意法半導體 (STM) 2008 Q3 法說會逐字稿

Hello.

This is the Chorus Call operator.

Welcome to the STMicroelectronics third quarter 2008 conference call.

As a reminder, all participants will be in listen-only mode.

There will be an opportunity for you to ask questions at the end of today's presentation.

(Operator Instructions).

The conference is being recorded.

At this time, I would like to turn the conference over to Mr.

Tait Sorensen, Director Investor Relations for STMicroelectronics.

Please go ahead, Mr.

Sorensen.

(Technical difficulty) third quarter 2008 conference call.

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

Also joining him on the call today are Alain Dutheil, ST's Chief Operating Officer and CEO of ST-NXP Wireless.

We have Carlo Ferro, Chief Financial Officer, Tommi Uhari, Executive Vice President of ST-NXP Wireless, Philippe Lambinet, our General Manager of Home Entertainment & Displays Group, and also Carmelo Papa, General Manager of the Industrial & Multisegment Sector.

This call is being broadcast live over the web and can be accessed through ST's website.

A replay will be available shortly after the conclusion of this call.

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.

We encourage you to review the Safe Harbor statement contained in the press release that was issued with the results last night and also in ST's most recent regulatory filings for a full description of these risk factors.

As a reminder, please limit yourself to one question and a brief follow-up.

I'd now like to turn the call over to Carlo Bozotti, ST's President and CEO.

Carlo?

Thank you, Tait.

Good morning and good afternoon to everybody and I thank all of you for joining us on today's conference call.

ST continues to focus and make solid progress on operating and strategic initiatives, but I must say that the market today is quite challenging.

Let's review some of the highlights of the third quarter and then I will take your questions.

ST's third quarter revenue and gross margin performance were well within the outlook we gave at the end of the second quarter, despite the more difficult economic environment in September.

Since then, the outlook for the semiconductor industry for 2008 has declined from mid single digit growth to low single digit growth, due to the turmoil in the world's financial markets.

On a positive note, the uncertainty in the market should benefit ST, as the dollar has significantly strengthened vis-a-vis the euro.

Looking at our financial performance in the third quarter, we continued to advance and strengthen our market position, in particular with multimedia convergence applications and power solutions.

In comparison to the year-ago quarter, ST, excluding NXP Wireless and the former Flash Memory Group, which is now part of Numonyx, grew 10.9% sequentially and 12.4% on a year-to-date basis.

We believe our performance is superior to that of the market for the similar periods.

We are also making progress in advancing the value of our portfolio.

ST is not just growing faster than the market.

We are strengthening our product portfolio as well.

A key element of this progress was the completion of the deconsolidation of our former flash memory business earlier this year.

Additionally, our desire to develop important products such as MEMS, digital-baseband ICs and advanced analog ICs, to name a few, have enabled us to organically grow our revenues and improve our margins.

Evidence of our success is our sales to new target key accounts, which in the third quarter increased sequentially by 16% and 47% year over year.

Further evidence is our clean third quarter revenue growth, in comparison to the year-ago period, was principally driven by a significant improvement in ASP due to a richer product mix, which more than offset increasing price pressure.

Unit volume growth was important, but it was not the principal driver.

Now, we have several important points to highlight in our third quarter results.

First, on August 2, 2008 we completed the creation of ST-NXP Wireless, a joint venture owned 80% by ST.

I am happy to report that the integration has progressed very smoothly.

In particular, the two management teams have come together to form one cohesive team.

In addition, relationships with customers and the alignment of the product roadmaps are on track.

Related to the creation of ST-NXP Wireless, we booked $133m of non-recurring in-process R&D and inventory step-up charges in the third quarter.

Second, ST completed the deconsolidation of FMG and retained a minority equity interest in Numonyx on March 30, 2008.

Due to a one-quarter lag in reporting, we book a non-cash charge of $44m of equity loss on Numonyx Q2 2008 results, mostly reflecting stand-up cost and purchase accounting items at Numonyx.

A further $300m impairment charge reflected the significant deterioration in both the equity market multiples for comparable companies and the memory industry.

To be very clear, Numonyx has a solid capital structure with available cash of about $490m and we have no plans to inject additional capital into Numonyx.

Finally, we reported an operating income of $55m and a net loss of $289m.

Upon further examination of the figures at the business operation level, ST registered an estimated $210m operating profit or operating margin of 7.8%, net earnings of $178m and diluted earnings per share of $0.19.

Additionally, return on invested capital improved to 10.5% during the third quarter.

Turning to our third quarter operations, net revenue before the NXP Wireless contribution increased by 2.7% sequentially to $2.46b, compared to our revenue outlook range between minus 1% and plus 6%, so we are slightly ahead of the midpoint.

NXP Wireless sales for the period starting August 2 were $241m.

Our gross margin result also tracked to our objective.

Specifically, our gross margin before the addition of NXP Wireless increased to 37.2%, compared to our range of 36.8% plus or minus 1 percentage point.

Currency impact was minimal on a sequential basis, as our effective dollar rate -- dollar to euro rate was $1.54 in the third quarter, similar to the $1.55 rate in Q2.

Here, I would like to make two key points about our gross margin progression.

First, NXP Wireless was a positive contributor to our gross margin by about 50 basis points in the quarter.

And including it in our result for the period brings our gross margin from 37.2% to 37.7% before non-recurring purchase accounting adjustments.

So, operating improvements, including a richer product mix and manufacturing efficiency, combined with a benefit from the ST-NXP joint venture, led to a sequential improvement in our gross margin of 90 basis points in total, from 36.8% gross margin in Q2.

Second, on a year-over-year basis, our underlying gross margin improvement is also significant.

In the year-ago quarter, our gross margin was 35.2%.

Since that timeframe, the euro has strengthened by about 13%, with an estimated impact of 250 basis points on our margin.

So, clearly, we have been creating underlying value, as our gross margin progress is coming from a number of enhancements in our product portfolio mix, to include our divestment of FMG and addition of NXP Wireless, and continuing improvements in manufacturing performance.

Operating expenses have remained under control.

Excluding non-recurring in-process R&D of $76m, operating expenses as a percentage of sales were 30.5%, flat with the prior quarter.

As a result, operating income excluding NXP Wireless purchase accounting adjustment and other one-time charges was 7.8%, up from 6.7% in the prior quarter.

From the year-ago quarter, we estimate currency had a negative impact on our operating expenses to sales ratio of about 220 basis points.

Turning to our product segments, we are now reporting under three product segments - Industrial & Multisegment, IMS, the same as before; the newly created Wireless Products Sector, WPS; and Automotive, Consumer, Computer & Telecom Infrastructure, ACCI, which is comprised of our former ASG Group excluding ST's wireless business.

ACCI's revenues were in line with our expectations and reflected very tough automotive market conditions, while Consumer & Computer increased sequentially.

Year-over-year growth of 9.6% was led by strong growth of both automotive and digital consumer products.

IMS continued its strong performance, led by MEMS, IPAD, Smartcards and microcontrollers.

In addition, we continued to enrich our product mix in IMS with IS -- with integrated circuits representing 64% of IMS sales in the third quarter, compared to 59% in the year-ago timeframe.

Sales of ICs were up 8% sequentially and an impressive 21% year over year.

Our portfolio improvements are clearly evidenced in the operating returns for this business.

Specifically, IMS operating profit was $152m, improving both sequentially and year over year.

Our focus on new product innovation is delivering results, in particular in analog -- advanced analog ICs, MEMS and microcontrollers.

The total Wireless Products Sector sales, including NXP Wireless, were $696m.

And operating profit was $22m, net of $12m of recurring amortization of the acquisition-related intangibles.

We had indicated in our communications about the joint venture that we anticipated achieving cost savings of approximately $250m over a three-year period.

With the integration having gone well and in light of the wireless industry being under pressure due to the current environment, the JV is working to accelerate the saving initiatives.

Consequently, we expect to start to see some benefit from these actions starting next quarter.

For the first nine months, net cash flow from operating activities was $1.33b and net operating cash flow was $487m, excluding the $1.69b paid for the M&A transactions.

Both our cash generation ability and our conservative approach to managing our capital structure have enabled ST to make sizeable moves to improve and enhance our market opportunities and future cash generating activities.

We were able to self-fund $1.7b for acquisition while increasing our cash dividend to among the highest in the semiconductor universe and undertaking a share buyback program.

Let me also add a comment on our net financial position, which was a net debt of $409m in the third quarter.

Up until this quarter, we had a net positive cash position 11 quarters in a row.

We firmly anticipate returning to a net positive cash position following the completion of the ST and Ericsson joint venture.

Going into the third quarter, we have spoken of a mixed macroeconomic environment and it was clear that we would see weaker results in our automotive business, which we did.

The narrow financial challenge has now turned into more of a broad economic crisis, resulting in most of the semiconductor industry looking at a much different Q3 to Q4 dynamic.

Instead of the typical seasonal growth we normally see in the fourth quarter, we are now expecting a seasonal decrease.

We expect sales to range between flat and minus 8% sequentially.

This would lead to a fiscal year growth of between 6.2% and 8.6%, excluding both FMG and NXP Wireless.

Despite the sequential decrease in revenue, we expect that our gross margin will show significant sequential improvements to 38.8%, plus or minus 1 percentage point.

Our outlook is based upon improved operational factors and a more favorable currency rate, partially offset by reduced fab loadings during this timeframe.

Our fourth quarter outlook is based on an assumed effective exchange rate of about $1.40 to EUR1.

In addition, this outlook includes the results of the ST-NXP Wireless for the full quarter, but excludes an estimated $30m cost in the fourth quarter due to an inventory step-up purchase accounting adjustment related to the former NXP Wireless business.

In August, we announced plans to combine our ST-NXP Wireless activity into a joint venture with Ericsson Mobile Platforms.

In combination, the fabless JV will be a leading player and will offer the industry's strongest product offering in semiconductors and platforms for mobile applications.

Once approved and started, we believe this new leader will be well positioned to continue and extend customer relationships with the most innovative players in the wireless industry.

To conclude, we have four key priorities at ST.

First, the market environment has changed quickly, so we will continue to take the appropriate actions to navigate through this downturn.

Importantly, we have the financial strength and resources needed to both manage through and emerge as a strong industry player.

Second, even though we are benefiting from a stronger dollar, we will continue to optimize our cost structure, improving our manufacturing efficiencies and advance our asset-lighter structure.

Our plans to rationalize our manufacturing operations are well underway, but we have not yet reached an agreement to sell our Phoenix fab.

Our priority is to sell the fab as an ongoing concern, but under the current difficult market conditions we will move forward with our original plan while attempting to find other potential solutions.

Third, with respect to our wireless business, as I indicated earlier, we are moving forward on an accelerated timeline to capture the identified synergies.

At the same time, our goal is to complete the ST/Ericsson joint venture as soon as feasible and to have a clear roadmap to drive success upon closing of the JV.

Four, we want to continue to leverage vital assets, in particular our strong base in power solutions.

Our presence in MEMS, IPAD, advanced analog and microcontrollers, to name just a few of our many products, are important contributors to our performance.

Our new products have enabled us to increase our position in our new key target customers.

In summary, I would like to conclude on our strong financial position.

Thanks to our systematically -- systematic ability to generate operating cash flow and our solid capital structure, we have been able to advance our strategic initiatives independent of the uncertainties in the financial markets.

We are very proud of our accomplishment in the first nine months of 2008 and we are well positioned to face the downturn in the market.

Now, let me stop to take your questions.

Thank you.

Excuse me.

This is the operator.

(Operator Instructions).

The first question is from Mr.

Sandeep Deshpande, JP Morgan.

Please go ahead, sir.

Good afternoon.

Thanks for taking my question.

Firstly, Carlo, I have a question regarding Numonyx.

How far have you written down the value of Numonyx already, given that the peer group is virtually being valued at nothing at all?

Secondly, regarding your own revenues itself, how do we look at utilization into the fourth quarter and how are you preparing your fabs looking into the fourth -- first quarter of next year?

Sorry, I --

Operator, we've got some disturbance on the line.

All lines are fine, sir.

Mr.

Deshpande, please go ahead.

Your line is open.

Okay, so -- I think I missed the second portion of the question.

I'm sorry.

Yes, the second question was what do you think your utilization -- I don't know where the noise -- utilization will be in the fourth quarter and the first quarter?

Sorry, how are you setting up for the first quarter of next year?

In terms of fab loading, right?

Fab loading, yes.

Yes.

So I would say that Carlo will take the first question on the multiples of comparable companies in the memory field.

And then, Alain will comment on the fab loading utilization and the actions that we are taking, particularly in the fourth quarter, to reduce the loading.

Carlo?

Yes.

Sandeep, I appreciate your colorful comments.

However, as you may expect, GAAP required for a little bit more detailed analysis.

The $300m impairment is a result of technical methodology based on discounted (technical difficulty) valuation on the company and the comparable market multiple valuation.

And as you can expect, the comparable peer companies include the key memory players that are listed on the stock market.

So, on this basis, we have realigned the equity investment in our book in Numonyx to a value for the ST equity which is today in the range of $600m before the ST notes to Numonyx.

And we believe, and also our independent accountants believe, that this is an appropriate and fair valuation.

Okay.

Alain?

Yes.

Regarding -- good afternoon and good morning to all of you.

Yes, regarding the utilization of our plant and of our wafer fab, of course the demand in Q4 is decreasing.

At the same time, we want to control our inventory.

Therefore, the demand placed on our wafer fab is leading to a utilization rate of about 75%.

By the way, it's a bit more on six-inch and a bit less on the eight-inch wafer fab, but overall it's 75%.

If you compare to what we had in Q3 and Q2, it was around about 85%.

So we have to take some action.

And what we are going to do at the end of the quarter is to close most of our fabs between one week and two weeks, depending on the fab.

And you were asking about Q1.

It's a bit early to discuss about the Q1 fab loading, but of course we will also take advantage of Chinese New Year and probably also at the beginning of the year to have some additional closure.

Sandeep, did you have a follow-up?

Yes.

My follow-up again was on this fab loading.

So, do you see this fab loading continuing to -- based on what you're loading the fab -- you have probably started put -- loading wafers into the fab which will actually be coming out in January.

Do you think that this is going to go down and will that impact margins going forward again?

Well, I think in Q4 the -- let's say the effect of the fab loading is -- or the fab unloading is particularly significant.

And I think, despite the big hit that is indeed material, we have given an outlook of a gross margin in the range of 38% to -- 38.8%.

I think that the measures that we are taking in Q4 are significant.

Of course, we will exploit, as Alain said, other opportunities in the course of Q1 if needed, like the Chinese New Year.

In general, fab loading has a negative impact.

But as you have seen in Q4, we have been able to manage this, taking vigorous actions to reduce the loading, but despite that increasing the gross margin.

Thank you.

Thank you for your question, Sandeep.

We'll move on.

Operator?

Yes.

The next question is from Mr.

Gerra Tristan, Robert Baird.

Please go ahead, sir.

Hi.

Good afternoon.

Given the decline in revenues in Q4, how should we look at R&D expenses going forward?

And specifically, are you going to take specific action so that the dollar amount could decline quarter on quarter, so we don't get above 20% of revenues?

And if you could explain whether the $150m in cost savings could have some impact on that line item going forward.

Yes.

I think that of course we have important actions in place, and then Carlo will comment more specifically on the fourth quarter.

But I just want to give a sense of the actions that we had anticipated.

In fact, these actions have started -- were started very much at the beginning of this year, with the dramatic weakening of the US dollars.

So we have the -- an initiative that is to minimize and optimize our overall SG&A in ST and this is very much related to the separation of Numonyx and also to the integration of Genesis.

So this initiative is going on.

We are making progresses and we will have more progresses in the future.

The second is of course the very significant cost synergies that we expect from the wireless joint venture and we are accelerating those measures.

And as I said before, we will, as much as possible, anticipate and enjoy the synergies in the course of 2009.

Then, we have an important program that is not yet finalized and is not yet in the financial performance in 2008.

And this is very much to improve our competitiveness in R&D overall and is related to the initiative that we have with the French government to improve the competitiveness in the R&D through a support program related to the hub that we have in Grenoble and in Crolles.

And another important action - of course, this is not for expenses, but is for manufacturing - is the manufacturing infrastructure rationalization with the closure of the three fabs that we have announced, in Ain Sebaa in Maroc, in Carrollton in the United States and in Phoenix.

So we have -- on top of the major impact of the dollar rate that will be positive for us, we have four important initiatives to overall improve our competitiveness.

And now I will leave to Carlo commenting more specifically on the fourth quarter.

Yes, Carlo.

I will try to add some number to the various initiatives that you have mentioned, as they do fall in the current quarter.

And I also appreciate Tristan having asked the question on discussing expenses in terms of absolute dollar as opposed as a percentage of sales, since, given the current dynamic of the industry and of sales, of course, we are in a very special situation.

We are -- for your understanding in respect to our OpEx to sales target ratio, the midpoint of sales for Q4 we currently see is more than 12%, lower than what we were expecting six months ago for the current quarter.

So in absolute -- let's look at piece by piece.

In absolute dollar, we expect the Q4 operating expenses -- and I talk about R&D and SG&A altogether, as we usually do.

Before the former NXP Wireless addition, we expect them to remain substantially flat on the level of the prior quarter.

On one side, we will see some benefit from currency, but also there will be less vacation and a normally higher Q4 in expenses that we historically experience.

Then, there is the portion that we have had.

And in this respect, on the NXP Wireless additions, in third quarter we have taken two months.

In the third quarter, we would take the three -- the full three months' period, so we have one more month.

That's including the amortization of the acquisition-related intangibles, who'll give some $50m to $60m increase in expenses from Q3 to Q4.

Carlo's mentioned the plan of savings from the wireless cost synergies that will be a substantial, a very substantial, reduction, absolutely in line with our plan when launching the joint venture.

And this will materialize through the year 2009, starting from Q1 2009, also thanks to the accelerated action plan that the joint venture is currently adopting to reply to the market.

And finally, I think Carlo referred also to the opportunity from the competitiveness support for the R&D activity in Grenoble and Crolles.

I have to mention that, so far, the R&D expenses incurred in our P&L have not been yet balanced by the expected grants.

As you know, we are finalizing an important R&D contract.

We can reasonably expect it to be signed and cleared by the European regulator before the year end.

Those two are the two conditions necessary to recognize the grants in our income statement.

And under these assumptions, if these assumptions will occur, expenses in Q4 will be possibly offset by an about $55m to $65m positive balance in other income.

Very helpful.

One follow-up, more strategically on the wireless JV.

My understanding is now that you have several engineer teams working on baseband architectures and -- one from the Nokia side, one from the NXP side and also a baseband platform from EMP.

Do you plan on reducing the number of engineers at the wireless JV?

And also, should we look at this from different teams serving different customers or instead one baseband architecture going forward and just one team working on that?

Okay.

This is Alain Dutheil speaking.

In fact, for the time being, we have two.

We don't have three yet.

So we have, as you said, the NXP and we have the Nokia.

But of course, we'll have to work, when the EMP deal is finished or is -- day one, we'll have to work actively in working on reducing some of them.

It may take some time.

So, for the time being, what we are working on is really to reduce the service agreement that we have with NXP, and this will have probably an immediate impact.

I would say in the next few months we'll see a decrease on our expenses, before working actively on reducing the different 3G model.

Thanks for the question, Tristan.

We'll move on.

Operator?

Yes.

The next question is from Mr.

John Dryden, Charter Equity.

Please go ahead, sir.

Hi.

Thanks for taking my question.

First, for Carlo, can you walk us through the $1.3b uptick to goodwill and other intangibles?

And can you clarify, did you say $15m or $50m increased amortization expense for 4Q and into 2009?

I think it's a question for Carlo Ferro.

Yes.

I -- no, what I've mentioned for Q4 2008 is an overall increase in the former NXP Wireless perimeter for expenses, which includes the amortization, but also of course includes the additional month, since in Q3 we only -- we closed the deal in early August, in the range between $50m to $60m.

But this is not only the amortization.

It's also including the additional month.

Then, your second question is about the goodwill in our balance sheet.

And this goodwill, at this stage, includes a significant impact of the purchase accounting from the wireless acquisition.

And more in particular, we have some -- about - I will tell you exactly the number - $735m resulting from the NXP acquisition.

And as my follow-up, for Tommi, Wireless was up double-digits excluding NXP on the expanded customer base and the favorable mix.

Can you provide some further insight on both the favorable mix and your expanded customer base outside of NXP?

So what you've seen over the time is that we've expanded our customer base in Wireless in the digital baseband area, together with EMC.

So this has clearly grown our share of the EMP customers.

And then, also, on the imaging business we have, let's say, a customer base outside our traditional ones, but we are not disclosing the customer names in that area.

Thanks for taking my questions.

Thanks, John.

Operator, we'll move on.

The next question is from Mr.

Simon Schafer, Goldman Sachs.

Please go ahead, sir.

Yes, hi there.

I had just a question on the gross margin guidance again.

When I look at that on an underlying basis, just over 100 basis points expected increase.

I was wondering whether you could just walk us through how much of that -- of an increase is coming from FX versus how much of a decline we would have to incorporate, just on your expectation that the fab loading is falling.

Well, I think qualitatively -- Carlo will comment and I think will give some color also in terms of numbers, but I think there is -- unfortunately, there is an important contribution of the fab loading that is a negative contribution.

And there is also an important contribution that is coming from -- this time from the dollar rate.

And I would say there is also a significant contribution that is coming from operational improvements, particularly in manufacturing.

So, Carlo.

Yes, Carlo.

The two effects you have mentioned are quite similar, with of course different sign of the impact.

The currency from $1.54 to $1.40 per euro will benefit the gross margin by about 1.5 percentage points.

The expected under-loading of the fabs, the related [unsaturation] charges, are anticipated to negatively hit the margin in a range between 120, 140 basis points.

So, substantially, the two wash each other.

Here, the opportunity is that the under-loading is transitional.

I cannot say about the exchange rate, but we can hope that will eventually last longer.

So, apart from the currency and the under-loading, the manufacturing efficiency that we have achieved in the third quarter and a continued positive contribution from the product mix improved the margin.

And this is basically the driver of the about 1 point net improvement, despite and after a pure price pressure that this quarter is expected to be even heavier than in the prior period.

That's really helpful.

Thank you.

And my second question would be just a bigger picture question in terms of M&A strategy.

You comment on the net debt position now.

Does that mean we're mostly done in terms of complementing the businesses that you have?

Absolutely, yes.

I think we have been very busy.

Of course, some tuning may happen.

I think you know there is some smaller product line under scrutiny.

We are still working on -- scrutiny in the sense that they are not good enough.

And I believe that at this level maybe something more will happen, but I think we are mostly done.

I think it has been very intensive.

We now need to focus on the four key programs that I have mentioned at the beginning.

They are all very, very important for the Company, very material.

There is -- of course, this is mostly execution.

The cost synergies in the wireless, the optimization of the SG&A infrastructure of the Company, the rationalization of the manufacturing with the closing of the three fabs.

We are also working another three fabs.

For instance, we are not mentioning what we are doing in Singapore.

In Singapore, we are transforming what was previously a decaying center in a major, major broadcasting area.

In this area in Singapore we will have 1,000 products, which is a very, very important size, and of course with reduced testing cost.

And the finalization with the French government undergoing.

So, these are very important, let's say, programs for the Company and all of this will make the Company more competitive.

I think M&A will be reduced and we'll focus on the execution.

I think at the end we will have a better product portfolio and I believe that we are almost done.

Thank you, Simon.

We'll move on to the next question.

The next question is from Mr.

Glen Young, Citigroup.

Please go ahead, sir.

Thank you.

In listening to your comments, I think I heard you say that automotive would be one of the weaker areas in the fourth quarter.

So, one, I just wanted to clarify that I'm reading that correctly.

And then secondly, with respect to that, when I think about Wireless as a division, automotive as a subset of a division, how are those businesses best able to weather the weakness in revenues?

Is one more, for example, able to preserve their margins than the other?

Well, I think from the point of view of the most recent quarters, I'd say that automotive was particularly positive, particularly strong, in the course of the second quarter, for instance.

We had a fantastic quarter in Q2 on automotive and unfortunately the only sector that did indeed experience a strong slowdown in the third quarter was automotive, but starting from a very high level in Q2.

And despite this slowdown, I think automotive year over year in Q3 grew significantly, so contributing to the overall -- ST, without NXP, grew 10.9% and the automotive group significantly contributed to this growth.

Now, moving on to Q4, I would say that is more across -- I think is more across the board, I think is more across the various segments.

It's not only automotive.

I think it's -- the decline in demand is more a broader range.

And I believe that rather than looking at -- in terms of price pressure, rather than looking at the various -- the difference between the various application sectors, I would like to mention two things.

Number one, we will not have Memory any longer in Q4 and this is going to help, because our portfolio without Memory is less sensitive to this kind of downturn.

And number two, I think on the rest, rather than looking at the market segments, of course, we have two blocks of products in the Company.

We have some products that are more standard products and some products that are more dedicated products.

So, in this phase of downturn, we expect some more pressure on the portion that is more standard.

But I think, if you compare with one year ago, we believe that we are less sensitive from the price pressure point of view because we do not have any longer the $350m that we had per quarter on memory products.

Glen, do you have a follow-up?

Yes.

The second question is you made the comment that you're going to bring down fab loadings to account for the weakness in the end markets.

But I wanted to understand, just to clarify, do you therefore anticipate that inventories will actually fall quarter on quarter?

I just want to clarify that.

And then, just as a subset of that, what's your view on where channel inventories are today?

On the channel inventory, I believe that what we are experiencing today is a drop in demand.

On the other hand, both with what we're doing with our customers, major customers, but also with our distributors, we do not see an increase in the channel inventory.

I would say, for instance, I was visiting Asia two weeks ago and I had dinner with the CEOs of all our distribution in Asia that are some major distributors there.

And overall, the inventory position is not bad at all.

I have to say that the inventory that they have on our products during the last few months has decreased, right.

So, overall, I do not believe that there is a problem of inventory with our customers.

With the major customers, we have a supply chain system that is relatively sophisticated in the sense that we can monitor and track continuously every week.

It's really the demand that has dropped.

So, of course, we are more concerned about the overall demand rather than the adjustment of at least inventory on the products that our customers have on our business.

Carlo, did you want to comment about the sequential inventory?

Overall, for ST, we expect that the initiatives Alain has described on the manufacturing operations in the fourth quarter will result in keeping the level of inventory under control in absolute dollar terms.

We have, as you have noticed, made some improvement this quarter in terms of inventory turns that accelerated from 3.8 to 4 times.

And now the objective for the fourth quarter is to control the inventory in absolute dollar terms.

Thank you, Glen.

We'll move on to the next question, please.

The next question is from Mr.

Martino De Ambroggi, Euromobiliare.

Please go ahead, sir.

Yes.

Good morning, good afternoon, everybody.

Two questions on a couple of issues already mentioned.

You mentioned price pressure heavier than in the past, but if I'm not wrong you didn't quantify it.

So, if you can elaborate a bit more.

And on NXP consolidation, if I'm not wrong, in Q3 the gross margin net of non-recurrent items was in excess of 42%.

I'd like to understand which is the assumption in your guidance for Q4.

Obviously, net or including the $30m additional non-recurring item.

Thank you.

Okay.

Maybe I'll take the question, Martino.

The first one is about the price pressure.

Yes, I've mentioned that the impact to gross margin of pure price in the Q4 will continue to be a negative contributor and this somehow should accelerate in respect to what we have experienced in the prior quarter.

Talking about price, it's also important to combine all the ingredients on the average selling price.

On one side, we have the pure price.

What we call the pure price is the dynamic of a selling price for a single specific device.

And the other one is the impact of the mix, so the change of the devices that we do sell.

Interesting to note that in our third quarter revenues dynamic, the 10.9% year-over-year growth or the 2.7% sequential growth, this quarter ASP increased and even contributed more than the increase in units.

And as you can imagine, this ASP increase is a balance between pure price pressure, which continues to be a negative, and a very substantial improvement in mix.

The second of your questions is a clarification.

And, yes, I do confirm the 38.8% gross margin guidance for the fourth quarter includes the NXP.

Ex-NXP, Wireless business does not include this tail of about $30m of purchase accounting, inventory step-up that has been $88m.

$57m have affected the third quarter and $31m, based on the turn of the inventory, will affect the current quarter.

If I may, Carlo, just a further clarification, because the gross margin for the NXP newly consolidated asset seems to be in excess of 42% in Q3.

Just to understand, in your assumption of 38.8%, what is the expected contribution of these newly consolidated assets?

I would say that you have done some math on all the various ingredients.

I believe your math is not uncorrect.

However, then, of course, we do not track a gross margin by specific division.

Even less we will track, quarter after quarter, gross margin by pieces of sources into a specific division.

So, if you don't mind, I believe your math in respect to the third quarter gross margin is substantially correct.

This is not a surprise.

When we acquired this business, we were expecting a good contribution from this business to the gross margin.

And then, when we will acquire the Ericsson mobile platform piece, this will be a further and even more substantial increase in gross margin.

Okay.

Thank you.

I don't mind.

I don't mind.

Thank you, Martino.

We'll take the next question, please.

The next question is from Mr.

Gunnar Plagge, Nomura.

Please go ahead, sir.

Yes, hello.

Good afternoon.

Does the macro situation impact your satellite strategy?

I guess you were at 7% in the first and second quarter for outsourcing.

You were supposed to be, I think, at 9% now and you were, I think, reaching for 20% by year end.

So, does that change?

Yes.

In fact, yes, last quarter we were a little bit more than 8%.

It was 8.8%.

This quarter, of course, with the situation I was describing before, we are not going to go to more subcontractors so we'll stay at about 8%, 8.5%.

And frankly, for next year it's very difficult to say.

The only thing I can say is that we are not going to increase our capacity.

In fact, we are going to decrease our capacity because at the end of the year, as mentioned, we will close two of our fab.

And then, what is going to be the demand?

This is the big question mark.

So, our goal is still to be about 20%, but everything is going to be depending on the demand.

Again, the only thing I can tell you is that we are not going to increase the capacity.

Okay.

Thank you.

On the IMS side, the IC side grew quite strongly but we had another quarter of weakness in discrete.

Was there any area specific that you mentioned?

I think IPADS were even strong.

Well, the composition of the portfolio -- this is Carmelo Papa speaking.

Thank you for your question.

The portfolio is so wide that you find many things.

Overall, I could say that there has been a weakness this quarter for the pure traditional discretes, largely compensated by the more advanced products, specifically MEMS and advanced analog.

Of course, this is -- we have big volumes on discrete, so each time there is a glitch on the market.

In this case, there was specifically for some overstocking in what we call the e-bike in China, which caused us some little turmoil in some product sales.

But it's a momentary situation that we will recover in the coming quarters.

Yes.

It's very much related to this electronic bicycle in China and I think we will -- we'll hopefully have the opportunity to do better in the future also in discrete.

But let me underline once more, 21% growth year over year on this block of IC that this year was, in Q3, $574m is an impressive growth.

But nothing unusual in Power MOSFET, for example?

No, no.

Power MOFSET is what I said.

I think there was this bubble on the e-bike in China.

Okay.

Thank you.

Thank you for your question, Gunnar.

Next question, please.

The next question is from Mr.

Jonathan Crossfield, Merrill Lynch.

Please go ahead, sir.

Yes, thank you for taking the questions.

I guess, looking into 2009, as we look at things deteriorating quite sharply, do you think the IMS business, which is clearly the much higher margin business for ST at the moment, can be more resilient in such a strong downturn?

Yes, of course.

There are two things.

First of all, we are in the market, so if there is any major drop in the market we'll suffer but we can always do better than our competitors.

And second, there is a strong product portfolio that we are continuously renewing, which has been in the last three years giving a tremendous visibility within the Company.

I mean the new products, what we consider new products, the things which have been born in the last two years, have been doubled, percentage wise, in the last three years.

So, this is a combination that makes me feel comfortable that next year, irrespective of what the market will be, we will outperform our competitors in the same range of products.

There are many new things coming.

For instance, microcontrollers I think is very good new products.

We have Smartcards.

That is another area.

We have more of the MEMS, the gyroscope, for instance, (multiple speakers) in the family.

Yes, microphones.

I mean the silicone microphones.

Many advanced analog products.

So, we are really trying to push a lot of ICs very much and introduce more new products.

Jonathan, did you have a follow-up?

Yes, please.

This is probably one for Carlo Ferro.

But have you changed your hedging policy in any way, because I understood that you were hedging on a rolling six-month basis and the Q4 FX rate of $1.4 looks pretty good if you're still doing that.

No.

Jonathan, we have not changed so far.

So, the second quarter 2009 is substantially clean from any hedging at this stage.

It has a very, very minimal amount.

So, in this respect, we have not changed.

I have to admit that in these days and with the euro/dollar moving towards the $1.20, as it seems, last week we are eventually contemplating some possible adoption of hedging through options for extending to a certain limited percentage of exposure the hedging from the six to the 12-month window.

However, at this stage, based on the usual systematic hedging occurred so far, the second quarter 2009 is substantially clean from hedging.

Having asked a question to me, let me take the opportunity to add one more economic ingredient answering your prior question, which is at the end -- the profitability to the top line of a product line very much depends on the R&D intensity.

And IMS also still benefits of running at an R&D to sales ratio that is substantially lower than the Company average.

And this is something that, when modeling for 2009, based on market environment and top line, you may want to consider for IMS, and to a certain extent also for the automotive sector.

Thank you very much.

Thank you, Jonathan.

I think at this point we'll take one more question, please.

The next question is from Mr.

Didier Scemama, RBS.

Please go ahead, sir.

Good afternoon, gentlemen.

Many thanks for taking my question.

A lot of good questions have been asked already, so I'll try to do my best.

So, first of all, can you just maybe, Tommi, give us a bit of color on what you see on the wireless space, maybe what you see in terms of apps processor, imaging, connectivity, mixing only in baseband the peak rate?

And I have a follow-up, if I may.

Tommi?

I would say that, let's say, what we have announced earlier in the year about the nomadic applications processor being driven by two major areas, so one the automotive and application of that, and then second one the [black seat] product at one of our customers.

Those are both kind of moving substantially forward.

And then, on imaging, I'd just, let's say, make the comment that we've been successful at diversifying the customer base and let's say the results were visible now already in Q3.

Okay.

Could I just go back to the gross margin guidance for the fourth quarter?

The 1 point improvement coming from manufacturing and mix and more than offsetting the price pressure, I'd just like to get back to that because it seems like quite an amazing achievement in such a short period of time.

So, can you maybe be a bit more specific as to effectively what has been the price pressure sequentially and maybe where -- specifically where you improved the manufacturing to get such a massive leverage on gross margins?

Yes.

Overall, we said there are three contributors here, right.

One is negative and then unfortunately this [asks the] question the charge that is very material and we have quantified that before.

The second one is positive, is the exchange rate variation.

And the third one is also positive, is the manufacturing efficiency, so (inaudible).

And of course the product mix.

The product mix is playing a role in Q3 already.

It was a good mix, a better mix.

Our manufacturing efficiency, at the end this, I have to admit, is one of the easiest piece to anticipate and to forecast for us, since given the inventory cycle at the end we are substantially reflecting on the fourth quarter the manufacturing performance, the actual manufacturing performance, of the third quarter.

The third quarter has been a quarter where the fab have been able to run at, as Alain said, a quite decent level of loading, moving through the learning curve.

You can imagine that in our 300 millimeter production we are still under significant opportunities on reducing wafer cost through the learning curve.

And the third quarter is also a quarter where we have some summer vacation and managing the shift, the productivity, has improved.

So, overall, I have to reconfirm that this manufacturing efficiency is not something we do predict.

It's something that has been incurred, actually.

We remain comfortable on these forecasts.

In addition, in the first half of 2008 our manufacturing costs, especially in assembly, have been significantly hit by material cost.

I refer to copper, to gold.

And as you see, the market trend of the raw silicon, as you see, the market trend, the market price, for this material is somehow turning more in the favor of the customers.

Great.

That's very helpful.

Thank you very much.

Thanks, Didier.

I think at this point we'll take a couple more questions.

Management's given me the sign that we've got just a little bit more time.

So, operator, if we could take two more questions, please.

The next question is from Mr.

Jerome Ramel, BNP Paribas.

Please go ahead, sir.

Yes, good afternoon.

Two quick questions.

One, the first one, concerning the guidance you gave.

Could you give us a little bit more color per division and what was the dynamics over the last few weeks?

And second point.

Is it fair to assume that NXP Wireless for the EBIT was breakeven or slightly negative?

Well, I think let's start from the second, Carlo.

Yes, I think it was basically breakeven.

No (multiple speakers).

No, this is more.

A small profit, I believe.

It's publicly reported.

At the end, yes, there could be some tuning in the numbers between the JV result on the ST consolidated and the JV result standalone.

For instance, the impact of the purchase accounting on the standalone is 100%.

The impact of the purchase accounting for the ST portion is the 80% of the ST ownership.

But I'm sure it would not be helpful to enter into this level of detail.

At the end, the press release reports the result of the Wireless Product Sector, which includes the two months of the joint venture and the month of July for the ST business standalone.

This is a $22m operating profit after $12m of amortization of intangible related to the acquisition.

Before this impact, the Wireless business, the JV ran the quarter at about a 4.8% operating margin, which under the current business conditions seems to us quite reasonable, terrifically far from what was the result of the ST and the NXP Wireless business 12 months ago, in prior period before the combination.

Yes.

I think we had anticipated that the contribution of NXP Wireless this year would have been substantially neutral, and I think we reconfirm that.

Okay.

Thank you, Jerome.

Next question, please.

The next question is from Mr.

Dick Gaudois, UBS.

Please go ahead, sir.

I guess a metamorphose from Nic to another name there.

Hi there.

Just a quick question on the margins for IMS, for Carmelo, I guess.

16.9% is pretty strong.

How much of that was related to mix, as you said, basically?

But your analog has done quite well vis-a-vis discrete.

Do we see this mix as being sustainable basically into next year?

I have got also a follow-up on the wireless side.

Thank you.

If I understood well, you want to know how much MEMS were among the analog?

No, how much of the margin improvement, year over year, 16.9% versus 16%, was due to mix, i.e.

in particular analog effectively being stronger than discretes overall.

It brings a strong contribution, yes, indeed.

Yes, it's significant, of course, is driven.

It's not -- but, of course, this is a family now with a return, what we like to define as RONA, the return on net asset.

It's a family that is at this point well above 20%.

So, I think -- and I have to say there is a difference, but also the portion that is less glamorous in terms of RONA is not bad at all.

It's well above Company average.

It allows me to finance the more advanced activities.

So, indeed the mix is helping, but also the portion that is less glamorous, like the discrete, is above Company average in terms of capital employed.

Okay, great.

And a follow-up on the margin side still, with Wireless.

So, basically, we had 0.8% ST plus NXP operating margin for the first nine months of the year.

Last year, you told us you were running at 6.7% combined.

So, quite a drop.

I understand part of that is currency.

But how should I look at this into next year, in a market which is potentially going to be really tricky?

Prior to cost synergies.

And then, on top of that, maybe Carlo could lay on the cost synergies impact for next year.

Yes.

I think what we have announced for the Wireless for the sector is, let's say, $22m of operating profit after the $12m of amortization of intangibles.

So, before this is $34m operational profit, let's say, out of revenues of $696m.

So, this is what we have announced for the third quarter and this would correspond to about 4.9% what we call G&L, gain and loss, from operation positive.

Right?

So, moving on, of course, there is good news and there is bad news.

The good news, I would say, in this area there are two good news and there is a bad news.

The bad news, of course, is the market trend.

But there are two good news.

One is the opportunity that we have to exploit the cost synergies and the other one -- which is material, is important, is a lot of money.

And the other one is, of course, the dollar rate, because big chunks of this activity, particularly in R&D, is in Europe.

Right?

So, I think there is a lot of work to do.

It's a lot of execution.

But I think we reconfirm that the opportunities are there, not only in terms of winning new customers and exploiting the technology and the leadership on products, but also from a financial and economic point of view in terms of cost control and cost reduction.

If I may add something, you remember that you know we have identified synergy, cost synergy, of about $250m and due to the market -- and this was in three years.

And due to the market condition, of course, we need to accelerate these synergies.

And this is exactly what we are working on today.

We won't wait three years to get it to [$93m].

Thanks, Alain, that's good news.

But I guess, taking into account since August, a) currency moved in your favor, b) the wireless market is probably moving against you, maybe if you could take this into consideration, could you again put a timeline on when ST plus NXP plus EMP could be earnings accretive that would be great.

Well, when NXP will be -- oh, EMP.

If you allow me this, we'll discuss when we close, but at this point we reconfirm.

So, I think it's very simple.

I think the NXP contribution -- the NXP Wireless portion contribution in this year is [growth] more than neutral.

It's neutral to the P&L of the Company.

And we expect that next year, despite the market uncertainties, and more than uncertainties at this point, and thanks to the cost synergies opportunity that is very important, and also some dollar effect that is much less whether than the cost synergies opportunity here, I think that overall next year we expect a contribution that will be the NXP Wireless will be accretive.

And what about EMP, so the new company?

If you allow me, we cannot comment at this point on EMP.

Of course, I think during the meeting that we had in London at the moment of the announcement there was a clear statement that the EMP activity was basically neutral, and so this is what we said.

But of course, we will know more the details after closing.

Great.

And the very last maintenance question.

What was the operating margin of Numonyx, if you may provide this color, in Q2?

Well, in Q2, I think I can say in fact there was a very significant impact on non-recurrent items.

There were two, in fact.

One is the stand-up which is of course the IT cost, the cost to establish a new company, to run the new company independently.

This has been a major contribution to the loss.

And the other one that was also very significant was the -- again, was similar, was the stand-up of the inventory.

Right?

So, as part of the separation, which is a non-cash item.

The first one is the stand-up of the company, of course, and the IT cost is a cash item.

So, overall, this is the big portion of -- the major portion of the loss.

Without these two elements, the company was relatively close to breakeven.

Okay, that's great.

That's helpful.

Thank you very much.

Thank you.

Thank you.

I think at this time, Carlo, do you have any closing comments?

Otherwise, we'll --

No, I think we have commented and gone through many times on the priorities and the execution.

And I would like to thank everybody for the questions and we will focus on these four major execution lines.

Okay.

With that, thank you everybody for attending.

At this time we'll go ahead and sign off.

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

Thank you for joining and have a pleasant day.

Goodbye.