意法半導體 (STM) 2005 Q1 法說會逐字稿

Hello, and welcome to the STMicroelectronics first quarter conference call. [OPERATOR INSTRUCTIONS] I would like to turn through call over to Stan March.

Sir, you may now begin.

Thank you very much.

Hello to all of you, and thanks again for calling and joining us today.

Around the table in Geneva we have from STMicroelectronics, Carlo Bozotti, our President and Chief Executive Officer, Alain Dutheil, ST's Chief Operating Officer.

We also have a large number of ST's executive committee members including Carlo Ferro, our Executive Vice President and Chief Financial Officer, Enrico Villa, our Executive Vice President representing the Sales and Marketing Organization, Philippe Geyres, our Executive Vice President who represents the product groups, and Andre Cuomo, our Executive Vice President responsible for strategy in Systems Technology.

I would like to make one -- make that two-- house keeping points here with you today.

First, many of the comments on this conference call will be forward-looking and as such are covered under the Safe Harbor provisions that are listed in today's press release and the most recent copy of the company's 20-F.

And, secondly, in the interest of time, please keep your questions during the Q&A session to one question and a brief follow-up.

If you have another question, please go back to the queue and we'll pick you up should time be ample at the end.

With that brief introduction, I would like to turn the microphone over to Carlo Bozotti.

Carlo?

Well, first of all, I would like to thank all of you for joining us on this call today.

I appreciate your interest in ST.

As many of you know, this is my first quarter international conference call since my appointment as President and CEO in March.

I would like to cover several topics with you today.

Our first quarter financial results and second quarter outlook, our road map to improve the competitive position and financial performance of the company, and the status of our progress and timetable ahead of us.

After my formal remarks, I will be glad, along with my staff, to answer any questions you may have.

Now, let's turn to a review of our first quarter financial results and outlook for the second quarter.

Gross revenue and gross margin the first three months of the year came in at the low end of our guidance range.

Revenue results reflected stronger seasonal factors and higher than anticipated price pressure in some of our applications.

Furthermore, the gross margin was also negatively impacted by lower revenues, as well as reduced utilization rates.

Looking more closely at our sales performance, revenues from strategic partners who had approximately 44%, up from about 41% in the fourth quarter.

Strategic partner sales declined less than the average of the company for the first quarter, [for this roll] was pretty much as expected.

However, business in the mass market including distribution, did not materialize at the level we had initially planned.

Also, the groups experienced decreasing sales on a sequential basis.

One bright spot for year-over-year instruments were automotive and wireless application.

Sequentially, data storage showing a high single-digit growth rate.

In the operating expense area, we work diligently to maintain combined SG&A [inaudible] in the expenses nearly flat comparing to Q4 2004 in dollar terms.

You will also notice that this is the first time we have provided results using our new organizational footprint.

Each group is reconfigured, with divisions having moved between organization and this is a good example [inaudible] but there has been a change in the reporting division.

Looking at results, French revenues were at $255 million, representing an 18% sequential decrease.

This decrease was driven primarily by both seasonal volume decline and pricing pressure which is continuing in the current negative market environment.

Our objectives are three-fold.

First, continue our product development, second, the move to [final] geometries, and third, improve or internal manufacturing cost structure.

Our application specific product groups include most of our dedicated products, and I would like to add some further details on application dynamics we see to in this organization.

These groups experienced sequential declines in wireless, digital consumer and automotive sales.

On a year-over-year basis, wireless products increased more than 20%, and automotive was up 15%, while [inaudible] consumer was down a high single digit present age.

The operating performance of this group is well below the levels experienced last quarter.

Reduced volumes, and the related increase in space to space ratio, are the primary results for this decline.

A key factor to drive sales growth in these groups is improved product [portfolio].

This is one of the major drivers of the need to better focus our R&D effort while -- which -- we address later in my comments.

We are encouraged by the sales and income performance in [MLD].

We have assembled here advanced solutions, [linear]power conversion, industrial ICs, micro-controllers, discrete, and more.

I expect this group will be a key element of our effort to expand the customer base and leverage our return on capital.

Moving briefly to the balance sheet, in Q1, inventory turns were 4.1 times, as anticipated, but below our target of 4.5 to 5.

Our goal is to reach our targeted range in the second half of this year.

Turning to cash flow, revenue [inaudible].

Net cash from operating activities was $359 million, while capital expenditures were $564 million.

However, the amount of equipment installed in Q1 was a much lower [venue] when tracked with our investment program for 2005 capital spending plan of $1.5 billion.

Looking ahead to the second quarter, with the recent visibility we expect sequential sales growth in the range of minus 1 to plus 7%, driven primarily by wireless and automotive applications.

Based upon the sales range, we expect our gross margin will be about 33.5%, plus or minus one percentage point.

Now, I would like to move to discussing our performance roadmap as the financial results we delivered this quarter are frankly unsatisfactory.

I believe that the [inaudible]people, the [inaudible], and the product portfolio to perform better.

Our recent performance is not indicative of ST's potential.

I have been with ST for my entire professional career, and I know our people and their capabilities.

I know they can make us be more competitive and more profitable.

First, it is a question of focusing on our core competencies.

We must better concentrate our R&D efforts on the products areas where we can add the most value and derive the most benefit.

In order to do that, we are selectively streamlining and optimizing our product portfolio.

Second, there is room to significantly improve our manufacturing cost structure [inaudible] and back end operations.

This is in addition to our previously announced [inaudible] restructuring plan.

This is a question of [inaudible] our identified initiatives.

I believe we are taking the right steps to strengthen ST, but I think we all sense the need to move forward and deliver better results, and do it soon.

At this point, let me tell you where we are on our road map to better performance.

First, from a product perspective, our objective is [inaudible] innovation, so that we can increase our product leadership and strengthen our gross margin over the medium term.

We do have significant and talented R&D resources.

Therefore, we need to first free up resources in order to redeploy them.

As we indicated last quarter, we are scaling back the CPE modem products, which resulted in a charge this quarter.

Most recently, we have also decided to stop development of GSM chipset, cancel our [SPGA] research program, and terminate contract design services for third parties.

We need to focus work on ST and not dilute our efforts.

These decisions, and many smaller ones, in the aggregate will allow us to deploy 1,000 engineers, representing 10% of our R&D work force, and this is a significant effort.

Now, where are these engineers going?

We are redirecting their talents to several [inaudible]areas, wireless with 3G and [inaudible] in particular, data storage, auto markets, and advanced analog and industrial products.

All of this will be completed by the end of Q2.

Second, from a cost perspective, we have accelerated the base of manufacturing cost improvements by shortening the time frames for implementation as well as introducing new action steps this quarter.

We are expanding the scope of the procurement cost [inaudible] contain.

The [inaudible ] seen generally as a result in a substantial savings [inaudible].

We are repatriating, wafer supply and assembly services, in order to improve our internal fab loading and cost structure.

On top of these efforts, the migration of the targeted portion of memory wafers to Asia is progressing well.

Coupled with our efforts in manufacturing, we are also driving a company wide program on the [inaudible].

This initiative is based on the three fundamental concepts of empowerment, discipline and sense of urgency.

To reshape and deploy this [inaudible], I already met with the top 150 managers of the company to insure that we are all focused on the same set of objectives which, ultimately, is a return on invested capital.

Let me summarize then.

With the [inaudible] today, we expect to progressively provide the results which will yield up to $100 million per quarter in manufacturing cost and expense savings in the [first] quarter of 2005 compared to the same period of 2004.

Our short-term challenge is to maximize the savings in order to more than compensate for the price erosion we are experiencing and to improve our margin.

At the same time, it will be the enrichment of our product portfolio and broadening of our customer base which we are pushing with all of our energies, that will solidify the financial performance of ST.

I would like now to answer your questions.

I think it's time for us to develop the queue, please.

[OPERATOR INSTRUCTIONS] Our first question comes from Nicklaus [Goodwell] of Deutsche Banc.

Yes, hi.

First question, if I may on your capacity plans.

Do you think,, for your [20x], recently [cap] is mentioned as being first of its size in 2004, 2003, but also, again, this year, as you know, [inaudible], for six months, I am wondering, if not questioning basically one what are the ramp plans for M6 [fact] at this point, 2006.

And I have got a follow-up.

Thank you.

Yes, when we are -- yes, Alain Dutheil speaking -- when we are talking about [20x], about [cant] production, of course, we are not talking about M6, We are talking about [quarterly] M5 you are referring to, which was is our [8 inch] fab, which for the time being dedicated to memory.

We are moving the last part of the production of memory now to Singapore from this plant, and replacing the production by some other product-mix technology.

So if you refer to M6.

M6 of the plant is today not yet completed, but you know it's on the way of completing facilitization, and we have not yet made the decision to stop the progression, to stop buying equipment to ramp up the position.

This will be done probably by the end of this year.

We decide when to start buying equipment and when to start the production.

Is this just a question of basically market demand, or service is in issue potentially in terms of your waiting level you would like to have to press a button.

Well, I think the major reason is, of course, because we want to -- when you start a big plant like this one, you want to make sure that you are going to be able to ramp up the progression as soon as possible, as fast as possible, so it's just a question of market demand.

Okay.

Great.

And, just looking at the [mass]segments, you must mentioned that revenues.

Up high single digits sequentially.

One of your main competitors is down about 9% sequentially in Q1.

Also, you've been talking about having an SOC design win for marketing the desk top segment.

Is your performance, vis-a-vis, one of your key competitors a function of a specific design win aside your major customer from last year, or you outperformed your competitor.

Thank you.

Phillipe Geyres speaking.

We have a majority of the sales with some strategic partners, which are experiencing good business results in those areas.

We can highlight, for instance, that one of our customers is very strong in the one-inch drive market, which is the fastest-growing at this stage.

So, today we have -- we are benefiting from the good position with customers who are having good business results.

Regarding our own system on chip that we are introducing, this will be further business but towards the second half of this year, so this is not yet in the sales results.

Okay.

Thank you very much.

Thank you Nicolas.

The next question comes from William Convoy of Sanders Morris.

Good morning.

Can you detail for us what utilization was in the front end and how much of wafer demand was sourced from foundries?

Our utilization rate in the first quarter was 81%, a little bit below the forecast.

This is Alain speaking again.

This is in line with the forecast I gave when we announced the fourth quarter.

And, by the way, this utilization decreased along the quarter, where we are adjusting our output to the demand.

And the foundry sourcing in the quarter?

Okay.

The foundry, maybe, you know, the foundry was about 6.5%, representing 6.5% of the total production.

But I think I would like at this stage to give you another indication, which I think is more representative to what we are doing.

If you look at the totals of contracting activity which we have, which is both with our foundry and back end, and if you look at that as a percentage of -- the cost as a percentage of sales, we have decreased from 11% in Q4 down to 8% in Q1.

So we are decreasing quite significantly our contracting activity, but again, this includes both front end and back end.

Stan, can I ask a quick follow-up?

Please.

I think this one -- I'm sorry.

Inventory days went up in the quarter.

Can you say how much of that was from currency and how much is from inventory itself building?

Yes, this is Carlo Ferro.

Good morning and good afternoon, everybody.

You have a [inaudible] on our closing inventory.

We estimated that this is in the range of some tens of million of balance sheet value of our inventory.

Of course, in the direction of reducing this quarter the value of the inventory, based on the end of March rate.

In terms of the part of the inventory returns, we estimate that these [inaudible] volumes, so frankly will not be a major factor.

The real major factor, indeed, is the fact that as anticipated inventory turns went down this quarter, and this is out of our target range of between 4.5 to 5 turns, which we do expect the company can reach again in the second half of the year.

Thanks very much.

You're welcome.

The next question comes from Matthew Gayle of Goldman Sachs.

Can you guys hear me?

Yes, fine.

There sorry.

I wanted to ask a question about the memory products group.

Some pretty cautious commentary from most of your competitors, both regarding the memory products area as well as the smart card IC area, so just interested in what you're expecting in the business in Q2.

Is there any prospects for a margin recovery in Q2, or is this something that is going to be Q3, Q4 at the earliest?

I think that there would be a progressive improvement in the margin, quarter after quarter, and we expect a moderate improvement in the margin in the second quarter, because the price measure today on the memory products is still significant.

Is there anything you can say about when you would expect the memory products group to return to a break-even level?

And what, really, are the milestones that we need to see, from ST particularly, to take it to that level?

Yes.

Rather than indicating the date, or the quarter, when we expect to be back into a profitable position, I would like to stress the actions that we are taking to make this happen, and I would like to start from R&D.

We have accelerated the effort in our R&D center [inaudible].

Our typical sale is now in full production, and we have now some key products moving into the two bit per sale, more products moving into the bit per sale, and we are also working on new technologies generation introduction now at the beginning of production, starting production, like the [meter].

The second major action is rebalancing the -- the overall manufacturing presence between Europe and Asia in memory.

And we are reducing our volume in Europe and moving the activity in Singapore in our 8 inch drive in Singapore, and this is for [more] products.

We also have, of course, the joint venture with [links] in China on [mens] products.

I have been a more general question -- a more general point of memories.

If I make and if I look back at our history, I think looking at the full cycle from 1999 through the year 2002, which was two good years, two excellent years, and two bad years.

The memory group did significantly contribute to the financial performance of the company.

If we look at the next cycle, starting from 2001 and ending at the end of last year, with two difficult years, and two better years, the memory group did not -- or the memory product did not contribute positively to the financial performance of the company, so I think that in the future we need to be less tolerant with this and, of course, we want to accelerate all of the actions [in manufacturing] to turn this around.

I think -- and this is more on the partnership approach, we are very pleased over what we have been able to do with our progress in accelerating the technology roadmap on advanced logic products, on the 12 inch and [too] with [presale] and Phillips.

We believe that this is a good model to look at, and this is something that we are also pushing for our memory activities.

Okay.

Thank you.

Do I have a follow-up, still, Stan, or am I off?

Well, you asked an MPG question, so if you stay, we will allow you to ask a brief question.

Just, as to the new divisional structure, I was wondering if you could give us some sense of what you see as the normalized margin for the MLD and the AST group, just because we don't really have any history beyond 2004 on either group.

Thank you, and then I'll get off.

Okay.

In the attempt to support your analysis for the group, the press release today includes the track of revenues and operating income for the new group for each of the four quarters of last year, so that may also offer some reference point.

In terms of the performance of the MLD with respect to the current quarter and the last quarter, I don't know if Philippe Geyres may want to add some comment from the group on that point.

Of course, this is a factor that profitability continues to be very high, also considering that the use of capital of this group is much less intensive than that for the Company.

They benefit from very high net turns, and they are running at the return on invested capital, which is overall very for us.

Yeah, I have a comment on MLD, of course.

I think it is important to underline that MLD -- in MLD today, we have grouped all of those products that we believe instrumental to address, very wide range of applications, of course, industrial applications, power supply applications, home appliances application, motor control applications.

There is very wide range of applications, and these products are not only the standard products, so it's not only standard linear, not only standard discrete, but there is a lot in terms of dedicated products.

We have created a new division focusing on advance analog products, which is, of course, very good margin family.

We have strong [inaudible] application specific discrete products.

So I think we will invest in -- we will boost the innovation effort, and we expect great return, of course, in terms of [inaudible]but also a continuous improvement together with innovation in the gross margin performance.

Okay.

Thank you.

Thanks, Matt.

Your next question comes from [Nav Shara] of Citigroup.

Thank you very much.

Good afternoon, guys.

Carlo, I just want to ask a question with regards to your gross margin.

Obviously, you have uplined your cost savings program to the tune of $100 million, and if we were to assume that that was attained by fourth quarter, what is your gross margin target by fourth quarter of this year?

Well, as I said at the beginning, rather than planning the target for Q4, I would like every quarter to establish and to describe to you new initiatives to grow quicker more revenue from where we are.

What we have announced this time is what we have achieved in Q1, which is a combination of several things, but I have to say very much is the -- we have restructured our global procurement organization, and we have launched this campaign, and I think the results are there, and this is a first step, and this is what we have achieved so far.

I think there are other initiatives, of course.

I think that, as I said before, we have a lot of opportunities for improvement, and this is not only with the migration into Asia, but also in Europe and in U.S., and I think we'll diligently describe to you the initiatives, and -- but I prefer to talk about the actions and describe the results on these actions, and the achievement there, rather than formalizing a goal for Q3 or Q4 this year.

Thank you.

Just as a quick follow-up Carlo.

I meant with the currency not changing as well, but I assume you have that incorporated, as well.

Yeah.

Just a very top level question.

On ST, historically has not been a company which has participated in a lot of M&A activity.

In the last couple of years, maybe your topline growth has not been, say, in line with semiconductor market growth, for whatever reasons.

As a new CEO would you be looking at that strategy going forward, not just looking at organic growth, but acquisitions, as well?

Well, I think that the focus today is on execution, and we want to focus more on R&D, growth factor in R&D, introduce more new products more rapidly, and reduce our manufacturing costs more rapidly.

So I think that we will not change the approach in so-called M&A.

Of course, we are ready to take any opportunity.

We are in discussions with everybody else in this area, but I do not believe that there is a change in our approach, vis-a-vis the M&A activities.

Thank you very much.

Thank you.

The next question --

Yes, please.

-- from Cody [Apress]of Legg Mason.

Thanks.

Carlo, you said specifically that you were now less tolerant of the losses in the memory group.

Can you talk about maybe the -- some of the shifts you've seen in tolerance of some of your competitors as they've decided to move away from the memory group, [that] moves back that eventually does drive growth?

Or is this something that you will de-emphasize over time?

Well, when I said that we will be less tolerant, we will be less tolerant with any family, of course.

I think every family has to provide with a return for us, of course, at the company level.

The weighed average cost of capital, and then of course we have these internal goals in terms of return on net assets before taxes.

So this is valid for the memory group, and this is valid for any other group or any other family.

In fact, it is valid for our 30 plus divisions that we have in the company.

The only point that I was making before is that we need to judge a family, of course, on the cycle of the business, and I did take the example of the memory, comparing two cycles, the cycle from '99 to 2002, two excellent years, two bad years, and then the cycle from 2001 to 2004, again two bad years and two -- a reasonably good year.

And I think this is valid for memory, and I think this is valid for every other product and families, and every family has to provide a return.

At the end, this is the only things that matter, and this is true, also, for memory.

Maybe I can ask a quick follow-up on your cost reduction initiatives.

You have been going through lot of cost savings plans over the last few quarters, a six-inch reorganization.

How much of this $100 million by Q4 cost savings is associated with some of your prior restructuring, and what do you expect from the new cost savings?

New.

This is all new.

Can you --

This is -- this is new initiatives that we have started during the last few months, so the six-inch restructuring plan is not inside the $100 million.

It is on top, of course, it is in addition.

But as we said last time, the six-inch restructuring plan will be completed by the middle of next year.

And we expect that the savings on the six-inch program will be more significant and more visible once the [plants] that are involved in these programs in Europe will be physically closed, and I think this is important to under line.

But, again, the $100 million saving that we have achieved with the actions that we have recently taken is in addition to the previous initiatives.

All right.

Thanks, guys.

Thanks, Cody.

The next question comes from of [Didias Amra] of [ABN Emrow].

Right this is [Didias Amra] from [ABN Emrow].

Guys.

I would like to starting with a question on the flash business.

Sorry about that.

When I look at the outlook for the new flash market, and I see that you -- one of your main competitors basically decided to give up, even though they had a probably better manufacturing, better portfolio with technology and margins.

Why do we need to wait X number of months before you make a radical decision?

You've just said that the last cycle was disappointing.

Why is it not enough just to draw the right conclusion, just to give up, spin off, sell the business, or close it down.

Because the previous cycle was great.

Don't you feel that it was just because the new flash technology was the beginning of a technology, that the technology is now mature, it is not obsolete?

I believe that -- first of all, I do not -- I am sorry to underline this, but I do not agree with your statement that we are late in terms of two bit per sale or manufacturing costs.

In fact, if you compare our performance in memories with other performance in memory in the relative terms, they are -- I believe they are better.

I think that in terms of technology, and in terms of the two bit per sale products, we are second to Intel.

This is my judgment, and I think it is a correct judgment.

The fact that the product is maturing is not necessarily a problem.

We have other examples in the company, just to mention [inaudible], however we are satisfied with the financial performance.

Unfortunately their contribution is not very significant, because but those are mature families, and we have enjoyed, and we are enjoying a good return.

So the fact that the family is maturing is not necessarily a --

But let me ask the question another way.

When you look at the performance of your non-memory business, I don't think it's doing any worse than your peers, in the U.S. or Europe.

Don't you see that the memory business is a massive drain on returns and on cash flow and your shareholders asked to support this, unfairly?

No, because our shareholders have enjoyed a lot.

Everything that we do is, of course, to generate value for our shareholders, and this must be clear.

With the memory business, we have generated significant value for our shareholders.

During the four-year cycle, which is fair, and I think we have all enjoyed, and we have not been able to do the same, ourself and our competitors, so not only ourself, but I think that in relative terms, we are -- we have performed better than our competitors, in the period from 2001-2004.

So I think that what I said before is the right definition.

We need to grow faster to better financial performance including the memory, and my comment before is that we are going to be less tolerant of memories, but if I know now that we have no hope, I would not wait a second to take action, of course.

Okay?

But we are going to be less tolerant in the future, because we want to improve our financial performance faster and rapidly.

Okay.

Can I just ask a question on [inaudible]?

We lost you there.

Can you come back up?

Okay.

Go ahead.

We just lost the last part your question.

Be more specific on the consumer side, the fact that declining revenue sequentially was a bit more, say, marked than expected.

Could you comment?

And I'm not sure, but I don't think you mentioned digital consumer as a driver for the second quarter?

Overall in Q1, we had strong maybe a little more seasonal than what we have been used to both in wireless and the retail part of the consumer.

Wire operated business was, I would say, as expected Q1 on the retail set top box, and analog TV, and audio was particularly low.

Now in Q2, we expect to increase from Q1, we shall increase from Q1 because of the seasonality Q2 starts to pick up, and Q3 is the best quarter, usually, and I must say that in the last couple of weeks, we have started to see quite a change in the orders coming in, in particular for the set top boxes.

So we -- while Q1 was rather low in those markets, we see some good signs for Q2.

Thanks again.

Thanks very much.

Thanks.

The next question comes from [Genarden Hammond] of BRKW.

Yeah, hi, good afternoon.

Just a follow-up to a comment you made earlier, Carlo, which was that you said that you will extend the partnership model of [inaudible], which is working very well to the MPG business, as well.

Just to get a bit deeper into that.

Does that mean that what you're thinking is purely a manufacturing R&D kind of partnership, or are you talking about a joint venture for the whole business itself, where you own the business fifty-fifty or something with another company?

No, I -- my comment was a more general comment.

I think we are very pleased with our partnership in I think we have to use this partnership to accelerate our mark in advanced logic products.

I think we see the results, and I think this is a good model.

I think we are, of course, keen to expand this and expand this model to other products like memories.

But my comment was a general kind of comment.

I think what I can say, that we need to accelerate the approach to this opportunity.

So by that comment, can I take it that you are at least in some preliminary exploration of possible deals in this area?

No, I didn't say that.

Okay.

And a question on currency, if I might.

You know, you had guided to a140 basis-points hit in gross margin into Q1, due to currency.

That was in your Q4 results -- at the end of your Q4 results.

Is the 100 basis points that you are commenting on today further to this?

Is that what I'm trying to say?

Have you take an 240 basis point hit on currency on margin in Q1?

No, in Q1, irrespective [inaudible] Q4, the currency factor on gross margin has been negative by 100 basis points.

This 100 basis points is slightly less than the 140 that we have anticipated entering the quarter as a combination of an average exchange rate irrespective to our expectation at 1.32, and a lower cost basis in our European during the quarter.

Okay.

So currency -- I mean with respect to your original guidance, your margin was actually helped by currency rather than limited by currency?

Correct.

Our guidance, the key driver of margin performance have been volume, the volume significant costs on the fab and price.

Okay.

So if the currency stays like right now the currency is at about 1.29 plus, the currency stays at this level, currency should not have any impact on your Q2 margin?

Especially on gross margin, also considering that, you know, our hedging policy is basically averaging a quarter rate between the actual rate of the prior quarter and the actual rate of the quarter itself, so we do not expect a significant impact of currency of our gross margin from Q1 to Q2.

Okay.

And, in your opening remarks, you had said that redeployment of the roughly thousand engineers coming out of areas like access would be into 3G and multimedia.

What, exactly, kind of product are you talking in the 3G market?

Well, maybe just a comment on my side, then I leave it to Philippe.

I said there are areas of focus, and one of the area is 3G and the application process for the cell phone, but other areas.

One is automotive.

For instance, I think we are very pleased with our performance in automotive, and frankly we have more opportunities we can deal with that we have in the model, and another one is storage, and another one is some of the products and some of the applications in MLG, so this is where we are moving, these experienced engineering resources.

But, I would like Philippe to comment on the wireless portion.

Of course the first thing we need to do is to make sure we put the right resources to defend the positions where we are strongest, to defend our positions where we are strong.

So in deployment of resources, as Carlo said, we want to accelerate accelerate on the drives.

In consumer, we need to accelerate the shift to new products and new technologies with HD-TV, with [4], and here we have a good successes coming in this quarter.

On wireless phone, what we did stop was the 2G, 2.5G chipset program, as well as stopping and ADS sales projects.

And this -- Intellicom, this is being deployed first to programs to give the perfect strategies to our partners.

You know, we have had a large business in cell phones, and we have a new of new opportunities that are requiring additional resources.

So in addition to that, we have some -- of course to put -- we have to put more resources on the application processor, which is a large hardware and software effort, but also all on the functions which represent a significant market.

I would like to mention things like BlueTooth, FM radio, wireless cell phone, and camera, where we have had very strong growth in the last two years, and we still have a lot of new markets to explore with this camera.

I have a complaint to make, which is when you decided to break up these new divisions, I actually thought it would result in a better understanding of the performance of your divisions, because I thought the breakup would be in the computer, automotive, and then the telecom consumer, but now my lumping out all together, we don't have any feel as to what is more profit and what is less profitable.

Any guidance you can give us on what you too have different operating divisions within the company, can you give us a feel for what is the differently on the automotive and telecom separately?

Okay.

This is Carlo.

Of course the aim is the one of providing you the best possible understanding.

Also consistent to first of all the reporting -- the reporting rolls and requirements, and consistently, also, with the -- I'll say easy to understand opportunities in terms of disclosing competitive information in too much detail.

We are still in a very competitive environment.

More competitive from time to time.

So you may hopefully appreciate it on this respect.

In this regard, the introductory comment on Carlo Bozotti I believe made some significant reference that it's better to economics of computer, automotive, and consumer, and all of ours remain very open with your questions in more specific detail and respects from case to case and time to time.

Okay.

Thank you very much.

Thank you.

Next question, please.

Yes.

The next question comes from [Jeremy Kwan] of Piper Jaffray.

Yes, hello.

Just a question in terms of the new resources you're allocating to each of the divisions.

Can you talk about maybe percentages, rough percentages of how much the outlook in each new business?

This is the 1,000 engineers you have.

So let me try to rephrase the question.

You want to understand of the thousand engineers how many are going to each of these families, Jeremy

That's correct.

I don't think we're going to break that out in specific detail.

Think the key idea is we quantified.

This is 10% of our engineers, and we've got obviously different needs based on existing resources, so obviously it not sprinkling them equally across the portfolio.

Of course the portion involving HP C that is not even a group, SPC is our internal definition as a sector, this is, of course, the major -- the major in terms of relocating these experienced engineering resources.

But I think it's significant, also, for automotive, it's significant for storage, and also is significant for R&D.

In maybe a follow-up then, in terms of the advance analog efforts that you're pursuing opinion can you talk about, there are any areas focused on here, also maybe in terms of ASPs versus general purpose?

Absolutely.

Absolutely.

It is a division I think is based in U.S., so a quarter of this division is in the -- in our facility in Carlton, and we group together all of this kind of, you know, special products, special products where it is within the frame of a certain application, you mentioned some, but there are others, there is a large variety of, let's say, with product functions and customizations, and this is high value products, this is covering the largest spectrum of applications, typically based either on -- by color on analog -- analog CMOS technologies.

So it is addressing a large variety of applications, but initially, these applications is also a large variety of small and given functionalities.

To wit, the customer requirements.

Thank you very much.

Thanks, Jeremy.

Operator, next, please?

The next question comes from of [Bouchay Ordy] of J.P. Morgan.

Okay.

Good afternoon, yes.

Can you hear me now?

Yes.

All right.

Can I just go back to memory products group for a minute.

Can you talk about the mix of man splash the memory product groups, and also can you talk to us about the status of your with Sanders, why it is that you are not going after and I have a few follow ups as well, please.

Well, I think that is incorporation with high NICs, and this year we are now introducing two Gigabit product at the end of this year will be a 4 Gigabit product.

Manufacturing is mostly in Korea today, and I think the model will -- that we have a ceremony for the joint venture, of course, is controlled by -- is controlled by with participation from state.

So this is the status in terms of technology is now almost all and we move in the second part of this year into the 70 nanometer technology.

So this is the status from that.

As far as the litigation with SanDisk, we have no further comment.

Good morning and good afternoon to everybody.

Yes, we have been -- we have a few on the sales in the U.S. only so it doesn't involve whatever worry elsewhere, which is in this moment the largest part of our business, which is more.

The second thing we believe SanDisk is using our patents as well, so we have taken actions as well in the U.S. against san disk.

We have won the first preliminary judgment in California, and we issue is going on.

Okay.

So how much memory products group right now is of sales?

if you -- very small.

We said that we are and I think we'll -- we provide as an aggregate our flash business.

Okay.

Fair enough.

Thank you.

Just one question on AST.

Just back to a question asked earlier.

I'm starting to under stand the significant drop-off in profitability, and if you can give thus guidance where profit is going from here, and within that answer, can you just try and correct the right pricing experience with in the quarter.

You know, if you can just talk about wireless, anything else that's of importance within that big group.

Philippe?

Hello?

Philippe?

The line dropped.

I can hear.

Can you hear me?

Yes.

Okay.

No, we have had, as I said earlier, a significant impact of the lower sales, the low Q1 seasonality, lower than we expected.

Of course, we have some manufacturing margin issue that we can correct here and there.

We have some product that will be replaced by a newer product along this year that will improve the quality of the product portfolio in this year going on.

However, the bulk of the drop in Q1 and the bulk of the recovery for this quarter and the rest of the year is going to be the effect of initial volume.

We didn't -- condition you just talk specifically about two product areas.

One is set top boxes, and also set top boxes first. [inaudible ] was talk about seeing very strong volume.

Do you think you lost market share in set top boxes within Q1?

No, I done think so.

In Q1, we -- what -- the volume which was low in Q1 for us was the set top box, while the operator business was normal was solid, and like I said earlier, we are seeing since the beginning of this quarter a strong recovery of the [inaudible ] ware and market.

As regards our market share, if we go by operator by operator, customer by customer and see our position, we believe that those days have reach this happened wall, and in we look forward, we are making a lot of design with high definition decoders and H264 in particular.

We are the only one with an HG decoder, H264, in 90 nanometer, and winning in designs with this one.

And last question, can you talk about your bookings coverage, how much of your mid-point of your sales growth next quarter is already in the bookings for the moment, just for us to gauge your book to bill, and, also, can you provide us with your forecast of capacity utilization for next quarter?

Yes, our coverage, if you compare to the mid-point, is about the same as it was last -- last quarter, when we commented our results, and we gave a forecast.

It is about the same as last quarter, which of course gives us some opportunity.

And if you look at our forecast for utilization, it's going to improve.

It is going to be about 85%, so we will have a better situation.

With this 85%, you're also looking at turns at 4.5 times in Within this 85%, what does that mean for inventory turns for next quarter?

Are you going to take inventories down next quarter?

Are you going to increase the turns?

I mentioned earlier that we expected to recover our return in our in the second half of the year on the second quarter.

We do not expect major changes in our inventory returns as a combination of the economics already discussed, and also the opportunity to prepare for the third quarter okay.

All right.

Thank you very much.

Thanks.

Operator, we'll take another question.

The next question comes from [Martino D'Ambrosi] of [Gio D'eani], SIM

Yeah, good morning, good afternoon.

My question is SG&A and R&D.

Could you give us a guidance for second quarter, and which is your view on full year basis for this to cost, sir?

And, secondly, is on the tax rate, because it seems quite clear that on a full-year basis, it's no more valid, your indication of 16, 17% tax rate.

Thank you.

Okay.

So Martino, thank you for the question on the taxes.

I like --

I know.

I started from this one, you know that.

We have some achievement to mention this quarter on the tax management, not only because of the positive impact of the 20 million of tax benefit, but also because these reverse of reserve is associated with an advanced price agreement with a -- is that the IRS in the U.S.

Over a five-year period, a six-year period, and these really provide the stability and pertaining to our tax position irrespective to one of the major positions where we do operate, and let me say, also, one eventually of the most challenging ones.

So if we give if we take out benefit from these reversals with the tax rate for the quarter, has been 16.4 in respect to the ongoing operation, and around the 17% tax benefit from the restructuring charges.

I would say that this reference point, with respect to the ongoing operations remain a firm reference point ask and a range between 15 to 18% as the normal range for ST including the one-time event, and excluding the restructuring.

The operating expenses in respect to operating expenses, you may have appreciate that first quarter take out these 24 million of one-time compensation charges that occurred in the quarter as a combination of the engineers that have already been described are substantially flat in dollar, irrespective to the prior quarter.

The dynamic for Q2 should consider that usually in Q2 we have some evolution of the ongoing evolution of labor compensation.

In terms of the exchange rate in part in SG&A we do not expect major changes.

While in R&D, due to our hedging policy, them rate of Q1 is more similar to the actual of Q4, the rate of Q2 is more similar to the actual of Q1, and based on that, of course, in the second quarter, we may have a negative hit from the exchange rate on our R&D.

So in general, I would anticipate that SG&A slightly higher in dollar than the Q4, of course, without the one-time, and I anticipate some R&D, some higher in dollar irrespective to the Q1 and I'll say that if we take our revenue guidance in the range of the mid-point, the expense is to ratio would be similar toe one of the prior quarter, excluding the one-time charge.

Of course, moving forward in the year, we remain committed to through tight control of expenses and higher sales to improve the ratio.

And thank you Carlo.

Okay.

Operator.

We'll take another question, please.

The next question is with of [Jean D'Anjou] of CMSB.

Good afternoon, yes.

Just a quick question on price erosion in Q1.

Obviously, flash, you mentioned that.

Besides flash, where do you see price erosion surprising you in Q1?

Okay.

In Q1, first of all, are affected by I would say a sort of in the first quarter, when entering with the customers into the new complex, and an additional of that also in some of the discrete, and again this is something that occurred in the memory business exercise much higher than at -- much, much higher than the average of the company.

Thank you.

All right.

Operator, we'll take one more.

So what's next?

The next question is from [Christian Parker] of Morgan Stanley.

Okay.

Good afternoon, yes.

Thanks for taking my call.

Carlo, right at the beginning of the conference call, you talked about focusing on decreasing manufacturing costs.

Does this refer only to the transition of increased production to Asia, or do you have other plans in terms of decreasing your internal manufacturing costs or manufacturing costs searches increased outsourcing?

Thanks very much.

My point was exactly this: I wanted to point out that on top of the migration to Asia, that is, as you know the mature technologies, and this is ongoing, there is also the memory activity that we want to balance better between Asia and Europe.

So this block is migration to Asia.

On top of this, we have planned, we have deployed three-year targets and programs, and I believe we have great opportunities to improve manufacturing performance in back end, and not only in Asia, but also -- but also in Europe, and there a lot of things.

There are a lot of things.

Material.

We mentioned the manufacturing material cost contained.

It is a very effective campaign.

I would like to mention also improvement in the back-end technology.

We have launched a new program on improving the configuration of most of our packages, and this will yield very significant savings.

Of course it is better utilization of our cleanrooms and our fabs.

It is a -- we are I believe we have great opportunities for improvement in everything that is -- in everything that is around yields.

I think there is great opportunities for improvement by benchmarking our [constructors]controlling all of our fabs internally, applying best strategies in all fabs.

So this is a major program.

This is a very significant opportunity for cost reduction and the size of this program, of course, is much more important than what you have in mind, for instance, at the level of the six-inch restructuring plan.

I think that another element is the depreciation charge.

I think during the course of next year, there will be a very significant -- significant reduction of our depreciation in some of our 8-inch fabs, so I think this is a great opportunity for ST, and we are focusing on this, and we want to accelerate on this.

I think this is one of the major pillars of the execution excellence campaign that I have started the day of launch, and I think is up important that we operate with a sense of urgency.

The other major pillar is, of course, R&D, is of course execution R&D.

We have a wave of new products already coming.

Philippe has mentioned the 90 nanometer products on digital consumer, but we have very interesting new products with wireless for instance where we combine in the same package solutions with other frequency ICs, discreet, passive solutions in the same package, providing a solution to our customers.

We have a new system on a chip for better storage.

All of this is coming out.

And on top of this, we want to accelerate the R&D effort, and I think it is a matter of focusing more, being a little more selective in our R&D approach with respect to both fostering introducing new product on the marketplace.

Great.

Thanks very much.

Just to clarify, intensive on the first pillar, or major strategy, when should we start to expect to see some of the benefits from all of these different projects?

Is this something to look for in 2006, or should we be seeing some of the benefits towards the back end of this year?

Thanks again?

Also this year, of course.

I think this is a progressive improvement.

We have deployed be of course target in every fab, in every plant, and this is a progressive improvement quarter after quarter.

The point that I want to make is this is this year, next year, this is a significant opportunity that we have in terms of cost reduction.

Okay.

Great.

Thanks very much.

Operator, I think that's all the time we have today.

Before we sign off, I would like to like to leave one thought with everyone, and that is that upcoming on May 16th is the field trip in New York, we've sent out invitations.

We'll be reminding you, but if you need any information, please contact our offices in Europe or New York.

Otherwise, we hope -- and all of the senior management looks forward to seeing you in New York.

Absolutely.

We'll be there.

Look forward meeting with you in New York.

Hopefully you will all be there.

with your questions.

So May 16th, we look forward to seeing you, and with that final announcement, this concludes or call.

Thank you very much

Thank you.

Thank you.

Thank you.

This does conclude today's teleconference.

You may now disconnect your lines.