意法半導體 (STM) 2010 Q3 法說會逐字稿

Good afternoon or good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the STMicroelectronics third-quarter and first nine months 2010 earning 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, Mr. Sorensen.

Thank you, everybody, for joining our third-quarter 2010 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining him on the call today are Alain Dutheil, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Carmelo Papa, Executive Vice President of the Industrial & Multisegment Sector; and Philippe Lambinet, Executive Vice President of the Home Entertainment & Displays.

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.

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

Thank you, Tait, and thank you all for joining today's call. We appreciate your interest in ST.

The third quarter was a good quarter for financial results, progressing toward our target model and seeing the benefits from our portfolio investments. First, our financial results were well in line with the outlook we shared with you in July.

Net revenues were $2.66 billion, representing year-over-year growth of 17%. On a sequential basis, net revenues increased 5%, above the midpoint of our range of 2% to 7% growth.

Gross margin came in at 39.2%, also above the midpoint of the guidance. Operating profit showed a significant sequential improvement, more than doubling. And finally, at the bottom line, adjusted earnings per share of $0.23 increased 28% sequentially and here again has shown progressive and substantial improvement during 2010.

Second, during the third quarter we had record sales in two product segments and, in reaching the record, achieved a key milestone. ACCI, our largest segment, accomplished record sales; and our IMS segment reached both a record sales level and surpassed the $1 billion in quarterly revenues milestone for the first time.

Third, the September quarter was also a period where we moved -- one quarter ahead of expectations -- into the key financial targets for 2010 that we outlined at our field trip in London this past June. Specifically, we were targeting an ACCI operating margin in the high single digits at year-end; and in the third quarter we exceeded that goal, with ACCI posting a double-digit operating margin. We were targeting an IMS operating margin in the high teens at year-end; and in the third quarter we were already at the very high end of that range.

Also, as anticipated, ST-Ericsson continued to make solid progress on transitioning its product portfolio and in the third quarter improved its cost structure and reduced its operating losses.

Looking at the Company in total, thanks to the improved operating results and higher net asset turns, the RONA attributable to ST reached 19% in the quarter. We moved into our target range of 16% to 22% well in advance of our expectations, even during this exceptional period of investment in wireless R&D.

These improvements are coming from multiple directions and demonstrate that our targeted investments across our business are paying dividends. First, the reshaping of our products and the investments in innovation over the last several years has positioned the Company to offer more robust and higher value products.

Second, the very significant realignment of our manufacturing has lowered our wafer costs. And third, through our investments in marketing and sales, we extended our customer reach and our presence in key geographic regions.

The progress of both ACCI and IMS, representing about 80% of our revenues, demonstrate that our efforts to develop waves of innovative products is taking hold and producing results. The investment we have made in product R&D are now bringing tangible benefits to ST from a financial perspective.

Key products contributing to the revenue growth of the quarter included our gyroscope families, our general-purpose 32-bit microcontroller families, and our power and smart power products, which serve many different markets.

But while we are pleased at our progress, we are not stopping here. Looking ahead, we are excited, as our product development pipeline is full of innovative and higher value products. Some of our most promising products include our later generation digital TV system on a chip and DisplayPort interface ICs, MEMS microphones, motion sensors, and high-performance analog products for a variety of applications such as advanced sensors for medical and powerline communication ICs for Smart Grids.

In regards to the remaining 20% of our revenues, the product transition is well underway at ST-Ericsson. The effort is currently shared with our partner Ericsson, but we look forward to sharing with Ericsson the future opportunities.

So, now let's turn to the quarter's results in detail. We saw continued positive progression with our gross margin. It reached 39.2% in the third quarter, representing a 90 basis point increase over the second quarter.

Since the start of the year, gross margin has improved 220 basis points. The sequential increase in the gross margin principally reflected improved manufacturing and the contribution of new products, partially offset by a slight decline in pricing trends. Currency did not have much impact this quarter.

Inventory turns during the third quarter were 4.5, in line with our target range of 4.5 to 5 times. They were lower than the second quarter's 4.8 times, reflecting a buildup of inventory for Q4. However, of the $130 million increase in inventory at the end of September compared to the end of June, about a quarter of increase simply reflects currency translation. At the completion of the year, we expect an improvement in turns from where we finished this past quarter.

Turning to CapEx, on our second-quarter conference call we indicated that capital expenditure levels would be significantly higher in the second half compared to the first half, reflecting the extended lead times earlier in the year for capital equipment. I had indicated that the delivery of equipment has been accelerated in the second half of the year, and this is exactly what has happened. Due to the accelerated demand we have face across all end-markets for the past few quarters, our year-to-date CapEx-to-sales ratio is slightly above 8%.

Our capital expenditures focus relates to important new products which will be coming onstream as well as new products that are already in volume production and for which we are looking to be in a position to satisfy higher demand levels. So effectively, ensuring the right type and level of capacity is one block; and the second is related to technology shifts where we are preparing for.

Turning to our balance sheet and liquidity, our net financials showed further progress again this quarter, increasing to an $878 million net cash balance. We talked about our path to even higher liquidity as the Micron shares and other items come into play. One of the pieces of this path came through this quarter as we collected our $250 million cash deposit formerly restricted as collateral for the Hynix-Numonyx joint venture.

In addition, we took further actions to maintain our financial strength and flexibility. During the quarter, we entered into a new unutilized EUR350 million credit facility at competitive terms with the European Investment Bank. Also, we repurchased a portion of our 2016 convertible bonds and 2013 senior bonds.

In the coming months, we are prepared to redeem from outstanding cash approximately $570 million in residual 2016 bonds that are likely to be put back to us in February 2011.

Now let me turn to our product segments. As I had said earlier, ACCI had a very good quarter with record sales. Net revenues increased 29% year-over-year and 4% sequentially. The growth was led by ICs for automotive applications and printer products on a sequential basis.

At the operating level, ACCI delivered a 29% sequential increase in operating income, leading to an improvement in the operating margin to 11.7% from 9.5%. The sequential improvement in ACCI's operating margin reflects the leverage coming from higher sales as well as product mix.

We are very pleased with this progress, as we exceeded our end-of-the-year high single-digit operating margin goal. We will not stop here, as we are focused on ACCI achieving midteens operating margins in the midterm.

IMS had record revenues and surpassed the $1 billion milestone. Revenues were up 43% year-over-year and 7% sequentially, with microcontrollers, analog, MEMS, and power products leading the growth. IMS is our most profitable business segment, and we are encouraged to see the segment grow quarter after quarter.

Its operating income increased 45% sequentially and its operating margin improved to 19.7% from 14.4%. IMS is already at the highest point of its end-of-the-year high-teens operating margin target, but we see some opportunity to further improvement.

Turning to Wireless, ST-Ericsson released its financial results and held its conference call last week. The joint venture, as expected, showed a sequential increase in revenues of 4% and reduced its operating loss.

In the third quarter, ST-Ericsson experienced good traction of their new high-value entry 2G/EDGE portfolio. The ongoing transition of ST-Ericsson product portfolio will continue for some time.

In the meantime, we see encouraging signs. The joint venture is completing the development of new and innovative platforms for smart phones and tablets and has impressive opportunities going forward.

Let's turn now to our fourth-quarter business outlook. We are encouraged by the level of our backlog in the fourth quarter. As a result, we expect sequential net revenues growth of between 2% and 7%.

Based upon our revenues outlook and currency assumptions, we are targeting a gross margin of about 39.5% plus or minus 1 percentage point. Our third-quarter gross margin was 39.2%, so we expect to see some additional improvement sequentially despite a negative impact from the sales mix between product segments.

Also, keep in mind that during Q3 we prepared for a seasonally higher Q4, so manufacturing activity was at more optimal levels compared to today, where we are preparing for a seasonal downtick in Q1.

Looking at the demand environment, as our results indicate, it was generally good in the third quarter. As noted by other industry players, we saw some softening in demand in some areas such as computer and consumer. The industry is coming off of unusually high levels of backlog.

We see this slowdown as a mild adjustment, not a downturn in the overall demand or a change in the semiconductor cycle. We would expect this softening to remain for a few quarters, so we have taken that into account in framing our fourth-quarter outlook and in looking at the environment going into the first quarter of 2011.

While the year is not over yet, we expect that our served market will have growth between 20% and 25% during 2010. In 2011, our early view is that ST's served market may grow between 5% and 10%, so a return to normal growth trends and seasonality for the industry following the deep crisis of 2009.

Based upon our product portfolio and customer discussions, we should be positioned to grow faster than our served market during 2011.

So to conclude, ST has made significant progress since the start of this year. The results of the investment in R&D are visible in our product portfolio, helping to position us to grow faster than the market, driving improvement in our profitability, and enhancing our future opportunities. ACCI and IMS are creating value now and will continue to do so in 2011, while ST-Ericsson will begin to capitalize on opportunities to create value and will demonstrate this as we move through next year.

Overall, we have dramatically improved our return on invested capital in the first nine months of 2010 for the ST shareholders, reaching a RONA -- a return on net asset -- attributable to ST of 19%, which is now about twice our weighted average cost of capital.

Now we would be happy to take your questions. Thank you.

(Operator Instructions) Gunnar Plagge, Nomura.

Yes, hello. Thank you. This is actually [Amit Desait]. Congratulations on a good quarter. My first question revolves around the OpEx going into Q4. If you could just share your thoughts on how would you see OpEx evolving in Q4; and I also have a follow-up.

Okay, so Carlo?

Yes, good morning, good afternoon, everybody. Thanks for the question. Indeed the third-quarter expenses of course reflect some seasonality as our press release highlighted and some of you rightly pick this morning.

However, also they do reflect a substantial reduction in the expenses, a streamline of the Company. In this respect, when comparing Q3 '10 to Q3 2009, so at a similar seasonality effect you may have noted that OpEx reduced by $46 million year over year. So there is of course a very structural and stable change in the expenses streamline.

Having said that, the fourth quarter would not reflect a similar seasonality given vacation in Europe in demand for the summer months. And also by our characterization of the fiscal year ending on December 31, the fourth quarter is slightly longer than the third quarter. So in absolute dollars, you may expect expenses in Q4 to be higher than Q3.

As a percentage of sales, for sure will not go back at all at the 35% of the second quarter. It will be more similar to the about 32% of Q3 or slightly higher than this as a percentage of sales. And obviously a lot also will depend where finally the sales fall within the range of our guidance.

Okay, thank you. As a follow-up, if I may, you are guiding to around 4.5% at the midpoint sequential growth; and ST-Ericsson earlier was looking at around flat growth going into Q4.

Which in that case, could you then probably explain how do you see trends evolving between Automotive and Industrial in terms of sequential growth going into Q4?

Yes, of course, we see a substantial growth in IMS in both our analog, power, MEMS, but also microcontrollers, and also a significant growth in the Automotive.

They are a significant growth there, very much driven also by new products. I would like to mention here two lines that are really giving an important contribution this year. One is microcontrollers and a second one is our MEMS families.

So they are leading the pack. There are other families where we are more flattish, like Wireless. Hopefully, we will grow, but -- I mean in Q4. And I think IMS overall will more than compensate these other segments that are in a kind of flat mode.

So you would say probably IMS growing faster than ACCI and then Wireless flat, close to flat?

Well, we do not provide the detail. Of course, Automotive will also grow significantly. So. But overall, IMS will grow more, yes.

Okay, thank you.

Next question, please.

Guenther Hollfelder, Unicredit.

Hi, I don't know whether Carmelo is around, so I was wondering whether he could comment on the trends he is seeing in the distribution channel here, going into the fourth quarter, given the comments we had from some competitors. And also ST has quite a lower exposure to the distribution channels than some of the US companies. Thanks.

Hi, Guenther Hollfelder. Good afternoon and good morning, everybody. Well, I would say the distribution channel is business as usual, because there is a slight increase of inventories in the various regions of the world; but it has been largely compensated by the increase in resale.

So all in all, the situation is under control, and I can confirm this is throughout the various regions. So I do not see for the time being any major problem in the distribution channel.

You would expect some sequential growth in Q4 then, for the distribution channel, for your business?

I think so.

Okay, great. Maybe just a follow-up on the CapEx. Is there already some visibility, or could you say whether CapEx in 2011 will remain below the 10% level for STMicro?

Yes, I will say definitively yes; the capital expenditure in 2011 at the current level of visibility will be below the 10% level I will say at the end. We incurred in one year with no substantial need of building capacity, and delivered a 5% CapEx-to-sales ratio in 2009. This year of course you know that we have been rushing to serve our customers, building up capacity.

And you noted year to date we are at 8%. I will not exclude that we will exit the year somehow higher, a little bit higher than this 8%. And frankly, the 2011 will very much depend on building up of demand for the year.

Of course, we continue to be very careful and very modular in spending, and we are preparing capacity for servicing the customer. We are preparing capacity for the new products, including the new products for ST-Ericsson.

And indeed respect the reference model for us remains a reference model with a CapEx in a range of about 7% over a full cycle.

Yes, and of course we are also intensely working to increase the outsourcing. There are areas where we really need more internally, and also from outside. I would like to mention some of these areas because they are also great business opportunities.

The first one is MEMS. It is really strong. I did already mention microcontrollers is the second one. But in general, our activity in analog CMOS is pretty strong. For advanced analog, for power management, including the power management and the radio frequency for the Mont Blanc as a companion chip for MEMS.

So we are expanding here both outside and inside. High-voltage power MOS, for instance; we have a new technology in power MOS that is very, very competitive technology.

So some BCD. So it is really focused mostly new products, technology, and manufacturing investment.

Okay, great. Thank you very much.

Next question, please.

David Mulholland, UBS.

Hi, thanks for taking the question. Just one following on from that I guess on MEMS. You've talked previously about possibly getting $100 million from gyroscopes. I would just question, is that still on track? Or how is it progressing? And where could it get to next year?

I was a little bit conservative, Dave. We will pass that number. Yes, we will definitely meet our objective. I said around $100 million; it will be more than $100 million.

Yes, it is becoming very material business for us. Of course, it is not only the gyroscopes. Gyroscope is for us the product of the year. But in the press release we did mention, for instance, MEMS microphones.

But we have a number of families around this technology that are hitting the market. And we see a tremendous opportunity for growth in 2011.

Did you have a follow-up, David?

Yes, just one quickly. Just how utilization rates were through the quarter and where it sits at the end of the quarter. I think you mentioned it sounds like slightly slowing.

Yes, this is Alain Dutheil speaking. In fact, our utilization rate this quarter was very high, above 90%. And today we are planning a utilization rate of about 87%, which is quite high also, because maybe you remember that when we talk about our utilization rate it is comparing to the standard line capacity, and 100% is not reachable for us.

When we are between 85% and 90%, I think it is a kind of ideal situation because we have enough flexibility if we need to enter new orders, and at the same time our fabs are fully loaded.

Maybe -- because usually I have also the question on the subcontractor, which Carlo mentioned, so I can take this opportunity also to say that we were very close to 17%, the activity of subcontractors.

That's great. Just one quick follow-up. Could you maybe just quantify the impact of how much longer the quarter is and how that will impact OpEx and also revenues?

In technical term, the number of days in Q4 is about 6% longer than the third quarter. Then on the question, how does it impact revenues and expenses, of course that very much also depends on --

(multiple speakers) season.

-- on the activity with our customers at the end of the year since these additional days between Christmas and New Year's not necessarily are active days for all customers. So I would expect that the impact in revenues is much, much more relevant -- in terms of calendar -- in respect eventually to the impact on operating expenses, which instead is more mechanical.

However, also under this respect of course we are taking some measure and suggesting also to enjoy the Christmas period for vacation to all our colleagues, at least in the indirect force. And we are trying also to mitigate this effect.

So it is not directly mathematical. Unfortunately cannot be in a (inaudible).

That's great. Thanks very much.

Thanks, David. Next question, please.

Francois Meunier, Morgan Stanley.

Yes, hello. It's Francois. Just a first question about the pricing environment. I guess everything were relatively easy in Q3. Have you seen any change going into Q4? That would be my first question.

In terms of market share, we have seen the -- I am sure you have seen as well. There is a guidance from Texas Instruments and other US companies going into Q4. [Obviously] got lower exposure than you to the distribution.

But still, do you feel like you are taking market share overall? Is it something which is sustainable into next year, given all the good work you have done in IMS and ACCI?

Well, fine. I think on the prices we do not see a real difference today compared to last quarter. I think there are still areas of constraints, by the way. Some of the areas that I did mention are also areas of continuous constraints in terms of supply chain from us, but also from some of our suppliers.

In terms of market share, let's face it, we are losing market share in Wireless because this is a transition year. But I believe we are gaining market share in a big way on the rest.

I think in Q3 I think net of Wireless we did grow by (technical difficulty) percent, which is a substantial growth, with IMS leading the pack for us in the growth.

We believe that mostly thanks to the new products that we did mention in the release and this conversation, we have a good opportunity next year to outperform the market. And we expect then a more substantial contribution from ST-Ericsson in the second half of next year.

Okay, thank you very much.

Thank you, Francois. Next question.

Sandeep Deshpande, JPMorgan.

Yes, hi. Sandeep here. Thanks for taking my question. A couple of questions for me.

Firstly, on your -- the businesses that you have, you have talked about in the past about the imaging business and doing something with the imaging business. Any progress on that front which will be able to improve your margins even further?

Secondly, on your manufacturing strategy, I mean clearly you are talking about more outsourcing. But surprisingly, the trend seems to be changing in the semiconductor industry. The IDMs, many of your other competitor IDMS are talking about building more fabs at this time.

So what are your thoughts on that? As well as whether you can use your 300-millimeter capacity at Crolles, given that Texas Instruments etc. keep talking about large 300-millimeter fabs in analog, whether you need that or whether your products don't need that sort of capacity? Thanks.

Yes, well I think -- sorry, the first question was on imaging. Well, I think very simply, the status quo is not an option. So we have two options and of course we are evaluating on the two options. One is restructuring of the business; and the second option is a strategic move.

The business today is clearly diluting from the gross margin point of view. It is not contributing basically to the earnings per share. This is not -- it is basically breakeven, so there is -- but the status quo is not an option.

What we want to do for anything that we do, we want to make sure we can be a leader. And we do not believe that this is the case in this piece of business.

So in terms of manufacturing, I think we are moving on with our strategy. We have of course a wide variety of analog products. Some of them we can manufacture in Singapore.

And of course we believe it is an enormous asset for ST because you may know that we are landing in Singapore now at a level that is in the range of 17,000 wafers. Well, it is 6 inch, but it is per day.

So it is a 17,000 wafers per day 6-inch equivalent; that is a very, very high volume. Every time we can manufacture there our analog products, of course we have a very strong motivation, that is of course the cost structure related to this tremendous volume.

On the other hand, there are other products like the products that I did mention before, our let's call CMOS analog for radio frequency, for power management, for many products including the companion chip for MEMS, for instance. Indeed for these products of course Crolles2 is a very good solution and is part of our plan.

So we will go on. I think we have greatly simplified the manufacturing machine of ST. Today we believe it is more stable and we are pleased about the structure that we have.

I think in any place where we operate the dimension of scale has improved significantly.

On the other hand, we want to move on with our strategy to outsource at least 20% of our revenues. And this is giving us an important advantage in terms of flexibility to make sure that we can systematically operate with an optimal loading on what we do internally.

If you talk about a little, if I can ask a little bit about profitability. Clearly your businesses are becoming much more profitable than they were for the last few years. I mean if you look at ST versus some of your peers in terms of valuation, you are clearly not being valued as highly as some of your peers.

But some of your businesses are now doing as well as your peers. But would you think of restructuring the Company such that you can improve the valuation of the Company given how the market looks at some of the pure-play companies?

What do you mean restructure the Company? I think we want to make sure that what we do in IMS today is not the arrival point, but it's just the starting point. We did discuss about imaging; and of course I believe we can do better in the area of Automotive and digital consumer.

But very importantly, we want to go through this exceptional phase of R&D investment in Wireless, and we are doing this not alone. I think by design it would have been impossible to do this alone in ST. As you know, the scope of the products is very wide.

We are confident that what we are doing they are has a certain value and we have good customer traction. It takes time. Unfortunately, it takes time. But we are confident that what we are doing is a top class, is really good products for smart phones and tablet applications.

So this is what we want to do. I mean it is more working on the fundamentals and making sure that Carmelo Papa is not only at the 20% level, etc. etc. But very importantly, that we get into much higher top line on Wireless.

Thank you very much.

Thanks, Sandeep. Next question, please.

Simon Schafer, Goldman Sachs.

Yes, thanks so much. I was interested in your comment about maybe going into a more I guess normalized period where maybe rush orders are ceasing and lead times are beginning to be a little bit more normal. That is something that your analog peer group have talked about as well.

But then that is coinciding with some inventory build on your own balance sheet. So in aggregate I guess I was wondering -- are you feeling more comfortable about the situation today than you did maybe three months ago, because lead times have come in and this acceleration of the order book has become a little bit more normal? Or should we worry about the inventory build on your books? Thank you.

Simon, the inventory build that you saw in the quarter at the end is aimed at servicing demand in the fourth quarter, in line with the revenues outlook that we have shared with you -- and which, by the way, is very well supported by the level of confirmed backlog we enter the quarter in this respect.

By the way, just as a technical note, you may have measured $130 million inventory increase in the balance sheet. However, over $30 million depends on the currency translation impact.

And the rest is at the end for servicing Q4. Q4 is normally a peak of seasonality for us. And normally exiting Q3, like exiting Q1, the Company experiences the lowest inventory turns in this seasonal pattern.

So we exited Q3 at 4.5 turns. We target to execute Q4 with accelerated turns, higher than 4.5. And in this respect we are managing inventory in line with the target model, which I remind to all is targeting a 4.5 to 5 turns.

I see. Understood. It sounds as if then I guess you are effectively saying that you feel the industry in aggregate is still somewhat undersupplied. So maybe you could comment as to about how much capacity of your internal factories is coming up? How much you are adding versus how much you're incrementally growing with the outsourcing partners?

And then I'd have a follow-up question on the manufacturing side. Thank you.

Yes, in fact -- this Alain Dutheil speaking again. We have told you several times that what we are going to do is to build, to increase our capacity Q4 over Q4 by about 20%. And if I look at what our level in Q3, in fact we increased our capacity already by about 15%.

What we said also is that of course our CapEx will be toward the end of the year because we could not get the equipment earlier. So the capacity is increasing and will keep increasing also in Q4 as I said before.

On top of that, I was mentioning that last quarter we moved from about 15% to about close to 17% on our outsourcing. And probably in the fourth quarter (technical difficulty) at the same level.

Understood. Got it. So my follow-up question --

Sorry, you need to understand that the 17% are applying on the capacity, which is (technical difficulty) output which is higher.

Yes, understood. Actually I am not sure I understood the answer of a previous question which I guess was -- look; TI is talking very highly about the economics of high-performance of -- well, analog in general on 300 millimeter. How is ST evaluating that step forward in terms of more aggressively migrating certain parts of analog onto 300 millimeter?

When would you do that? Would you consider doing that more aggressively and so on? Your thoughts on the economics of that would be very helpful. Thank you.

Yes, I think I did answer that; depends on the products. There will be products like advanced -- I mean CMOS analog, the products that we are using as a companion chip for Mont Blanc, both for radio frequency and for power management for instance.

But these are also the products that we are using as a companion chip for our MEMS micro-machinery products. Indeed, we see on this category of analog a good opportunity to go 12-inch. And we have the assets that we have, what we need, in Crolles2 for this migration in this 12 inches.

In fact, is available. The micro-lithography is of course not of the same complexity of the 45-nanometer, but it is much more complex of many other analog products. And this is something that we plan to do in 12 inch also. Okay?

Then there is a second block that is our smart power technologies. On this block, we believe that the machine that we have in 8-inch is very competitive.

We're working on the dimension of scale. In fact, we have significantly simplified and grown the dimension of scale of [8-inch] machine.

And then there is an 8 -- and then there is a third block that is a more mature analog products. And frankly, I believe with the volume and the dimension of scale that we have in Singapore we are extremely competitive because the volume in Singapore is very, very, very high. I did mention the 17,000 wafers per day that is a 6-inch equivalent, but is an enormous volume.

So this is the strategy. We have a block that is of course 12-inch. We have a block that is -- and is mostly the smart power -- that is 8-inch.

And we have a block that is the more mature analog -- but including advanced analog, but mature from the technology point of view -- that is perfectly comparable with our 6-inch operation in Singapore. And of course for us it is a great advantage to be able to manufacture these products in Singapore.

Got it. Thanks so much.

Thanks, Simon. Next question, please.

Jerome Ramel, Exane BNP Paribas.

Yes, good afternoon. I've got two questions. One for the Philippe. Broadcom this morning gave some positive comments about the set-top box market. They were claiming a market share, namely in China in cable. So I just wanted to check with you how you see the situation in set-top box market. And when do you expect revenues from Freeman for the digital TV?

The second question will be more for Alain. So, with all of what you have accomplished with the Company, and all of what you have done, and where the Company is now today, what do you think the Company still need to have to do from a manufacturing standpoint? Thank you.

Okay. I will start then on the set-top box and TV question. Set-top box market is indeed doing pretty good.

I would disagree with the statement of my favorite competitor about their share overall. I think worldwide we are this year gaining share.

For sure, they are entering some of our markets. That has been the history. We always open new markets, and China was one of them; and then they come later and gain some share. But thank God there's always new markets which we open.

And we grow our sales -- if we compare 2010 sales versus 2009 sales, the growth is absolutely tremendous. So yes, set-top box business is doing well also for us, let's put it this way.

On the TV, we will start generating sales this quarter on the Freeman family. Of course they will be small sales, yes, because it is just the start of production of this new platform. The sales will continue to grow all along 2011 and of course 2012.

So there is a pretty aggressive growth plan on Freeman and then on the next generation, [Newman]. But we already have, as I said already, we already have design wins and committed customers. And the first sales are happening this quarter.

Okay, now about manufacturing, Jerome, impact -- most of what we had to do has been done, as you were mentioning. So I would not recommend to have some big closure of fab or whatever.

But there is always some optimization which is possible. What we always need to look for is to have a right dimension of scale. And this of course will be -- is a continuous process.

I think for -- my opinion is that at least for the foreseeable future, I think the infrastructure that we have is the right one, is the one we need. But we always need to challenge it. Of course, again, dimension of scale is important and also the location of the plant is also very important.

But I think now what we had to accomplish and what we defined a few years ago I think has been done. It is going to be over when [finished] is getting out of our perimeter.

But I think this is a never-ending process, which we will still have to challenge our manufacturing infrastructure and take the right decision at the right time.

Okay. Thank you very much.

Thank you. Next question, please.

Jonathan Crossfield, Bank of America Merrill Lynch.

Thank you. Hi, good afternoon. I just had a question on your computing business which I think was up 16% sequentially, driven by -- I think you mentioned printers.

And then in the outlook you mentioned some softness in computing. Is that a situation of some overbuild, or is there something else going on in that market?

No, we see -- you know we wrote softening because we see a Q4 that is relatively flat. (inaudible) to say stop growing. I think this is of course printers; it is also disk drives; it is --.

I believe for us, disk drives, there are two blocks. One is more the power product that is very strategic and is very strategic and very important for ST. Then there is a second block that is more an ASIC business, it is more opportunistic kind of products.

And then there is the printers, and in the printers business there are of course at least three angles. There is the digital core of the printers; there is all the power elements in the printers; and there is all the cartridge business.

We see some flattening, but from a level that is pretty good and I believe is a normal adjustment. We are convinced that what we are doing in the area of smart power here, in the area of the digital core, adding also functionalities for the multifunction printers, and all the cartridge printer business with new technologies and new applications is a great line for ST.

Okay, thank you. Then just as a follow-up, you mentioned that the smartcards business was down sequentially I think in Q3.

Was that just a normal lumpiness in that business? And do you see that trend reversing in the fourth quarter and going forward?

Can you say again, what business?

The smartcard business.

No, I think we have -- I think maybe the segment I think is -- we see a good momentum in everything that we do in MMS, what we call MMS. I think we expect a very significant growth in MMS this quarter. Of course, MMS is part of IMS, but --

Every product (multiple speakers) microcontroller.

I think is -- there is nothing special. I think it's good momentum, and MMS with microcontrollers, smartcard, will contribute to the growth in Q4 this year, compared to Q3.

Okay. Then just finally, Carlo could you maybe comment on the hedging position going forward, given we have seen the dollar weakening somewhat in the last couple of months?

Yes, I would say that this exchange rate -- I was waiting for the question and hopefully we have also greatly prepared in term of hedging by adopting our systematic hedging, which today starts again to give advantage to our P&L.

To be short on the answer, I will share with you the percentage of euro-denominated expenses exposure, which is currently hedged for the next four quarters and the relevant average rate. For this current quarter, 50% is hedged at a rate in the range of 1.33. And the effective 1.36 rate underlying our outlook for the quarter substantially reflects an expectation of current rates as they are today, or slightly higher, to continue through the rest of the quarter in November and December.

For the first quarter '11, about 45% is currently hedged; the average rate is 1.31. For the second quarter, about 30% is currently hedged at 1.28.

So going on forward, of course a lower percentage of exposure is hedged. As we see these numbers became relevant for many of you, you will find there is a statistic also in the quarterly presentation that we normally post on the website after the call.

Thank you very much.

Thanks, Jonathan. Next question, please.

Glen Yeung, Citi.

Thank you for taking my question. The first thing I want to ask is a bigger picture, cyclical question. Because what we see in the market is lead times coming in; we see orders starting to slow down. But for ST we see capacity going up and actually positive revenue guidance for the fourth quarter.

I would be the first one to tell you that I think the cycle is different. But I would love to hear your perspective on what is changing, or what is different this cycle than what we may have seen in other cycles where we see the same type of things, lead times slowing.

Then as part of that -- and I think this ultimately is going to answer my own question. But you spent a lot of time on this call talking about secular growth opportunities. So I wonder, as part of your response to what we are seeing cyclical, if you could try to weave in what is secular for STMicro that may make this different.

Well, to be very, very direct, we are investing really on new products, technologies, and capacity. I mean we have a tremendous demand on MEMS. It is not one product family. It is not one application. It is very broad from consumer to portable equipment to industrial to medical.

And we are investing there because we have an enormous demand. And we want to respond properly and support our customers on these proprietary technologies.

There is another area where we are investing, I already mentioned; it's the analog CMOS. Again here it is for very specific products, applications, and customers.

There is another area where we are investing in certain BCD technologies because the demand from our Automotive customers in these areas is very, very strong. So it is very focused on three or four blocks of technologies to support ST and also to support in the second half of next year ST-Ericsson with the Mont Blanc ramp-up that will be very significant.

So, this is what we are doing. Of course, we are not investing in general-purpose technologies. Of course we are careful in looking at the evolution of the inventory position of our distributors; we're looking at the trend of the POS at our distributors.

But we are confident that what we are doing in terms of capital investment is absolutely the right move, because it's supporting our new products growth and is new products with also good value there.

There is a correction in the bookings. Our backlog position for Q4 is solid. We have a strong backlog for Q4.

I think on the other hand we understand that there is a flattening in the market. There will be for sure an important deceleration of the growth. Our visibility today is that the market will be flattish in Q4, will decline in Q1, and then will start to pick up again in Q2.

But overall, this year the market that we serve is going to grow from 20% to 25%. Next year the visibility that we have at this moment is that the market is going to grow between 5% and 10%.

At a very broad level, at a macro-economic level, I mean the visibility that we have is that there is a recovery, but there are of course concern about the fragility, the potential fragility of this recovery. But the recovery is in place and despite a certain concern I think we believe the trend is there.

Great. That is actually very helpful. Thank you.

I just wanted one other follow-up. In the call you mentioned that pricing was a little softer. I just wonder if it was softer beyond your expectations, or did you expect pricing to slow a little bit?

And maybe you could just help us with what the pricing trend has been earlier this year, and how that compares to what you saw in the third quarter.

Say that in 2010 at the end we are experiencing, I will say, normal pricing trends for this industry in, I will say, the area of the application-specific standard product, and in the advanced technology, while we have been enjoying -- as we continue to enjoy a quite easier pricing environment on the standard product.

Of course, there are differences also based on the new product. The product innovation is very critical on this respect. Currently for instance in Wireless we are experiencing more than normal price pressure on the legacy product portfolio, while of course the future products are expected to boost profitability.

Thanks; sounds about normal. I appreciate that, and well done.

Next question, please.

Odon de Laporte, Cheuvreux.

Yes, good afternoon, gentlemen. Thank you for taking my question. You just said you expect the market, your addressable market, to grow by between 5% and 10%. I was wondering; is it excluding Wireless or including Wireless?

No, this is including Wireless.

Okay. Okay, thank you.

This does not include the memories, for instance. This does not include the microprocessor and optoelectronics.

Do you expect in 2011 to grow in line with the market in Wireless?

Since the conference call was last week, I can respond in general. I think Wireless -- let's face it; we are in the transition. The first half of next year is not going to be easy, but we expect a strong improvement in the second part of next year.

Overall, I believe looking at the new products, Mont Blanc of course is a new product but is going to be, as I said, more in the second part of the year.

We have the MEMS; we have the microcontrollers, we have the high-voltage power MOS. We believe we have a lot of new smart power products. We have the Freemen, okay?

We also have new interesting families in the area of consumer. And the interface between consumer products and computer products is our DisplayPort offer. So we have a comfort that thanks to all of these new products next year we can outperform the market in terms of overall growth, including ST-Ericsson.

Okay, this is impressive. Thank you very much.

Thanks, Odon. Next question, please.

Lee Simpson, Jefferies.

Hi, good afternoon, gentlemen. Quick question on autos if I could. You mentioned earlier in the call that you see significant sales growth in the automotive end-market. But some others are actually steering to a slowdown in order intake and seem to be pointing towards sense and control as the areas where the slowdown is occurring.

Do you have any visibility of a new conservatism in ordering going into 2011? Could you give us any sense about the changing lead times that might be evolving there as well? Thanks.

What we see is a pretty strong demand for 2011 in Automotive. In fact, we have been in contact with many customers, of course. Sometimes also with carmakers; and there are important drivers.

Of course, I am talking about our traditional customers, I mean particularly the European customers. But we also have customers in America and we also have customers in Asia.

China is a very, very important driver. And the electronic content both on the low-end cars and of course in the high-end cars for China is very good for us. It is an important electronic content.

There are other drivers. For instance, the replacement of the traditional lamps technologies, headlight technologies with the power LED and a lot of smart power products.

So we see a good momentum. We see a strong demand. And we are planning for a significant growth next year in the Automotive.

Great. That's pretty clear. Maybe just one quick follow-up if I may. Just with respect to the permanence of some of the OpEx savings we saw last quarter, I wonder if you can give us a sense about how complete now do you think the R&D program is ahead of the new products that you see shipping next year in Wireless and beyond?

I did not catch completely the question. Can you say again? Sorry.

No problem. Just trying to get a sense for -- you have got a lot of new platform products coming out next year in the Wireless sector. Clearly it has been a main focus for your R&D this last cycle. You have certainly overinvested this last cycle into Wireless.

Now that will translate into sales next year. I just wanted to get a sense for how complete the R&D program is, and the extent therefore -- how much further R&D savings we could get in 2011. Thank you.

Well, I think that -- and again this is specific to Wireless. But the way that we see is the following. We have the ambition to cover wireless applications not on the very low end of the products, but as I say we have the ambition to go from single-chip, single-chip EDGE kind of products into the HSPA+, 3G, and also the LTE, and this is the modem line. So it's pretty broad.

We have the ambition to have a competitive application processor both for integrated solutions, also in terms of standalone products. We also have the ambition to cover all the connectivity products like the GPS, the Bluetooth, the FM radio, the WiFi, all of these pieces that we need.

Of course, this is on top of the traditional power management and radio frequency device. So, the scope is pretty broad. We know that there is an effort here that we are sharing with the Ericcson group.

Compared to what we have today, there are still some additional savings that are part of the restructuring plan that we have announced. This is about $70 million as annualized R&D savings.

Then starting from there, once this is completed -- that is basically at the end of this year -- the focus will be on speeding up the time-to-market and, as I said, will be material in the second part of next year and move from there.

I think the wireless market today is a $23 billion market. This market will become in the next few years a $30 billion market, and we want to have our fair share.

And as I said, the scope is global. It is a big scope. Therefore we could not do this in a [standalone], but we are sharing with a solid partner.

But once this restructuring is completed, it will be more the continuous improvement and efficiency improvement rather than additional restructuring plan.

That's perfect. Thank you very much.

Thank you, Lee. Next question, please.

Stephane Houri, Natixis.

Good afternoon, everyone. Just a quick question on the first quarter. Could you give us some comment on the seasonality of the first quarter as you see it now? I.e., what tells you your order book right now?

Well, of course, I think it is still two good months to go, so it is a little bit -- you know. I think we see a kind of a normal seasonal.

We have areas where probably is -- IMS for instance, system is pretty good in Q1. I did mention Automotive again seems to be pretty good in Q1.

But there are other areas that are impacted by the seasonal effect. I would say that overall it's on the norm. So we have a visibility that is on track with the normal trend that we have in Q1.

Okay. How would you qualify the trend in Q1, normal trend? Is it minus 8%, minus 10% sequentially, something like that?

Then we -- I think you know this. In fact, I think you know it is above 7% but below 10% in terms of decline.

Okay. Thank you very much.

Thanks, Stephane. Next question, please.

Tristan Gerra, Robert W. Baird.

Hi, good afternoon. Quick question on the cycle again, and there seems to be a growing consensus that you are supporting that basically we are going to have a pause, as opposed to a down cycle.

Yes.

At the same time, lead times remain well above normal, and I think they have come down much slower than a lot of people would have expected just a quarter ago. What makes us think, however, that once lead times normalize back to normal level that we wouldn't see the type of late-cycle effect that we have seen in the past? And I guess that relates to ordering relative to reorder and demand trends earlier this year.

Tristan, I believe that we substantially concur on this interpretation. Carlo said earlier we do not see a sign of the downturn. Is a pause, is a mild adjustment, at least based on the current visibility we have.

We have talked about a fourth quarter which we see in a sequential growth; and we have talked about a normal seasonal pattern for the first quarter, based on the current visibility; and then an expected peak in demand back starting from the second quarter of 2011.

Yes. On the lead time there are products that -- take for instance computer peripheral products. These are mostly major customers and we work on forecasting systems that are pretty sophisticated, and rolling, and covering typically 12 months or even with some visibility over two years.

It is now -- lead time is important, of course, for IMS, where we have certain families that is more standard products. I believe that there will be on these standard products some form of normalization. But frankly, it is just in IMS and both APM and MMS that we have so many new things where really lead times on all of these new things for us remains pretty stretched.

Maybe, I would like to add something, because just to come back on the question which was put before -- what is different this cycle than other cycle? I think there is a major difference.

It is that the other cycles were created by our industry. Our industry was overinvesting, and then we were creating overcapacity. And then the usual scheme, which is overcapacity, then a drop of price, overinventory and so on and so forth.

This time it was not the case. We didn't have -- the industry didn't overinvest. It was the consumer demand which was decreasing, the end-customer demand, consumer demand which was decreasing.

So therefore, our industry was not in a situation of overcapacity because of overinvestment. And now investments which are made are just a kind of recovery to a normal situation.

This is why I don't see an overcapacity existing, because it is just -- it is true for us, for example. It is just a recovery from a situation which was a situation of underinvestment.

I just remind you that we are not investing any longer in the 25%. Our industry is more in the 10% to 15%.

So this is what is the major difference, it's that this time it is not our industry which has created the problem. It was the consumer demand.

That's very useful. Also second question, in analog. I think you have addressed the question of your competitiveness from a cost standpoint in analog versus the competition.

What about market share? So if we look at TI talking about adding about $4.5 billion in capacity over time through three new fabs, clearly going after market share over the next few years.

Would you on your end emphasize capacity expansion to at least protect your market share in analog? Or are you going to emphasize instead mix and margins?

And do you think that TI move overall in analog is going to be disruptive? Or do you think that -- or do not expect much difference in dynamics in that market over the next couple of years?

Well, I think Carmelo will comment, but from my side the analog market is a very fragmented and very differentiated kind of market. Here we have many, many things. There are at least four important blocks in any of these systems; three of them can easily be considered as analog. The fourth one is different.

But if you take any electronic system, you have a block that is about sensors; you have a block that is about power management; you have a block that is more about the control and all the analog techniques; and then you have a block that is typically a microcontroller or a microcontroller system.

It is very spread out. I am sure that TI is very aggressive, but I mean we have our own strengths and we believe that we can competitively participate and win and grow both in terms of revenues and in terms of margin.

Of course, we are focusing on areas in the frames of what I have described where we believe we have important competitive advantages. We will not of course focus on analog-to-digital or digital-to-analog converters. This would not make any sense.

But there are other areas like sensors, for instance, where we can absolutely lead the pack with enormous, tremendous growth opportunities. So you see it is very broad. Carmelo, if you have --?

If I can complement what you said, Carlo, I think that the battle, if we can say, will be all around the new products. We have our -- of course we are also thinking of refurbishing technologies to make us more competitive in some areas. But all in all, it is more the new products.

And we have our distinguishing capabilities, which is around MEMS, around power management, around sensors, and network. This is all the low-power management overall. This is the areas where we are focus.

Then of course, this means ability in design, and the application knowledge, and ties with customers. I think we all have this, so we can compete neck-to-neck with the best in the sector.

(inaudible) had also a consideration around that, since we appreciate all these questions at the end are dealing with some possible concern about the competitive contest in advanced analog, and the possibility this competitive contest may fall into some erosion of margin at this point.

But in this respect, what is important today for ST is to expand the wave of advanced analog as a percentage of our total sales. Whatever at the end could be the size of this erosion in margin, you may expect for sure this business will be substantially accretive to the 39% gross margin we started from.

Sometimes it happens to me, sometimes to meet investors, say at the end if one believes in analog but is concerned about some point of erosion of the margin on analog, ST is the best stock pick, since whatever may happen on this margin if we expand our presence that this will create value for ST.

Very useful. Thank you.

Thanks, Tristan. Next question, please.

Kai Korschelt, Deutsche Bank.

Good afternoon. I had a question on the 15% margin target for ACCI. Can you just give a bit more color on what you think will drive that quite significant improvement in your view? And also what the time frame of that be? Is it pure revenue growth, volumes, is it mix, is it cost?

Then my second question is just in terms of the guidance. So if I back out the 6% increase in base, then essentially your guidance looks like it is implying plus 1 to minus 4.

Is that the right way to think about it, that [this] accounting has a probably more than (technical difficulty) usual impact on the fourth quarter? Thank you.

So the first question is about the driver of margin expansion in ACCI. Basically are we still -- we have captured a portion of the opportunities we have introduced to you when meeting in June about the profitability pattern for our key segments, but there is a substantial portion still to come.

Talking specifically about ACCI at the end, when we met in June the segment was running at mid-single digits. We anticipated ACCI to move towards high single digits by the end of this year, and then to target midterm the midteens.

The first points are the fact. The fact is that ACCI has already reached 11.7% in this last quarter. However, there are still some substantial rate of improvements, and I would like to mention at least three at the moment.

One is about Automotive. Automotive is substantially sensible to operating leverage on revenues, has not reached yet the peak of revenues this group can reach. And his profitability is not yet at the level that we have experienced before the recession.

Additionally, you know about our final initiative of streamlining manufacturing by closing Phoenix. And today is the Automotive group the one paying, how you say, the bill of this transition from Phoenix that will be complete in the course of the first-quarter 2011.

The second one is about the digital consumer. In digital consumer, set-top box delivered a nice profitability. Digital TV is today an area of investment, and Philippe has already mentioned to you about the good progress encouraging on digital TV also, progressively moving to a level of revenues yielding a profitability.

And the third one already addressed is in your prior question is about the end, eventually, the opportunity for fixing a level of margin and the profitability of imaging which is well below the Company target that Carlo has already addressed.

The second part of your question is about the calendar impact on revenues, is right, Kai?

Yes, that's right. Yes.

So in this respect at the end of the day, really we have customer demand which at the end is based on expected delivery per month, not necessarily on the specific day. A longer quarter for sure help revenues but not necessarily proportionally.

A significant part of our business is also based on consignment inventory, whereby we recognize revenues when the products are drawn from the inventory at the customers. Obviously if there is less activity -- as normally there is less activity between Christmas and New Year's -- this not necessarily fall into revenues at the same run rate of the prior period.

Okay. That's very clear. Thank you.

I think we will end on one last question. We have been running long, so we have one more question, operator?

Francois Meunier, Morgan Stanley.

Yes, it's a pretty simple question actually. It is on the OpEx reduction compared to the previous quarter and compared to last year. If you can give us a bit more detail where you have cut in terms of R&D specifically?

Well, you know, Francois, at the end this is really the progressive rollover of all the various restructuring initiatives that we had launched at the beginning of 2009, coupled with the cost streamlining launch by ST-Ericsson in the various spaces.

Then when comparing year over year, I would say that both the ingredients have contributed to the result when comparing sequentially from the prior quarter in 2Q 2010 the substantial progress has been made in the ST-Ericsson R&D, in line or even a little bit faster than the announced plan of restructuring, which is ongoing. And as ST-Ericsson management talked to you on Friday will be completed by the end of this year.

Okay. Thank you very much.

Thank you, Francois. I think at this point we would like to go ahead and close down the call. Thank you for your attendance.

Thank you, all.

Thanks to all of you. Bye-bye.

Bye, thanks.

Ladies and gentlemen, the conference is now over. Thank you for choosing the Chorus Call facility and thank you for participating in the call. You may now disconnect your lines.