意法半導體 (STM) 2009 Q2 法說會逐字稿

Good morning and good afternoon.

This is the Chorus Call conference operator.

Welcome, and thank you for joining the STMicroelectronics second quarter and first half 2009 earning results conference call.

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

Tait Sorensen, Director, Investor Relations.

Please go ahead, sir.

Thank you, Dino.

Thank you for joining our second quarter 2009 conference call.

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

Joining him on the call are Carlo Ferro, our Chief Financial Officer, Philippe Lambinet, our Executive Vice President of Home Entertainment and Displays, and Carmelo Papa, Executive Vice President of the Industrial and 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.

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

Carlo.

Thank you, Tait, and good afternoon and good morning.

Thank you for joining us on today's conference call.

Last quarter's indicators of improvement in booking activity and increased visibility were confirmed as ST reported second quarter revenue results of $1.99b, coming in above the high end of our targeted range.

We posted sharp sequential increases in most market segments.

And from a regional perspective, we benefited from strong sequential improvement in China and in Asia Pacific, but not yet from Europe and United States.

While the environment is still uncertain, we had a number of positive metrics, demonstrating that ST is well aligned with the key priorities that we shared with you at the time of our Annual Field Trip on May 15 in New York.

First, we indicated that we planned to maintain a positive net cash position and we have, for both the first and the second quarters of this year, having reversed our net debt position of $542m (sic - see press release) at the year-end 2008.

Our positive net cash position in the second quarter was $205m.

Looking ahead, we expect to continue to be in a strong position for the final two quarters of 2009.

Second, we indicated that we were taking aggressive action with respect to inventory levels.

Our goal is to reach 4.5 turns by the end of this year.

During the second quarter we decreased our inventory by $207m, improving our inventory turns to 4.1 times from 2.9 turns at the end of the first quarter.

And from our outlook, we can see that our goal is to deliver further improvement in the third quarter.

Our aggressive actions are clearly reflected in the extraordinary low level of our gross margin for both the first and the second quarters of 2009.

These are ugly numbers.

I don't like them any more than you do.

But we are right to take these necessary actions.

Looking ahead to the third quarter, we expect to see a sequential improvement in the gross margin to about 31%, plus or minus 2 percentage points.

This range assumes some partial recovery in operating efficiencies and fab loading, but is still far below our optimal levels as it also reflects an anticipated 75% fab loading, as we expect some further inventory reduction in the third quarter.

We are encouraged by our four quarter backlog dynamic, but we have a broader than usual gross margin range that still reflects uncertainty in the market and related fab loading in Singapore -- in September.

Third, we indicated that we expect to turn cash flow positive and we have, with net operating cash flow, excluding M&A, of $45m in Q2.

Looking ahead, we expect to generate positive net operating cash flow in the second half of the year if market conditions develop as anticipated.

Fourth, we indicated that we are continuing to advance our lighter asset strategy, and we have.

For the first half of this year, capital expenditures totaled $166m.

And so we will be well below the $500m for this year, and well below last year's expenditure of $983m.

Also, we continue to push our Ji technology approach, after having recently finalized the R&D grant from the French government.

Today, we have extended the partnership for sharing technology development of it to Global Foundries.

And finally, turning to wireless, let me make the following points.

Obviously, putting together three companies was not easy to do.

But again, it was the right move strategically.

It is certain in this business to be successful you need three critical elements.

You must have the scale, you must have a diversified customer base and you must have the R&D resources to innovate and serve the different market segments.

ST-Ericsson is one of the very few companies that have all three.

We know that under this post-crisis market scenario we have to lower the Company's breakeven point.

Indeed, ST is executing towards a $1b productivity and saving programs to lower our breakeven.

I will not recap it in detail, as it has been extensively discussed in other venues but, simply stated, it is a broad-reaching plan including manufacturing, the continual rationalization of the sites, the improvement of the R&D effectiveness and, importantly, capturing the synergies in wireless.

Now, let me turn to some specific highlights of the second quarter.

The quarter was essentially the opposite of the first, with all market segments and applications up on a sequential basis.

And just as distribution saw a significant distort in the first quarter, it rebounded sharply in the second quarter with 44% sequential growth, due to improving business conditions in some regions as well as more normalized alignment of inventory to demand.

As I said earlier, our gross margin of 26.1% was reflective of our efforts to make significant headway in inventory reduction.

In the second quarter, we had $121m in unused capacity charges compared to $139m last quarter.

In addition, the results were affected by inefficiencies related to manufacturing, as almost all our fabs have experienced operational disruptions when running at such low volumes, and this will happen again in Q3.

And finally, industrial applications and higher demand in China, while driving revenue growth, had a negative mix impact.

So some of these factors explain why we were not able to leverage the higher than expected revenue result.

Operating expenses of $896m increased sequentially, due to the integration of one additional month of the former Ericsson Mobile Platform business into ST-Ericsson and a higher number of days in the second quarter, but were partially offset by the ongoing cost reduction programs.

Turning to the third quarter, with somewhat improved visibility, we are returning to a more normal outlook.

Based upon current information, we expect revenue to increase sequentially between 4% and 14%, representing a revenue range of about $2.07b to $2.27b.

We expect sequential growth in all product groups, with industrial, automotive and computer driving the growth.

Now, there was one final metric that I did not speak about at the start of the call, market share.

Our sequential revenue growth in the second quarter was 20%.

This is certainly above what many semiconductor companies have reported, so I believe we are positioned to capture market share sequentially and year over year.

This brings me to the final topic for this call.

It is about continuing to improve our market position by introducing innovative products to serve the needs of the markets we address.

And it is about expanding our customer -- our base of customers in specific regions such as China where we grew 38% sequentially, in the mass market where we grew 36% sequentially, and in our new key customers where we grew 34% on a sequential basis.

Looking from a regional perspective, our focus on Asia Pacific and Greater China is paying off.

Over the last three years, we have gained market share in Asia Pacific, and we expect to do so again this year.

As we discussed last quarter, we have in place important marketing and development initiatives with our regional sales and marketing organizations, in combination with our product groups.

In the second quarter, we registered strong growth in several programs.

As we mentioned in the press release, we are excited about our progress in the sense and power initiative, as we began shipping analog controllers and power MOSFETs for power management in computer motherboards for the first time.

We expanded the range of our high-voltage MDMesh power MOSFETs for switched-mode power supplies.

We gained traction in the 32-bit microcontrollers in the industrial, smart card and automotive markets.

And we continued to ramp up our new cost optimized product family based on advanced 55-nanometer low-power technologies for the set-top boxes.

And in wireless, ST-Ericsson is making significant progress with its product portfolio.

As of the end of the second quarter, the JV has shipped over 1m units of the TD-SCDMA devices, and recently announced a strategic partnership with China Mobile to drive development of both high-end and low-cost handsets based on this technology.

Let me summarize our significant progress during this quarter and the first half.

First, with respect to managing our cash and liquidity, we maintained a positive net cash position, we generated positive cash flow -- operating cash flow and we drove down inventory levels sharply, and we made prudent capital expenditures.

Second, with respect to our cost programs, we are on track and on time to deliver results.

Third, with wireless, here again we are moving ahead with product initiatives with customers and with right-sizing the JV for profitable growth.

And finally, product innovation, with the introduction of a wide range of high-value-added products.

Moving to a longer-term perspective, I believe that the world cannot get out of the crisis without building its future growth on the solid foundation of electronics.

There is an enormous potential demand for improved connections between people, machines and enterprises.

There is a widespread need for improved security.

The applications of remote sensing and robotics are just beginning to show their potential in the support of an aging population.

The same is true for the application of electronics through healthcare.

And we are all aware of how vital electronics are for the more environmentally friendly vehicles, the efficient use of energy and to exploit renewal resources -- sources.

Well, today and for the next several decades, microelectronics, as it evolves towards nanoelectronics, will be the most powerful enabling technology for all those applications of electronics.

The potential is huge and we are prepared to grab all of the opportunities, as we play a major role in this new step forward in the industry.

With that, my colleagues and I are now available to answer your questions.

Thank you.

The first question is from Mr.

Simon Schafer of Goldman Sachs.

Please go ahead, sir.

Yes, thank you very much.

My first question is related to gross margin outlook.

Just in light of your statement that you would expect utilization rates to be as high as 75%, it would appear that maybe the gross margin leverage that is coming through isn't as pronounced as one may have expected, and that seems to be the case for -- or seems to be the case for some of the other companies in this space.

I understand that perhaps the inventory burn down issue is taking a little bit longer, but at that sort of utilization rate it would be great if you could shed some more color as to when we would expect that to be coming up more.

Is that just a function of cycle times and inventory burn down, or is there anything else at work?

Thank you.

Well, I think Carlo is taking this as -- I think it's very technical, and I am sure Carlo is covering.

Good morning, good afternoon, everybody.

At the end, we already addressed, I guess, the point at the prior quarter call.

The way that we are currently running the fab is affecting gross margin negatively in two respects.

One is the technical cost of unused capacity.

This is an impact of about 6 points in the second quarter and will continue to be somehow visible as large as 3 points of gross margin in Q3, based on our current visibility.

And the other one is the inefficiencies that when running the fab at half of the capacity exists, given the inability when a machine runs of really using the move on the most effective way.

And this is a substantial effect.

When we met in May, at the Analysts' Day, I guess I've shared with you about 5 points of negative impacts at the time was in the first quarter.

The one that we are experiencing in second quarter is no different, even eventually a little bit higher.

And these at the end fall on the inventory cycle, and based on that fall on the following quarter.

So this is an effect that is still present in our third quarter gross margin current visibility.

At the end, from Q2 to Q3 we do see some opportunity of improving margin at mid-point of the guidance by about 5 points, and these 5 points reflect the initiatives that have been significant in the restructuring.

Since -- I would remember that in early April the Company phased out the operations in the 6-inch fab in Carrollton and the assembly plant in Ain Sebaa, so this has positively affected manufacturing costs during Q2 that benefited the margin of Q3.

But obviously, we are not yet at a normal situation, at full speed, of running the fab.

Going forward, this is the last part of your questions, of course, for Q4 we do expect another substantial step up, based on the current visibility.

However, since at the end these effects will progressively mitigate it.

However, also for Q4 we do not currently see full loading.

We see about 80% of fab loading.

And in Q3 the use of the fab will continue to be not optimal, so the inefficiency effect is progressively absorbed but not totally absorbed.

What we see positive, looking at the gross margin for the fourth quarter, is the mix impact.

Mix, at the end, can turn to a positive contribution, with the new products in the 50-nanometers, with the TD-SCDMA that quarter after quarter will ramp to higher volume and very visible revenues, and given a more balanced geographic distribution as the margin in Q2, and to a certain extent also in Q3, is very much affected by weight of sales to geographies like China that is lower margin, which is higher than the normal balance for the Company.

Yes, we do not have enough orders from Europe.

And unfortunately, Q3 in Europe is seasonally weaker.

But we expect a strong recovery from Europe and from America in the fourth quarter.

Simon, did you have a follow-up?

Yes, if I may.

The second question is actually something more related to Carlo Bozotti's statement just now, in terms of just pure ordering environment in Europe.

I think your press release is clearly stating that that's the part of the geographies which are still slightly weaker.

But you did, I think, comment that even some of the industrial portions of the business, in automotive we are seeing some initial signs of life.

I think that's sort of what you said in the May Analysts' Day.

But I was wondering as to whether you could maybe just elaborate a little bit more qualitatively as to what you are seeing in terms of the ordering environment, in terms of restocking or real end demand.

Thank you.

Right.

Yes, absolutely.

So, first of all, automotive grew in Q2 but China was very strong in automotive in Q2.

And of course it's not the same kind of cars; it's much lower-end cars.

But I -- what we see, very, very simply, is the numerical indicators, the indicators that we have on our backlog, also for Q4 are positive.

So, of course, we track backlog on a rolling basis and we have good indicators for Q4.

Still, we are in a -- living and we have lived a major crisis, so we remain cautious and we want to work being very, very careful on inventory, and we are ready to adjust loading down if necessary in September.

The risk that we see is more a correction in Asia, in China and in Taiwan, in Korea, because the recovery was pretty fast.

And in case this will come, we will rapidly adjust our loading because we are strongly committed to move on with inventory reduction.

So this is the concern, but it is not in our numbers.

If we look at all the indicators, at our backlog, today our backlog for Q4 is substantially up.

Okay.

Thank you very much.

Thank you, Simon.

Dino, next question, please.

The next question is from Mr.

Glen Yeung of Citi.

Please go ahead, sir.

Thanks for taking my question.

I just wanted to follow up again on the gross margin question.

You make the point that you'll be at 75% utilization Q3, 80% Q4, and yet you still are seeing inefficiency charges.

I understand that there are maybe still some under-utilization charges.

But at that level of loading, do you actually -- are you actually still seeing an impact, an inefficiency impact from being at quote/unquote low production levels, if you are at 75% or 80%?

Yes.

Again, of course, Glen, you may consider that obviously each quarter basically reflects the prior quarter performance of the fab in this respect.

So Q3 at the end is affected by the second quarter, which frankly has been, how say, the worst quarter for manufacturing due to the level of activity of the fab in the history of the Company.

And the Q4 still reflects 75% to a certain extent.

So, we are improving, what is also important, and I would like to highlight it, is that the effort done in restructuring manufacturing and the headcount reduction, which is a plan of 3,500 people, has been substantially completed.

And this helped us significantly to mitigate these factors.

So I would qualify as very visible these effects, otherwise the impact would have been obviously might higher.

At the end, we are now, I believe, experiencing a phase of recovering activity, and in a phase of recovering activity the fabs are progressively restarting.

None when phasing out, none when restarting the activity, all goes perfectly smooth.

Semiconductor fabs are designed to work as a perfect continuous process, and any of this kind of disruption up or down is not helping performance, for sure.

Great.

That's a good answer.

Thank you.

The second question I have is maybe if you could just shed a little bit more light on your recent announcement with Global Foundries, maybe let us know what the genesis of that relationship was, what benefits we might expect to see and when we might expect to see them.

Well, I think the -- of course, is -- for us is -- aligning with our advanced CMOS technologies is a good opportunity for us, is an additional source for us.

And what is important is fully aligned because it is our own technologies and therefore we expect not only competitive solutions but also, from a technical point of view, a smooth way to work together and -- so I think this is the value of the agreement.

It's an additional source, it's a full alignment and therefore a good opportunity to run smoothly, for instance, product -- the same product in two different facilities.

Irrespective -- Carlo, can I add a point, in respect to the cost model for the Company?

I guess we have expanded in New York, Jean-Marc Chery has expanded about this agile technology model, where pursuing the ability of mastering advanced CMOS technology we are also substantially reducing the technology R&D effort as a percentage of sales, and in total dollar.

And this is a combination of main ingredients through a network of initiatives and partnership, the one that we have started with IBM, the one that we de facto have with the French government and the related grants.

And licensing technology, as is the case for the Global Foundries, and the receiving licensing royalty flow from partners is another form of mitigating with revenues, other income, the costs that you see on the R&D P&L line.

Thank you, Glen.

If we can move to the next question, Dino.

The next question is from Mr.

Nicolas Gaudois of UBS.

Please go ahead, sir.

Yes, hi.

I've got two questions, if I may.

The first one, if you could come back to comments you made in May on reaching $2.1b, $2.4b of quarterly revenues by either Q4 this year or Q2 next year, and in that context to break even.

There were some reports from the press this morning which seemed to suggest you may not necessarily -- I think it's probably too early to call for breakeven in Q4, despite the fact that your revenue base in Q3 could put this within reach.

And the second question is could you help us a little bit on OpEx, since they were higher than expected in Q2?

How should we think about it in absolute relative terms into the first quarter?

Thank you.

Yes.

No, I think this morning I said exactly what I said in New York.

So we have a model, I think we are implementing this model.

I think the timeframe for the implementation is from six to 12 months.

I think that maybe some elements will be for sure in Q4, maybe not all the elements.

But this is -- I said exactly what I said in New York.

And we do not have any -- in this respect, any different position.

I think that, from the free cash flow point of view, we expect now a positive performance in the second half of the year.

So, in this brutal crisis I think, as you know, we have burned some cash in Q1, $139m from an operational point of view.

This, of course, is after capital investment.

And I -- at this point, we expect to have a positive free cash flow in the second half of the year.

So, overall, I think we will close 2009 with a financial position that is substantially stronger than what we had at the end of 2008, despite going through the most dramatic crisis that we lived, with the target not to burn any cash from an operational point of view.

As far as expenses is concerned, I think that Carlo will take it, Carlo Ferro.

Yes.

I guess, maybe to address Nicolas' question and maybe anticipate other questions, it will be beneficial to share with you where we stand on the headcount restructuring, as the operating expenses activities are concerned.

We were presented and we are pursuing a plan of reducing headcount in that area, SG&A and R&D, by 2,350 people.

This is the combination of the ST plan.

This is the combination of ST-Ericsson phase one, the one announced after the merger with NXP, and the ST-Ericsson phase two, the one announced at the end of April, immediately after inception of ST-Ericsson.

Where we stand today, we have done about 850 people at the end of June.

So there are other 1,500 still remaining to be addressed.

So this is a big -- a large number.

It's unfortunate for people, but it's a big and large opportunity on our OpEx stream going forward.

You know that the phase two of ST-Ericsson has been announced end of April and the two months of the quarter have been then devoted to completing all the procedure in Europe for labor communication and so far.

So they will start to reduce the headcount in the next future and they have not done so far.

You know there is a portion of this plan that is a plan to be completed in 2010, by mid-2010 to be exact.

So I would characterize the 1,500 headcount to be addressed as about 900 for the second half of 2009 and 600 for the first half of 2010.

In this respect, looking forward to our operating expenses, we have a substantial opportunity for reducing expenses in Q3 and in Q4 in respect to the level of the second quarter 2009.

We may expect some, I would say, some tens of million dollars in each, Q3 and Q4.

We will continue, quarter after quarter, to increase the benefit from the restructuring initiatives.

For Q4, please consider in your modeling that the quarter has an impact of the accounting calendar which results in about a 6% higher number of days.

And, of course, as another caveat for your modeling, our model was based on the exchange rate at $1.37.

Where we stand now, it's not exactly there.

This could be another ingredient.

But apart from these contingent ingredients, the plan is on track, and the operating expenses will move down in absolute dollar and even more leveraging on sales increase as a percentage of sales from Q2 into Q3.

So tens of millions of dollars, basically, you said, in Q3 versus Q2, you would expect?

Yes.

This is what I said, some tens of million dollars.

Okay.

That's great.

Thank you, Carlo.

Thanks, Nicolas.

Dino, next question, please.

The next question is from Mr.

Didier Scemama of RBS.

Please go ahead, sir.

Yes.

Good afternoon, gentlemen.

It's Didier Scemama from RBS.

Thanks for taking my question.

I'd just like to start with a question on the view on the cycle and maybe your inventories in the supply chain.

Because when I look at aggregate inventories for OEMs and EMS during the second quarter, I appreciate we don't have all the numbers yet, but it looks like inventories have been drawn down substantially again in Q2.

And I am just wondering what you think is a sustainable level of inventories in the supply chain as we move into the second half, with seasonality, and perhaps also catch up with end demand.

That's my first question.

And my second question, just strategically, one of your competitors is talking about a partner in the set-top box and DTV arena for a JV.

I just wanted to have your thoughts, perhaps, Carlo.

Thanks.

Yes.

Well, there is Philippe here, so we'll take this with pleasure.

I think that on the first one, of course, we track our distributors.

And here, I think I have to say that the POS performance is up in Asia.

But unfortunately, in Q2 the POS was still somehow deteriorating, both in the United States and in Europe.

And I am not talking necessarily about the POS of ST.

I am talking about the point of sales of the market.

And the inventories, they are down everywhere.

Okay?

We saw a strong reduction of inventory at our distributors everywhere.

This, of course, is -- I believe that there are challenges; there are even some delivery challenges in these days, because the inventory at these distributors went down very dramatically.

If you look at the OEM, we see significant -- we see numerous requests from customers to in a sense expedite products, which is a sign, which is a sign that inventories are down.

Of course, they have been and they are very cautious in planning and in their preparation of orders.

I think is not going to be sustainable.

I think that some better planning is needed because the swings have been too brutal.

So we moved here from a certain level, dropping 40% and now up, and all the inventory are down.

And there are a lot of customers somehow screaming and trying to expedite products, because the planning process was not optimal in these months.

I do not know whether I responded, but this is what we see.

Okay.

And on the potential partner for NXP in set-tops and DTV?

(Multiple speakers) they are looking for someone, so.

So I think that this is now -- Philippe Lambinet that is in front of me.

I am not going to do investor relations for NXP, so it's --

Maybe some of our former colleague is doing for us.

Maybe (inaudible) would know.

It's well known that in the area of digital television there is only two companies of the size, the critical size, to afford the R&D that's needed in this field.

So there is a company in California and there is us.

We have the critical mass to be sustainable.

Others don't.

Therefore, it's not surprising to see some consolidation happening.

We saw NXP getting the digital TV part of Conexant.

They are still below critical mass.

They are still not enjoying a very good market situation.

So there is no big surprise to see moves to consolidate.

There could be other moves from other people who are also below critical mass, though.

That's not particularly surprising.

As far as we are concerned, we enjoy a lot of design wins with our new families.

We are introducing, later this year, extremely competitive products with a very high level of performance.

We are delivering on our plan to come back in the TV chassis, thanks to our acquisition of Genesis.

The [Freeman] new platform is in the fab at the moment and we expect to start generating business later this year and maybe next year.

So we are executing according to our plans.

And fine, if the others are struggling and need to partner, you should ask them the question where they are going.

Thank you, Didier.

Dino, we'll take the next question.

The next question is from Mr.

Tristan Gerra of Robert Baird.

Please go ahead, sir.

Hi.

Could you talk about your plans in terms of product mix going forward and which areas you may be emphasizing or de-emphasizing in the future, in addition to what you've done so far in terms of divestitures, and also, maybe more specifically, in analogue?

Yes.

So I think -- I will leave Carmelo to make the point on the analogue, where we have a lot of initiatives.

I already said this, but I believe that today the geographical mix -- in Q2 and partially also in Q3, the geographical mix is pretty unfavorable, because we had a global crisis.

Practically all industrial sectors and all geographies collapsed.

And the first to recover were China, Taiwan, Korea, and the mix is somehow poor in these regions.

While the recovery in Europe or the recovery in the United States and also in Japan is -- well, in Japan the bottom was in Q2, in fact, so Q2 in Japan is lower than Q1, so the recovery is not there yet.

So we expect that in the next two or three quarters there will be a normalization in this respect, because today it's not that we are purposely pushing for a worse mix in China or in Taiwan; it's simply that we do not have enough orders from Europe and US.

And this, of course, it takes longer time to recover.

So this is from a geographical point of view.

From the point of view of very shortly in the ST-Ericsson, I think that -- I am sure Alain Dutheil already commented this, but I think we have a strong focus on high-end products like the connected devices and the smartphones applications.

And in the area of digital consumer, I think is very much for us moving also into smaller geometries from one side but more value in the products, including dual-core set-top box products with very performant 3D capabilities.

So this is the part of the VLSI, in a sense, and I leave to Carmelo to talk about all the initiatives that we have in the area of analogue.

Well, this is Carmelo speaking.

The major initiatives (technical difficulty) analogue are (technical difficulty) with the sensor power campaign.

And we have a very bullish objective, in a market that is -- nobody knows how it will end up.

Some people talk about minus 20% now, this year.

We have an object of growth by 7% in this field, which means several hundred million dollars.

And so most of the products here are pure analogue products.

There is a combination of also some discreet high-end discreet power that complements in many applications the analogue product, but most of it is 90%, 85%, is pure analogue product.

So we are really hitting the ground with this type of product.

And I must say that for the -- we have a budget for the year that I am not -- I don't know if I can mention this here.

No, you cannot.

You cannot.

All right.

The boss says I cannot, therefore I don't.

But we have hit the target for Q1 and Q2, and therefore it's promising.

Of course, most of it will depend how the market will evolve.

If there is a double dip, then this will hit also the campaign.

But we count more than everything else on innovation.

We have a bunch of new products that are coming.

I must tell you that in the first two quarters we doubled the presence of new products.

By us, new products are those that are -- were born in the last two years, let's say.

So, in the first two quarters, we have doubled the presence of new products.

Some examples, well, of course everybody knows the MEMS example, and this is a part of the sense in the sense and power campaign.

So we started with -- we are introducing the gyroscopes next to the accelerometers.

Q4 will come the microphones.

This will enlarge the scope of the mission of the MEMS, not only for wherever we were before, mobile telephony, say gaming, but also industrial application and medical application, so we are making inroads everywhere.

The rest of the campaign of this sense and power is devoted to motor control application, where there is a lot of -- it seems that apparently this should be discrete power.

It's discrete power, but there's a lot of analog devices in there.

And this is -- this motor control is a part of the mission of the sense and power.

We have analog front-end and back-end applications.

So this is a thorough, let's say, number -- numerous of applications we are following and one on -- one more thing which was not happening in the past.

Besides the new products that we're introducing quarter after quarter is the system applications that we are following now.

So we introduced on the market a lot of boards that are for the mass market and the similar customer are of essential -- most preferred by this customer, what I want to say, so in the sense that we do a lot of R&D for these people and they do the final industrialization of these products.

And we have already sold 9,000 boards, which is not peanuts.

Altogether, we have 250 different boards covering different application, most of them industrial application.

So we count a lot on this sense and power campaign, which in the end, in terms of products, means a lot more analog.

And the first results are proving good.

Okay.

And then a quick follow-up.

Could you talk about your market share dynamics in microcontrollers, given the new focus for one of your main competitor in this area?

And if you could remind us what your market share is for 32-bit MCUs.

Well --

Sure.

Go, Carmelo.

Well, the 32-bit campaign is one of the most promising and a result given of the [amount] that ST has done until now.

Of course, a microcontroller takes a lot of time of -- in terms of designing.

So we started last year and there are hundreds designing that.

Between now and next year we'll give results.

Of course we are not alone, but we were not alone before.

What's happening now, that we have a very clear strategy, a very good platform of technology.

We are introducing now, not only in the area of 32-bit, but also 8-bit, the low-power version that will allow us also to enter us in the medical field.

So we are well equipped.

We can fight with anybody.

We are in a very well position on the market, much better than before, than three years ago, for sure.

Yes.

We have, in relation to the things that we are discussing at this point, three major initiatives.

One is the sense and power.

It's global, geographically, of course with a lot of focus on analog, on sensors, on some selected power.

And in all our regions, we have a deployment of sales.

I think it's moving on aggressively.

The second one is on the 32-bit microcontrollers.

And this is for -- also for secure microcontrollers.

So, again, it's a lot of new products, a lot of applications, clear deployment in all the regions.

And the third one is medical.

I think we have a major effort now in our medical products, in the healthcare.

And I'm sure it's a new field where also, thanks to our -- to certain proprietary technologies that we have in medical, we can really achieve good results.

So it's a very focused approach, on sense and power, 32-bit microcontrollers and medical applications.

Great.

Thank you.

Thank you, Tristan.

We'll take the next question, please.

The next question is from Mr.

Sandeep Deshpande of JP Morgan.

Please go ahead, sir.

Yes, hi.

Thanks for taking my question.

Sorry to go on about this, but one more question on your costs, essentially.

You talked about where you will break even in your Analysts' Day.

Would you now say, given what you've seen in terms of your cost progression, where ST's breakeven point is at this point?

Again, Sandeep, we are, as I said, executing the plan.

And, I would say, mentioning the 1,500 headcount to be completed under the OpEx restructuring plan, I give also you a flavor on what is the opportunity for bringing down the operating expenses going forward.

Then, obviously, translating this into breakeven depends on many other ingredients, including the level of the gross margin of the Company.

Overall, I would repeat, at the end, we are on track.

We said in New York that we are committed on moving the Company to generate a substantial free cash flow when reaching a level of sales between $2.3b and $2.4b, and some profitability at that level.

You may have noticed, by the way, that the Company turned to generate positive free cash flow in the second quarter.

And we are on track on this plan.

Then, whether it will occur on the six-months or 12-months horizon, repositioning to where we were in May, so whether it will occur in Q4 '09 or Q2 '10, this is still pending and very much depending on demand dynamic.

Okay.

And then, a follow-up on the mix itself.

You did comment earlier that the gross margin guidance in the third quarter is, to some extent, an impact of the mix.

Can you comment on the mix?

Is it because of this China/Taiwan impact or is it some end-market impact or product impact, or base-band versus other handset chip impact, or some other kind of mix impact which is causing this?

Or are you seeing a clear decline in ASPs which is causing the impact?

No, when we look at the mix impact, group -- product group by product group, at the end, we experience -- expected a normal price trend improvement in mix and innovation.

Of course, in certain quarter it's more evident in one group, in other quarter it's more evident in the other, according to the ramping up of the new product and the evolution of products through the learning curve.

While what we have negatively experienced this current quarter is that -- is the impact of the geographies.

When selling higher weight of total sales to China, this has two effects, indeed.

One is the overall profitability of that market in respect to other.

And the other is the mix of products and applications, which is more exposed for this market to lower end of products.

And this is what we have experienced in the second quarter.

We expect that could mitigate but not disappear in the current quarter, in Q3.

And if our current visibility on demand will be confirmed, as we see currently the backlog, Q4 could be different.

Q4 could be different since some recovering in Europe, and to a certain extent in the US as well, can mitigate this effect, going back to a, I would say, more normal balance of sales by geographies.

Thank you, Sandeep.

We'll take the next question, please.

The next question is from Mr.

Kai Korschelt of Deutsche Bank.

Please go ahead, sir.

Yes.

Thanks for taking my question.

My first one is to kind of rephrase, maybe, the inventory versus end-demand question slightly.

Do you believe you're over or under-shipping end demand in Q2 and Q3?

And then I have a follow-up, please.

Thank you.

I think so.

I think so.

I think that we are under-shipping.

Overall, I think this is the case.

And this is particularly true in Asia.

Okay.

And my follow-up is, if I look at CapEx, it was obviously still at very low levels in Q2.

And I think there's been some headlines of larger CapEx plans in France.

What kind of normalized CapEx level, looking into 2010, should we expect?

Oh, but I think this -- as we said, I think this is a big difference in ST and I -- we're spending much more in R&D and we will get a return on that.

And we are spending much less in capital.

In ST, we had a capital expenditure of $1.5b per year, and now we are moving to 5% to 7% of sales.

This is the number that I gave in New York and it is the number that I can reconfirm today.

Of course, this is what we want to do is -- and this is sustainable.

It's not something that we can do one year and then we cannot -- we need to stop.

And this is something that I believe is a sustainable number for what we have today.

And on the other hand, we are investing much more in R&D.

Of course today, particularly considering the size of the Company, we are over-investing.

Carlo mentioned this reduction of 1,500 people to be done during the next few quarter.

That is -- of course is very significant.

The question is, why not right away?

Apart the legal instruments in the various geographies that we need to comply, this is normal.

I think that the other thing is the disruption of the customers and on the products that we are developing and the teams that we need to dismiss.

So it's not that we are just waiting and -- it's that we need to complete certain products, we need to support central customers.

So I think, overall, we are becoming much lighter.

So we are going to invest 5% to 7% of revenues.

Today, we are overspending in R&D.

This, with time, quarter after quarter, will become of course more under control.

Okay.

And that 5% to -- yes.

And just to be clear, that 5% to 7% of sales includes the, I think it was, $1.25b investment that you were planning, according to some press reports in France, I think, [if I remember well].

Absolutely.

Not only includes.

And eventually, to add some color on this number, this number refers to an investment period from Q4 '07 included through the end of 2012.

So a substantial portion of -- a good portion of this amount has been already incurred.

You know that, at the end, in the five quarters from Q4 '07 through 2008, when paying the bill of divorcing with our former partners, we have taken a substantial charge of capital expenditure.

And this is part of this number, to clarify the number.

Okay.

That's great.

Thank you.

Thank you, Kai.

We'll take the next question, please.

The next question is from Mr.

Mark Lipacis of Morgan Stanley.

Please go ahead, sir.

Thank you for taking my question.

Just a clarification and a question, please.

Just so I'm clear, I think you've suggested that the channel inventories had declined, so I guess that means that you under-shipped demand in Q2, despite the 20% sequential revenue growth.

Is that a fair interpretation?

In our distribution in Asia, yes, it is a fair interpretation.

I think it's a little bit more difficult for me to understand Europe and America, because both POS and inventory decreased.

But for sure, in Asia we under-shipped, absolutely.

Okay.

Fair enough.

And then, the question is what do you think it will take to get your customers and distributors to start restocking?

If you believe that the inventories are below normal levels, is it simply a matter of your utilization rates going up and your lead times extending?

And as part of that, could you discuss what your manufacturing lead times have done?

I understand that you probably have a quote to your customers.

But if your utilization rates are low, my guess would be that your customers ask for expedited orders, you can accommodate those quickly.

But as you move to 75% and 85% utilization, my guess would be that your lead times -- your effective manufacturing lead times would stretch out.

If you could comment on that, that would be helpful.

Thank you.

Yes.

Well, I think I said already, the number of expediting requests that we are receiving is significant -- is becoming bigger.

And therefore, I believe that this is not sustainable and this will be positive, of course.

But there is a concern, and the concern is the underlying demand.

And this is where, of course, we do not have an answer.

It is not that simple.

But we need to be prudent.

And this is why -- so supposedly, there is a -- it will not be the first time that in our industry we have double dips.

And I think we need to have the degree of flexibility, for instance, in September, if we see some form of correction, to reduce loading.

Now, is this in our numbers today?

Not at all.

Our numbers for Q4, of course, rolling backlog number are showing a strong increase.

Okay?

But the concern is really the trend of the underlying of the consumer demand.

And here it's not that easy for us to understand.

Of course, we talk to our customers.

Most of them have the same question mark.

So I think it's not sustainable.

If the recovery of the demand is moving on, I think inventories are too low.

Thank you very much.

Thank you, Mark.

Next question, please.

The next question is from Mr.

Odon de Laporte of Cheuvreux.

Please go ahead, sir.

Yes.

Good afternoon.

On a sequential basis, I noted the telecom segment posted a growth of only 14%, which is less than the wireless unit which grew 19%.

So, if my maths is correct, the non-wireless part of the telecoms business was down sequentially in Q2.

So I was wondering what is the issue there.

Is that due to the cameras and [cells] business?

Can you update us on this point?

Thank you.

Yes, Odon.

Carlo Ferro speaking.

The question -- your understanding is absolutely correct.

At the end, we have two portion of business out of the wireless, the ST-Ericsson business in telecom.

One is -- we have three portions, actually.

Now we have still some products of ATM and they have grown, I would say, substantially nicely.

Then we have the camera modules.

Camera modules did this quarter grew a little bit, substantially below the average of telecom.

And I'm sure many of you would not claim about that when looking at the margin impact.

And ASICs -- and the third block is ASIC for infrastructure, and this is another area that (technical difficulty) substantially but less than the average of telecom.

And just the last question.

Could you tell us what is the cash on Numonyx' balance sheet?

Thank you.

Is estimated in a range of $380m at the end of June.

Thank you very much.

$480m, sorry.

Thank you, Tait.

$480m.

$480m.

$480m?

$480m.

Yes, $480m, yes.

Just to be clear, that's in the press release, Odon.

I'm sorry.

Thank you, Tait.

Next question, please.

The next question is from Mr.

Jonathan Crossfield, Banc of America-Merrill Lynch.

Please go ahead, sir.

Yes, hi.

Thanks for taking my questions.

First of all, a lot of chip companies at the moment are citing strong demand in China as driving top line growth, and many of these are actually beating on profitability.

Why do you think ST's business in the region is inherently so much less profitable than it would be in America and Europe?

Well, I think that the -- we are not saying -- the major problem that we have today vis-a-vis the profitability is two things.

Of course, one is the manufacturing machine.

Okay?

And this is something that we are curing.

We are restructuring, we have a plan, and by the end of this year the overall headcount reduction will be about 3,500 people in manufacturing.

So it is the loading of these fabs, it's the inefficiency in these fab that have of course determined disruption and an important hit on the P&L.

The second is the major effort in R&D, particularly in the wireless.

And it happens that we decided to merge these three companies just before the major crisis.

I think it was absolutely crucial for us that we did this before, because today we would not absolutely have the scale to run our wireless business without this combination.

But it's obvious that when you merge three companies, you need to resolve overlaps.

It's simpler, of course, in G&A and sales and marketing.

It's a little bit more complicated in R&D because you have -- of course you have customer obligations and therefore this takes a little more time.

So these are the two major things, and these are the two things that we are curing.

And we have given our model in New York in May.

And we are moving on with restructuring, the headcount reduction, both in manufacturing and, as far as sensors is concerned, particularly in the wireless domain.

As far as the mix, of course the mix is there, is -- I believe is a short-term challenge.

I think in a couple of quarter, one to two quarters, I expect a normalization of the mix, with Europe moving back to more normal revenues and the same for the United States.

Okay.

And then, maybe just as a follow-up, we've seen some pretty strong growth from the hard disk drive manufacturers and you reported, I think, 36% sequential growth in your business there.

Do you think that was all restocking or do you think you're making progress on market share within the hard disk segment?

Well, I think it's -- first of all, I'm not sure it is only disk drives.

I think it's indeed a combination of printers and disk drives.

I think we're gaining share.

I think we're gaining share geographically.

For instance, we have new business coming from -- also from other geographies.

And I think for sure we are gaining share on printers.

And on disk drives, I do not know, frankly.

But I believe I saw that we have some new programs also outside our traditional customers.

Thank you, Jonathan.

Okay.

Thanks very much.

I think we have time for one last question, if we can make it quick, please.

The next question is from Mr.

Jerome Ramel of BNP Paribas.

Please go ahead, sir.

Yes.

Good afternoon.

I've got a question on the gross margin.

If we assume that Q4 sales should be around $2.3b, or let's say to the level of Q4 2008, is there any reason, with the dollar at $1.40, roughly, that you should not achieve a 36% gross margin?

Okay.

It's always unfortunate, Jerome, not to be in a position to have a straight and clear answer to the last -- especially to the last question of the meeting.

But you know our communication policy.

And of course, your question is a little bit earlier than -- came a little bit earlier than expected.

What I could eventually repeat on our gross margin dynamic for the fourth quarter is that we do expect another substantial step-up.

This is based on the current visibility.

There are positive ingredients, that is, these overall inefficiencies in the fab, in the prior quarter to mitigate, but not to completely disappear.

The [unsaturation] to substantially mitigate, but at 80% of loading you may expect that will incur some [-- have] some new charges for new capacity in Q4, as well.

And then, there is two important positive contribution.

One is that costs will continue to go down amid progressing on the restructuring plan.

And the other one is that the mix can turn to be positive.

Then, whether this translate in the number you said, if I will tell now, no-one will attend the call two months from now.

So there is one point here.

There is a strong focus in the Company, of course, on the cash gross margin.

For us, it's crucial.

We are driving our capital investment strategy very clearly to a level that is much lower than it was before.

Okay?

So, with time, our depreciation will decrease because we will go on with the capital investment in the range, as I said, between 5% and 7%.

And this we will do.

And of course, there is a very, very strong focus on the cash gross margin that for us is a fundamental indicator.

And, with time, our block of depreciations will go down and will be replaced by the new capital investment that is much less than what we did, for instance, in 2004.

Okay.

Thank you very much.

Thank you, Jerome.

Thank you.

So, at this point, Carlo, would you like to make any closing comments?

No, I think we had a lot of discussion and I'm just going to thank you, everybody, for the interest.

And strongly working to make a good Q3.

Thank you.

Thank you, Dino.

And that will conclude the call.

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

Thank you for joining and have a pleasant day.

Bye-bye.