意法半導體 (STM) 2005 Q3 法說會逐字稿

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

Thank you and good day to all of you.

Welcome to STMicroelectronics 3rd Quarter 2005 earnings conference call.

Today joining us in the line from ST, we have Carlo Bozotti, ST's President and Chief Executive Officer, Alain Dutheil, our Chief Operating Officer, Carlo Ferro, our Executive Vice President and CFO, Philippe Geyres , our Executive Vice President responsible for the product groups, and Andrea Cuomo, Executive Vice President responsible for strategy.

Just a couple of points before we begin with a more formal portion of our call today.

First, please remember that several of the comments that will be made today on the call are forward-looking and as such are covered by the risk factors in safe harbor language found in the press release issued yesterday as well as in our 20F filed in March.

Secondly, in the interests of maximizing the question queue, please limit your initial question today to one question and one follow-up and, should you have subsequent questions, please go to the end of the queue.

We, and all other participants on the call, appreciate your good manners in this regard.

With that brief introduction, I would like to turn the call over to Carlo Bozotti, our President and Chief Executive Officer.

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

I appreciate your interest in ST.

I would like to cover four areas in my formal remarks, including our third quarter financial results and activity by product groups, our outlook for the fourth quarter, an update on our cost initiatives, progress on developing our business, and reshaping ST's competitive position within our industry, and then we will open the call up for your questions.

Now let's have a discussion of five financial performance.

Net revenues for the third quarter increased 3.9% sequentially in line with our guidance range between 0 and 6.

Sequential sales were off, primarily reflected higher sales of wireless and computer applications.

Each product group had increase sales and an improvement in operating margins in the third quarter.

Applications for specific product groups represented 56% of net revenues in the quarter.

Application specific product revenues increase 2.2% sequentially.

Which includes a decline in the automotive revenues due to seasonality of the euro and market weakness in the U.S.

Wireless applications increased into double digits sequentially and were the key driver of sequential sales, including [inaudible] Computer applications had a good performance sequentially and year-over-year with both data storage and printers seeing growth.

Consumer revenues were basically flat on a sequential basis.

Analog consumers continue to be the declining market and our digital consumer sales were less than originally anticipated.

However, we are taking the right steps here and are seeing good traction from our new wave of high-definition consumer product offerings.

As a result, I believe our future is bright in this important segment.

Operating profitability for applications-specific product groups increased 15%, driven by good volumes and cost control.

Within the tough industry environment, our MLD group sales increased 2.7% sequentially and operating income increased 5%.

The improvement in sales and margin reflect the systemic changes that have been underway for some time to develop a more robust product portfolio.

Our focus in MLD has been on introducing systems solutions for the broad but fragmented customer base, the broader advanced analog portfolio, and finally an expansion of our industrial product offerings.

The results of this quarter confirmed the success of our MLD product strategy.

Memory product sales increased 10.5% sequentially and the operating loss was 17 medium.

Representing a significant improvement from the second quarter, specifically our flash memory sales, increased 17% sequentially.

Pricing pressure was still evident with prices lower sequentially in the mid-single digit range.

However, overall flash averaged standing prices improved in the quarter thanks to a richer mix such as our [inaudible] products.

The internal improvement efforts we have outlined in the past are continuing to progress well.

Our migration of memory production to Asia is along; our technology migration to [inaudible] is on track.

In the second quarter, the two-bit per cell production of wireless flash was 25%.

This quarter, we were at 60% and we expect to be at 80% during the fourth quarter.

Finally, our technology shrinks are moving along our planned path.

In addition to internal problems, we improve our memory products group financial performance, we continue to actively store, arrange or extend our options in order to access the best manner in which ST should generate revenue from its participation in the flash memory market.

Our gross margin was 34.1% in the quarter, at the midpoint of the previous guidance range.

While we do not like this level, we made steady progress in the quarter and expect to accelerate as we move into the fourth quarter.

Higher revenue, improved product mix, and manufacturing performance contributed to to the sequential improvement in the gross margin, offsetting father pricing pressure in memory and standard products.

Due to currency edges that matured in the quarter, none of the gross margin improvement in the third quarter is currency-related.

Turning to operating expenses, both SG&A and R&D expenses were in line with our expectations of representing a decrease in presentation of net revenues.

Our combined SG&A and R&D expenses were 28.9% of total revenue, improving from 31.4% in the second quarter and moving toward our target of below 28%.

The improvement in the quarter largely reflected cost control actions throughout the company.

In addition, we also benefited from seasonal factor, namely the vacation period in Europe.

We also made some progress in improving our capital management this quarter.

Overall we were pleased by the improvement in cash flow, in particular net operating cash flow, the metric we use for ST increased significantly from $23 million to $173 million for the third quarter.

We reduced capital expenditures in the quarter by $17 million to $234 million in the quarter.

Capital expenditures totaled $1.2 billion, so we are on track with our capital spending plan of $1.5 billion.

Inventory terms were 4.2 times this quarter, flat with the second quarter.

These are the current plans, we do not expect that we will reach, as previously anticipated, the targeted range of 4.5 to 5 turns in the fourth quarter.

However, we are still committed to achieving this goal two quarters from now.

Looking ahead to the fourth quarter, we believe that moderate industry growth will continue.

I believe we are positioning to show sequential improvement in both revenue and gross margin.

Specifically, with our present total visibility, we expect sequential sales growth of 3 to 9% in the fourth quarter.

Based upon this sales range and current industry dynamics, we expect our gross margin will be about 36% plus or minus 1%.

Our outlook is based upon an effective currency exchange rate of 1.22 per 1 euro. $1.22 U.S. per 1 euro.

Reflecting product exchange-rate levels combined with the impact of existing edge in contracts.

Now, let's turn to our manufacturing and cost initiatives.

Our cost-reduction program, focused on improvement in purchasing centralization and increased efficiencies, is tracking to plan.

We confirm our ability to reduce such costs by about $100 million by the fourth quarter this year in comparison to the ERA for the fourth quarter.

Our six-inch restructuring program is also progressing and is on the track from a timetable perspective.

As we are moving forward, the restructuring actually created some temporary inefficiencies which raised costs over the near term.

The bulk of the remaining savings, including the benefit of removing these inefficiencies, will result in savings on the order of $150 million on [inaudible] and will come after the two six-inch fabs in [inaudible] are closed by mid next year.

Our account reduction program is moving ahead as planned.

We expect an annualized savings of $90 million after the plan is completed in the middle of 2006.

In summary, our restructuring initiatives are well underway and moving ahead according to their respective timetables.

On the sales expansion side of our recovery, we are intentionally focused on reshaping and improving our position in the industry.

A key component of our effort is further developing our regional presence, particularly in China and in Japan.

We took actions this quarter on both fronts.

First, we have created a greater China region, expanding our operations in China, Hong Kong and Taiwan, and there appointed a call for a vice-president.

ST is already the fourth largest semiconductor in China, and we are positioned to serve national and local customers.

We have an incubated presence with research, design, sales and marketing as well as manufacturing operations.

With our existing strong presence, we are well-positioned to broaden our efforts to further development of our local alliances in the region.

We are upbeat about ST's future there.

In Japan, we are strengthening the organization and realigning our people to have the right resources in the right places.

After the appointment of a new president of the Japan region, we're working on stepping up the pace of our improvement effort.

We want to expand our market share in this important region and I believe we have the means to do so.

Just a few words on products.

Last quarter, I described in an expanded way the positioning of new products.

In the quarterly release, you will see numerous new design wins.

These are across our targeted market segments and include large and important new customers.

I would like to highlight new high-definition digital consumer products, Bluetooth and wireless LAN connectivity devices, 65-nanometer [inaudible] for IP infrastructure, 212 megabit flash devices and our in-check memory chip platform for DNA-based detection of bacteria.

This effort within the company to expand our new product offerings is essential for ST to begin the Company's historic performance of the industry.

I am confident that we are making good progress on this effort and it will improve performance in 2006 and beyond.

In summary, I believe we have put in place a [inaudible] market to improve the overall corporate performance of ST.

In the second quarter we were moving in the right direction but we feel signs of improvement.

In the third quarter, we have made steady progress on our key industrial and financial objectives.

We know there's still room for improvement.

We continue to execute rapidly on many fronts and I am excited about the prospect for ST which are starting to take shape.

Thank you.

I would like to answer, with my colleagues, all of your questions.

[[OPERATOR INSTRUCTIONS] Our first question comes from Nicolas Gaudois from Deutsche Banc.

Please go ahead.

First question would be on profitability within your memory product group.

Many put improvement into the third quarter from the second.

Would you care to rank for us the profitability levels you are reaching in NOR Flash between wireless NOR, non-wireless NOR, and other types of memory, i.e. [inaudible]?

It's Philippe Geyres.

I'm sorry, but we do not disclose profitability by sub-product line.

So we'll stay with the global profitability with memory.

Could you help us understand if the NOR segment is more or less profitable than MPG at this point?

We are not disclosing this.

Okay, I tried at least.

For obvious reasons, let's move on to the next question.

You seem to be getting some traction on Bluetooth and wireless LAN, could this be your largest incremental revenue opportunity in the wireless segment next year?

Could you qualify the timing of these starting to generate revenues,vis-a-vis the Nomadic and your [inaudible] that you announced a few moments ago?

Yes, indeed, Bluetooth and the wireless LAN are representing areas for growth and the real growth is starting just now, this quarter, and will continue quarter after quarter in 2006.

The advantage by far because we fell from nearly zero will be the [inaudible] segment.

In absolute dollars, it will be significant but I would say comparable to growth we are expecting in other of the wireless segments.

But we see -- it's still early.

We see a lot of traction on wireless line on Bluetooth, even more since one knows we have demonstrated and proven our profitability both [inaudible] Bluetooth.

Showing superior performance in Bluetooth and range..

The situation looks good on those two Lines.

This growth is starting now.

There are some important areas in wireless that we grow next year, but more towards the end of the year, in the second part of the year, namely our participation in a 3G-based band with an S6 solution and nomadic, the application processor.

That answers my question.

Thank you very much.

The next question comes from Matthew Gehl from Goldman Sachs.

Question on the profitability and the application-specific groups, where it did show a minor sequential increase, but looking at the comments you made about the product mix with consumer being relatively weak in the quarter, and the strength coming in computer peripherals and the wireless area, I have been intrigued why the profitability in application-specifics did not go up more because I would imagine that is a more profitable mix.

I was hoping you could comment on that and what you are expecting to happen with the profitability in that group going into Q4.

Is it potentially going to get up to the 10% level again already next quarter?

If we look at the profitability of application-specific products, it is true we have different levels of profitability, but as consumer goes down, maybe the profitability could benefit in percentage.

But also [inaudible] has good profitability and the material was not so good.

Also, when we go and compare the gross margins between applications, we may have higher valuation to the bottom line reflecting the R&D effort we decide to put here or there.

When you compare gross margin, we cannot say there is a huge difference between the application segments.

So with your expectations for Q4, do you expect a significant change in the profitability of that group?

We don't give guidance of profitability by group, but in Q4, the profitability will increase in line with the increase of the rest of the company.

Okay, a follow-up for Carlo Ferro, just on operating expenditures, could you make a comment on what you are expecting after the Q3 level looking into 2006, either in an absolute or percentage terms basis?

First of all, we're quite happy to see the 28.9% of 2003 close to our range which is below 28%.

We may expect to progress quarter after quarter to reduce effects of the ratio.

We may have a possible exception for the seasonal impact we might incur in the first quarter of 2006, we will continue to bring these down, leveraging on [inaudible] cost options, and sales growth.

In respect, more strategically, to the coming quarter, I am confident that the [inaudible] ratio will go down.

The chance [inaudible] on this point, I will share also some additional comments.

One is that in Q3 [inaudible], the expenses in dollar have been benefiting from the impact of a [inaudible].

In Q4, you may expect expenses to go up but this should result in a reducing a [inaudible] ratio.

Another technical point that I have a chance to introduce, if you don't mind I'll take one more minute to share with all, is the affects of the stock-based compensation on our [inaudible].

We have talked about the company having moved from granting stock options into granting shares.

As a part of this tuning of the compensation policy, we have been also able not to incur any charge from the outstanding stock options based on 123R.

This is a great savings by tens of millions of dollars per quarter.

Then we have the costs of the stock granted.

The cost of stock granted is in the range of $9 million per quarter on a normal and ongoing basis.

It occurs that for the combination of having moved the plan and also having enough of the granting criteria met.

So far it may have occurred that either it would not materialize, which is a pitiful outlook, [inaudible], we may incur on charging a larger portion on a given specific quarter, which might be either the Q4 or the Q1 or the combination.

I want to [inaudible] about this possible specific impact in the quarter that might be an amount to which is easy to go from zero to $17 million in the quarter depending whether or not during the quarter the financial performance [inaudible] will become probable to materialize.

Next question comes from Didier Scemama with ABN AMRO.

Please go ahead.

I had a few questions on the storage sites.

Can you be a bit more precise of the performance of the different divisions in Q3 sequentially?

You just said this morning, I listened to the webcast, that you're starting to ramp in Q3.

The question I had was, do we see that performance continued in Q4, and in 2006, or do you think that, because of the strong performance we had already in 2005, this is going to tail off?

And related to the presentation you had this morning, you talked about design wins in Bluetooth, I think with Sharp.

From my understanding, this is for a 3D headset, and from my understanding, Sharp only works with CMP for 3D phones, and they only work with Phillips or Bluetooth.

Does that mean that you have a relationship with CMP starting their?

On the drives?

We don't comment sequentially on the dealings but computer reflows did increase from Q2 to Q3 and we can say that the drive was in this trend.

Yes, we are ramping up our product and what we see here is not a one-shot increase.

We continue to enrich the catalog to have more [inaudible] with more IP from ST as opposed to traditional ST products.

So this move from [inaudible] to ASP and engineer all of our strengths and positioning in disk drives, from the [inaudible], from the preamplifier.

That gives us confidence that we'll continue to increase in dollars and we should continue to gain market share in drives in the following quarters.

Regarding Bluetooth what you're saying is correct, you can find the Sharp phone with the Bluetooth and that the chips are from the MP.

This is correct.

On the wi-fi side, Is Nokia the only customer or do you have other customers for headsets?

Nokia is not the only design win we have in the wireless LAN, we have several customers, but it is fair to say that Nokia represents by far the majority of the initial volume we are doing now.

Of the two megapixel business, do you think you have the majority of the designs there or is it also balance between you and Toshiba?

Is too soon to know because we are in the ramp-up of the volume of those models.

What is our market share, I don't know.

You said this morning something interesting, that design activity was accelerating.

I think a very large OEM was making a big decision between nomadic format, is that referring to that?

No, we don't know whether we are selected or not.

We're selected at 41 customers.

It is true that some of those customers are using [inaudible], are may have already used [inaudible].

But I cannot comment further.

Just a final question on the memory side.

Maybe I made a mistake, but your revenues increased $48 million but your [inaudible] shrunk by 49 million.

Is there something in the numbers?

What you see was a big impact of mix change, of shipping memories with better technology.

There was a significant increase that allowed us to regain margin.

Thank you very much.

Next question comes from [Rami Tomal] from [Shovo].

Please go ahead.

As a follow-up on the previous question.

Can you speak up?

We cannot hear you.

Is that better?

There we go!

As a follow-up on the question, you have four design ins.

Can you help us assess how we should look at the ramp-up of revenues there, is it Q1, Q2, Q3 of 2006, will we see anything at all in 2005?

You mentioned this morning that you were in many of the [inaudible] for IPTV.

I understand that Verizon's already started the service, SPC is about to do the same.

Should we see some revenues as early as Q4 in this field and should that help offset the current weakness of the free-to-air [inaudible] box market?

The ramp up -- in the cellphone we are going to see very small sales until we arrive in the second half of 2006.

The nomadic growth is in the second half of next year.

The IP set-up box -- there are programs ramping up in volume.

That should be significant but not this quarter.

For instance, the deployments that you are mentioning, this would really kick in for volume early next year.

If I was to look at digital consumer overall, which has been disappointing in the last two quarters, how should we look at it moving in to Q4?

What are the dynamics in this segment?

On the operative business, where we have better visibility, it is improving, steadily improving.

On the free-to-air, it's really, the market on which we have no visibility, we are trying to judge inventory of our customers, if the pipeline is too full.

We don't have this impression and we start to see some orders coming in but really we have too little visibility for me to risk a forecast.

Thank you very much.

Next question, please?

Next question is from Tristan Gerra with Baird.

Please go ahead.

Quick question on your inventory turns.

You mentioned it was slightly middle of target for this quarter.

What sector are you executing this to and will end demand be a factor?

Yes,okay, this is [David Karloff] Say that, yes, our inventory turn is 4.2, frankly, it's disappointing.

It's bad reputation to accelerate it.

And frankly how not to consider significant ingredient, a relevant ingredient that crosses the different applications.

The reason is also based on, first of all, the pairing of Q4 this season, then meeting effects related to customer demand and level of services that, with the theme of our customer, may require a higher level of inventory which is very solid, guaranteed to be sold.

Also, we have to mention that these six inchers -- the inventory is temporarily negatively affecting performance.

We had some overstocking in six inch due to the fact that the manufacturing clothes are not optimal and secondly, when moving qualification from one fab to the other, we have many security overstocking, to make sure we serve the customer.

I would say that more of these general reasons and also duplication is it falls with specific applications related issues.

Along the line about your comment about customers requiring -- some customers potentially requiring a higher level of inventories, is any area where you see the potential between inventory [inaudible] and OEM at the product level, or do you see an area where there is actual inventory [inaudible] and have you seen any change in your [inaudible] so far in the quarter?

The problem's with distribution at this point, but it's only distribution.

I think that the visibility that we have is that the inventory correction phase has been completed, but beyond the reflow from the distribution channels, from the distribution channel is still relatively weak.

We monitor our mass market, all the revenues with the old customers that our not in our top 50 list, we are still far from our record year, but we expect now to the second quarter of last year.

I think this is becoming an opportunity because we expect that the distribution channel will start more aggressively to replenish the inventories.

On the customer base, it will depend a lot of on their performance at the Christmas season.

So far there is no evidence of accumulation at all.

I think the demand is very strong.

We have strong pressure to manufacture more and more rapidly.

On the mass markets, [inaudible] products, industrial, etc., I believe that we have an opportunity to do better with the replenishment of distribution inventories.

We need to take into account that there are some vulnerabilities if some of our major accounts will end up accumulating inventories during the Christmas season.

But of course we do not know that.

We will know better at the beginning of next year.

Last question, could you talk about the mix you expect to generate from [inaudible] the end of this year and what this represents by the end of next year?

We have two families.

One family is memory.

One family is -- we have started manufacturing and we have production in our other center, and this is the NOR activity.

Our memories today, all of the production, all the production which we do on NAND products is 19 nanometer technologies and the dysfunction here on both families, NOR and NAND, will be 19 nanometer technologies [inaudible].

Particularly wireless, particularly wireless products that are now running at two bits per cell, 110, or 150 nanometers, will move aggressively to 90 In Q1, and Q2 next year.

The NAND, in the course of next year we move to 70 nanometer.

If you look at the logic, the plan is that by the end of, I would say Q1, latest Q2 next year all our activity will be 90 nanometer, so only some limited automotive activity will remain at 150-nanometer and we need to do more of this because the demands on nanometer products is increasing.

We're also using [inaudible].

Particularly in the business of consumer areas.

We have started with a wave of new products in the fourth quarter in mass production.

We have important products that will come out in Q1, Q2 next year and we expect the volume will be Q3, Q4, more Q4 I would say in 2006.

And on both memories.

In two words we're comfortable with the 90-nanometer and 70-nanometer with we have done in the past years.

We will have to change the mix of some equipment but the fab is compatible with that and we have the opportunity to expand and grow to the capacity on both 90, and 65 and of course we have the opportunity to buy more from our [inaudible] partners.

Thank you.

Next question comes from [Titus Mences] with Jefferies.

Please go ahead.

Good afternoon.

A couple questions if I may.

One on the MLD business.

Could you give us an idea on when you could see a possible crossover between your NAN Flash versus your NOR Flash business?

And secondly in the MLD business, if a worst-case scenario, the MLD business does not start to generate a profit despite topline growth, what options have you looked at in terms of divesting or doing [inaudible], have you looked at any other options at present?

[inaudible], MLDs were microlinear [inaudible.

In memory products group.

MP3, sorry.

The way we put it is not to say when we will see a crossover.

The NOR has a lot of room for growth and the market for NOR will continue to grow in operation.

The NAN Flash market is also growing -- in our plan, both continue to grow.

The evolution of our strategy depending on every color --

There is a strong commitment, first of all, to be profitable.

This is not far away.

Just next quarter.

Back to profit, which is good.

Also, we expect that three areas of extreme focus: number one, on the two bit to cell conversion, number two on manufacturing in Singapore, and number three, a very special effort on wireless.

Our main interest, for instance, in NAN, is the mass storage, the mass memory, the capacity of swaps.

With this strong focus on embedded solutions for wireless, on Asian manufacturing and conversion to two bit per cell, we expect to generate positive cash flow from this family during 2006.

Last question regarding migration for the memory and logic in the middle of next year.

In memory, we're looking for 70-nanometer on the NAN, and logic going to 65-nanometer, have you already put in place the new machinery required for the migration which could be used beyond that for the next node as well, have you made orders for that equipment, particularly on the front end line area?

If you look at our [inaudible]technology, the 65-nanometer node is in manufacturing.

We're doing product in a surprising stage and are ramping up in less than one year from now, for logic, so the equipment is in place and this will continue to expand the capacity, mostly on 65-nanometer.

For what regard, 45-nanometer, the equipment for that, already in our central R&D and we are developing the 45 nanometer process on the generation of equipment but it is still R&D equipment..

We have not moved that the the manufacturing area.

This will be 18 months from now.

So for a name on the equation, for your 65-nanometer, either logic or memory, would you be using a 248 phase shift or would be going direct into 193 dry type of machinery.

These are very specific questions.

On a global basis, the work we need, what we need for the 19 nanometer production NOR activity in Singapore is already establishing the fact.

We are running out of technologies but what the 19-nanometer technology will run on the same specter equipment.

I would like not to mention what equipment.

When moving the NOR Flash activity from 19-nanometer to 65-nanometer and when the activity will go from 90-nanometer to 70-nanometer and then 60 with the shrink, we would need another generation, but not the immersion.

Thank you.

The next one.

Next question comes from Stewart Adrian with Morgan Stanley.

Please go ahead.

Can you hear me?

Just a question for Carlo Ferro.

On the cost reduction programs, if we look at the purchasing product and GNA chart, I think when you originally set up the target for $400 million you basically said there would be a heavy skew towards the fourth quarter in terms of when you would realize these cost savings.

But as we have gone through Q2 and Q3, you have come in ahead of what we were expecting but you have kept the total unchanged.

Do you think that total now for that particular project looks conservative or is there a finite amount of cost cuts that you can do within that group?

Well, it's done for this year, we'll start again first of January next year, we launch another --

You have a --- a catch -- on the charts.

First of all, the fact that we are absolutely on track on delivering the $100 million savings on a quarterly basis.

This is the fifth one of our six packages in terms of a fine line I believe is also good news and delivering the completion of the program in a couple months we have delivered the expected savings.

And then [inaudible], of course this is not restraining you from further development causing the amounts of the size and overall expectation may be part of all the ingredients in our financial dynamics or we may consider again a specific item to look at individually.

What is important is that this is somehow completed.

In the third quarter, we made progress in part of this program and also somehow in the six incher and it is important in my opinion that all of these benefits that results in the third quarter from this program, we see them in the gross margin and operating profit evolution quarter after quarter.

We have been, even with you three months ago, discussing about the factor -- [inaudible] -- this program used together to [inaudible] pressure and the second quarter is not the evidence.

In this respect, hopefully you'll see in the third quarter this is very evident.

An extension of that, looking into the first half of 2006, do we expect to see sequential benefits from the cost side, helping us out on gross margin, or because the 6-inch is really going to step up, it looks like Q3 of 2006, are we going to go through a one to two quarter period where the cost savings are relatively neutral and then we start getting the benefits again middle of the year?

I would be more inclined to suggest that the bulk of the benefits in the second half of 2006, in the six incher restructuring, we're now facing the situation of a plant which is well-accomplished in transferring the wafers.

This is done by more than half of the expected quantity.

Or whether the savings are in fact somehow mitigated by the cost of inefficiencies -- [inaudible], This will be closed by the middle of 2006.

In this respect, you may not expect any significant change for the next couple of quarters.

Maybe in the second quarter but the [inaudible] from Q3.

About the comment you made about the head count of restructuring, I agree with you, that is more than additional savings in the third quarter.

One clarification, on the NOR Flash business, can I confirm that you are thinking more strategically about this business?

Previously, you have said you would have some sort of decision as to how to progress before year end, is that still the plan or has that changed?

It's still the plan.

We come back I believe on this before the end of the year.

I think there is a condition for us in trying this business.

There are two things that are extremely important.

Number one, I think that we want to generate revenue from this business.

Very strong point.

Second point, this business is very important for our wireless presence, and we're convinced that these are intensifying our efforts in technologies shrinks, migration to the two-bit per cell, and relocation to Asia, or partnering with other companies.

We'll achieve the financial performance and we will maintain the focus on the wireless applications, which is the most important area of focus for NOR Flash.

Thank you very much.

Next question comes from Cody Acree with Legg Mason.

Please go ahead.

A quick follow-up on Carlo's comments on the operating expenses.

You had a nice absolute decline this quarter, sounds like they're going to increase absolute dollars to come down as a percentage in Q4.

Do we see another period, maybe not in the first half, maybe the second half of next year where we can actually see not just the decline in operating expense percentage but absolute dollars operating expenses?

This is a mismatching.

Your mother did not have a chance to discuss specifically about Q4 when discussing the second quarter results.

As usual, quarter after quarter, we discard the trend.

In one of the next conferences I have a strong hesitation of our having to go down in absolute dollar.

Can you also talk to lead times?

You talked about manufacturing inefficiencies.

Has that caused any delay in lead times that have caused any issues with supplies from your customers?

I don't remember we talk about manufacturing inefficiencies related to --

The 6-inch?

No, we talk about the situation that is becoming more difficult in the past that we are closing.

We are starting to unload the cost in this case, European fabs, is increasing and washing out the advantage that we have in transferring the production to Singapore.

In terms of the time, today, one of the opportunities for improvement that we have is to better load our fabs.

We're not yet in the condition to completely load our fabs.

This is an opportunity for improvement.

We are relatively reactive in terms of leadtime performance.

If you take the 16-inch, in particular, we are in a way trying to protect our customers, building up European wafers inventory before we relocate the production to Asia because we want to prevent any kind of problem to our customers and this is an aggravation in terms of inventory stock turn, but we to this purposely because we want to protect particularly our customers and the inventory is done with European wafers and then we will reduce this once the production is absolutely safe and smooth in Singapore.

Just for your information, in Q3, just to give you an idea, our [inaudible] fab 6 inch, were far from being situated, we went to 80%.

We have plenty of capacity.

We were talking about inefficiency because we have some litigation.

On that point, you have given in the past utilization rates, you mentioned different levels of manufacturing.

Can you give us that this quarter as well?

In Q3, the 6-inch was 80%. 8-inch was 88%.

When we talk about this number, we are comparing ourselves with [inaudible] capacity which is a kind of ideal situation.

In Q4 we are planning to increase to about 85%, 86% in 6-inch and 88% in 8-inch.

Thank you.

Next question comes from Brett Carroll from Lehman Brothers.

Please go ahead.

Good afternoon.

Quick question this morning, within MLD during the presentation, you spoke about product innovation.

Did you say ST was on track to reach 20% EBIT margin in the near term?

Would that be possible in the first half of next year?

Talking about MLD?

Today we can say we have about 50% on this group.

I think I have to say we do this despite, number one, a difficult market environment.

I already mentioned the situation in distribution, which is not brilliant in terms of other entries.

We are running below our record sales in the mass market by far, and despite this and despite also that the MLD participating into the 6-inch restructuring, in the middle of the restructuring, despite all of this, we have today 20% run-up and I think that [inaudible] is making a special effort to to introduce rapidly a wave of new products in the area of advanced analog.

We have 85 new products.

We are making this new products for [inaudible] application, industrial products, some new microcontrollers.

There is a lot of effort to boost innovation and we're very confident that this is and will remain a very strong asset for ST overall.

Also, the opportunities, market share, M&D is the group that if we look at the server markets that we serve, M&D is the group with the lowest market share in the company, in our company.

So we need to be more aggressive in our sales and marketing organization in selling more of these products.

As a follow-up on flash, would shrinks down to 45 nanometers all be manufactured on 8-inch?

That's the plan?

This is the plan today.

I think that our 8-inch facilities in Singapore is the most modern facility in the company, the last 8 inch fabs that we have developed.

It's the most modern 8 inch fabs, of course.

And we do not plan to make NOR memories, neither 65 and we are really coming to the conclusion that those at 45 will be 8-inch.

Thank you.

Next question is from Karsten Iltgen with West LB.

Please go ahead.

On the cash flow, you said earlier this year that you might invest some $250 million into an equity investment business, can we see this in the cash flow?

Is it still to come?

What happened to that?

Our commitment to for our capital injection in the joint venture, for manufacturing together, the product in our advanced technology involved 8 inch and 12 inch is $250 million.

I make this introduction to make sure we're talking about investments in a deal with [inaudible] and not at all investing into the [inaudible] Out of this $250 million, so far we have injected $25 million that are already incorporated in the cash flow in the second and third quarter and we expect to complete this capital injection by the end of 2006 on a quarterly basis to depend on the timing of the ramping up the installation of the [inaudible].

I would like to point out that when we talk about our cash flow objectives and when we mention that the company intends to continue to generate that positive grow, that includes this cash flow.

So it is safe to say your earnings are somewhat slower than anticipated earlier this year?

Are you asking if this is -- the speed of the investment in line with our original expectations?

Yes, basically it is.

There was a delay.

When comparing the amount, please consider that obviously there is another capital [inaudible] which is comprised of injection, comprised of the third party, is comprised of the arrangement on announcing the facility with the local Chinese authorities, so that it would not be represented based on $25 million, any assessment on the stage of these initiatives.

The stage of these initiatives is the one in the phase of facilitizing the fab and is substantially on track with the original plans.

Thank you.

Next question comes from Jeremy Kwan with Piper Jaffray.

Please go ahead.

In terms of the landscape in Asia, please give us an update there, specifically within our power analog industry?

I have not understood the question.

Can you repeat?

Speak louder and closer.

A little hard to hear you.

Please try that again.

Wondering if you can give us an update with respect to the competitive landscape in Asia, specifically from power analog and discreets.

Have you seen any shifts or changes?

Yes, the products, we stopped seeing some Chinese suppliers coming into the picture.

For example, as far as we are concerned, we started seeing on the low end.

Some competitors coming there.

We're not sure about quality, but the prices, this is for the time being on the very low end product.

You mentioned some additional investments in China.

On the research side, can you talk about what areas, is this on the design engineering side or is it on field applications side, and if it is design, can you tell us which areas it is focused on?

We have already design centers established in China, mostly in [inaudible] and Shanghai.

Our plan is to continue to grow in product design, also in application.

Application of allotment and supports.

The areas, of course, consumer, Telecom, also Shanghai, we are also a strong center for industrial and microcontrollers in Shanghai.

The wide variety of missions.

On top of the traditional things that would be a strong drive in our [inaudible] on automotive and MLD and also.

Traditional was more consumer.

It would be a strong drive in Shanghai to post MLD and automotive.

I'm talking about product designs.

One final question in the automotive segment, it looks like growth there, on a year-to-year basis is decelerating.

Can you tell us when you can expect to see an inflection point in terms of free acceleration in year-to-year growth rates.

Already in Q4 we should see some increase.

We have two things behind this.

Number one, the growth of the market to is steady.

The growth of the market share, the increase of market share year after year, we've been sharing them with you.

We have also some seasonal effects and cycles to the markets.

The last quarter was not good.

As you know in particular in the U.S., but overall we continue to be very considerate to both in the markets and in the position in the market.

Thank you very much.

Andrew.

Next question comes from William Conroy with Sanders Morris.

Thank you for taking my questions.

One more on the transition of production over to Singapore.

It is a nuance.

How fully qualified are the products that were made in Castelletto, at Singapore, so not the transition in production, but the qualification in Singapore.

Are you at 100% at this point?

Not yet.

If you talk about the qualification, we are very close to 80%.

But the problem we have is adding some delay.

It's the fact that not only our customer is supplied by us, but also the customer of our customer, and here I am talking about mainly the automotive market.

All of our products are qualified and we have started the possession in Singapore.

On the volatility market, basically going to take another six months to eight months before we get the final qualification on both of our customers and the customers of our customers.

That helps a lot.

Within MLD, can you discuss a little bit lead times and pricing.

Can you give us some color on that?

There is no specific trend.

We don't see a shortage of capacity.

There are no abnormal times and on pricing, price pressure like always.

But especially more in some low end commodities, with some new entrants trying to take some positions, we may see a little more pressure.

I would say business as usual.

We can send much more of these products.

We would sell much more.

I will mention that we are far from our record sales in the mass-market in Q2 last year.

There was a phase where inventories of our distribution channel was too high, now I think the correction is done.

It would be the phase where there will be an acceleration of the replenishment of those inventories.

This is more a traditional portion of this business.

What is nice is the opportunity to have much more on high end products.

With high end products, I mean advanced analog.

We have established -- we have now three product divisions inside MLD group working on linear and advanced analog.

We have a standard linear division, industrial products division and we have an advanced analog division.

So it's a major effort.

We are hiring and putting in place more resources for these three divisions to accelerate their effort in this domain.

The same for microcontrollers.

We are working on 32 bit solutions.

We are working on a low power, 8 bit solution.

This is the opportunity, the real opportunity to improve the product with much stronger focus on the high end.

We're starting from a good base because in a difficult market environment we have started from 20%.

We can do better.

Thank you very much.

We have time for two more questions.

Andrew?

Next question is from [Cindy Fishpond] from [DKW].

Regarding the consumer markets, you had some slightly weaker growth in the third quarter, can you talk about what is happening in the fourth quarter?

Is what you saw in the third quarter a result mainly of what has been happening in the box market?

Are there other factors involved?

In the third quarter we have seen continued weakness in the resale of the box.

We thought we would have some orders that did not materialize.

We also saw in the third quarter the weakness in the traditional analog TV market.

In the fourth quarter, this quarter, we are seeing, we already saw in one month, a good level of entry for immediate delivery.

The analog TV is benefiting from good year-end conditions.

While retail, [inaudible] box continues to be at the same level.

However, in the [inaudible] box domain, we start to see the benefits of the new programs and we are in Q4 already ramping up in volume in high definition products.

Will you see an impact on your ESP in the consumer market from the [inaudible] products in Q4 itself?

Oh, yes.

In Q4 we start to see volume shipments of products and the mix is better.

There has been -- some of your competitors in the market have claimed to gain market share against you in the operators.

Is this to some extent true or is it just the end market which has been responsible for the weakness?

If you take the list of all the operators, there are some points at which we may have lost market share and we have gained some others.

It depends on the models and the quarters.

Globally, our market share in the Operator market remains high, remains about 50%.

It is true that some operators like DirectTV that introduced programs to have more diversity of their semiconductor suppliers, but that is some other Operator in particular in Europe, ST has gained a lot of share, gaining a lot of share in the Chinese cable market.

Overall, in the Operator business, we see continued solid market share, about 50%.

On the H.264, the same operators will be moving to H.R. 264, do you see the same level of penetration with those operators or has anything changed?

In H264, when we go to HD, H264, it is a new wave of products.

It's like ten years ago we introduced the Mpeg 2.

Today we see the market introducing HD with 264 with VC one.

This is a new wave of products, a new way of designing.

It is well positioned, ST is today, the only one in volume production in 19 nanometer with a one-chip capable to decode HD 264.

Clearly we are benefiting on this new wave of products to gain design wins in the traditional operators -- satellite, cable -- as well as in the new markets.

Some countries are deploying 864 and also --

Thank you.

Last question, Andrew?

Last question from Stephane Fraenkel with Oddo Securities.

Please go ahead.

My question has been answered, thank you.

I guess we will take, if there's anyone left, since Stefan was gracious enough to give us his question time, we will take one more if you have someone there Andrew.

Just one moment.

Just one moment, sir.

Just one moment.

We have a question from Guenther Hollfelder with HVB.

Please go ahead.

I have one question concerning the reaction of the depreciation you are expecting for 2006 and 2007.

Which of your groups is actually the most profiting with regards to the margins from this reduction?

Good question.

What they have in front of me --

The application of specific groups is a difficult search.

Frankly, it is across [inaudible] and is across all digitals.

As you know, this is in the year 2003, in the year 2000, probably one in comparison, how said that the group's have been at the time equally bullish to stay in the margin the groups are today equally benefiting from this capacity.

I don't see significant difference in this respect.

Thank you very much.

This concludes the time we have available for our conference call to discuss the third quarter 2005 earnings results.

We want to thank you for your participation and remind you that investor Relations team remains available on a global basis to answer any follow-up questions you may have.

We will disconnect at the source.

Thank you for your time.

Goodbye.