意法半導體 (STM) 2006 Q4 法說會逐字稿

Hello and welcome to the STMicroelectronics fourth quarter 2006 conference call. [OPERATOR INSTRUCTIONS].

I would like to turn the call over to Mr. Stan March Vice President, Investor Relations for STMicroelectronics.

Mr. March.

Thank you Vicky, and thanks to all of you for joining our conference call today to discuss STMicroelectronics fourth quarter, and full year 2006 financial results.

Joining us on the call today, and hosting the call from Paris today, is Carlo Bozotti, our President and Chief Executive Officer.

We have also -- joining Carlo, Alain Dutheil, our Chief Operating Officer, Carlo Ferro, our Chief Financial Officer, and three other members of our Executive Committee.

We have Tommi Uhari, who is representing the product Groups.

We have Carmelo Papa, who is representing the Industrial and Multi-segment Sector, and we have Andrea Cuomo the Chief Strategy Officer.

Just like to make a few announcements before we begin.

First of all, I think all of you know that we are going to try to work through as many questions as we can, so please keep your questions to one with a quick follow up.

And if you have subsequent questions please re-enter the queue.

We should be able to get through all the questions, given that this is a follow-on event to our earlier conference that we held here in Paris.

And separately, but importantly, you should also note that several of the statements that we've made today are forward-looking and, as such, are covered by the risk factors and other items that are covered in both our press release as well as in our regulatory filings including the 20-F.

So with that bit of administrative background, I'd like to turn the microphone over to Carlo Bozotti for some introductory comments.

Carlo.

Thank you Stan, and thank you for joining us to all of you on our conference call today.

I would like to focus my remarks on three main areas.

First, the current market trends and the way in selective key markets we serve, and the impact on our fourth quarter and first quarter outlook.

Secondly, the substantial progress made over the course of 2006 to strengthen ST.

And finally, I would like to share with you our road map of 2007.

So let's get started with the review of the environment and our fourth quarter results.

Looking first at the semiconductor environment, we did expect to see a moderation and correction in the market.

We indicated last October that our sequential growth would be below historical levels for the Company, with Wireless and Automotive sales below normal seasonal trends.

We expected Automotive would be affected by market weakness, particularly, in the United States, while Wireless would suffer from a product mix towards the low end.

This was indeed the case.

However, these trends were more pronounced than we had anticipated.

In particular, our Wireless business came in well below historical seasonal patterns, leading to a sequential revenue decrease of 6.5% in Telecom.

As a result our net revenues for the Company decreased 1.2% coming in at the low end of the range we had communicated.

On the plus side, our consumer results were pretty good with sequential growth of 5%.

Here, I would like to point out that Q3 is normally seasonally stronger than Q4.

This year, however, our Q4 sales were higher, demonstrating the good acceptance of our new products and improving position with selected customers.

Industrial and Computers were up about 2 percentage.

As anticipated, Automotive was flat compared to normal seasonality for Q4, which generally shows sequential improvement over Q3.

I believe having the global presence with Automotive customers helped us, as weakness in The Americas was to some extent mitigated by a better automotive environment in Europe and in Asia.

Lower than expected revenues, and the less favorable Wireless mix put additional pressure on our margins and operating performance during the fourth quarter.

However, despite this sales performance and a tougher currency environment, we did see sequential expansion of the gross margin to 36.3% due to our cost reduction activities we have shared with you in the past.

The resolution of a tax claim benefited net income in the quarter also.

Turning to the first quarter, let me begin by saying that we see a continuation of the market correction in some of the major application we address.

And the level of this multi-quarter correction is somewhat higher than what we had expected.

As a result, our first quarter revenue outlook assumes a sequential decrease of between minus 3 and minus 11%.

Looking to the full year 2007, we believe that the semiconductor market should continue to show year-over-year growth, estimated in the range of 6 to 8%.

But we believe it will be back-end loaded compared to the quarterly trends of 2006.

Essentially, 2007 is to some extent the reverse of 2006, with an expectation of a softer first half, and strengthening in the second half of the year.

Now what is ST doing to address the situation?

Our key focus in our management is on managing the absolute level of our inventory, and this is a top priority in the first two quarters of the year.

We finished 2006 with inventory about $50m higher than we had at the end of Q3.

Half of this was exchange rate related, and the other half arose from revenues coming in at the low end of our outlook, compared to the mid-point.

Doing some simple math, revenues were lower by about $80m, currency added $25m, so our efforts with factory loadings and closing, certainly helped but not sufficiently.

As a result, our revenue outlook and inventory growth, our gross margin in Q1 will reflect unfavorable fab loading conditions, leading to a gross margin expectation of about 35, plus or minus 1 percentage point.

Now, in spite of the weakness in the fourth quarter, ST delivered strong year- over-year improvement in financial performance, with revenues up 11% to $9.85b, driven by targeted key accounts up 48% year over year and by our mass market efforts, or sales outside the top 50 customers, which rose 17% over 2005 levels.

Regionally, sales in Japan grew 31% in a local market that was up 7 to 8%, while Greater China was up 16%.

In summary, ST gained market share in 2006.

Operating income increased by $433m to $677m, net of other factors 37% of the $972m in incremental sales achieved in 2006 [if] the [EBIT declined].

Net income was $782m compared to $266m in 2005.

And ST generated over $650m in net operating cash flow during 2006.

Looking at the key operating metrics gross margins and -- gross margin expanded 160 basis points.

Operating margin was up over 400 basis points.

Operating expenses improved to 27.7% of net revenues under our 28% target level.

We improved the operating performance of each our major product groups and RONA improved to 8.8%, substantially doubling from the level in 2005.

So the signs are clear.

Our product portfolio and marketing strategies, as well as our cost restructuring initiatives, are delivering results for ST and are helping the Company better navigate the current market correction.

Overall our market share is growing, our financial performance is improving, and our balance sheet is stronger.

Now, before opening for questions let's talk more broadly about our business objectives for 2007, and the continuous progress we plan to make, notwithstanding some negative headwind.

In early December we announced a corporate reorganization.

As a result, on January 1, 2007 we have organized our NOR and NAND Flash business into a standalone segment.

Further, we are moving ahead on creating a separate legal entity in connection with our strategic repositioning of this business.

The Flash Memory Group represented 16% of net revenues for 2006, and with the first quarter we will provide operating data.

We are also driving a significant reduction in our capital intensities.

This is visible, not only in our 2006 results, with our CapEx to sales ratio down to 15.6% from over 20% just a few years ago, but also in our guidance for 2007 spending.

Specifically, we have set our initial capital expenditure budget for 2007 at approximately $1.2b compared to $1.5b in 2006, representing a 20% reduction.

We have initiated a new CapEx to sales ratio target of 12% through a combination of a less capital intensive product portfolio, increased usage of foundries for non-proprietary technologies, and the optimization of our manufacturing facilities.

We are confident we will reach that goal this year.

Our product portfolio continues to strengthen, and in many ways it is the most critical effort we have underway.

I believe we are developing the strongest pipeline of new products in our history with the important implications for both our market share and margins.

As you know, we have recently reorganized our largest segment, ASG and IMS, and strengthened the management of both.

I would like to spend the last few minutes of my remarks focusing on the changes and emphasis we are making in these two organizations.

As an example, looking at our business units that participate in a digital consumer segment, we can see the improvement in profitability and financial return from [investing] in each quarter of 2006.

From loss making in Q1 to attractive financial performance in Q4, the primary driver of this improvement has been the new generation of products for the high-end definition market.

The same sort of initial loss making when starting the business, to sound financial performance trend, is likewise seen in computer systems, where our new products effort in printers are also paying off.

While these types of improved results were largely obscured by the Wireless performance in the 2006 fourth quarter, they are real.

And in the case of Wireless our new products from activity for multimedia and for the 3G base band are ready, qualified and prepared for the market [resurgence].

For the industrial and multi-segment sector we are planning to build on the successes of 2006 sales growth of 19% while maintaining a RONA over 20%.

Further evidence was seen in the ranking of our industrial segment that grew to number one position in the industry.

Advanced Analog and [media] sales grew faster than, and has a superior financial return, and there are still many opportunities to realize here.

In summary, looking back, the inflation point for ST began in mid-2005, as our efforts started to result in a reversal of our market share losses and the commencement of our market share gains. 2006 was a period of hard work, diligently focused on strengthening all areas of the Company, resulting in stronger new growth and earnings improvement.

Looking ahead, 2007 is poised to be a year where ST's longer-term potential becomes more evident and visible.

Now let me stop, so my colleagues and I can take your questions.

Thank you.

Thank you Carlo.

Vicky, if you would assemble the question queue please, we'd like to begin as soon as possible.

Thank you. [OPERATOR INSTRUCTIONS].

The first question is from Mr. Nicolas Gaudois, Deutsche Bank.

Please go ahead sir.

Yes, hi there, good afternoon.

My question will be on margins by mix.

If I look at the current cycle it seems like you effectively have peaked here at 46.3% in Q4.

If I look back at 2004 the peak was 47.9% for the last quarter.

And when looking at MPG within this period of time, we've got broadly a business which is [either] on breakeven.

So, it's difficult to rationalize the fact that margins are lower, despite cost cutting only because of Flash.

Can you give us a bit of clarity, in your view, why margins are still [really lower] in the current cycle, despite all the efforts you've made since the first restructuring in September '03?

Thank you.

Okay, Carlo Ferro will take your question.

Hi Nicholas, good afternoon.

Your question at the end it was on the year-over-year dynamic of the margin.

And, of course, we are not completely happy about the progression from Q4 to Q4 or, if you wish, similarly the progression from Q1 '06 to the mid-point of our guidance for Q1 '07.

We have made significant initiatives in order to mitigate the current exposure.

And you have noticed that we are not any longer making a point on a few percentage points of exchange rate volatility quarter after quarter.

However, when comparing these two periods we have to take into account that in both Q4 '05 and Q1 '06 the exchange rate was at 1.20 and today it is -- been 1.28 for Q4, 1.29 is the reference point for our guidance for Q1 '07.

And this is a 7% swing, and the 7% swing regarding more than 1.5 of impact on our gross margins.

Of course, having said that, there is a sign of some progress from the 35.4% of Q1 '06 to the mid-point at 35 of this current quarter [of our better] -- the Q4 '05 improved the Q4 '06.

Another key [calculization] are the manufacturing performance.

In the manufacturing performance the margin [wholly detracted the expected savings of the values of the restructuring initiative.

However both the Q4 '06 and Q1 '07 are heavily affected by cost of our situation.

And I would consider approximately 1 point of effect from -- or slightly less than 1 point of negative effect from the [saturation] in this respect.

Your question what are the [companies] doing on these specific respects.

May -- I have also announced where [sure] Carlos addressed and other questions will address, about the mitigating of our capital expenditure.

We have not expressed the CapEx guidance at $1.2b are significantly below the historical record of the Company.

And, of course, [getting] overtime makes a difference in our manufacturing machine that, could avoid in the future a major hit from the saturation as we have incurred in last quarter, and we are incurring to a certain extent also in this current quarter.

In respect to the product portfolio, there are many various items for digital and spends for sure.

During the conversation we will address what is very evident in our number is that, the Flash business is, as we have anticipated, diluting.

The overall gross margin or ST are significantly diluting the overall gross margin of ST.

Okay, thank you very much Carlo.

Just a quick follow up as well for Carlo, Carlo Ferro.

Could you put some guidance please on operating expenses for Q1 and also [which would] develop for the rest of the year?

Thank you.

Yes, sure Nicolas.

When we talk -- just address a similar question three months ago we had anticipated that some increase in the dollar amount of [effects] from Q3 to Q4, and I would say that actual number has not realized exactly as expected.

To notice that, I believe the actual number is perfectly in line within the average of the [how say, motives] of analysts that I am familiar with.

Of course, the top line hit, the OpEx to sales ratio, 28.6% in Q4 is above our target.

And this is only driven by the top line.

Moving forward, I would expect that in Q1 '07 expenses in absolute dollar, of course, after the [preferential] rate will go slightly down from -- sequentially, from Q4 '06 to Q1 '07 there will be slightly down in absolute dollar.

And I would expect that as the revenues will recover, and this is likely in second quarter, we will be back below the 28%, which is our target.

And our plan is to have a fiscal year 2007 with OpEx to sales ratio overall within our -- or below our 28% target, progressing quarter after quarter, and by [progressively] leveraging on and the revenues growth, while continuing to tightly control the expenses in absolute dollars.

Is this the clarification in absolute terms '07 versus '06, you should see this how much, or what do you think?

Not so -- how say that on the overall we are also, in the end of January on the possibility to continue to [modulate] 22-- our expenses trend, especially in the second half of the year.

So, in this respect I would prefer to remain within our objective, which is the one of keeping for the OpEx to sales ratio at or below 28%.

Okay.

Thank you very much Carlo.

Thank you Nicolas.

Okay, I think we are ready for the next question please.

Next question from Mr. Amit Kapur, Piper Jaffray.

Please go ahead sir.

Great, thank you very much.

Just to -- given the shift that we are seeing towards more low-end phones in the handset market, I was wondering do you have any plans to shift your product development to further address that market.

Well, I think it's a question that will be taken by Tommi Uhari, General Manager of our MMC the Mobile and Multimedia organization.

Hello, this is Tommi Uhari.

So, our product portfolio is very much geared towards succeeding with the higher end of the mobile phone product portfolio.

We don't see the increase in the [reductive] share of the low-end market changing our strategy.

And that is mainly driven by our understanding that, in the higher end, the margin opportunities are also significantly higher.

In the low-end space we are, of course, also enjoying some significant business with the designs that we have in that space.

But the bulk of the new investments that we are making here are gearing towards the mid and the higher range of the market.

Great, thank you.

And maybe as a quick follow up, if you could talk about your outlook for the 3G handset market during 2007?

I think, overall, that we've seen market volume growth estimates, on the level of sales to market, market [this year is] around 100 -- sorry, for '06 is about 100, '07 would be in the level of 150m.

Let's say we are quite comfortable with that estimate.

And we believe that, due to our relationship with Ericsson Mobile platform our absolute share of the business that we can turn from that market will increase significantly towards the end of the year.

Great, thank you very much.

Next question please Vicky.

Next question from Mr. Didier Scemama, ABN Amro.

Please go ahead sir.

Yes, thanks for taking my question.

I think I am going to remain on the Wireless theme.

Two questions.

First of all, can you maybe give us an idea, Tommi, about any plans you may have to develop a system solution for the 3G, 3.5G market, i.e., you own base band, with your own [ESP], your own software, as opposed to using the [AMP] software?

That's my first question.

And second, looking at the broad trend of the handset industry where you've been relying quite excessively, in fact, on Nokia [SX] in the RF and palm hand management market.

What is the chance that, over the next three years or so that market goes away?

And the role of ODM increasing you are not able essentially to address the opportunity that Nokia may address, may outsource more phones to ODMs?

[This is] my first comment on our own plan for the chipset on the 2.5G and 3G.

So, basically, currently our strategy is built that -- on working in a close partnership together with our main customers.

And we think that with the 3G market being quite captive towards the platform players that are in that market, we believe that this is a very sound strategy.

Like I already commented on the low-end handsets, I think we are seeing a similar phenomena on the 2.5G, so that will be a very [competitive] market, where the margins will be quite a challenge.

So, our strategy here is to continue with the current customer arrangements we have, and serve those customers to the best of our ability.

And we do not have a plan of developing our own solution at the moment.

Okay, great.

And you know -- if you let me continue on that for while.

So in order for us to succeed well with our [normal] this application for this effort we, of course, need the communication technology to go with that.

And in the engagements that we've had with the top OEMs we find that -- we find our customers extremely competent, and capable to integrate our application processor together with the modem of their choice.

So we are not seeing that this is limiting our market opportunity in that space.

We are also working closely with the modem vendors to ease the integration effort for our customers.

Right.

And moving onto your second question, which was about [the RF1] and power management.

So, that our position at the current customer base there pose a significant risk in 3G in the next three years, I think not.

Perfect.

And my follow-up question would be, just looking at the 2006 results, where ST has outperformed the market overall.

However, if I look at the application-specific groups, which I think has grown by about 8%, based on a preliminary [SIA] data it seems like the application-specific market has grown by about 10%.

And the other thing is, given the amount of R&D you've pumped into the business in the last five years and given the low base, in fact, that we have in 2005, it seems like the new products, so far, have not really delivered any satisfactory results.

So do you expect an acceleration of the application-specific revenue group in 2007, or not?

I think that on the statistics and the -- Carlo Bozotti speaking.

I think that there is, of course, there is a main block that is our dedicated products for industrial applications that is not, from an organizational point of view, under the application-specific groups.

But they are still -- is part of the dedicated products.

And this is a very, very important segment for us.

It is not -- it's very high margin products by the way.

And it is -- and I am talking about the industrial segment that is part of this year in the new IMS organization.

And, of course, when we can get the reporting and the market statistics, this is to be considered in the application-specific products, because this is the case.

In this area we have grown at a very high rate at year end 2006 and we believe that our growth last year, on the overall, and if we split our business in Discrete, Microcontrollers, Dedicated products, I believe that in the area of Dedicated products we have grown at the same pace as the market.

While at the Company level we have grown more than the average of the market, thanks to big increase in Linear, standard Linear and Advance Analog, Discrete, particularly [Power Loss] and also Flash Memories.

Having said that, I think that, as you know we started a major refocusing effort mid-2005, and let's go through some of the examples, let's take disc drives.

In the disc drives -- and, of course, disc drives is the major part or the major portion of our computer peripherals, there was a clear change in the strategy.

So we have started to develop system-on-a-chip disc drive solutions based on our own ideas and this products is, of course, is our development cycle time, but is also the cycle time of our customers to include the products in their own systems.

The effect of this will be at the mid of this year.

This is one example that I think is very important.

The other example that I would like to make is the digital consumer, -- digital consumer.

It was -- it is for sure that in 2004 and 2005 we have lost ground.

But during 2006 we have regained a lot in this field, and we are more and more confident that with the 90 nanometer products that we are introduce, and where we are now expanding our customer base, we are regaining share and we have now introduced the first 65 nanometer products for dual TV set top box for the high definition TV, for the high definition DVD, the Blu-ray.

We are absolutely comfortable that, with this wave of new products, and digital consumers, we are regaining share in that respect.

In the Wireless I think this year is the year of new initiatives.

As we mentioned, all the new products are hitting the market this year, and even in the area of network in that we are not discussing so frequently, I think that [inaudible] is going to be in 2007.

So, this is an area of focus.

Our G applications, the product groups, of course, are very, very vital to ST.

Also the industrial product group is very, very vital to ST.

So, I think that [beginning to see] in a block that there is a major effort to accelerate the R&D effectiveness on these products.

Okay.

Just a clarification from what you said this morning, because I am afraid I did not really understand.

When you talk about [Krol 2], and the fact that you are going to align with technology leaders, what does that mean?

Does that mean that you follow the path of one of your American competitors?

Yes, but we have -- I think that basically what we will do is the following in very practical terms because we understand.

So the 45 nanometer platform will be changed the way it was foreseen.

In fact, we have a budget with the previous -- with the existing alliance partners.

And the funds to support and to complete the development of the 45 nanometer platform are available from ST, and from the two existing partners.

So this would be concluded in the course of 2007.

Then, starting from 2008, there will be a discontinuation.

And the discontinuation is such, because of the increase of the effort that would be required to fully support the 32 nanometer platform in Krol 2, we have decided the core technology on the 32 nanometer would become available through partnership with the industry leaders in this field.

And, of course, it's obvious that we have [alternative], while, in Krol we will focus on the development of the proprietary technology deliveries that are fundamental for our Wireless business and, specifically, [to give] us a sense of technology for the [inaudible] [modules].

The other frequency, [CMOS] technology for, of course, the communication portion of the cellular phone, and the analog CMOS for the power management application in the cellular phone.

So, it is clearly changing the structure but, of course, Krol is and remain a very important asset and still is the key center for the most advanced technology development.

And the focus will be on derivatives technologies.

And while on the bulk, on the [CMOS] bulk we will align with industry leaders, and just make sure that this will be available in our facility to integrate and develop the derivatives on one side, and also to support a portion of our manufacturing activity.

And, of course, the other portion will be supported by foundries from external, or by external foundries.

But, I don't understand how you are going to then continue to negotiate and partner with people like Seagate and HP and so on that uses your leading edge CMOS process for their [ISPs].

How do you keep the relationship going essentially?

I think this is also the pressure of our customers, and we need to take our customers -- I don't like to mention customers, we did mention customers, but we have customers that are demanding that we have two manufacturing facilities.

They want to have a double source right.

So, in our manufacturing strategy the sourcing ST of the CMOS logic is, of course, Krol 2.

But the alternative source is, and will be, we believe that it will be more outside.

But this is not new.

For instance, we are developing today products with our top telecom customers where it is very, very clear that we have a manufacturing capacity available inside in [in ST].

But is also very, very clear to them that we have an important pick up that is [vital] for flexibility up and down outside ST.

And let's not forget that as part of the existing [Krol] alliance we have an external partner that we have [inaudible].

So, this is not changing, and we will have two manufacturing sources, one side that is Krol and one outside that is the foundry services.

Most of our customers require that we have two sources, and one source is being [outsourced], and this is exactly what we are doing.

Okay thanks.

Vicky, next question please.

Next question is from Mr. Sandeep Deshpande, JPMorgan.

Hello.

Hello.

Hi, just the first question I have is on your inventory development.

Your inventories rose from Q3 to Q4, and now you have said that you are going to reduce loading to be able to address that.

Based on the current orders you have, and your guidance for Q1, how do you think your inventories are going to trend at the end of Q1?

I guess the question is for me, and this is Carlo Ferro.

Yes, hi, Sandeep.

First of all, as Carlo has mentioned during the introduction, the inventory increased by 50m occurred in the fourth quarter, has been the factor of the market situation not allowing the Company to hit the mid-point of our [sales] expectation.

You may have noted the [map] at the end that this expectation sales occurred $80m below the point of expectations, and that inventory did increase in the range of $25m, if we consider that the other half of the value increase in the inventory in the balance sheet.

It's only driven by the exchange rate [that] of December 31, the reporting date, has been [1.317].

So, in Q4, the efforts of managing the manufacturing has partially resulted in mitigating the impact on inventory.

In Q1, we [continued] [to both show] the objective of reducing inventory in the absolute dollar amount.

At this stage this is what we have in our plan.

Of course, the evolution will also depend on how going forward the backlog of the second quarter will build up and what will be also the [dice] and what was the requirement to support the revenues for the second quarter of the year.

Okay.

Thank you.

Secondly, just a follow-up, you've talked about CapEx to sales of 12% which was your goal for this year.

Does this CapEx to sales goal include your goals for the NOR Flash business?

That is, if there was to be a strategic action to do with NOR, would this goal of 12% CapEx to sales change?

Yes, the budget that we are providing today includes Flash.

Okay.

Thank you.

Of course, it may change.

This I do not know.

With the separation of change -- with the separation of Flash, of course, we expect one of the targets is to make sure that the Company will become less capital intensive.

But the budget that we have approved is including the Flash Memory business.

Do you -- whatever action you take on the Flash business, do you expect to continue to be spending CapEx dollars on the Flash business going forward after this action is taken, or that would form the end of -- deconsolidation would mean that is your final investment in that business?

This means that will be the final investment in this business.

The objective is, of course, to see this Company run independently.

And with the separation we will not, from an operational point of view, be involved any longer and we do not expect to provide further investment in this business.

Thank you very much.

Thank you.

Next question please, Vicky.

Next question from Mr. Titus Menzies, Jefferies.

Please go ahead, sir.

Good afternoon gentlemen.

Thank you for taking my questions.

Just to clarify one question from a previous question, inventories by the end of Q1, are you expecting to be back down by 16m as a Group -- by $16m in absolute value coming out of Q4, and you expect to reducing the Fab loading to bring it back down by 16m by the end of the first quarter '07?

Titus, your question -- Carlo Ferro answered the question about inventories in Q1 by not giving a specific number but indicated that this was an effort [at the control of] the Company, and -- but it's, of course, dependent on the building of the backlog and other factors.

There was no specific number.

The mention of the $80m and the $25m, that was a mathematical analysis which was used to describe what occurred in Q4 and what the net effects were, the currency activity as well as the real impact of the Company's revenue level coming in below the mid-point.

Obviously, we were able to mitigate but not completely offset through fab closures.

But the comment Carlo Ferro made was not a specific number and not a specific magnitude with respect to Q1 inventory levels.

Sorry to jump in on there.

Thank you.

The first question I have is, then, in regards to the license for the nomadic to Samsung, for DDB phones, is that a domestic license only for Korea or does Samsung have the option to translate that license to the non-domestic market going forward?

Is it a flexible contract or is it just a closed contract only for the Korean market?

This is Tommi Uhari.

We don't have a limitation on Samsung on the market that they can sell the product in.

Okay.

So it's open beyond just the domestic market?

Of course.

Perfect.

And the second question I have is regarding the STi7200 for the set-top boxes, could you give us an idea of the mix between the number of customers who are sampling that product right now and maybe a breakup between how many of them are U.S., how many of them are Japanese?

This is a very specific question.

The product number is what?

The STi7200.

Yes.

The 7200, of course.

This is a 65 nanometer platform.

This is for dual set-top box TV applications.

This is for the digital and high definition TV applications.

And this is also for Blu-ray.

So I think that the measure, the effort -- because we have this product now.

The product is out.

Of course, it's at the sampling level on 65 nanometer.

The major effort that we are doing with this product is really in the United States and in Japan.

And I would not, of course, comment on customer names.

But it is clear that the focus is there.

This is a major effort.

And at the same time there is a proliferation, there is a [pervasion] of our 7100 families in the various forms from the 7100, to 7 -- the 7109.

So there is a proliferation.

We believe that we are making big, big progress in the United States on the -- with this 90 nanometer family.

And the focus -- for the time being, the focus on the 7200 is, again, the United States and Japan.

Okay.

So the focus is Japan and United States.

And the number of customers, it's more than -- is it more like one and two or more like maybe half a dozen customers?

Well, I have to confess that I do not know exactly the number of customers.

However, this is a kind of business that it is very fragmented.

So I am sure that the focus of [Christo Lacomikos] and, of course, also the focus of the Group organizations -- the two regional organizations is on a wide base of customers because this is [in principle] a characteristic of this business.

It's not one customer -- product for one customer.

This is a [cluster], like we have done with the 7100, we want to reach a very wide range of customers.

Okay.

And the 7200 is a 65 nanometer process.

Is that correct?

The 65 is a full -- the 65 is a full 65 nanometer process.

Absolutely.

Carlo, thank you very much for taking my call.

Thank you everyone.

Next question, Vicky, please.

The next question is from Mr. Simon Schafer, Goldman Sachs.

Please go ahead, sir.

Hello Simon.

Please go ahead.

Thanks, good afternoon.

I just noticed one of your slides in the presentation shows the revenue to strategic customers seems to have only grown in single-digit terms in 2006.

I was wondering whether you could share with us which -- by end-market segment, which application under-grew or out-grew that average that you're showing on that slide there.

Well, I think that -- it's Carlo Bozotti here.

I think that first of all, as you know, these customers, many of these customers have been very close to ST for several years now.

And some of these customers have been more successful.

However, there have been other customers which have been less successful.

But, for us, what was important 18 months ago or so was the understanding that, globally, there is a degree of plateau and the understanding that the revenues growth opportunities at this traditional base of strategic partners was somehow limited.

For this reason, we have identified 12 new major accounts.

And altogether these 12 new [major] accounts have a total available market in excess of $40b.

That is a very important target in our marketing initiative.

And last year we grew these 12 accounts 48%.

And I think you can see that our revenues have largely exceeded the $1b mark at these 12 new accounts.

So, [against] to this contribution now, this new range of top customers that is about 20 customers, have grown more or less at the same pace as the Company, slightly higher at the 12% growth.

Now, to come back to your question, well, of course, some customers -- well, we know, take Alcatel, they have sold many years ago their cellular phone activity.

At [Foxon], they have sold their TV activities.

These things go on.

So they are in [debt] provisionally customers that have grown at a higher pace and something that has growth at a lower pace.

What I would say it's more customer-dependent rather than segment-dependent or rather than a steep performance dependent.

I think it's more the evolution of the customer itself.

But I think it's important to notice that with this addition of 12 new major accounts and, of course, this will become also major partners for us, or some of them, we have reversed the trend.

And now, overall, this block has started to grow again and last year, globally, it was 12%.

So last year this new block who grew 12%.

In the mass market we grew 17%, which is all the customers outside the top 50 list.

And then from a geographical point of view there was a major growth in Japan and a very significant growth in China.

In China we grew 16%.

And in Japan we grew 31%.

And I am very pleased to report the progresses that we are doing in Japan in our new marketing initiative.

It is not just one further client.

It is not just one [month] segment.

It is very wide.

And I think we will make good progress there in the coming months and years.

Understood.

Thank you.

And then, given that you've given us some numbers for the reorganized Flash Memory group, can you share with us what percentage of your 2006 CapEx and depreciation was in that product?

Well, depreciation -- depreciation, of course, we're not doing very well.

And CapEx we also not doing very well.

But, of course, you understand that these numbers are very confidential.

And I think we will start reporting at the end of Q1.

And we have -- frankly, we have not even decided yet fully in ST what will be the degree of the reporting.

For sure, as in the past, we will report the top line and we will report the bottom line in this business.

But you can imagine if it's a Flash business, it is clearly [deleting] our gross margin, it's more capital intensive.

But, unfortunately, we cannot provide these figures.

Understood.

And just a very brief follow-up question on something you said in Paris this morning, I think you described the mix obviously in Wireless as somewhat slightly more to the low end.

As we go into Q1, did you also say that you expect it to be -- that you expect the seasonality to be more or less normal as we go into the new year?

I think the seasonality for us is normal, except [Wireless].

I think I have to say that the mix issue is -- of course, it's from our angle because, at the end of the day, it's revenues [for us].

The mix issue is the turning decline in Wireless that is significant.

Now the question is how is the volume [at several point] in Q1, I think that maybe what is the expectation from the volume point of view.

Tommi can respond better than me.

But the impact on ST is more than the normal seasonal [negative] seasonal adjustment that we have in Q1.

But Tommi, can you comment?

Well, rather than commenting on the volume, I'd comment on our product [gap].

Because in our product portfolio mix, which will be in the different Wireless businesses that we are in, it will be much stronger towards the second half of -- the second half of the year.

So, let's say, in addition to a low-end mix, we are also seeing low-end mixes in Q4 and Q1.

We are also seeing an improvement in our imaging product portfolio towards the latter part of the year which will improve our performance.

Okay.

Thanks very much.

Thank you, Simon.

Vicky, the next question please.

The next question is from Mr. Cody Acree, Stifel Nicolaus.

Please go ahead sir.

Thank you.

Carlo, could you give any more clarity on your gross margin thoughts progressing off this first-quarter low throughout the year?

Yes, on the first quarter, I think that -- through the year, okay.

Yes, through the year.

Well, I think that, first of all, if we talk on Q1, the major issue that we have is [the block].

I think that this is, of course, related also to the manufacturing cost that we have, let's say, upshot in Q4 than is product that we sell in Q1.

And this is affected by the loading of the fact that is definitely suboptimal.

So I think that in our manufacturing machines we did progress properly.

And then there was the significant glitch in Q4.

But it's really related to the volume loading.

Moving on in the course of the year I think that we are taking, from one side, actions that are on the continuous improvement process.

I think that there will be a strong focus this year on our 8-inch fabs.

And this year we will fully enjoy the improvement that is related with the 6-inch restructuring.

So in manufacturing there will be this very strong focus on 8 inch.

Again, in terms of continuous improvement process, it is the wave of new products that we have described in many, many segments and there will be an acceleration quarter after quarter of this.

But, in addition to this, continuous improvement in terms of manufacturing cost reduction and new product introduction, there are two significant discontinuation that we believe are very, very important in ST.

The first discontinuation is -- or discontinuity.

My colleagues are telling me that the right word in English is discontinuity.

So there are two important positive discontinuity in our approach, on top of the continuous improvement.

The first one is the separation of the Flash business.

And this one, of course, is significant in terms of gross margin improvement because of the [dilution] effort of the Flash Memory on the total ST.

And the second is the capital investment strategy.

I think that we are moving from more than 20% CapEx to sales ratio to, let's say below 12%, 12%.

And this has two effects.

This is, on one side, mitigating and improving the evolution of the depreciation.

That has been one of the key challenges that we have to address.

On the other side is we provide -- we increase foundry services.

That's flexibility that, for instance, we did not have in Q4.

So in Q4 we had -- to operate with a suboptimal loading of our fabs, because the flexibility with our silicone foundry was not at the level that we had -- that would have been requested to fully compensate both a drop in the demand and for the drop -- and for the reduction in the sales.

So I think that I want to underline the fact that 2007 is going to be a good year where this discontinuity will be visible.

And I believe that -- I am sure we will progress with our products.

I think there is more [profit] and there is a wave of new products.

I'm sure that we will repeat in the 8-inch manufacturing what we have done in the 6 inch, with a very strong improvement in manufacturing cost.

But, on top of this continuous improvement from activities, I think it's important to underline the discontinuity and this is major steps in our Company.

Thank you, very helpful.

And then maybe to follow up, with a little more of a strategic question.

Your outlook and your in-market expectations sound very similar to what we have just heard out of Texas Instruments, yet both of you are taking a very different approach strategically to how you're handling internal inventories.

Do you see any possibility of a risk if we get demand recovery in the second quarter, of you then having a shortness of supply?

Well, I have to say that today we are [leading among] -- the correction was significant in Q4, let's face it.

In September we had in mind $2.6b in Q4.

And when we met in the beginning or the middle of October, we had in mind the mid-point for the guidance and, compared to the mid-point of the guidance, we missed by $80m.

I believe that all of this is mostly on Wireless.

I think on Wireless we are, on one side, also protected by the -- all these long-term visibilities that our customers are providing.

And we operate with them some flexibility.

So we think the inventories that we have and with the flexibility that we provide, if there will be a resurgence of the market, we will be able to follow very, very quickly.

But the priority today is to make sure that we do not -- that we resolve the inventory problem.

We want to resolve the inventory problem.

I think that Q1 was -- Q4 was tough.

But we must address this and resolve this.

And then with the inventory level that we have, it's very good products.

And with the flexibility of process that we have with our customers in case of a resurgence of the demand, we can react very, very quickly.

In many other products this was business as usual.

We do not comment today much about IMS.

Last year was $2.8b in the Group.

So a significant portion of ST this year there will be another major growth in IMS after the growth in 2006.

And here the business is more normal.

It's more a normal adjustment in Q1 and I think it's a more normal inventory situation internally in ST.

But also with our distributors, for instance, it's not too bad what we see in terms of point of sales and what we see in sense of distributors' inventory evolution.

So I think that, to go back to your question, we believe that the major customers who are evolving [with us] will react very quickly if needed.

And on the other portion of the business that is IMS, I think it's more business as usual.

There is some direction that is very mild and moderate.

That's very good, thanks.

Thank you.

Next question please, Vicky.

Hello, Vicky?

The next question is from Mr. Mark Lipacis, Prudential.

Please go ahead sir.

Great.

Thank you for taking my question.

You may have covered this but, hopefully, you can give me clarification.

You mentioned the CapEx intensity has come down markedly over the past years and it's certainly impressive and beneficial to the cash flow.

As you look into the next couple of years, is there a risk that you have to reverse the downward trend to increase your capital intensity over the -- some time over the next couple of years?

I'm just trying to understand how long will CapEx stay below the depreciation expense.

And, as part of that, would you also be so kind as to review your CapEx expectations for Krol 2 and your outsourcing strategy?

What percentage is outsourced now to foundries and over the next couple of years?

Thank you.

Yes, this is [Allain Dutheil] here.

About CapEx, there are a few things which are changing here which make us very confident to keep this CapEx to sales ratio at the 12% or near the 12%.

Number one, as you know, the market holds now even more in the area of 12 to 15%, as you [see] in the past.

Today, it's more [maverick].

Number two, our sales [marketing] action.

One of the action is to separate the Flash Memory which are more capital intensive than the average of our business.

So this is also something which is going to affect our CapEx to sales down.

And, number three, we will go [needing] more foundries.

Just to remind you today, our foundry, the rate of our foundry in our production is above 10%.

And as a first step we can move to 15 and then increase.

So, frankly, with all this, the market itself, the Flash cut out, the less capital intensity that we will need more foundries, as well as a better usage of our CapEx than in the past, it should allow us to stay at about the 12% CapEx to sales.

About Krol, we are not disclosing any CapEx number in Krol.

But the only thing I can tell you is that this year we are not going to spend $1 on increasing our capacity.

The money we spend there will be mainly for R&D and will be moderate.

And your third question was --

I think you got most -- I think you got them all.

The follow up would be the 15% target for foundry, would that be a goal for the end of this year, for the end of 2008?

How should we think about that then?

15% is a goal that we have.

I don't think for the first half this will be possible because one of our challenges today, as it was mentioned before, is really to [inaudible].

So, therefore, we are not going to increase the weight of the family.

But this will go probably similarly it will probably will reach [inaudible] 2008.

I think that the objective we have is to make sure that, of course, it is not a new objective.

It's something we started with a CapEx to sales ratio of more than 20.

We went down to 15.

Now it's 12.

What is the objective?

Of course, the objective is, on one side, the financials to run at the level of depreciation that is more bearable.

On the other side, it is to make sure that there is a degree of flexibility that we need to prevent any, poor loading conditions in our facilities.

If we take Q4.

If we would get -- if we would have had more outside, in terms of silicone foundry, it would have been possible to put [more] with our facilities during the course of Q4.

And this is a lot of money.

This is -- I had in mind, and Carlo will correct me if I'm wrong, I had in mind that this year, a pick up of $30m.

So this is significant.

So why's that?

Because we did not have enough flexibility outside to absorb the market correction.

And we are building up in the course of this quarter the flexibility.

So this is what we want to do.

And there is a CapEx strategy.

And there is financial implications, but there is also a strategy that is to make sure that there is more flexibility to outsourcing and so guaranteeing a continuation of optimal loading conditions -- optimal loading conditions in all our fabs.

Very helpful.

Thank you very much.

Thank you.

Okay, Vicky, we have time for two more questions so could you give us the first of those two please?

The next question from Mr. Manish Goyal, TIAA-CREF.

Please go ahead sir.

Yes, hi.

Thank you.

The question is on nomadic.

Do you -- are your customers working on Symbian or Linux operating system on that platform or are they working on both of them?

The question will be taken by Tommi, of course.

Yes.

So, for the products that are currently on the market, it is apparent that [what are] the operating systems in those and there is a variety of the Symbian series 6 Gen and even [Natos]. [Natos] device there.

On the ones that are in the development, I'll just say that a variety of the high-end operating systems are under development.

And ST is taking no stand on which way to go and we are happy to support our customers in whatever is their choice.

So, specifically to Nokia, do you know if you will be designed in only Symbian operating system or will you also have a design in the Linux-based ones?

Well, I am afraid that we cannot comment on that.

It's very specific to customers -- one customer.

And, of course, we cannot comment on this.

Okay.

Thank you so much.

Thank you.

Thank you.

Vicky, could we take the last question now please?

The last question is from Mr. Tristan Gerra, Robert Baird.

Please go ahead sir.

Hi.

In Wireless, in 3G, if you could talk a little bit about the dynamics impacting the trends.

Do you view this as just short term or is there a more fundamental structure problem that could last beyond the first half of this year?

Yes.

Well, I think this is the last question concerning Wireless, and Tommi will take the question.

So, I think that what we've seen -- what we've seen in 2006 has been a stronger than expected demand in the low end which is, I think, a higher market growth than was originally forecasted. 3G growth continues strong for this year.

I think that with the product mix that we have to address that market.

Let's say, the current 3G outlook for this year looks positive for us.

Okay.

And then just a quick follow up, how much visibility do you have into Q2 at this point?

If you can talk about your backlog and how that compares versus Q4 and also the book-to-bill Q4.

Well, I will take this question on visibility.

Of course, that is part of the guidance.

We would say that visibility is worse than what we had than, for instance, in Q3 last year.

And I think that we have provided a guidance that this time was, in fact, it is 8 percentage points because we have a fuller visibility compared to what we had -- to what we had in the past.

But, on the other hand, I think that in our business, in the Semiconductor business, the [term] business generation is not unusual.

So I think all companies are working to generate term business.

And, of course, this is something that is normal in a period where there is inventory correction.

And this is particularly important for us in the memory area and is particularly important for us in the area of our IMS products.

So I think that, indeed, the visibility is worse than what we had last year.

We have tried to make sure that our guidance takes care about this worse visibility.

On the other hand, the opportunity in all our regions and with many of our product groups is on term business.

And term business is a kind of element that has become a common denominator when the market is in a correction mode.

I think that there is a switch in the visibility.

So you mentioned Q2.

I think we do not see yet a difference between Q2 and Q1.

So we'll see later, hopefully, in the course of the first quarter.

And we'll be pleased to report some better visibility for the second quarter.

Great.

Thank you.

Thanks to everyone for participating.

I would like to make one announcement before we conclude the call.

And, frankly, we thought we'd get the question.

But today in the presentation by the Chief Financial Officer in response to a question, we did make one announcement that I think is appropriate for all the participants on this call, and that is that formerly the effective tax rate guidance for the Company, for ST, was planning in the 15 to 17% range.

However, given the fine work that's been done by our colleagues in the tax planning, and some very good work that's been done by the manufacturing activity and other elements of ST, we are in a position to be able to indicate that, for planning purposes and modeling purposes beginning in 2007, the appropriate tax rate for the Company, or effective tax rate for the Company, is in a range of 12 to 16%.

So I just want to make sure that that one piece of information, which we thought we'd get the chance to discuss on the call but we did discuss this morning, was communicated.

If you'd like to hear the full comment from the CFO, certainly check the webcast of this morning's conference if you'd like to hear that.

But it's essentially what I just communicated.

Once again, we want to thank you for participating in our fourth quarter and full year results for 2006 and we look forward to communicating with you through the quarter and in next quarter's results.

Thank you and good day.

Ladies and gentlemen, the conference call is now over and you may disconnect your telephones.

Thank you very much for joining.

Goodbye.