse the full rates turned to sequential revenue growth of between 6% and 12% which translates into year-over-year growth of between 26 and 33%.

Revenue performance will be driven by automotive, consumer and industrial markets.

Within these areas, quarter-over-quarter growth is anticipated before originally all of our automotive applications, set-top box, imaging and smart cards.

Additionally we are looking for sequential increases in printers and networking applications, while shift dimensions to the world wireless market will be basically flat.

In terms of the product categories, Flash memory, which serve a broad range applications are expected to increase by double digits on a sequential basis.

We see good quarter-over-quarter growth in discreet, which are benefiting from both increased in demand and the better pricing environment.

The 2004 gross margin is anticipated to be approximately 57%, driven by higher revenues and manufacturing efficiencies as well trimming prices for certain products.

As noted in our earnings release we have revised our 2004 capital budget after-ward to approximately $2.2 billion.

This reflects our analysis of full year 2004 market conditions as this positioning within the TI growth applications and our prospects for 2005.

We reallocate about to two thirds of this amount to leading-edge technologies and R&D programs.

This Capex increases with the funded by net cash from operating activities.

In summary, we believe that our balance for total portfolio will enable ST to over perform in some of the markets in 2004.

And this is we hold with present currency situation and the excellent trends we are experiencing in order intake and manufacturing improvements.

We are increasingly confident in our ability to progressively expand the gross margin throughout the year.

Ladies and gentlemen, my colleagues and I will be please to take your questions.

[OPERATOR INSTRUCTIONS].

Your next question comes from Naif Shroud (ph) with Citigroup.

Mr. Shroud, your line is open.

The next question comes from Cody Acree with Legg Mason.

May be you can talk a little bit about gross margin as the drivers, I guess.

You talked a little bit about some manufacturing constraints.

Does that have any impact on the gross margin this quarter?

You also talked to some other manufacturing efficiencies.

Can you talk about how that shook out this quarter and what bottle-necks linger on into the June quarter and what do you expect to be the drivers to the gross margin upside in June?

Well first of all, the bottlenecks we mentioned are related essential to testing of equipment's.

As you know this time in deliver, of quick result, we are expecting, so it is not unusual in this phase of the cycle to experience some later delivery in some equipment that which, over course if arise late in the end of the quarter, can delay some shipments we have planned.

As far as the gross margin, no, that this bottleneck hasn't effect our gross margin except Indonesia that has using potential sales of the course, there is an indirect impact.

As far as the second quarter, the gross margin, I think, we will see an overall improvement in gross margin in all the four groups driven by manufacturing efficiency.

In some area there will be some better pricing environment and in other areas with the contractual pricing will continue to be applied.

If you speak over to the franchise of the products most of them have year concepts so with respect to year already.

If you speak over most on the products, then you have lots of return business that can improve the pricing situation.

But all the product group we will experience an improvement in gross margin in our expectation and manufacturing efficiencies is due to the fact that (a), we are much better manufacturing machine, (b), we are ramping up more aggressively 0.15 micron capabilities.

And maybe that if my colleagues want to mention some specific things that we have put to formal users.

Carlo, do you want to about Flash?

Well I think you mentioned it all.

It's the combination of increasing volume in our fabs, particularly in our Singapore fabs and much stronger impact on the 0.15 microns sales during the second quarter and of course some further price trimming.

And so it is the combination of the things that you said.

And then just one follow-up.

If you look at your restructuring initiatives, how far into the process are we, what's left to do and, I guess, how far out are we looking at before we get really full impact to the income statement?

OK.

Carlo Ferro I will see to comment on that.

Our attraction initiatives on fix this manufacturing these progressing, basically as planned.

As we have already see and already stated that we confirm once the plan will be completed, are in the range of 110 million bottom line or 140 million.

The tax would occur once the initiatives are completed.

The current, on the next quarter we do not kind if expect that a major impact the year has from the restructuring initiatives and the restructuring charges are concern, I will say that what is clearly defined and is absolutely on track with our previous guidance.

May I just be clear, the restructuring initiative, this the cost savings that you expect, you haven't begun to realize to a large degree, is that correct?

Yes, it will provide some benefit in Q2, but I will say this is not the key driver.

All right great.

Thanks, guys.

Your next question comes from Naif Shroud with Citigroup.

Hello good afternoon guys.

I will try again.

Can you hear me now?

Sorry, I just want to ask you, you have been clear about your goal of 40% gross margin.

I just wanted to ask is there a corresponding goal for operating margin, as well, that you would be trying to attain in the same time period?

Thank you.

First of all, the 40% that we've been indicating and pursuing, I must say, now I feel more comfortable than ever that by Q4 we will reach and exceed that target.

I think that everything is in place in that direction.

As far as operating margin, there is an operation that it serves the revenue growth, gross the margin goes, then the growth in sales will generate some leverage of the expenditure so the operating margin will be growing in accordance, but we don't provide the guidance on the operating margin also because we intend to accelerate our R&D expenditures, as I said.

As we look overall, our expenditure throughout the year and more we move towards the fourth quarter, the growth in sales should provide also some leverage on our expenditure.

Thank you very much.

And just a direct quick follow-up.

In your first quarter that you just reported did you have any currency related attributes to your gross margins, either negative or positive?

Thank you.

Little bit negative and Carlo will comment.

Yes, we had negative impact.

You may recall that the last quarter exchange rate for ST was 1.26 and our average rate was 1.818 and 1.26 is the average exchange rate for the current quarter, so we are incurred on 7% further impact, which as you know affects our gross margin and our operating expenses.

I estimate that the exchange rating factor now our gross margin sequentially in Q1 has been in the range of half a point.

Negative.

Thank you very much.

Your next question comes from Nicholas Goodwa (ph) with Deutsche Bank.

Yes, hi.

First question is on depreciation charges.

You basically were increasing your capital spending for this year.

Looking at the position and amortization charges in Q1 actually went down a bit from Q4 '03.

Could you give us a rough idea of all depreciation charges and amortization for '04 and '05 and also a feel for the second quarter?

Thank you.

OK.

In effect to the fiscal year of '04, I will say that we have two factors.

One is the acceleration capital expenditure, the other one is the current exchange rate may litigate is impact on depreciation.

So, as you to confirm the 1.9 billion of overall depreciation and amortization and provision for the fiscal year '04.

And in respect to the next quarter, I would not expect major change in respect to Q1 and I will say going forward for fiscal year '05, you can expect acceleration in CAPEX will affect our depreciation.

Again, one of the key driver unfortunately, which is on in accounting factor on our depreciation, is the exchange rate so that is even early today to talk about year '05.

OK. that's great and just a quick follow-up.

Could you comment on overall price decline sequentially if any versus -3% in average you had in Q4 and if Carlo could specifically comment about what he saw on the Northern side by the entities and what he would expect in the second quarter?

Thank you very much.

Carlo?

Yes.

This time we saw some initial price increase.

In fact, overall in my group was a positive price effect of around 2%.

I think, I can say I reconfirm the trend we saw and started to see in Q4, this positive strength is more - definitely more visible on the low density products.

While on the identity products market provisions remain competitive.

And we expect continuation of this trend during the next quarter.

Would you actually expect high density prices to start to come up for some applications in Q2?

We do not see this yet.

OK.

Thank you very much.

If you want also, I'll comment from TPA ended at not earning commodities we are not enjoying any price growth and we have to use our price structure, we have to use our priced followed by product expanded at the moment in which I would like to underline one point that in spite of this price pressure in every segment we have been able to maintain approximately the same gross profits which we are not publishing by group but we have been able to show the same gross profit.

Somewhat reduce profitability of PPA is due to only one reason, which is the one which I have already mentioned before.

TPA is doing in this moment and not adjustable this quarter but also for all our (inaudible) in additional R&D.

Additional R&D we perceive the change in the market which requires stronger ability in providing solutions t our customers pricing major efforts in TPA compared to what we did in the past.

So, we are taking a stronger action to correct it and being more aggressive on the market with standard solution.

In Q1 we continue to see reversion on prices but in line with the normal trend and we in Q2 because we have a very strong demand in TV.

We should be able to do that to manage to more of the mix and see the price will not go up but with go down less than the usual trend.

So we should see effect of the (inaudible).

Maybe one word on the street, I think the trend is similar to what we see in memories and we had some initial positive price impact on all of the activity in the first quarter.

Thanks for the details.

So, just to summarize for the group as a whole, would it be fair to say that the sequential prices could be closer to flat sequentially in Q2?

Yes.

OK.

Thanks very much.

Your next question comes from Jean Danu with CSSB.

Hi, good afternoon, gentlemen.

I have a question on the consumer business.

Could you speak the different developments in the various segments for Q1 and what you see for Q2?

Maybe differentiate between set-top box, TV and imaging.

You had a nice pick-up in sales over the last couple of quarters but margins remain to pretty low level.

Are you targeting specific margin level over the next 12 months?

And when do you think we are going to see a pick-up in margins there?

If we look at the various segments of consumer, let's talk by TV.

TV is very strong and speaking both of the traditional TV and the digital TV, which is picking up everywhere, both because of panels and pause of digital broadcast.

So TV is strong and I think we continue to gain share through TV.

In coders, the market is currently very strong both in the quarters and in America.

So here we have had very short-term request on sides and we are currently struggling to increase the new factoring as best as we can.

As a consequence we are not -- because we are manufacturing limited in set top box, we are not going after any business in DVD where the margins are lower.

And in cameras for the cell phone as well as other applications we continue to see good growth quarter after quarter.

So, we had a good growth last year and this is continuing this year.

For which regards the margins, as I just said on the last question, we should be able to see a better price trend starting this quarter and this coupled with the effect of improved manufacturing performance, we are going to see also in consumer the improvement of the gross margin of the company is foreseeing for the rest of the product.

Any specific target?

No, we don't disclose specific -- we don't give guidance on gross margin by group.

Thank you.

Your next question comes from William Conroy with Sanders Morris.

Good afternoon, just maybe couple clarifications.

First I think probably for Carlo Bozotti.

Can you detail a little bit if the wireless business is going to be flat sequentially?

I think that was Pasquale Pistorio comment.

Where are you seeing growth that will enable Flash to come up, is that also in wireless or is that from other applications?

In fact is a broad range.

I would say that overall Flash business we remain flat just by the fact we had one full week less.

It was several less working days.

I think that we have enjoyed growth in certain areas for instance, with the consumer and automotive.

While we had some decline in the wireless activity.

I will say that today we have about 50-55% on wireless application.

Many customers, more and more customers.

But the rest is important, this growth range several things from disk drive to printers, from digital consumers throughout the market.

Of course, the distribution channel, so is becoming very broad.

And we grew on the non-wireless Flash application, while we decline wireless this year.

And Carlo, also for you, where do you break between low density and high density what, when you make reference to that, what is kind of the break point that you are referring to?

Well, the break, this is really the 32-meg.

The 32 is, as far as the pricing comments are concerned related to the low-density products, then from 64 up is, what we consider high density products.

Thank you very much.

Thank you

Your next question comes from Remy Toma with Chevron.

Hi, yes good afternoon and thank you.

First a question on R&D expenses in marketing.

You've already stepped them up a lot in the last three quarters and yet you're talking of further increasing that effort.

Should we expect that to be roughly stable as a percentage of sales going forward or would you expect slight decline as your revenues accelerate on a sequential basis?

And, second it's always been hard to forecast your tax rate and it looks like it is becoming even harder.

Was this a one-time event in Q1 and should we just assume going forward that you'll have standard tax rate of 17 to 18% minus the tax breaks related to the restructuring charge?

Can you help us a bit there?

Let me comment for the expenditures in general.

There is an operation that our increasing efforts in R&D and our increase efforts also in marketing programs in the short term, they haven't provide any volume leverage.

But we are progressing, the more we move toward the end of the year, the more we will see leverage, because of revenue will keep increasing.

So, our major objective is to put some act on all those programs.

We have found a lot in R&D marketing so immediate leverage would not be significant, but the end of the year should be important.

As far as the tax rate Carlo can comment.

Yes, I am happy to comment.

Thanks for the question since it gives the opportunity to talk a very several, about tax ruling that has been finalized in the month of March.

And to, decreasing and to reduce on long-term basis the tax rate where as the excess evenly operate.

And these trigger, as mentioned on the press release, a one-time impact of $13 million, which is due to the fact that we are carrying the tax liabilities in these jurisdictions.

So at lower future rate, the value of the decline.

Since that accounting and of course, these also would trigger the future, something else that benefit of our effective tax rate on a more permanent basis.

Counting on, with these one-time event, the tax rate for the quarter that is 15% when including the restructuring charges of 16.7% if we exclude the restructuring charges.

And how should I say that, this is where we see, the range that we usually provide, which is between 15 to 17, 18%, excluding the restructuring plus the impact of the restructuring.

So, how say, is good news and in respect to you are more make reference to what we said prior quarter call, I mean 15 to 17% rate.

Thanks.

Your next question comes from Ule Telser with Lehman Brothers.

Yes, just a quick one on the impact of currency.

Just wondering, can your Q2 guidance how much of the gross margin increase is due to the currency assumption of dollar Euro 1 20 and also SG&A and R&D in absolute terms should they be more or those declining Q1 to given what the currency is doing?

OK.

The exchange rate impact on our Q2 margin on a sequential basis we can estimate something like half a point.

Right.

And SG&A and R&D, can those decline Q1 with more favorable exchange rate environment?

Yes, the more exchange rate environment of course is going to, -- has been, now to handle, also - our excess operating expenses structure and as my colleagues mentioned earlier, this is also coupled with some additional R&D and the marketing.

Although I don't expect to leverage in the sense of percent of sales in Q2, should be about expense of total expense should be about in line with Q1.

The leverage will come when we progress in time.

OK.

So it will be up Q on Q, correct?

As the, operating expense as percentage of sales should be roughly in line with Q1.

Saying (inaudible), that's for sure.

Thank you.

Your next question comes from Adam Parker, with Sanford Bernstein.

Hi, if I understand your depreciation guidance correctly you are expecting a pretty material acceleration in depreciation in Q3 and Q4 versus the Q1 and I guess your guidance for Q2 so I'm just trying to make sure that is correct in dollar terms if that's ramping up a ton, how much of the improvement from here on the margins is cost versus pricing given you need a bunch of both actually offset what is look like, pretty dramatically increasing depreciation.

Yes, indeed the depreciation taken, it will be higher than in the first half.

This is related to the (inaudible) of our capital spending.

Right.

Clearly, I'm just saying that you had, the number you have for Q1 and what you will have for Q2 if you look at the first half average is materially below the guidance for the whole year implying a big ramp-up in depreciation which is obviously a penalty on your margin.

So, given your Pasquale it sort of bullishness about the 40% Q4 target.

It really implies the material ramp in both mix or pricing or on the cost side I'm just trying to find out how much do you think is cost versus mix and pricing given what it looks like an improvement, you expect to get on the margins?

OK.

Out of the 1.9 billion of overall amortization and provision, I was mentioning that, few of the depreciation of shown, is in the range of 1.7 billion and a portion of that of course goes into the cost of goods sold and other portion (inaudible) or also affect our research and development.

OK.

May be, different question for Pasquale on the same topic.

Seems like a year or two ago you had indicated that you may else where some more of your leading-edge processes you use try and reduce your capital intensity.

Given a material ramp-up in capital spending growth, and I am just wondering has there been a change to your business model or do you think you are reducing your capital intensity at all?

No I think the way we have been operating in the past is the same. capital expenditure follows the identified demand.

The company has been controlling, building laid infrastructure.

We have infrastructure ready so we can accelerate.

The key in our capital expenditure is our flexibility.

When we started the year we had 1.6 billion, but we said we could accelerate if the market -- since our infrastructure is there we are accelerating.

So I think that the response will be driven by the demand rather than predetermined model.

We have seen now the demand accelerating by putting more capital.

So if demand suddenly gets worse in 2005 are you confident you guys can still make money?

Absolutely.

Please remember ST has not lost money in every single year since we were a public company.

Even in 2001 and 2002 and particularly 2001 were very, very bad year, ST was profitable.

I think again our resilience of the broader portfolio and our ability to motivate the capital spending had allowed us to maintain our manufacturing machine relatively well saturated.

In terms of capital in terms of capacity utilization, of course we complement our internal capacity with outsourcing and this gives us an additional flexibility, but we remain always with our rule that majority will be in-house because we think this is for us more competitive, more suitable for product mix and particularly much more able to respond to wide technologies that we have.

I'm struggling with how long do I wait to evaluate the return on these investments relative to their current cost?

And you know given that it looks like the expenses both capital expenditure and operating expenses continue to exceed what your forecasts are and your expectations are, they keep ratcheting up each quarter.

I'm try to gauge how long I should wait to evaluate whether or not to good you are saying the back half of the year is when we should start to really see the initial benefits is that correct?

No, every quarter I repeat in every quarter we respond to capital with need we see in the market and the return on the capital and return on investments has been not at the level that should have been in the last few years.

We arrive a bit because there has been a better diverse market condition, but I think over the right to insist on the fact you would be in always profitable.

We will be back to the level we were before the crisis.

I remember when our return on tax that was in the range of 19 to 20%.

This is going to be a few quarters, but that's where we are going to go.

Not going to be pretty soon, however.

Sorry, one last question.

Do you guy vs. any corporate goals about free cash flow generation?

I know you said you could fund the Capex through cash flow from operations but you feel like over the next say three to five years you should be able to generate free cash flow per share above 0?

We don't have this kind of goals because it depends on rate of growth.

As long as the company has the opportunity to continue to gain market share and growth this has to be the driving factor.

What the goal is on the contrary and return on net asset and return on equity and this goal is for me 20%.

Now we use towards that level and we will come back to that level once the markets holds the size and the ones we deliver our capability in place.

So, you're saying if you start to generate meaningful free cash over the extended period then I should trouble a bit you have run out of growth opportunities?

Hello.

We are not trying to say that we will not drive our operations by cash generation.

We will operation by return on equity.

Thanks for your time.

Thank you.

Your next question comes from Janardan Menon with Dresdner.

Good afternoon.

Can you just tell me what the capacity utilization was in the first quarter and what you expect into the second quarter?

When you say manufacturing efficiencies, are you refer to utilization or you also referring to anything else apart from that?

Well, it's there basically yes.

So in Q1 if you compare to what we called standalone capacity our utilization rate was 77%.

But you need to keep in mind that the first quarter was three working days less than the fourth quarter.

So therefore, you should correct with this our utilization rate was about 80% about the same as in Q4.

And you know, 6-inch width of fab that was about with this correction I was talk being was about 80% and the 8-inch was about 86%.

Now if we look at the next quarter, this quarter we are going to increase quite significantly our utilization rate and our utilization rate is going to be 86% between 86 and 88% overall.

Improving our position rate up to about 90% and in 6 inch about 85%.

OK.

About the manufacturing efficiencies.

There were several things being done during the quarter.

When we talk about manufacturing efficiency of course is overloading of the fab, but it is more the efficiency itself.

That means productivity improvement, the years improvement program we are having when projection of the new technologies and so on.

And so what kind of improvement are you saying your 0.13 micron will improve through the next couple of quarters?

Would that be one of the major factor?

The 0.13 micron we are introducing it now so we are going to improve it yield, but also to improve projection.

We will be allowed to start of our projection in micron.

OK.

Just a follow-up question to Mr. Pistorio.

You said in your opening remarks because of your increased spending on SG&A since the beginning of last year you are seeing a solid increase to a broader group of customers now.

And just that when we look at the market we some times find that ST is not increasing it's penetration of customers outside it's historical traditional customers, especially in areas like wireless or DVD or areas like that.

So can you give us some data point as to which product areas, which markets that you are seeing the solid increase or growing group of customers and if you can give us any specifics that will be extremely useful, as well.

Yes on the year figure that we have expanded the all the broader customer base, not specific segments.

What I mean historically we have been focusing on our first of all the strategic partners then what we call the docked-up in each of this or which of this strategic that are parked.

I will talk to - that we will keep serving with all our life, all of our dedication, all of our brains, all of our heart, all of our priorities to those stock customers and those strategic partners, there is not any change.

But in store qualities I think that it is very cost effective to leverage the existing product portfolio and the existing the commodity portfolio generating new products to cover a broader customer base.

And therefore we are expanding, our leading customers historical top customers, are spread across all the segments so is our effort to expand the customer base.

We are seeing very good results.

This year the growth outside the traditional proper accounts will be at least double or maybe even triple the growth that we will have with our traditional top accounts.

So I think this is very good results.

Of course we are starting from relatively lower penetration and that is easier, but is paying off, the effort is paying off and that, I repeat, is very cost effective.

But in which area are you seeing much of that early success, will that be in areas like Flash and discrete, so will that it also be in some of the

We are seeing is the consumer customers, which are many, many and the markets, so I say, China for example where there is plenty, but also this all should be a under progress of course and of course it's easier to start to doing this with established products, multi-socket products with the view to make it specific design and again consumer products like power devices of any kind, memory products, standard products discrete set up, but then you have been offered also differentiate the products and there ought to some differentiate of the products purposely.

So it is so a large customer base and the across the product base.

OK.

Thank you very much.

Your next question comes from Matthew Gell with Goldman Sachs.

Yes good afternoon.

Question regarding the wireless guidance, first just a clarification.

When you are saying wireless grew flat sequentially, is that including the flash wireless shipments?

Yes, this is including all products of the company.

OK.

And than if I look at your flat guidance and I look at the consensus numbers out there for handset shipments in both Q2 and Q3.

I think it is consensus you will see sequential growth in both quarters, so your wireless guidance is little bit below the market growth.

Would you be willing to comment on the factors that are impacting that, I mean is there an inventory build up in your supply chain and if you work through before you see it return to growth?

Price is the first on which I will comment, but units and prices are not the same thing.

But any way --.

Well in what our revenues are concerned and really started influenced by volumes, and also by other parameters like variations in inventory, like ASP or the some and by change in the mix.

Now all these things must be taken into account.

So we have first quarter in which we had a sequential decline and the main reason is, one of the reasons is, certainly some our performance of all working customers, but also the variation of the ESP that has to be taken into account and the mix.

For example the early days the volume grow but this volume growth is not always connected with revenue growth by our customers and clearly there is some correlation between our customers and our performance in terms of billing.

So there is some correlation, maybe the mix and maybe the selling price or some body as supposes to indulge there.

I don't know if I answer your question.

OK.

So you don't see any significant issues in your wireless inventory going into Q2?

No, we don't think this is, there is anything to mention on this specific point.

OK and than just a further question on the gross margin guidance of 37%.

You mentioned the different factors that have some impact on that.

I think you are up about 160 basis points in your guidance from Q1.

You mentioned around 50 basis points of that would come from currency or a bit less.

Your utilization rate will be up around 6% and you are expecting an overall increase in pricing.

Would you be willing to break down how much of that further 100 basis point or so increase is utilization driven versus price driven?

Well it's, this takes complex mathematical model.

I'm sure you guys have that, sure.

Well, I think that conducting real (inaudible) because there are several factors.

Let me try to say for one, let's say that and Alain already have mention that, the shipments of 0.15 micron in Q2 will be much higher than the shipments of 0.15 micron in Q1 and of course when you get a given product, for example, just for say something of Flash, moving, migrating from 0.15 to 0.13, there is significant impact on gross margin.

This is technology migration.

This component would be, I believe as the most important in the Flash.

Carlo, correct me if I am wrong.

So technology migration is one, we are making this technology migration not only on Flash, but also on the system on chip.

Another components which is not so important and will sometimes plays favorably and sometimes plays unfavorably, is the currency and as Carlo Ferro said, in Q2 as our expectation will be some 0.4 points but again may be this, may be that or may be worse because of some thing we don't control.

Pricing, being of the standard products including Flash and discrete, not only the position, but some place going up.

Overall the different state of the products are not going up, but as Philippe here has said, we are going down more in line with normal trend, which is built in our industry.

So this is something that we can overcome with the manufacturing efficiencies.

Debt speculation over the fabs is always something that brings a lot of impact on the gross margin and all those factors, how to break them down, I think that's sort of biggest and way it will be technology migration followed by manufacturing efficiency and much less pricing.

So technology migration mix and manufacturing efficiency, pricing is something that can help formerly and not some other.

Although maybe I have not given you exact complete breakdown, but I hope I have given you an idea of what to expect.

Thank you.

Your next question comes from Stuart Adrian with Morgan Stanley.

Hi.

Just looking at the profitability by division.

The TPA group had an EBIT margin of about 13.6% and clearly that was impacted by your acceleration of some of these R&D programs.

Could you maybe guess as to when that EBIT margin is going to get back into a sort of more normal 17 to 18% range?

OK.

Normal 17% -- certainly this is a something that we will not wait much to achieve.

This is certainly in our goal during this year not for the future in spite of this R&D effort.

Certainly we must be supported by the planed increase in our revenue, which by the way already happening in Q1 in those segments except in telecom - to be precise except the wireless because in the other telecom segment we have been serving very nice growth both access and networking mostly positive sequential and year-over-year very good growth.

So we plan to return to normal situation of profitability as soon as sales will grows significantly, which should as soon as the second part of this year as soon as- let me call this way we'll be back.

By the way, 14% is not as the stand of the historical (inaudible) of TPA, but it is not a kind of situation.

Back to this number, very good.

Thanks very much.

Just one follow-up.

On the other category within your divisional split.

It seems to bounce around quite a lot.

Going forward what should we attempt to model that as?

What's a normal run rate for the other category within operating income?

Yes, the category will soon include the restructuring charge so the 108 million of this growth includes 33 million of restructuring and that 35 million s9ph) is including manufacturing.

It is quite consistent to the last quarter excluding restructuring manufacturing where at 72 negative operating profit.

In this category basically include two major items those are strategic initiative that (inaudible).

Going forward you may expect the first one to increase, the second one will be especially in the second part of the year.

I would anticipate that we would not any more negative balance on these line for the next three quarters in a row.

Thank you very much.

Your next question comes from Martino De Ambroggi with Euromobiliare.

Good afternoon to everybody.

First question concern some shipment delay that you mentioned in your press release.

If you could elaborate a little bit more just to understand if there is a risk of cancellation or which business in particular was affected?

Second one is your strong upward revision in CAPEX, I can assume that it depends on your upward revision in market growth.

You mentioned 2005 as a year with sustained growth.

Could you give us an update on this subject?

If I may, you didn't mention any foundry recourse, which is percentage of sales coming from foundry, thank you.

Let me comment on shipments delays or whatever.

First of all, 25 - the fact that we have guidance that would be in the range of 2 billion 60 and we cannot - as a center point over the guidance we have been down in the lower end of the guidance means that we were expecting some that is what we are talking.

OK.

Also out of the 30 million from our expectation, little bit more than half is related to the bottle-neck investing capabilities.

With the equipment arriving should be too late to complete the first quarter billings.

Yes.

Therefore, the customer push-outs are really something like peanuts, less than $15 million and is not one or two, but few customers here and there pushing out, little bit, some little bit more, some little bit less so I think this impacted inventory in any form, so I think this is more to be very precise of why we came middle range of our expectation.

For the rest I think Alain can comment.

We are increasing our CAPEX expenditure, we plan to improve our CAPEX expenditure, number one because visibility we have coming from our customer is improving and make us more confident could do better than we were expecting before.

This is of course in to the market.

You may remember that our forecast for market growth this year was little bit below 25%, in fact though I was mentioning 23%.

Today we are looking at revising this forecast probably within a few weeks we will disclose it, but the for sure going to be more than 23%.

That is what I can tell you for this year and of course, for 2005 are pretty good also and we should see some growth in 2005.

Double-digit?

Absolutely and about your third question was about the foundry?

Yes.

Foundry was representing last quarter 7% of our total production.

And you know, going to grow probably between 8 and 10% in the coming quarters.

Of course we are also increasing our production - our internal production.

OK.

8 we are also increasing our production, we are increasing our percentage of our foundry to about 8 to 10%.

While increasing the total production of the company.

OK.

Thank you.

If, I may a follow-up on your market growth.

So you always believe to be able to out perform the market?

Absolutely.

Absolutely.

Thank you.

Your next question comes from Marisa Balda with SG Securities.

Yes, good afternoon.

Quick clarification question regarding operating expenses.

I couldn't get whether you're expecting them to be flat in percentage of, or flat in absolute terms?

In (inaudible) will grow up with particularly in R&D, but also in SG&A.

As percentage of sales in a short term, they are going to be around flat, but the quarter progression, we should have leverage, there fore we should decline its percent of sales.

Right.

When you're talking about decline, talking about Q3 and Q4?.

Correct.

OK.

And second, last year do you had revenue figures for strategic customers?

Yes, it's about 45% of our sales for this quarter.

OK.

And the last 25 make, could we have a-

Sorry, this was the quarter before. 38.7%, 39%.

OK.

And, quick follow-up on financial's.

Could we have guidance, which you had in net expense in Q1, where you have a net cash position.

So, how should we model that looking forward?

I'm not, I'm sorry, what was your question.

But, net financials on the net interest expenses.

How should we model that looking forward knowing that you have net cash position now?

OK.

Sorry, very straightforward question.

Of course, the net cash position benefit in term of interest income.

But pretty low when considering, you are more than (inaudible) in accounted but, their interest line also include the amortization of the underwriting expenses on our convertible bond.

So, we have a way, fixed amount of expenses each quarter.

I would not expect it to Q1 to have a major changes going forward next quarter.

OK.

Thank you.

Your next question comes from Andrew Griffin with Merrill Lynch.

Hi, good afternoon.

Could you comment on your non-Flash programs, please?

Well, we had a initial shipments to, at the end of March and the non (inaudible) will start contributing to sales, but you know very strong to this year.

And then grow, of course in Q3 and in Q4.

What we're shipping today is 0.115 micron and we will be moving to, 19-nanometer technology at the beginning of the fourth quarter of this year.

I think that the next key product for us is this 1 gigabit 19 nanometer, as we are shipping that (inaudible) and so we're moving on.

As you know, we started this program in October 2002 and March last quarter was the first shipment month.

So it was, quick kind of, in terms of technology and product development and we expect that more significant throughout the second part of the year.

Thanks.

I think you mentioned that the last quarter that you were thinking about 5 or 10% of total Flash production this year being accounted for by NAND.

Is there an update on that figure?

I also wonder whether any start-up losses would have any pull-back effect on MPG profitability this year?

I think I can confirm 10 to 15% exactly what we (inaudible) this year because of the fresh revenues and I think there is no material impact on the MPG bottom line even in Q2.

Thanks very much.

Your next question comes from Debay Simano with ABM Amro.

Just like to get a few questions on wireless.

If I understand correctly you are guiding flat wireless in Q1 with double-digit growth rate in Flash growth rate positive for the semi-sensor.

I assume your IB products will grow sequentially.

Do I have to assume you are mixing your business is going to be down sequentially?

If I do the math, probably down close to double digit.

Is that due in your view to some customer issues or due to maybe market share loss?

Second, I have a question regarding, can you give us an update on the product, is it shipping already and do you confirm you will have a meaningful impact in Q4?

Thanks.

I have a follow-up, as well.

Production on the correction one comment on Flash.

The state that we grow on wireless Flash in Q2.

In fact, I think that today we are strong on Flash products and we need to serve our customers and keep a balance.

We are trying to of course please all of our customers in this segment.

So I think that in the second quarter the wireless Flash growth will be very minimal.

Concerning the (inaudible) we -- visibility we have today is something fresh revenue.

OK.

With those of been domestically remember what I said before concerning changes in, price and similar subject.

However the focus on the high side.

So do we see what happened to see to comment on the second part, for the second part of the, -- in terms of you mentioned say customers, you know we have a strong dependence on one, one well known customer and you know everything about it.

So I will not comment further on this subject.

Concerning the -- we have some more, let's say, some awards and some practical awards, this is to say.

The more on award is that this product has been considered the best micro application processor in the world, quite prestigious legacy in U.S., OK and this, that is a good sign.

The other I have said, the more practical, I would say that we have customers working on our product.

But your question was if we have, we can put the revenues in Q4, if I remember your question.

Yes.

Frankly, I am not happy, but the time that is requested the currently to design a new common, a new complex phone using this application, the processor is little longer compare to my, also my expectations.

So I am not saying we can't expect revenues in the this year.

As I said already in the past by the way, you know.

Yes.

OK.

So 2005 story, then?

Yes.

Just an update so on the CDMA chip set.

I think you mentioned design win was your subject customer in your press release and production in '05.

If I remember what Philippe said in the 3-GSM presentation, I think he was talking to or made the more orally some comments about getting something like 20% share in CDMA by Q4.

Is that still something we should expect?

Yes first of all let me summarize this equation on CDMA.

In addition to large customer, we, which obviously are using our path together with this agreement that we have been enabled the two companies to gain significant number of customers and also brought-up customer.

So the production will start, in the first case, at the very end of this year, beginning next year and the goal of the 20% of the total market that was mentioned by Philippe (ph) seems more and more visible.

I'm very pleased on what is happening in this specific case.

Yes.

OK.

Just a last question on the Detroit market.

There is a bit of an issue which the three big desktop makers.

Can you may be give us an update of, how your business performed in Q1 and how you see the business performing in Q2?

Thank you.

OK if you want me to - for the this, in TPA will be with the support of has been good quarter.

For the total computer peripherals, we have been growing also sequentially which is not common give to the seasonality.

And we have similar vision, say for all the computer peripheral field also for the next quarter, and next doesn't mean that this quarter.

But with that in spite of this, as you say have said the total balance sequence in this one.

So that's what I can say.

OK.

Thank you.

I think we have time maybe for one or two more questions.

Your next question comes from Oshe Orgey with J.P. Morgan.

All right good afternoon, gentlemen.

Just a question on your backlog, if you can give me an idea of what the possibility or tell me how much of your top end of your Q2 forecast discovered by booking as of currently and how this you see?

Well, you know that book to bill ratio are less significantly, but what I can tell you is that our guidance of 6% (ph) to 7% (ph) is based on the existing demand at the beginning of the quarter.

Entering Q2 our backlog frame all prescribed of the expected in the form was substantially higher what we were at the end of Q1 and this base we are given in the guidance.

OK.

Just another question on your CAPEX.

Given your forecast for full year sales, your CAPEX to sales ratio will be near 25% and my question is, is this a ration to expect for next year or going forward or what kind of ratios you are expecting in terms of your company intensity, bearing in mind that you are spending a lot more in the edge, which will require more and more investment to maintain your cutting edge performance.

What kind of CAPEX to sales ratio should we be thinking about going forward?

Well over course the ratio depends on the revenue.

And the market, if the market keeps growing and the revenue keep to growing, that we gain market share then we will invest more.

So we don't say again and we discuss everything before and we can do that as talked, the capital investment ratios as we will give a cut for given ratio target.

What we have is, in fact it is probably right to speak what are the financial parameters that are driving our activity.

I think the key financial parameter, there it go, Q2 at, a Q2 is little more structure.

This is the sympuses, in my opinion, the best sympuses of all the financial parameters which of course have been the depending on the with regard to rest of the capital need.

Most of the items we look more than any thing else.

Minimum we can expect on your target?

Again, return on the tax, you must multiply it by net profit to get the number.

In my opinion, the number is the most important and my idea number is 20%.

We were at the cover across that level and by the way for the moment we were in the public of 2000, the way to balance our reformat in all those years, that was yielding for us in the 19.5%.

So we did perform upon long and is been to the period on the greater dollar should based, close to 20% performance.

Than the crisis of 2001 and we have not yet come back to those levels but we plan to come back to those levels and we are working towards it as fast as we can.

So this is one part.

Another parameter is financial conservatism.

Today our ratio debt-capital ratio is basically 0 because we have no debt.

But what I think that is very well acceptable and manageable is the debt-capital ratio which should not exceed 03 and may be in the range of 0.15 to 0.3.

So of course 0 is even better, but in any case 0.15, 0.3 is well pretty and well manageable.

Those things are driving and than we will react investing according to the demand.

But what we try to control is our return on deposit and debt-capital ratio.

Just one last question for Carlo.

The, most of your compliance doesn't, in non-Flash, I am talking about really converting to 90 nanometers by the end of this year.

Where are you in terms of 90 nanometer, where would you be at the end of the year and more importantly if that happens we are looking at substantial capacity coming into the market for non-Flash.

Is that something that worries you and you think that market can absorb that sort of demand.

With that sort of supply, will the demand be changed in a moment?

Well today we have the first product in 90 nanometer, is 128-meg and we expect to start the production of the 90 nanometer at the end of this year.

And we'll be on two products.

We'll have also thought on acquire Mega PC Byte (ph).

I think that of course for us and for others the 90 nanometer is very complex process.

It requires top-of and is more complex than 0.15 and I think there are limitation in the available capacities.

So there will be I think ground more that gross this during this 2005 on this technology.

I think we'll be, we'll start -- today we have four fabs, the 0.15 is really running smoothly in through these fabs and by the end of this quarter we'll have also the second two fabs moving into the 0.15.

And next year we'll have, initially want to have, what's the 90 nanometer and than by the end of next year and second part of next year, second fab with the 90 nanometer.

I think we are running out of time for more questions.

The investor relations team is obviously available for any additional questions you may have.

I'd like to turn the call over to Pasquale for summarizing comments.

Thank you.

Well again I think we have discuss some of the aspects of our released today, with the comments that we have answered and I can see the most favorable comment that I would like deliver is that the we perceive that the market recovery is gaining momentum.

We perceive the situation in capacity worldwide is getting much better.

The conditions are very well positioned for ST to enjoy this product portfolio, continued performance improvement across the quarters to come.

The first improvement that we believe is important and we are pursuing, that we acquired, is the gross margin.

With our indication of 37% in the gross margin in Q2 we are indicating that the condition for the proposed capacity situation and the efficiency of the attrition in technology et cetera are such that the indication over the 40% into Q4 and be exceeded, and answer this specifically corporation in the sense.

We also believe that our financial position is very strong.

I think it's worthwhile to recall the over $2 billion in net operating cash flow that we have generated in the last some quarter.

This gives us activity to finance the growth and invest $2.2 billion in capital investment that we are protecting now is going to be financed with our generated cash flow this year.

So the situation for the company looks very strong in all the four areas.

We are looking forward to the level of possibility that are going to be much better in the coming quarters.

So thank you again, ladies and gentlemen, for being with us.