意法半導體 (STM) 2008 Q1 法說會逐字稿

Hello.

This is the Chorus Call operator.

Welcome to the STMicroelectronics first quarter 2008 conference call.

(OPERATOR INSTRUCTIONS).

At this time, I would like to turn the conference over to Stan March, Vice President Investor Relations for STMicroelectronics.

Please go ahead, Mr.

March.

Vicky, thank you very much.

And thanks to all of you who are participating in this call for STMicroelectronics' first quarter 2008 results discussion.

Carlo Bozotti, ST's President and Chief Executive Officer, is hosting the call today.

And joining him will be Carlo Ferro, our Chief Financial Officer, Alain Dutheil, our Chief Operating Officer.

We have three General Managers, Tommi Uhari from our MMC Group, Philippe Lambinet from our Home Entertainment and Display Group, and Carmelo Papa from our Industrial and Multisegment Sector also in attendance.

Before we begin, make a couple of initial points with you.

Please, following Carlo's introductory comments, if you have a question don't hesitate to enter the queue.

And we do hope to have time for everyone's questions.

Please limit yourself to one question and a quick follow-up, as it's in the best interest of all participants to get as many questions as possible answered.

Also, this call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans.

And we encourage you to review the Safe Harbor Statement contained in today's press release, excuse me, last night's press release, and also the most recent regulatory filing for a complete description of these risk factors.

With that bit of housekeeping completed, I'll now turn the call to Carlo Bozotti, ST's President and Chief Executive Officer.

Carlo?

Well, thank you, Stan, and hello to all of you and thank you for joining us on today's call.

We had a very active start to 2008.

We completed the spin-off of our FMG business into a new company, Numonyx.

We better secured our wireless position for the future through the announced majority owned venture with NXP, combining complementary product lines and customer bases, places us in a position of being a very competitive market leader.

And we strengthened our position in digital TV with the acquisition of Genesis Microchip.

In addition, we entered 2008 with a much stronger portfolio through our internal investments in R&D over the last several years.

We're also becoming a leaner company in reducing our capital intensity, as evidenced by our capital expenditures in the first quarter.

And finally, we continue to drive significant cash flow.

So let me first begin with a review of our financial results.

Net revenues tracked to plan, coming in within our guidance.

On a sequential basis, we saw what I would describe as normal seasonality.

On a year-over-year basis, net revenues increased 8.9%, and excluding FMG were up 11.6%.

When we compare to others in our industry, I think this shows a very solid performance.

Our year-over-year growth was led by automotive, industrial and wireless segment, and also benefited from $32m of sales following the completion of the Genesis acquisition.

Looking at revenue growth by market segment, and excluding FMG, our year-over-year growth was led by both telecom and industrial, up 15%, followed by consumer which was up 10%, computer up 8% and automotive by 7%.

Looking at the revenue growth by product segment, overall ASG revenues were up 14% year over year, driven by application-specific wireless and growth in consumer, excluding Genesis, and up strongly including it.

Automotive products were also notable contributors to the growth of ASG.

We anticipate that application-specific wireless, led by 3G baseband products and automotive, notably the Nomadik based digital devices, will be important contributors in 2008.

IMS revenues increased 7% year over year, principally reflecting strength in MEMS, microcontrollers and advanced analog products.

MEMS reached about $100m in sales in 2007 and we expect the ramp to continue on a steep curve in 2008.

Our gross margin result also came in within our guidance range, in this case, right at the mid point.

In total, our gross margin was 36.3%.

Excluding FMG, our gross margin increased 60 basis points to 37.6% in the 2008 first quarter, compared to the year-ago quarter.

We estimate, however, that the benefit of our progress in strengthening our product portfolio and manufacturing costs were, to a large extent, offset by the significant swing in the U.S.

dollar.

In other words, 300 basis points of improvement in our gross margin, excluding Flash, were absorbed by currency.

We have continued to invest in R&D where, cleaning of the one-time in-process R&D write-off, costs are up 12% year over year.

However, currency accounts for 10 points of this growth.

So excluding currency, R&D costs were up 2% year over year.

This includes internal growth, as well as the addition of the Nokia and the Genesis schemes.

Similarly, looking at the SG&A, it was higher year over year by 16%, with currency accounting for 11 points and increased stock-based compensation charges contributing another 2 points.

Excluding those effects, SG&A grew 3%.

It is true that the first quarter reflected expense levels that were higher than we had started it.

Despite the currency situation, over the next few quarters we will continue to realize the identified synergies of our strategic investment and we will reach our target expense to sales ratio of 28% in the fourth quarter, and this will be done even at current euro/dollar rates.

This brings us to our operating income before impairment, restructuring and the one-time cost.

For the 2008 first quarter it was $116m, compared to $74m in the 2007 first quarter.

However, the true measure of the progress we have made can be seen by examining the change in operating income on a constant perimeter basis.

During this timeframe, the U.S.

dollar weakened 14% against the euro, costing us an estimated $143m in lost operating income improvement.

I want to emphasize that we did see improvement, notwithstanding currency, but we hope this very transparent analysis helps you understand how much progress we have made across the Company in strengthening our product portfolio, improving our market positioning, improving our manufacturing and improving our return on R&D investment.

As a very important example, let me point to ASG.

We have made significant underlying improvement in the profitability of this segment during the past year.

However, currency masks much of this improvement.

In addition, we have initially higher expenses coming from Genesis until the synergies take effect.

At the exchange rate of last year first quarter, and excluding these Genesis effects, ASG would have shown nearly $100m in operating profit.

We are also improving our cash flow.

In fact, looking at 2008 first quarter, our net operating cash flow was about $220m before payment for the Genesis Microchip acquisition.

So we continue to generate cash at a run rate of over $200m a quarter.

Inventory reflecting seasonality factors posted inventory turns, excluding FMG, of 3.5 times from 4.4 times in the fourth quarter.

Inventory was $1.54b at quarter end.

This is after the FMG spin-off.

It includes Genesis Microchip inventory, an estimated $40m due to currency, and in anticipation of sales growth the second quarter.

This will be the low point in our turns level evolution for 2008, as we will make progress each quarter through the year.

We indicated last quarter that our capital budget target for 2008 is to be at or below a CapEx to sales ratio of 10%, improving from our 11.4% level of last year.

During the 2008 first quarter, we spent $250m, representing 10.4% of net sales.

I also confirm that based upon the timing of the remaining two purchases related to Crolles2, we continue to anticipate a higher CapEx run rate in the first half of the year compared to the second half.

So clearly we are right on target with our goal to advance our asset light strategy.

Turning to the 2008 second quarter, we continue to make good progress with our new product introductions.

Despite the current economic uncertainties, we expect sales to increase between 5% and 11% sequentially compared to our first quarter sales of $2.18b, excluding FMG.

This would represent year-over-year sales growth of between 10% and 16%.

For the gross margin we are targeting 37%, plus or minus 1 percentage point.

Our outlook is based on an assumed average effective exchange rate of $1.55 to EUR1, compared to the $1.47 to EUR1 actual rate for the 2008 first quarter and up from $1.33 to EUR1 in the year-ago second quarter.

I would like to add a few words here on Numonyx.

As you noticed, we closed this transaction at the end of our first quarter.

All of the partners are looking forward to the future success of this company.

As we have mentioned in the past, we will report ST's product equity ownership of Numonyx's performance on the income statement line, named gain or loss on equity investment.

Finally, we will report Numonyx's result with a one quarter lag.

Accordingly, Numonyx's second quarter result will be reflected in the ST's Q3 numbers and there will be no earnings impact in the second quarter from our equity interest in Numonyx.

We remain confident on the earnings contribution of Numonyx after the first quarter of their results, which could be affected by purchase accounting items, and reaffirm we expect accretive gain of this transaction to ST's EPS.

Last quarter we indicated that we would look for selective acquisitions in our core businesses to improve returns.

During the first quarter we completed the acquisition of Genesis Microchip, to add to our Home Entertainment Group within ASG.

We started work immediately and we'll continue over the next two quarters to diligently pursue in the identified areas the synergies we will achieve.

We expect Genesis to be accretive in 2009.

Just a few weeks ago we announced joining with NXP to create a new wireless semiconductor leader, with 2007 sales of about $3b based on the businesses each of us is contributing.

Our goal is to improve the returns in our wireless business, while being in a much better position to serve the needs of our customers.

We will consolidate the joint venture into our result, given our 80% ownership position.

We anticipate closing the transaction during the third quarter and consolidating it into our result as of the closing date.

We plan to move quickly to make this opportunity accretive to ST.

With respect to 2008, we continue to expect that it will have minimal impact on our non-GAAP cash earnings per share.

And it is expected to be accretive in 2009 and more significantly beyond.

And finally, as we mentioned on our recent call, we expect that the new company's currency exposure will have a positive impact on ST cost structure, reducing overall euro exposure by about 3 percentage points.

We are also returning cash to shareholders through a proposed dividend increase and through the recently announced share buyback plan.

This dividend increase results in a dividend yield that is equal 3.1% based on yesterday's stock price, about 1 point higher than current yield of a risk-free short-term bond investment.

In summary, we demonstrated solid progresses at the top line, with revenue following the seasonal pattern.

Our year-over-year growth is clear evidence that our new product pipeline is providing positive momentum, and we believe helping ST outperform the market during 2008.

We are clearly in the middle of a significant reshaping of our product portfolio, replacing revenue that was giving us negative returns with revenue that is generating positive results and will further improve our overall returns as we extract identified synergies.

Currency effects have caused ST to be far from our targeted returns range in the first quarter of 2008.

However, we still expect to reach our targeted RONA range during the course of this year.

Just to remind you, we set this range of RONA objective of between 12% and 20% when the exchange rate was $1.25 to EUR1.

We reaffirm it; in fact, we realized it in Q3 and Q4 of 2007, excluding FMG, at $1.35.

And at $1.55 we will still reach it.

In conclusion, I believe the fundamentals for ST are positive and our improvement will continue to materialize.

Now, let me stop to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

The first question is from Amit Kapur, Piper Jaffray.

Please go ahead, sir.

Great.

Thank you very much.

Just one quick question on inventory, given the increase in inventory days.

Could you discuss your view as to your own inventory levels, any breakdown you can provide in terms of raw materials versus finished goods, and then how we should expect inventory to trend in coming quarters in terms of dollars?

Yes.

Carlo Ferro will take this -- the question.

Yes.

Hi, Amit.

Good afternoon.

Good afternoon and good morning, everybody.

So inventory at the end of this quarter reflects the exit from the seasonal pattern of the first quarter, entering the second quarter that, as you may have appreciated from the revenue guidance, is preferred for a significant sequential growth.

So in this respect the level of inventory has increased.

This also incorporates some tens of millions of dollars of exchange rate impact, which is a pure accounting effect.

So, having said that, we continue to work on accelerating the inventory turns.

We do expect that inventory turns will positively improve quarter after quarter.

And then, going more specifically to the point of your question in respect to the breakdown of inventory by category, I would say that material is a very minor item.

We have less than $100m of inventory for material.

And of the remaining semi-finished is prevailing in respect to the finished product.

Our inventory still reflects a pipeline with some significant internal manufacturing, whereby work in progress still remains the most relevant ingredient of our inventory.

Great.

Thank you.

Maybe one quick follow-up in terms of the 3G handset market.

Obviously we've seen some mixed data points recently.

What's your -- could you remind us your outlook for the 3G handset market in 2008?

This is Tommi Uhari.

We don't provide our own guidance for that.

But what we see basically, tracking from the two major customers who, let's say, brought us to the business is that we see solid demand throughout the year, and particularly that we are still in a ramp-up phase in which the Ericsson mobile platforms account.

We see continued growth there.

Great.

Thank you.

Vicky, we'll take the next question, please.

Next question from Mr.

Odon De Laporte, Cheuvreux.

Please go ahead, sir.

Yes.

Good afternoon, everyone.

I have a question relating on operating expenses.

Excluding Flash memory, pro forma operating income would have been $100m, which implies OpEx representing 32.6% of sales, if my math is correct.

Given further dollar -- given further weakness in dollar, I was wondering if you will be able to bring this ratio below the 28% target by the end of the year.

Thank you.

Maybe I'll take -- Carlo Ferro speaking.

Maybe I'll take your question, which I understand is looking forward to the evolution of our operating expenses.

And you may be sure that in these last weeks we have been intensively working on actions in order to react to the current exchange rate environment, which is fuelling our OpEx at this level.

And frankly, this is the most relevant reasons for the OpEx increase.

Carlo has mentioned in his introductory remarks, at the end, if we carve out from the year-over-year comparison the exchange rate impact and the one-time item of $21m of write-off for in-process R&D related to the Genesis acquisitions, R&D expenses increased year over year by 2% and SG&A expenses, net of the exchange rate and some increase in stock compensation, increased by 3%.

So, in this respect, the issue the Company and management is addressing is how to react to the exchange rate impact.

This is a period of transition through the second and the third quarter.

First of all, the deconsolidation of Flash.

Flash has absorbed so far in Q1 actually $65m of expenses.

And as anticipated, we have about $8m to $10m of expenses that used to be absorbed by Flash and will not be taken by Numonyx, so it will take for us a couple of quarters to absorb them, as we have already anticipated.

We just acquired Genesis.

We closed the deal in January.

And those incremental expenses are under a restructuring initiative which is obviously already started.

And we plan about $10m of savings once this initiative would be completed, by the fourth quarter of this year, by the end of Q3.

We have also, as you can imagine, [raised] several actions in terms of readjusting this headcount in SG&A, with an additional target of $10m savings by year-end.

So moreover, most importantly, we have announced the NXP wireless deal, a deal that will add scale, about $400m of revenues per quarter, with a limited contribution of additional operating expenses.

Indeed, this business will come to ST with operating expenses to sales well below the ratio of the Company, and with a structure of the deal whereby our partner is retaining resources even from day one.

And we have in the prior call anticipated our partner retaining about 900 employees.

So this is a period of transition, for the [cost] Flash, for Genesis, waiting for the (inaudible).

Actions are ongoing.

I have to say that frankly we are not totally lucky that this transaction couples with the historical peak of the euro/dollar rate, but we remain active and totally encouraged on the result of the plan.

And in this respect we continue -- we will continue to bring down the OpEx to sales ratio quarter after quarter, and we will bring it down to about 28% in Q4, as Carlo has earlier anticipated, of course, assuming the currency exchange rate.

Could be even better with a better exchange rate and we will react more if the exchange rate will further deteriorate.

Yes, our target today is 28% in Q4, with the present exchange rate without NXP.

Okay.

Thank you.

That's very clear.

Thank you.

Vicky, we'll take the next question, please.

Next question from Adrien Bommelaer, Credit Suisse.

Please go ahead, sir.

Hi.

Thanks for taking my question.

I was hoping you'd give us a little bit more color on your guidance in terms of top line for Q2.

I think you talked about sequential growth of 5% to 11%, which is -- it's higher than the normal seasonality sequential growth from Q1 to Q2.

So I was wondering what you see.

Is it the benefit of the ramp-up at EMP and Nomadik, or is there something else that you see?

And then I had the same question, basically, on the margin.

I think the U.S.

dollar's come down really aggressively.

And your gross margin guidance seems to be certainly better than anticipations.

And again, I wanted a little bit more color on that front.

Thank you.

Yes.

Overall, I think that we have to say that it's pretty broad range.

This growth is broad range.

If we go through family by family, for instance, in the automotive I think we have very, very strong growth in the books now we are shipping, in the area of car navigation applications.

And this extends to our Cartesio platform that is a different name for Nomadik in the automotive.

So it's still the same Nomadik platform that we have used, of course, for the car navigation.

So this is very material in the course of the second quarter.

Then we have in the area of industrial, for instance, in the area of IMS, I think we have two areas of strong, let's say, growth.

One is really MEMS.

I said before that MEMS last year, we did $100m.

I think that this year we can more than double this business.

It's a very strong, let's say, pattern for us.

So this is one.

But the other that I would like to mention, discrete was relatively weak in Q4.

There were areas of discrete, like -- in fact, starting from the next quarter, we will report not only ASG and IMS, but we will report also ICs and discretes for the Company, so you have a better visibility.

And discrete was relatively weak in Q1, particularly in the area of power MOS in Asia, in China, but also some of our IFET products.

And there is a good recovery in the second quarter.

So these are the two drivers for our IMS group.

If we -- and of course also continuous growth in, let's say, what we call advanced analog.

Now, we've been moving to wireless, the digital baseband, and we had a strong growth in, I would say, in Sony Ericsson with the digital baseband, our digital core.

Now, in computer peripheral the growth is very shy in the second quarter, so we expect them to grow in the second half of the year, starting from Q3, with our new products.

And what else?

In the digital consumer, of course, there is good growth in Genesis, but also in our traditional set-top box products, I think, is -- so it's pretty wide, I would say, with the exception of computer peripherals, and many, many new products.

That's great.

Thanks.

It's crystal clear.

Thank you.

Okay.

Thanks, Adrien.

Vicky, next question, please.

Next question is from Gunnar Plagge, Nomura.

Please go ahead, sir.

Yes.

Hello.

You mentioned last quarter that there were some areas in consumer that were weaker, for example, displays in analog consumer.

Could you tell us how this was shaping up this quarter?

I think Philippe Lambinet is on the line, so, Philippe, can you take the question, please?

Yes.

I think there is a big seasonality, of course, in our products.

So I think one aspect of the growth between Q1 and Q2 is this seasonality.

There is another aspect, which is the continuous drive towards high definition and continuous drive from the MPEG-2 compression technology to MPEG-4 compression technology.

We have a lot of new programs that are being launched, particularly in Asia and even more in India.

It's really a region where we have a lot of new projects which are reaching maturity now.

So this ramp-up is particularly evident in Q2.

I hope --

Yes.

Philippe, the question was on analog consumer, where I believe we are experiencing a decline.

I think it was -- the question was on display drivers in analog products.

Well, this is the decline of the traditional CRT analogue TV, the decline of those old families of products.

Of course, as you know, analog TV and in particular analog CRT is declining and going away.

And, in fact, we have announced a lot of product terminations, but that's more than compensated by the new projects.

Okay.

Thanks.

Could you also comment on HDD?

Was seasonality within range or was it stronger than expected this quarter?

So, data storage, I think that we see -- data storage, I think is a good -- is a relatively good momentum.

In fact, as you know, computer peripherals, for us, is a combination of two businesses.

One business is disk drives and the other business is printers.

The weakness in these weeks, I would say, in Q1 and second quarter is more on printers.

And data storage is growing and I would say that it's very much, then, driven by our new digital core that will be very material, well, start to be material in Q2 but will be very material in the course of the third quarter.

But this positive, let's say, driver in disk drives is negatively offset by the printer market.

I believe we have a very strong position.

In fact, I believe we are number one in printer in the world.

And we see a strong recovery, then, on printers in the second half of the year.

So we expect that CPG, which is the addition of these two businesses, to be relatively flat in the course of the second quarter and then restart growing in the third quarter of this year.

Okay.

Thanks for taking my question.

Thank you.

Thank you.

Vicky, can we take the next question, please?

Next question, Mr.

Francois Meunier, Cazenove.

Please go ahead, sir.

Hello.

Yes, it's Francois.

In terms of the guidance for Q2 and the relatively good sequential increase, given that the Q1 sales, excluding Numonyx, were a bit light, could we infer that there were some push outs from Q1 into Q2?

So, Francois, just to -- your question was -- I'm trying -- I didn't quite -- I couldn't follow the question.

Were you asking whether there were push outs in Q1, to the benefit of Q2?

Yes.

His question is, given the sales progression in Q1 versus the midpoint which excluding Flash was 8.5% versus 8%, indicates we are consistent with our guidance almost at the midpoint and we've given what I think is -- we've given what we think is appropriate guidance.

So it's consistent with our visibility.

Okay.

By the way, Francois, this is Carlo Ferro.

We entered this quarter and I believe all the industry has also announced some lack of visibility and expected the usual trend when entering this current quarter, with revenue guidance between minus 5% to minus 11%.

For the benefit of all, I would recall that ex-Flash actual revenues declined by minus 8.6%.

This is very close to the midpoint of the guidance.

This is very close to the normal seasonal pattern when moving from Q4 to Q1.

So for the benefit of all, I would stand, unfortunately, not to concur with the assumption of your question in respect to revenues performance on the first quarter.

And that is that obviously there is no push out from one quarter to another quarter.

No, I think it's a natural trend and it's very much driven by our backlog.

And we have a strong backlog for Q2 and the guidance that we have given for Q2 does simply reflect the visibility that we have today with the backlog and with our customers.

Okay.

If I may add something, if you look at year over year our sales growth is close to 12%, 11.6% without Flash, while the market, as far as we understand, will grow 7% to 8%.

So we are outgrowing the market in Q1 compared to a year ago.

Talking about market share gain, I guess you are planning this year for market share gain.

What's the cost of those market share gains, because it looks like maybe the gross margin is more or less fine, declining year over year in Q2.

But is it coming at a higher operating cost, those market share gains?

No, I think that is -- of course, we have a strategy on product portfolio that is to separate those things that we do not believe is yielding good returns.

Of course, it's not only gross margin but it's overall return, but the gross margin is a very important indicator.

So I think we have separated memories.

We may have other separations.

And then for the rest, of course we aggressively pursue all the opportunities.

I think we are expected to grow in the second quarter about 13%.

This is the midpoint of the range.

That is an important growth over last year.

We believe that is much better than the market.

So here what we are trying to do is to separate those things that we do not believe would yield.

We have done memories.

We may do more.

But on the rest, then of course we push.

And I believe it's, let's say, with the vision to be a strong leader on two blocks of applications and products, one is all kind of power applications.

And this is one block, including the automotive where power applications are very numerous.

And the second block is, of course, what we call converging multimedia that is very much wireless and digital consumer.

So these are the two blocks where we want to retain -- maintain when we have or gain a strong leadership position and on these products we push.

But we have separated memories.

We may separate more.

And the point is we want to separate those things that are not yielding the return that we want to provide to our shareholders.

Okay.

Vicky, next question, please.

Next question from Robert Sanders, Dresdner Kleinwort.

Please go ahead, sir.

Yes.

Hi.

Maybe a question for Tommi, actually, just to go into the Nomadik a bit more.

The Nokia N96 seems to be quite a TV-focused model that's coming out in Q3.

It doesn't actually have 3D graphics acceleration and it seems to use a dedicated DSP to improve its battery life.

I was just wondering if you thought this was an architecture that you saw catching on, not just at Nokia but maybe at other handset customers, and whether that would benefit you going forward.

Thanks.

Overall, I wouldn't like comment on a particular customer product, but clearly what we see is that the investment that we have done to the Nomadik multimedia platform is a key for our business in the mobile as a platform offering.

And like Carlo mentioned earlier, we are also applying it to the automotive segment, in a product family that we call Cartesio.

And we also see that this will have, let's say, a key element that's a multimedia system that we integrate into future single chip devices.

But when it comes round to 3GSM 2009, do you -- can you give us an idea of how many models you'll be showing off with the Nomadik inside in terms of handset models?

I think that in 3GSM 2009 it will be basically in a new company set up, together with the exciting venture that they built up with NXP.

And I wouldn't like to get ahead of things, so I'll comment together with my colleagues on that one (inaudible).

Okay.

And then just a quick follow-up to Carlo.

Maybe if you could just talk about the four-year guarantee that you've given to the banks that are supporting Numonyx with their financing.

If Numonyx were to go bankrupt, what is exactly STM's and Intel's obligations?

If you could just give us some disclosure there, that'd be great.

Thanks.

Well, I think Carlo Ferro will take this question but, just to comment on my side, I do not believe that Numonyx will go bankrupt because -- one comment here.

We had four fabs in Intel and four fabs in ST to support this business.

The new company, the infrastructure, the manufacturing infrastructure of the new company is with three fabs, much optimized, one in China, one in Singapore and one in Israel.

And the requirement, in terms of capital investment, is very moderate, thanks to the optimized manufacturing infrastructure.

So they can really moderate CapEx, because they have a running 12 inch in China, which is a joint venture with Hynix, and they have two modern 8 inch in Singapore and in Israel.

So I believe that the risk that Numonyx will go bankrupt is very, very, very limited.

But having said that, I'll leave Carlo Ferro to describe the configuration of the bank guarantees that we have on the loan.

Yes.

Numonyx financing is based on a 450m on a four years maturity line, plus a $100m revolver, both assisted by a joint [announced] guarantee issued by Intel and ST.

So the current ST exposure is up to 225m, and in case of withdrawal of revolver can go up to 275m.

Technically, the guarantee is assisted by a collateral which ultimately gives the guarantor rights on the assets of Numonyx.

And I would recall that the net book value of the assets that have been contributed by ST and Intel was originally in excess of $2.53b.

So there is a very significant difference between the market value of the assets and the value of the guarantee.

So, frankly, this kind of risk does not exist.

When answering this question, by far I can guarantee you that I have not even touched [food] during the [adverts].

There is no need of touching [food].

By the way, during his remark, Carlo has also anticipated that Numonyx expect to generate, after the first quarter of transition, a positive earnings contribution.

Having said that, I'd also highlight that Numonyx is starting with about $585m available cash, plus $100m of revolver.

For those of you familiar with the Flash industry, you may see how this financial position is much stronger than the one of other players in this industry.

Thanks a lot.

All right.

Thanks.

Vicky, we'll take the next question, please.

Next question comes Stephane Houri, Natixis.

Please go ahead, sir.

Yes.

Good afternoon.

Just to come back quickly on your guidance for Q2, could you just tell us how much of your guidance is now covered by your order backlog at the moment?

And can you tell us how you would qualify the visibility you have now on H2, compared to what -- to the visibility you had three months ago?

Well, I think I will start from Q3, that is not qualitative, and then Carlo will give you some -- Carlo Ferro will give you some firmer description of the backlog in the second quarter.

The backlog in Q3 is building up nicely.

This is what we see today.

Of course, the visibility that we have in the second half is not at the same level compared to the second quarter.

However, we see a building up of the backlog that, for the time being, is good, so it's building up nicely and again is pretty broad range.

It's not focused, as I was saying before, on a specific product line but is broad range on the products that we have.

So now it is obvious that also looking at our competitors, etc., we need to make sure we are vigilant and cautious, etc., in CapEx.

We are trying to be, as much as possible, focused not to exceed and disciplined there, but the Q3 backlog is building up nicely and the trend is also quarter three is a positive trend.

Now, coming to Q2, I think that, overall -- well, Carlo will comment.

Yes.

The quick answer to your question is that, as of today, about 95% of expected revenues at midpoint of the guidance is covered by the combination of billing so far and backlog for delivery in the quarter.

So this is quite solid and is, I could say, at the highest level of visibility we normally have when being in a quarter at this stage.

Okay.

95%.

Okay.

Just a quick follow-up.

Can you tell us what is the percentage of outsourced production in this quarter, with and without FMG, and what is your target for the next quarter?

Okay.

Maybe I can answer this question.

In fact, in Q1, with FMG it was about 13% and without FMG 7.3%.

7.3%.

So if we look at Q2, of course, we are not going to talk about FMG any longer, so we are going to move from 7.3% to a little bit more than 8%.

And as I said before, our goal is still to reach about 20% by the end of 2009.

This is still our goal and, of course, without FMG.

Okay.

Thank you very much.

Thank you.

Next question, please, Vicky.

Next question from Mr.

Cody Acree, Stifel Nicolaus.

Please go ahead, sir.

Thanks, guys.

Although the dollar has strengthened here a bit recently, obviously there's still lots of pressure on the income statement from the currency.

Outside of hedging, can you talk about some steps that maybe are still available to be taken to reduce some of this currency fluctuation?

Well, yes.

So I think we are working on four blocks of action about the hedging, but the hedging is just to mitigate.

We do that rigorous -- well, mechanically, systematically, mechanically.

And I think that we are working on four fronts and some of the things we have already described, some we have not.

So the first is the organic growth.

I think of course this is mitigating.

And this year we see the semiconductor market growing from 4% to 6%.

In fact, this was also our indication one quarter ago and now we see a lot of institutions, market research institutions, converging on this number.

And we believe we can do much better this year.

In fact, we have done 11.6% in Q1.

We believe we can do 13% in the second quarter.

This is the range that we have given, between 10% and 16%.

And of course, we want to move on and we hope that we could outperform the markets in the course of the year.

The second is the discipline on the capital investment.

We are moving from 20 or plus percent three or four years ago.

We went to 15%.

Last year it was 11.4%.

And this year the target is to stay around 10% and then to decrease further in the next years.

Also, this of course is helping to mitigate, because one of the problems that we have with the dollar is not cash.

Of course, the major problem is cash cost but there is one portion that is cashless, and it is the appreciation of the assets.

Because we have localized it in France and in Italy that are depreciated in euro, and then unfortunately, when we consolidate it back at the corporate level, we go from euro into dollar.

And we end up paying these machines in terms of depreciation more than the real cash out at the moment of the acquisition of the machines.

And to give you an indication about this phenomena, this of course is requested by the U.S.

GAAP, moving from Q1 2007 to Q2 -- Q1 2007 to Q1 2008, this is about 1 point of gross margin.

And this is a cashless effect but still impacting the gross margin.

So we want to reduce the dependence on the capital investment and move on with the asset light strategy.

Then, there is a third block.

A third block is portfolio management and here we have done something.

We will do more.

I think it's not only hedging.

We will have some pruning.

And again, the objective is to sell or dismiss our venture activities, venture without consolidating activities that we believe are not core business for ST, that are typically more capital intensive or lower margin or more commodity kinds of business, and maybe move on with some other form of acquisition or venturing, but this time consolidating the result.

And then there is a fourth block.

That is the acceleration of the restructuring.

Three years ago we had 25 manufacturing centers in the Company.

With the separation of Flash, we are now at 18 manufacturing centers.

We have announced the closure of other three manufacturing centers, so with this happening it is 15.

We are optimizing, resizing, restructuring other three fabs.

So, at this moment, we are working on six fabs, three to be closed and three to be optimized worldwide.

And this is a major effort because this will drive us from 25 manufacturing centers three years ago to maybe -- to 13 fabs, 14 fabs at the end of this process.

And finally, I think from now to the end of this year we will aggressively work on the SG&A, to go back to what we believe is the right number for ST.

That is not the 12.5% or so that we had in Q1.

So these are the actions that we are taking.

It is mitigating the capital investment, trying to grow faster than the market, portfolio management.

We have separated the memories.

There is the NXP.

There is the acquisition of Genesis.

We may have more pruning or some adding, and the acceleration of the restructuring.

Today we are working on six fabs and the work is a very heavy program that we have, three to be closed, three to be optimized.

And finally, on the SG&A, we'll be very aggressive from now to the end of this year.

And then maybe a follow-up, if I may, more detail on the OpEx side.

Obviously, some of your plans for OpEx reduction are longer term, at least on a percentage basis.

Do you believe -- or can you give us any more detail on the second quarter OpEx plans?

Do you believe that any of these initiatives start to come through to help to lower that number as early as the second quarter?

We mentioned before, in the second half, I think, that, as we said, the target is to go to 28%.

OpEx, in the last quarter of this year, Carlo will take for the second quarter.

Yes.

For the -- as I mentioned, second quarter is a quarter of transition.

We have the cost Flash, the cost Genesis, the restructuring of Genesis that will be ongoing but not fully completed.

We'll not take benefit of the fact -- the NXP integration.

And then, more importantly, there is another significant impact.

The euro/dollar rate moves from the $1.47 into an expected average rate of $1.55, including the impact of the outstanding -- or thanks to the impact of the outstanding hedges.

So we should expect some increase in the dollar amount due to these ingredients.

On the other side, the OpEx to sales ratio will start to go down starting from the second quarter.

So we should have higher in dollar, lower the percentage of sales.

All right.

Very good.

Very helpful.

Thank you.

Thank you, Cody.

Next question, please, Vicky.

Next question from Mr.

Jerome Ramel, Exane BNP Paribas.

Please go ahead, sir.

Good afternoon.

Just a question concerning the gross margin.

What would have been the gross margin target for Q2, assuming the dollar would have stayed where it was in Q1?

1 point more.

38%, roughly, about 38%.

Unfortunately, it is another $45m swing and it is 1 point.

1 point?

Yes.

Frankly, Jerome, I would be more than happy to answer a question what could have been with the exchange rate of Q2 '07, since that difference is about 3 points.

So it would have been 40%.

Okay.

It will take more time.

We will go through.

Okay.

No problem.

And just one question concerning EMP.

Do you maintain the target of triple the number of -- based on shipments this year?

Yes.

Okay.

Thank you.

We are aligned, [the result in line].

We believe that tripling versus last year is the right estimate at the moment.

Okay.

Great.

Okay.

Vicky, thank you, next question, please.

Next question from Mr.

Nicolas Gaudois, UBS.

Please go ahead, sir.

Yes.

Hi there.

First question is on -- going back on inventories.

Could you just clarify, if we look back at the Q4 '07 numbers, that you had inventories which were effectively non-Flash related on the balance sheet, and that as a consequence, if we want to do inventory days or inventory turns we should relate that to the COGs of the non-Flash business?

If (inaudible) [were 83], providing I was correct on my statement that inventories were non-Flash related and we went up to 102, so if that is the case, could you just go back once again on the dynamics of that because in any way you cut it, it seems like a big jump, and actually a bigger jump than what we've seen at Texas Instruments, [who lost] 15 days?

Carlo Ferro taking your question.

Inventory, Flash related, at the end of December 2007 were $339m.

And after the disposal of the business in March, in the balance as of end of March, there are no longer Flash inventory.

Inventory, excluding Flash, increased from end of December to the end of March from $1.35b to $1.5b, and this also includes some tens of million of addition from the Genesis acquisition and several tens of million of exchange rate impact, given the exchange rate at the closing of March.

As anticipated in my answer to the prior question, this is not the level of turns which is normal for the Company.

This is anticipating a sales growth for the next quarter.

And we will continue to manage inventory in order to accelerate inventory turns, now that the Flash transaction is completed and our inventory will be without Flash.

And, Carlo, could you typically, as it tends to build inventories in Q2 and Q3 ahead of the seasonal peak, can you actually manage down inventories in absolute levels, despite the normal seasonal pattern?

There are -- I would say there are also some good reasons in order to optimize the capital for the business in certain applications to build some [nice] inventory to prepare the equipment, [the season] that optimize the utilization of the [proving testers] and the finished products, etc., at the end of each period, since we don't want this category of assets to be stacked at the maximum level of demand, which is the one normally of demand of October and September, October and November, for our production.

So normally the pattern of our inventory is to build some inventory in the first half of the year and to decrease inventory starting in Q3 and, more significantly, in the fourth quarter.

Okay.

Fair enough.

And maybe a quick one for Alain.

Utilization rates, as they were, I guess, including Flash in Q1 and then excluding, and how should we convert it in Q2, please?

Okay.

Last quarter, the number including or excluding Flash was about the same.

And it's 83% for 6 inch and 86% for 8 inch, so it's an average of 84%.

And if we look at what it's going to be in Q2, 6 inch will stay a bit unloaded, so we'll still have 83%, and this is mainly our Singapore plant, which is not going to be optimally loaded, while the 8 inch fab is going to increase to 87%.

So, as you can see, there are not big changes there.

And the average will move from 84% to 85%.

I would like to mention also that our [Core 2] fab, which is not -- neither a 6 inch nor a 8 inch but a 12 inch, is pretty well saturated also, which I think is good news.

Okay.

Thank you very much

It's more than 90%.

Okay.

Great, Alain.

Thank you.

Okay.

Vicky, we'll take the next question, please.

Next question, Mr.

Simon Schafer, Goldman Sachs.

Please go ahead, sir.

Yes.

Hi there.

Thanks.

I was wondering, on the ASG business, just from what you actually reported in the quarter, on an underlying basis, perhaps, only 2% margin, to me that's perhaps a little bit lower than what you were expecting towards the end of the year.

I understand some of that, of course, is currency but even on an underlying basis something seems to have changed a little bit.

So any color on that weakness would be helpful.

Thanks.

Well, I can take this and then maybe Carlo will help me with some numbers.

I think that the underlying profit on this business, with the same currency of Q1 2007, would have been $100m, okay?

So this is the number.

Of course, then there is the currency deterioration but, fine, I think we'll restart from here.

In Q1, there is also the initial negative effect of the Genesis acquisition that is, of course, plugged into the number.

But if we just take what we have done last year and move into this year with the same currency, it would have been about $100m of G&L, of gain and loss, for the family.

I think that we see good opportunities for growing from here on practically all of these products.

And starting from next quarter, as I was saying, we will also show the result of the application-specific products that we have embedded -- that we have in IMS that is not visible today.

In fact, with Flash memory exiting, we want to give a better granularity, including all the application-specific products that are in the IMS reporting today.

Okay.

My second question would be, and it's inter-related to the previous question of inventory and gross margin, now that you've completed the divestiture of Numonyx, assuming that currency stays at these levels, what do you think the structural margin potential is at the gross margin level for this business now?

Thank you.

Well, I think that what we want to achieve is with the dollar at $1.55 we want to get into the 12% to 20% range in the second half of this year.

So this is the RONA performance, and, of course, it's much tougher.

The first time we had set and described the objective was, I think, a couple of years ago and the dollar rate was $1.25.

And then we have reconfirmed last year with a dollar rate of $1.35.

In fact, in the second half of last year we have achieved that.

Both in Q3 and in Q4 last year, without Flash, we were above 12%, but we want to achieve that at $1.55.

So the target that we have set internally is to get into the range for the second half.

It's an ambitious target, but I believe this is what we should do, even at $1.55.

Okay.

Thanks.

Thank you.

Okay.

Vicky, we have time for one more question, please.

Then the last question is from Mr.

Guenther Hollfelder, UniCredit.

Please go ahead, sir.

Hi.

Thanks.

The first question is could you provide a little bit more color on what sort of sales growth sequentially you would expect going in, to achieve the 28% OpEx sales level?

And maybe also, given that in the second quarter for the first time you will be able to deconsolidate the Flash memory business, is there -- could you give an indication how much Nokia, maybe on a full year, could be responsible for your total sales?

Well, yes, of course, we have a budget for Q4 this year.

But the best way to see, I think, is to take where we are in Q1 and in Q2 and simulate our historical -- of course, there is some growth, there is some pattern of growth that we have embedded into the model.

In fact, it's our budget, it's not only model.

So this is -- but I would say that this is in line with the historical progression of our business, looking at the second portion of the year and comparing with the -- compared to the first part of the year.

I think that if we, of course, isolate Flash, our -- its dependence, in a sense, on wireless would be reduced.

I think, if I remember well, but Stan will correct me, without Flash we are at 32%.

This is the weight of the wireless business.

That's correct.

For us, and --

31 in telecom, the vast majority of which is --

Right.

So, it's 32% for telecom and the vast majority is wireless.

And Nokia, I think, is probably proportional in the sense that the weight for our Flash business -- I mean the weight of the Nokia business for our Flash is similar to the rest -- to the average of the Company.

I do not know whether I'm clear.

Yes.

That's pretty clear.

Yes.

Okay.

Okay.

Thank you very much.

Thank you.

Thanks.

Thanks to all of you for joining us on this call today.

I recognize that some of you have been left in the queue but we've been on the phone for about an hour.

And if you've still got some questions, please don't hesitate to call myself or any member of the Investor Relations team.

We'd be glad to respond.

Let me conclude with this one recognition.

We have an upcoming event, May 27, our Analysts' Day, it'll be in London.

We look forward to seeing all of you who can participate.

And until then, please give us a call if you have any questions.

Thank you very much for participating in this call and we'll speak to you all soon.

Bye.

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

Thank you very much for joining.

Goodbye.