意法半導體 (STM) 2009 Q4 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 ST Microelectronics fourth quarter and full year 2009 results conference call.

As a reminder, all participants are in listen-only mode, and the conference is being recorded.

After the presentation, there will be an opportunity to ask questions.

(Operator instructions).

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 fourth quarter and full year 2009 conference call.

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

Joining him on the call are Alain Dutheil, our Chief Operating Officer; Carlo Ferro, our Chief Financial Officer; Philippe Lambinet, Executive Vice President of Home Entertainment and Displays Group; 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.

Also, please note that today's earnings webcast is available as well, and should be on the website from our Paris presentation just a few hours ago.

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.

Thank you for joining us on the call today.

And thanks to those of you who attended our presentation earlier in the day in Paris.

Certainly 2009 was unprecedented with a steep downturn in demand in the early part of the year, and then a sharp reversal where it is a challenge to keep up with demand.

As we speak with you here today ST is on track to continue to deliver results within its transitional financial model.

The industry is recovering faster than expected.

And we believe, as a result, that 2010 should be a period of growth for the semiconductor industry and ST.

A key ingredient that gives me a good deal of optimism regarding 2010 is that we have remained focused on research and technology to advance our product portfolio.

We have steadily increased our percentage of sales coming from new products, and I would like to expand on three important blocks, microcontrollers, analog and digital platforms.

During 2009 ST introduced 32-bit microcontrollers for industrial smartcards and the automotive market, and we are making very good progress here.

We have extended our success in 32-bit low-power MCUs applications by expanding our range of STM32 micros with new families, including the STM32 connectivity line.

And recently we achieved an industry first for devices based on the ARM Cortex-M processor cores with new microcontrollers featuring 90 nanometer embedded Flash.

As you know, in digital consumer, we have been introducing and shipping our cost-optimized 55 nanometer low power set-top-boxes for cable, satellite and IPTV.

In addition, we have a number of design wins for set-top box platforms with major cable and telecom companies for their deployment of high definition TV.

At the Consumer Electronics Show, we recently demonstrated our focus on delivering energy efficient platforms, and announced 11 new products including our next generation decoders, which include our 3D video and graphics ready devices.

We also introduced our Freeman integrated digital TV System-on-Chips.

In analog our innovative product portfolio is quite diverse.

Looking at the power applications we have introduced many innovative devices that can save power and increase energy efficiency in a broad range of applications.

We have developed chips to preserve battery life in mobile products, produce advanced power transistors that can significantly improve power density and efficiency power supplies, and are shipping complete smart metering solutions for remote power management systems that are now being deployed by large utility companies.

We are also working on electronics for hybrid and electronic vehicles, and we will surely be telling you about exciting and innovative products for those vehicles in 2010.

In medical our products are being used in diagnostic systems, insulin nanopumps and other microfluidics applications.

Our MEMS division has aggressively expanded its leadership, introducing new families of gyroscopes, accelerometers and active microphones.

MEMS offer significant opportunities for us as they target, and are being design win a wider base of customers and very high volume applications.

And finally in wireless, ST-Ericsson is well along with its new product strategy and new product launches.

ST had a solid finish to 2009 with continued improvement in our financial metrics, including revenue, gross margin, operating income and cash flow.

If we look back to what we discussed during -- together at our Analyst Day last May, our results for the fourth quarter are well aligned with our expectations at that time.

In fact, we achieved all key targets of our transitional financial model, at our most aggressive date expected.

First, we indicated that we expected ST to return to operating profitability before restructuring charges once we reach a revenue level of $2.4b, and assuming a 1.33 euro to dollar exchange rate level.

Our fourth quarter revenues were $2.58b, above our outlook range, and we posted a clean operating profit of $90m or 3.5% of net revenues.

Adjusting for the joint ownership of ST-Ericsson we estimate the clean operating margin at 5.7%.

We achieved this level of performance despite a much weaker US dollar.

Second, we said we expected our product segments to return to profitability.

We achieved this with IMS in the third quarter, and the segment continued to improve in the fourth quarter to post an operating margin of 10.6%.

IMS is an important driver of revenue growth for us, and a key contributor to our operating margin target performance.

ACCI turned profitable in the fourth quarter with an operating margin of 5.7%.

All of ACCI's product groups, except imaging, were profitable.

Going forward we see the opportunity for a substantial improvement in the level of profitability in IMS and ACCI.

In wireless, ST-Ericsson is committed to delivering on its cost realignment plans, and is tracking to its timeline.

And they are well aligned on transitioning to their new portfolio strategy as they outlined on their conference call last week.

Third, from a cash flow perspective we were targeting net operating cash flow before restructuring of between 6% to 10% of net sales.

Looking at our fourth quarter results we came in at 8.6%.

Clearly, our progression over the year has been good from a negative $139m in the first quarter to a positive of $221m in the fourth quarter.

Fourth, we are well aligned with our asset lighter strategy.

Total capital expenditure for 2009 came in at $451m, under our $500m target.

Our CapEx to sales ratio for 2009 was 5.3% of net revenues, well aligned to our target ratio of 5% to about 7% over the next few years.

Fifth, despite the very difficult year we returned to a positive net cash flow -- net cash position as we had targeted.

In fact, we delivered a significant improvement in our net financial position, almost a $1b shift, going from net debt of $545m at the end of 2008 to a net cash position of $420m.

Sixth, as a result of our ability to generate cash, ST was able to retire about 30% of its convertible debt early with no need of refinancing.

The repurchase of the bonds from an earnings per share perspective, reduced our share count by 13m shares on a fully diluted basis.

Now, let's turn to a detailed review of the fourth quarter.

Revenues increased about 14% both sequentially and on a year-over-year basis.

Revenues came in above the high end of our outlook range of 5% to 12%, and it was the third quarter in a row where revenue grew by double digits.

The sequential growth in net revenue was broad-based as demonstrated by our results by market segment, by geographic region and by product segment.

By market segment, computer increased 22%, industrial and automotive 19% and consumer by 12%.

Distribution increased 35%, and here the growth was reflective of improving market conditions and underlying strong demand.

Looking at our regional performance on a sequential basis, Japan was strongest, up 28% as they are starting to benefit from the economic recovery.

Greater China increased 22%, Americas 20% and Asia Pacific and EMEA by about 8%.

I would point out that year-on-year Japan is still down sharply while all the other regions are moving in a positive direction.

Now, with EMEA showing a significant improvement this should have a positive effect on our margin as we move through 2010.

Our product segments performed as expected.

In fact, ACCI and IMS better than anticipated.

We expected IMS to grow faster than the company average, and it did with a sequential increase in revenues of 23%, bringing revenues to $854m.

This performance benefited from strong growth in microcontrollers, analog, smartcards and power discretes.

ACCI revenue increased 17% sequentially and reflected important growth from automotive, set-top box and computer peripherals.

Digital consumer, benefiting from new products as well as improving market conditions, grew sequentially in contrast to normal seasonal digital consumer patterns.

And finally, wireless increased 1% sequentially in line with expectation.

We ended the year with a healthy inventory position.

We have reduced inventory by $565m since the end of 2008.

Inventory turns have been progressively improving as a result.

In fact for the fourth quarter we had a record inventory turns of 5.1 times, improving sequentially from 4.8 times.

Looking ahead inventory turns levels will vary by quarter as we prepare for future periods as we continue to target inventory turns within a range of 4.5 to 5 times.

Our gross margin in the fourth quarter was also a point of good news, coming in above the midpoint of our range.

Specifically, the gross margin was 37%, a 570 basis point sequential improvement, thanks to higher volumes, increased fab loading and improved efficiencies.

And it was above the year ago period level of 36.1%.

We are still not at full saturation though, so the margin continues to reflect some unused capacity charges.

Turning now to the business outlook for the first quarter of 2010, we started the quarter with a solid backlog and indeed we are working hard to serve our customers' demand.

We are anticipating a normal historic revenue pattern, leading to a sequential decrease in net revenues between about 7% and 13%, which corresponds to 35% to 45% growth when compared to the year ago period.

Our Q1 quarter is, in terms of calendar days, about 10% shorter than Q4.

Gross margin is expected to be about 37.5% plus or minus 1 percentage point.

We anticipate a better than normal historical pattern thanks to better manufacturing loading as well as improved efficiencies and a more favorable product mix.

Indeed this is the first time since 2002 that our gross margin is higher in the first quarter than the fourth quarter.

With respect to capital expenditure we will continue to follow our asset lighter strategy, targeting an average CapEx to sales ratio of between 5% and about 7%.

Of course, this level may vary on a quarterly basis depending on what we need to prepare for.

Based upon our current plans we expect to add some further capacity, so we would accordingly expect the first quarter CapEx ratio to reflect that.

In summary, ST has emerged from the recession in a stronger financial position.

Our balance sheet is among the strongest in the semiconductor industry, with receivables healthy, inventory in line and a solid net cash position.

Two of our three product segments are back to profitability, and should continue to improve their level of operating margin performance as we move through 2010.

And we expect ST-Ericsson to complete its cost realignment plan during this year.

Overall, we are very confident all product segments will contribute to further improvement in our operating results.

During 2009, we estimate we gained market share within our served market.

We expect to see further progress in 2010.

And this leads me to the final two key objectives I would like to share with you for the upcoming year.

In 2010, we will gain market share within our served markets.

Based on our current visibility we expect the sum to increase by a low double digit number.

Also we believe this will allow us to bring back revenues back to their pre-crisis levels.

We will continue to improve our financial performance.

As I mentioned we achieved our transitional financial model in the fourth quarter of 2009, but we can and must do more.

We expect to make progress on the key financial targets and we are still confident in our ability to achieve our long-term financial model.

At this point my colleagues and I would like to answer your questions.

Thank you.

(Operator Instructions).

The first question is from Mr.

Didier Scemama of RBS.

Please go ahead, sir.

Yes, good afternoon, gentlemen.

Thanks for taking my questions.

I have just one question, one follow up, just to start with your gross margin guidance, Carlo, very impressive indeed.

I was just wondering if you could elaborate a little bit on what you just said.

You mentioned higher production levels in the first quarter.

Can you maybe give us an indication on your utilization rates for Q4 and what you expect for Q1, and also whether you expect inventories to increase, and if so by how much in the first quarter.

And I've got a quick follow up.

Yes, I think we'll cover -- Alain will describe the pattern, the trend of the utilization rate in our facilities.

Yes.

In fact -- you may remember that the beginning of the year utilization rate was very poor, a little bit more than 50%.

The bottom was in March at 35%, but in anyway the two quarters were about 50%.

In Q3 we moved to about 75%.

And in Q4 we were at 85%.

So we have already increased our utilization rate.

And what we are forecasting for the Q1 of this year is about 90%.

Okay, would that lead to an increase in inventories, and if so by how much roughly?

Well, Carlo will take this.

Of course at this point the quarter is very short it is about 10, 11 less days.

And we need to respond, I think we will stop declining inventory at this time.

Carlo will comment on the evolution of the stock turns.

I believe that really we have reached at the end of 2009 a quite great performance in terms of inventory turns at 5.1 times.

Then I would expect individually each of the quarters in 2010 to remain in the 4.5 to 5 times range, which is our target range.

And then each quarter you may have also some fluctuation within this range, also depending how we are preparing for the sales of the following quarter.

And, of course, today we do see also we are encouraged on the backlog going forward.

So maybe in Q1 inventory turns will remain in the range, but for sure have to go down in respect to the current 5 times level.

Okay, great.

And just a quick follow up if I may, Carlo, you mentioned microcontrollers as an area of focus going forward and in your prepared comments.

I was just wondering if you could give us a sense of whether the growth will mostly come from the ARM-based microcontrollers or whether they will come from the power-based microcontrollers for autos.

No, no, no, will come from the ARM-based.

Of course, we are very pleased of the progresses in terms of design wins on the automotive products, but as you know the time cycle [required] for qualification, etc.

is much longer here.

No, no, it is an accelerated growth in the area of 32-microcontrollers for -- mostly for industrial but not exclusively for industrial, and this is based on our ARM products.

Great, thanks so much.

Thank you.

Thanks, Didier.

Next question please, Dino.

The next question is from Mr.

Tristan Gerra of Robert Baird.

Please go ahead, sir.

Hi.

Just looking at the Q1 visibility and your -- I think in your comment today that some of the end demand trend that you are seeing is unsustainable.

What end market do you think will be more prone to a slowdown?

And is that something that you would expect in Q1 that you see signs of that or just speculating at this point based on the strength that you've seen so far in Q4?

Well, first of all, I also said that we believe our billing is sustainable.

In fact we want to go back to a level of billing in the course of this year that is largely at the level of what we had before the start of the crisis.

The backlog today is in fact is very, very strong, is across the board.

I have to say that it is across the board, it is not one specific sector.

So we expect that there will be some adjustment here, and we do not count, we do not believe that this level of backlog is sustainable.

On the other hand, I repeat, we are confident that the trend that we had in Q4 and the now what we are showing for Q1 [repeat] with the quarter then is 10%, 11% shorter in terms of calendar days is sustainable.

And our objective is to go back to the pre-crisis quarterly sales level during the course of the year.

To say where the adjustment will come first, I think will be probably a general adjustment, because what we see today is very, very strong demand indeed across the board both geographically and also from a market segment point of view.

Okay.

And then how should we look at SG&A and R&D for the whole year if there is any preliminary guidance you can give us or even more near term for Q1?

Carlo will take this.

Well, Tristan, let's maybe start from this current quarter.

On this current quarter we do expect (inaudible) SG&A and R&D to go down in absolute dollar with respect to the level of the prior quarter.

And then maybe to project on the full year what we want to share with you, as we have said this morning is that where we stand with this initiative of cost restructuring measures.

That at the end the combination and now I am more talking about all the initiative and some of them are still in COGS but the bulk is in OpEx.

What we said this morning, we have anticipated is that we expect the completion of the announced restructuring plan, including the portion of ST-Ericsson, to fall in Q4 2010 into a cost reduction in a range of $70m in respect to Q4 '09.

And then all the rest would be to be modulated, how to say, in between also based upon the time of execution of this plan that ST-Ericsson has announced could complete in for phase II by mid of this year but for the newly announced phase by the very end of 2010.

Okay.

Thanks, Tristan.

We'll move to the next question, Dino.

The next question is from Mr.

Gunnar Plagge of Nomura.

Please go ahead, sir.

Hi, good afternoon.

I was wondering whether you could talk about the advanced logic outsourcing level that you've reached now at the end of the year.

And maybe you could give us also a view where we are maybe at the end of 2010.

(multiple speakers)

Yes.

Yes, as we said I will take your question.

In fact, today our total outsourcing in Q4 was about 13% and is going to be about the same in Q1.

I would like to mention that here we are talking about total outsourcing, which includes what we are buying out of NXP.

You remember that when we formed ST-NXP Wireless we had a supply coming from the NXP plant.

And this is including the NXP, what we are getting out of NXP.

So it's about 14% I would say.

And our plan there is still the same.

I am sorry to repeat myself, because we have been saying many times we want to reach 20% in order to avoid the fluctuation of the market, like -- of the impact of fluctuation of the market like we had by the way end of 2008 and in 2009.

So our goal is still to go to 20%.

And I think this time this year is going to be more easier to reach the 20%, because the demand is there, and of course we are limiting the capacity.

I was specifically referring to the advanced logic, so below 90 nanometer.

Sorry, I was --

Sorry.

I was answering the total.

So the advanced logic represent about, let's say, two-thirds of the total I was mentioning.

Okay, thank you.

Two-thirds of the 13%.

Thanks.

And with regard to wireless profitability, do you think it's possible that we reach that in the second half?

Well, I will take this, and of course, we cannot describe the approved budget of ST-Ericsson in this conference call.

On the other hand I think we have been very clear not just with the description of the restructuring plan that is taking place, and we need to move on with this.

And I would like to say that we have also been very clear on the commitment that management is showing and the determination to move on with this restructuring plan.

And this is another, unfortunately 1,500 people reduction there, of course, all in high cost or very high cost areas.

And I think is probably better than -- that you look at this potential positive impact in term of people reduction.

It's clear that we are also using our manufacturing assets and technology assets to serve ST-Ericsson, and we have a contribution from ST that is coming from this activity.

So I think you need to look at all the ingredients here, of course, moving from bottom in Q1 in terms of revenues to some good growth in the second half of the year, and very significant reduction of headcount that we have quantified.

This is all in high cost, or very high cost areas.

And also you need to take into consideration some contribution to the manufacturing support that we provide to the new company.

Okay, thank you.

Thank you.

Thanks, Gunnar.

We'll take the next question.

The next question is from Mr.

Janardan Menon of Liberum Capital.

Please go ahead, sir.

Yes, hi.

Thanks for the question.

I just want to go a little bit more into the gross margin guidance for Q1 and wondering how that shapes into Q2 and beyond.

What I am trying to get at is if you assume normal seasonality in revenues into Q2 and Q3, would you say that the 37.5% is a sort of low base for the year, and you'll be able to build up on that?

Or will you -- do you forecast any changes in your utilization levels over the next few months, or any other changes which could drop that to a lower level in any future quarter?

Then I have a follow up if I can.

Yes.

Well, maybe I take, Carlo Ferro speaking, I take the question, first of all at the end really to add some color about this progression from Q4 into Q1 from 37% to the midpoint of [37.5%].

I really believe what did happen in 2009 has been that our business has really developed in 2009 substantial drivers of gross margin improvement in terms of product portfolio that have been hit on the performance by the manufacturing impact, or manufacturing cost of this under-loading combined with the uncertainty in the way the operation of the fabs, this disruption in the operation of them.

So, when justifying why Q1 this year and against the seasonal pattern is better than Q4 I would say the reason is really now that manufacturing is normalizing, the manufacturing machine is now working at full steam.

We have the full effect of those ingredients in terms of value of our product portfolio.

And indeed at the end the improvement in manufacturing is the most important factor of the gross margin dynamic from Q4 into Q1.

Price are expected to be negative, and this is not a surprise when entering a first quarter with a new year price list with several customers.

And the product mix could partially recover.

It will contribute positively.

So going forward on the year we are encouraged about the opportunity for mix to continue to improve, and the manufacturing that now is back to full functionality to enter into the very positive continuous improvement that has always delivered.

Additionally, you know that we complete in the second half of the year the closure of Phoenix.

We are continuing to move in shifting capacity, mostly increasing capacity in Asia in respect to the euro-based Mediterranean area for assembly.

So these ingredients are making us quite optimistic about the fact that you may see through 2010 some further progression in gross margin.

Okay, that's very clear.

And just as a follow up on your industrial and consumer sales, these were the only two end markets where you ended last year still quick significantly down year-on-year, whereas automotive, computer and to some extent telecom was also up year-on-year.

So was there any -- was it just the fact that these end markets themselves are extremely weak and haven't recovered as much as other markets?

Or was there any market share losses that you suffered in these segments?

Or, on the other hand, were there market share gains in the other segments, like automotive and computer, which made those divisions go up year on year by the end of the year?

Well, maybe Philippe could comment here.

I think industrial is almost back at the level we were before.

The peak for IMS I think was $900m, right?

Q3 '08.

Q3 '08, and in Q4 we have done about $850m.

So we are almost back and we expect to go back or even exceed it.

But on consumer I will ask Philippe to comment.

I can comment on digital consumer in particular, which is really our area of focus.

In fact, Q4 had a good sequential growth compared to Q3.

If you look year-on-year, which I believe is your question, clearly it's still below because in fact consumer was the last one to enter the crisis and in a way is the last one to exit the crisis, because Q4 2008 was still a very strong quarter for in particular our set-top box sales.

So now in Q4 2009 we start to recover quite strongly.

And the recovery continues -- will continue in Q1 2010.

So it's not a result of share loss in terms of our set-top box presence in particular.

It's more that the market actually was resilient at the end of 2008 and is only coming back now in to where it was before in Q1 2010.

So we're a bit shifted compared to the other markets by about one quarter.

Yes.

Thank you very much.

Thanks, Janardan.

Next question please.

The next question is from Mr.

Simon Schafer of Goldman Sachs.

Please go ahead, sir.

Yes.

Thanks so much.

I also wanted to ask on gross margin, perhaps as a follow-on.

If I just contextualize some of these numbers, in the second half of 2007, when the currency environment was sort of broadly similar, i.e.

around $1.40-ish or slightly above, I think your gross margin was tracking around 38%, 39%.

Excluding Numonyx, but of course then you didn't have the fully consolidated ST-Ericsson business, I was wondering on a like-for-like basis then, as you look into the second half of this year, with the utilization rate perhaps peaking and so on, what sort of net improvement do we actually see on the gross margin line, giving you credit for some of these restructuring programs that you have executed against throughout the downturn?

So I guess I'm just wondering whether it's significantly higher than it used to be in the second half of '07 or is ST-Ericsson still too much of a headwind?

Well, of course, we cannot give a guidance for the second half of this year.

I think I'd like to mention two things.

The first is that in terms of product portfolio, we have done a lot of work, as you know.

We still have about $1.2b of discrete that we believe is a very important business for us, is of course diluting the gross margin performance but is a very good business in terms of return on net assets and free cash flow.

Having said that, and moving to manufacturing, I believe that we have a very good opportunity now that our manufacturing machine is back to almost normal, to really focus on performance.

And we expect some very significant improvement, particularly in the second half of this year.

Again I cannot give a guidance of the second half of the year much here, but I'd like to mention that the opportunity to drive manufacturing is very significant, to move our cost structure now that we are in a more stable position.

And we believe that 2010 is a very important year because this is a kind of bridge for us.

And of course what we want to do is to go from the 3.5% operating profit that we had in Q4 last year and progressively move into double-digit configuration for the operating income.

And the same for free cash flow.

Of course we started from a base that is more competitive, but we have the same objective.

So Sony Ericsson -- excuse me, ST-Ericsson is not zero gross margin.

And I think this is an important comment to make.

Understood.

Thank you very much.

My follow-up question would be more related on OpEx, a basic question about just the net.

Carlo Ferro, I think this morning you commented that in absolute dollar terms obviously OpEx would be coming down in Q1.

But I was wondering, given your comment about the $70m savings run rate by Q4 compared to the OpEx run rate, what sort of savings run rate are we looking at into the first quarter?

I can confirm, this morning I said and I also said earlier in this call that operating expenses, R&D plus G&A in Q1 will go down in absolute dollar in respect to Q4.

And then frankly I did not add any other color in respect to how much.

Otherwise really you do not have any longer ability of exercising your skills in modeling if I give the numbers, Simon.

I think you know we are progressing on our restructuring plan.

I think ST-Ericsson in Q4, they did what they said they would have done in terms of headcount reduction.

There was the completion of our headcount reduction plan in ST.

So we are moving on on the right direction.

Of course the reduction of 1,500 people in ST-Ericsson is very material this year.

The economic impact is very significant.

The dollar -- the euro/dollar rate also plays a role obviously.

I think that $1.40 is better for us than $1.50, as you know.

So I think we are encouraged by the progress.

Okay.

Very clear.

Thank you.

Thanks, Simon.

Next question.

The next question is from Mr.

Peter Knox of Vantage Capital Markets.

Please go ahead, sir.

Yes.

Thank you for taking the call.

Can we just drill a bit more into gross margin?

Sorry to go on about it, but in previous quarters you've quantified the under-utilization costs and the manufacturing inefficiency costs in the quarter.

Can you just give us those numbers for the fourth quarter, please?

Yes.

Similar in the fourth quarter the combination of unused capacity and still from inefficiencies in the manufacturing driven by this restructuring in the functionality of the fab, we do estimate in about 70 basis points the combining factor to the gross margin in Q4.

And are we -- am I right in assuming there will be no such charges again in Q1?

Low.

Very, very marginal.

Very, very specific to selected technology.

A little bit.

Right, it's a little bit.

It's something but it's not so material to the number.

But the opportunity for the rest of the year is more now that -- our saturation cost of course is an important element.

But the other even more important element is the disruption in the fabs.

And I think now we are almost back to normal.

And now our fabs will improve on the fundamentals, moving on, and not laying off people or rehiring people.

So we expect that there will be continuous improvement with, as I said before, a significant step forward in the second part of this year.

Okay.

That's very clear.

Could I just have a follow-on about cash?

Cash generation in the fourth quarter was very strong and I can see with rising profitability increasing cash generation moving forward.

Should we be expecting an increase in dividend payouts or are we likely to see cash accumulating in the balance sheet over the coming year?

Well, I think of course the decision is not taken and I think as we do every year we will do it in April.

And I can here underline the fact that we are very encouraged by the progress in terms of cash flow performance.

In fact, if I look back at last year, it was a very difficult year, our loss was very significant unfortunately.

But from the cash position point of view, it was a very good turnaround.

We have improved our net financial position by almost $1b.

And we had three major contributors.

One, of course, was the initiative with Ericsson.

The second one is the reduction of inventory by $565m.

And the third important ingredient, I would say, is the remarkable free cash flow performance in Q4.

So all of this is encouraging.

And of course all of this is giving us more confidence to move on with increased dividends when the time comes for a decision.

Okay.

Thank you.

Thanks, Peter.

Next question.

The next question is from Mr.

Guenther Hollfelder of UniCredit.

Please go ahead, sir.

Hi.

I was wondering whether you could give us an update for the performance of Numonyx in the December quarter, just to get an impression for the first quarter.

And on the other hand, I was also wondering the guidance in line with normal seasonality.

So isn't there any, let's say, like automotive or industrial business extending demand into the first quarter what should help here?

And maybe as a last one, if Carmelo could give an update on the distribution channel situation from a regional perspective, this would be great too.

Thanks.

So let's start with Carmelo.

We see a very under-control situation in the distribution network.

They keep ordering because deliveries are very tight, so we keep the stocks under control by measuring week after week the run rate, making sure that we deliver goes not to topping stocks but to final applications and customers.

So the situation is very tight.

The demand is much higher than what we can offer.

And this demand comes not only from distribution but from major OEMs as well.

So I would say that this time of the year we see for the medium term very good demand coming from all across the board.

But we monitor because it cannot be sustainable at current level for a long period of time.

It's growing too fast.

And so it must be controlled and we do this continuously.

But it's coming from all segments right now.

First part of your question is about the Q4 for Numonyx.

I would say that Q4 has been a quite -- pretty good quarter for Numonyx as well, some substantial sequential increase in revenues.

Not [participated] their results, but they are reaching substantially breakeven at operating income level.

So -- and you noted in our press release the gross cash balance at the end of the year, which is $572m, which you note is much higher than the one that Numonyx had at inception of the company.

So it is in respect that Numonyx is somehow well on track.

We are encouraged to see their gross cash building up.

And this could be also an opportunity eventually for us through the year to reduce our exposure to the guarantee of Numonyx.

Do you want to address automotive and industrial as well?

Well, I think on automotive and industrial in this very moment the demand is very, very strong.

So there is absolutely no doubt, I think, the pattern is similar in the two segments.

I think is on a variety of technology, on variety of products and very much across the board geographically.

So I have nothing more to say.

It's strong demand and broad range on these two segments.

Okay.

Thank you, Guenther.

Thanks.

Next question please.

(Operator Instructions).

We have a follow-up from Mr.

Didier Scemama of RBS.

Please go ahead, sir.

Yes.

Thanks for taking my question.

Carlo, I think I asked you the question last quarter but I'd like to have maybe some more thoughts on that this quarter.

You've actually achieved quite a lot in terms of portfolio pruning already with the ST-Ericsson joint venture, the NOR Flash joint venture as well.

Do you think that some of your other application-specific businesses, computer peripherals, consumer obviously, and obviously the imaging business also requires more scale?

And would you consider a similar joint venture or perhaps sale of those businesses if you can't achieve the scale required to make money in those markets?

I think at this point, and I was making the point of course this morning, for us the priority is execution.

So 2010 must be the year of execution.

I was mentioning in our -- in my little address here this afternoon I spoke about two objectives.

But this morning I was mentioning the four priorities, the four key priorities that we have.

So priority number one is the restructuring of -- not in order of importance, but the restructuring of ST-Ericsson.

That is a lot of money.

Priority number two is what I said on manufacturing.

We have great opportunity to improve the manufacturing efficiency and decrease manufacturing variations and decrease the manufacturing cost, particularly in the front end.

Priority number three is market share.

The market will grow 10% to 12% and I am confident we can do better or much better than the market this year.

And priority number four is to get the value that we deserve on our products, particularly on the new products.

Here I think we see a lot of progresses.

For instance, you mentioned digital consumer.

We are very pleased today about the profitability in the area of a certain portion of digital consumer products.

And of course there are other families that are in grand part.

We have recently launched our premium platform for high-quality digital TV applications and the Internet TV.

We are very pleased about the progresses in general in the ASIC products that we have in the computer peripheral sector.

We're all ASIC, you know, is for printers, is for disc drives, is for computer infrastructure.

They're all ASIC products.

We are pleased about our progresses in analog, in MEMS.

We will have two more important families this year, the gyroscopes, the active microphones.

A lot of new power products, discrete power, smart power products.

We mentioned before the 32-bit microcontrollers, etc.

So all of this is very good.

I think at this point we do not expect any significant move.

Imaging we said, I think, we have lost money in Q4.

It's the only family as part of ACCI where we lost money.

And of course we have two options.

Either we fix it or we dismiss it.

The third option, to stay like this, is not a good option.

Right.

I guess I'm going to be a bit more precise on my question.

If you look where ST is very, very good at is in IMS and automotive in basically the horizontal markets.

And in all the verticals basically have struggled historically to make money on a sustained basis.

So I'd just like to understand what's going to be different this time in consumer and computer peripherals, in imaging over the next cycle, how are you going to make -- beat your WACC basically in those markets over the cycle?

Yes.

I would say that on computer peripheral, if you allow me, the general pattern was good and now is very good.

And it was at least for one year or two.

But I think on a long-term vision this has been a good business for ST and is now a very good business for ST, and there was a glitch for one or two years.

In digital consumer, I think we have a block of this business that is our traditional set-top box activity.

That is very healthy.

We do not publish the number, but it is a very healthy business.

We have an intense effort to speed up the introduction of the platforms on the high-quality digital TV.

And of course this is intensive in terms of utilization of the resources.

But we expect to be successful there.

And finally there is wireless.

When the wireless business was an ASIC model business, I think it was good performance for ST.

And then the business model changed completely, so we had only two alternatives.

One alternative was to abandon wireless and the second alternative is to join forces because we could not stay alone and sustain this change in the business model with a model in R&D that is more intense.

I think we are merging these three companies.

This is of course a transition.

But we expect that we have all the ingredients to succeed.

We have a base of IT that is unique.

We will have a cost base that will be much more competitive at the end of this year, and we have strong customer involvement.

Of course it's challenging.

So you're right, there are two major portions in ST.

One is what we like to call power applications, and it's a lot of analog, it's a lot of power, it's a lot of microcontrollers, sensors, etc.

We want to be a leader there.

We are already number one in certain areas in industrial, in power conversion.

And this is an area where more or less already today just outside the crisis our profitability is double digit.

We can grow.

I think IMS in Q3 2008, they had 17% [G&L].

Also we need to get back there, of course, on these areas.

And the same is for automotive.

Now it's back to be profitable, but of course they need to improve.

But the second portion of the Company is the one of the multimedia convergence.

We are absolutely committed to succeed, both in terms of ranking and market share, but of course also in terms of profitability.

And we are taking a lot of measures during these two years to make sure that our portfolio here is becoming more competitive and of course giving us the confidence that we can substantially turn around from the point of view of the profitability.

Okay.

Thanks very much.

Thanks, Didier.

I think we've got time for about one more question.

The final question for the day is from Mr.

Janardan Menon of Liberum Capital.

Please go ahead, sir.

Yes.

Hi.

Thanks for the follow-up.

Just a quick question on IMS margins.

Your IMS margins were a bit disappointing in the quarter because you did 10.5% margin, whereas in 2007, first half 2008, at a similar level of revenue which is under $700m to mid $800m kind of range, you did 15%, 16%, etc.

So I was just wondering, has anything structurally changed in that business or is it a temporary issue and do you think that at these levels of revenue you can get back to that kind of a mid-teen margin in coming quarters?

Well, this is Carmelo Papa answering.

So first of all the result depends very much on two things.

2009 was a very depressed year, especially the first half of the year.

And therefore this was reflected in the price.

It had an effect, an immediate effect on the gross margin.

Second, the manufacturing machine was absolutely disaster again in the first half and again in Q3.

Therefore all this is there.

But we are confident that this year we'll go back on track to the previous peaks.

And the target is the sky.

We think can do a lot more because the manufacturing is now efficient.

We have a lot of new products.

Just to talk about MEMS, the last few years were the accelerometer years.

Now we have the microphone year and the gyroscope year, along with the accelerometer.

And then if we move into the third bit, the last two year there was just masses of design-ins we will harvest this year.

And if you want the analog, there is a lot more products for power saving in the area of smart metering.

So these things will give a result.

The manufacturing machine will be much more efficient.

The prices will be -- customers in a tight situation like this have -- we will have a better say versus our customers.

Therefore all these things put together will put IMS back on track towards the top as we did in the past.

Okay.

Thank you very much.

Thanks, Janardan.

I think at this time I'll hand it over to Carlo Bozotti to close.

But before I do, I'd like to announce that on June 3 of this year, of course, we'll host our analyst field trip in London.

We'll send out information here shortly, but just wanted to get that on your calendar.

So now, Carlo, if you'd like to close up.

I'd like to invite all of you in June.

I think it will be a good moment to review the progresses.

As I said before, 2010 is a very important year for us.

We are concluding most of our restructuring now, the part of restructuring is headcount in ST-Ericsson.

And I think that will be a very good time to review the progress and to give you some good visibility for the second half of this year.

Thank you again.

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

Thank you for joining us and have a pleasant day.

Goodbye.