意法半導體 (STM) 2012 Q1 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon.

Welcome to the STMicroelectronics first quarter 2012 earnings results conference call.

I am Moira, the Chorus Call operator.

(Operator Instructions).

I would like to remind you that all participants are in a listen-only mode and the conference is being recorded.

(Operator Instructions).

The conference must not be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr.

Tait Sorensen, Director Investor Relations.

Please go ahead, sir.

Thank you, Moira, and thank you to everyone for joining our first quarter 2012 conference call.

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

Joining Carlo on the call today are Philippe Lambinet, Chief Strategic Officer and Executive Vice President of the Digital Sector; Mario Arlati, Chief Financial Officer; Carmelo Papa, Executive Vice President of the Industrial and Multisegment Sector; Jean-Marc Chery, Executive Vice President Manufacturing, Technology, and R&D; Lorenzo Grandi, Corporate Vice President, External Reporting; and Claudia Levo, Corporate Vice President, Communications.

And finally, joining us is Carlo Ferro, Chief Operating Officer of ST-Ericsson.

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

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

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

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

As a reminder, please limit yourself to one question and a brief follow-up and now I'd like to turn the call over to Carlo Bozotti.

Thank you, Tait, and thank you all for joining us on today's conference call.

Over the last two days, there have been important announcements related to ST.

First, ST-Ericsson guideline of its new strategic direction, with a sharper end-market and further focus and its plans to right size its business.

Second, ST also announced a partnership with ST-Ericsson for the development of future application processors, and, third, yesterday evening both ST and ST-Ericsson announced first quarter 2012 financial results.

I want to cover each of these and then open to your questions.

In addition to the ST's top management here with me today, as Tait just said, we also have from ST-Ericsson Carlo Ferro, Chief Operating Officer.

To begin with, ST-Ericsson, our joint venture, unveiled a new strategy based on repositioning the whole business model to place it on the appropriate track towards excellence in execution, leadership, and sustainable profitability.

Also, the joint venture needs to be right sized in a meaningful to align its top-line potential, which is not what we had originally expected, even as recent as a few months ago.

And I fully trust Didier Lamouche and Carlo Ferro are taking with a sense of great urgency the proper actions to resize the company.

Yesterday, ST-Ericsson spoke about $320 million in annualized cost reduction to come by the end of 2013, giving further color to the ongoing and proposed SG&A savings and site reductions to ensure more R&D working synergies.

The expected ST-Ericsson savings will fully benefit ST's consolidated results, starting in Q3 2012 through the completion of the saving plans by the end of 2013.

The savings are based on three key initiatives -- first, the R&D site rationalization; second, about 25% SG&A reduction; and third, our partnership in application processors.

The savings specifically related to the partnership will be achieved in two steps.

One, a transitional cost-sharing model for the current generation of application processors, and two, synergies related to a common ecosystem, which for us is ARM based.

In addition, royalties will be paid by ST-Ericsson to ST to integrate the next generation application processor into their product platforms.

Overall, this initiative is an important first step in ST-Ericsson's move towards leadership and improved financial returns.

We will see measurable progress in reducing the quarterly operating losses at ST-Ericsson in the second half of this year, leading to a significant reduction in losses as we exit the year.

Now let me give you additional details on the partnership announced with ST-Ericsson for the application processor, which is part of our plan to advance our multimedia convergence strategy.

It is very clear that delivering a similar experience across multiple screens is what service and content providers are looking for.

So, what might seem to be individual markets are actually very related markets as consumers expect their smart TV, cars, smart phones, and tablets to offer them the same experience.

ST is building a unique and competitive advantage by unifying these application processor platforms.

As we outlined yesterday in our press release, we are adding the wireless application processor (inaudible) within ST-Ericsson to the extensive multimedia capabilities ST has already developed within its Digital Sector for set-top boxes and TV.

Now let's turn to the first quarter financial results.

ST performed in line with our guidance against this quarter.

Revenues at $2.02 billion was near the midpoint of our business outlook and so was our gross margin, excluding the impact of the one-time arbitration award.

With respect to wireless, total revenues, as expected, decreased sequentially due to a drop in sales of new products at one of ST-Ericsson's largest customers.

In addition to the usual seasonal effect and to the continual decline of ST-Ericsson legacy products.

In the first quarter overall, ST-Ericsson reached a milestone on the new product sales side with the NovaThor U8500 ModAp systems starting to successfully ramp at Samsung and Sony with smart phones from both now available on the market.

Looking in greater depth, ST's net revenues from its wholly-owned businesses were lower by 3%, better than normal seasonality, as we had anticipated and shared with you.

Specifically, both the Automotive and AMM product segment revenues in the first quarter were up sequentially compared to a usual seasonal decline, while PDP and Digital were down.

In particular, Digital Sector revenues decreased, mainly due to a significant decrease in Imaging revenues related to certain wireless customers.

While we are not happy with this performance, we believe the quality of our portfolio offers the potential for our Digital Sectors to significantly grow and rapidly return to profit.

Moreover, the just announced addition of the application process activity will further increase this growth potential and the expected synergies will compensate for the cost of the additional resources.

In the quarter, we made good progress in expanding our wide range of innovative products in a number of applications.

If we look at Automotive, for example, our innovation efforts in this market allowed us to record design wins in Japan with two top customers, a breakthrough win for our microcontroller in a safety application for a next-generation braking system, and one for body control modules.

Japan is one of the markets where security and safety mandates are fueling our products' adoption in cars.

We are also putting MEMS in the worldwide Automotive market by ramping up production of accelerometers and gyroscopes for telematic boxes in automotive eTolling systems [to help] companies track their vehicles.

These design wins help us further penetrate the Automotive market with our MEMS and improve our already strong position in tolling.

Expanding our reach into new applications like Automotive for MEMS, does not mean we are taking our foot off the gas in our existing markets.

We won significant design wins for MEMS accelerometers and gyroscopes for next-generation high-end smart phones, exploiting our new ultra-compact and ultra-low-power technology.

In addition, we have won a significant number of designs for digital MEMS microphones at Taiwanese manufacturers for PC applications.

After the year of the gyroscope in 2011 when we rose form 1% market share to more than 50% market share, we see this wave of new MEMS microphone design wins as the dawn of ST's year of the digital microphone.

And our ARM-core-based microcontrollers are also achieving success.

In healthcare and wellness applications, our STM32 microcontrollers and MEMS gyro both won sockets in Nike's innovative new FuelBand fitness monitoring application.

We are very proud of Orly, clearly the most powerful 32-nanometer set-top box system-on-a-chip on the market and we are extremely pleased with the interest from our customers that is now turning into design wins.

We earned several in Europe and Asia this quarter in the set-top box market.

Let me also point out that we continue to be a strong player, expanding our trend in ASICs by earning several design wins in our 32-nanometer process technology for network applications from top-tier networking manufacturers.

Reviewing our key financial metrics in further details, let me share the following.

First, as anticipated, our gross margin reflected approximately 350 basis points of unsaturation.

And, as we disclosed on April the 9th, we incurred an additional one-time 260 basis point negative impact reflecting an unexpected arbitration award.

With one of these items significantly improved and the other one simply removed as we move forward, we anticipate a return to higher level of gross margin in the second quarter.

Second, our focused inventory management mainly drove the unsaturation charges.

With demand trends improving, our efforts put us in good position going forward.

We took aggressive actions to bring down our inventory levels in the fourth quarter and an additional $23 million in the first quarter, bringing the total inventory reduction to just under $200 million in the last two quarters.

Third, our free cash flow improved again this quarter to $98 million.

We entered 2012 with plans for a [much smaller CapEx budget than 2011] and you can see this in our first quarter figure of $125 million compared to over $400 million in the year-ago quarter.

Fourth, ST's financial position improved thanks to our efforts to reduce inventory and our prudent capital management.

Adjusted to account for our 50% investment in ST-Ericsson, we finished the quarter with a positive $1.27 billion net financial position, up $100 million from December 31st, 2011, in a still-weak quarter.

Additionally, based on the strength of our capital structure, ST's Board has submitted for shareholder approval the distribution of a cash dividend of $0.40 per share to be paid in four equal quarterly installments.

Turning now to our second quarter outlook and 2012, more broadly, let me share a few observations.

Last quarter we indicated that we believed the bookings had bottomed in the fourth quarter with billings likely to bottom in the first quarter.

That appears to have been the case.

We see our inventory in alignment and believe it is in good shape in distribution.

So, we see a recovery path for the semiconductor industry and for ourselves.

Based upon improvements across the board in bookings, we anticipate a solid sequential increase in revenue on the order of 7.5% growth.

We continue to be somewhat cautious as there are still macroeconomic uncertainties.

From a product perspective, we think that the growth will be broad and we are even more confident that the second half should bring a very healthy acceleration in our MEMS and analog business, based upon the demand we are seeing for our products, as well as the growth of our customer base.

So, to summarize, let me share the following points.

First, the first quarter of 2011 was the bottom of the semiconductor cycle.

Second, we expect a major financial improvement of ST-Ericsson during the course of 2012, both in terms of top line and expense reduction.

Third, ST's wholly-owned business bottomed in the first quarter and we now expect a recovery across the board, quarter after quarter, with a strong acceleration of growth in MEMS, analog, and power discrete in the second half of 2012.

And now, we would be happy to take your questions.

Thank you.

(Operator Instructions).

The first question is from Mr.

Sandeep Deshpande from JPMorgan.

Please go ahead.

Yes, hi.

Thanks for letting me on.

Just a couple of questions.

Firstly, Carlo, you see -- you are talking about an improvement in your core businesses into the next quarter and into the second half of the year.

Is this based on -- entirely on the new products that you're coming out with or is it based on what your customers are telling you at this point regarding where they are in the cycle, that their inventories are low, et cetera?

That's the first part of the question.

The second part of the question is on ST-Ericsson.

I mean, what -- I think -- I don't understand is clearly ST-Ericsson looks much better after the announcement of the restructuring, because their losses will reduce with the removal of the SG&A, as well as removal of the R&D, but ST is taking over for that R&D, but there doesn't seem to be a compensation to ST from your other partner.

So, why is ST taking over costs which may be over $100 million or maybe -- we don't know what this cost is, which is coming to ST, without any compensation from the partner?

Yes.

Well, I think there is several questions.

I think the first -- the first part, Sandeep, is we see both.

I think we see a strong momentum on our new products.

We mentioned some, of course, in the press release and in our conversation today.

But we also see a much stronger backlog.

So, it's not only based on customer information, it is also based on the present backlog that we have for Q2 that, of course, is reflected in the guidance that we have given for the second quarter, but also in what we see today in the backlog for the third quarter that is significantly up compared to the second quarter.

So, it's based on new products.

It's based on information that we have from customers.

It's based on the position of the inventory of our distributors, particularly in Asia, and it's based on the present backlog that we have for Q2 and also the backlog for Q3 and we can compare, of course, on a rolling base at the same time the various periods, right?

So, it's obvious that we need to be cautious because of the macro situation economic overall is still with uncertainties but we are very much more encouraged on the semiconductor cycle, given the information that we have.

As far as ST-Ericsson is concerned, there are three steps.

In fact, it's three things and I would like to mention myself today, because Carlo is with me, and, of course, he will elaborate, Carlo Ferro, but I think the first is clear an important restructuring in terms of reduction of the number of sites and focusing more on the R&D and the execution of the key programs.

I would like to mention that the focus is really on the ModAp.

So, the focus is on the integration of the modem, together with the application processors, for smart phone and tablets, putting together the two IPs in one piece of silicon.

The second important initiative that we have discussed in the past, of course, is a major, major reduction of the SG&A.

It's a 25% reduction.

Of course, this is material, particularly in a company like ST-Ericsson that has been greatly impacted by some major customers on the top line evolution.

And the third is the partnership with ST.

The partnership with ST is based, of course, on a transfer of the application team from ST-Ericsson into ST, but is also based on, let's say, transitional cost sharing between ST-Ericsson and ST.

This, of course, will not change at the operating level -- at the operating income level, but will have an impact at the bottom line for the Company, obviously, after minority interest.

And also is based on the fact that we see now the real opportunity to extract synergies from merging these two teams.

So, if the question is, why not before, before our consumer business was based on a proprietary microprocessor and today it's based on the ARM platform.

The ST-Ericsson application processor is also based on the ARM platform, as you know, so merging these two teams we have the potential and we have the plan to extract significant synergies from the merging of the two activities.

In fact, our plan is to compensate at the operating level in ST the additional cost that we have from importing the application processor team from ST-Ericsson with synergies that are planned that will be developed by merging the teams and having both teams basically working on the same programs and the same products, because now is -- or very similar products, because now our digital consumer activity and our wireless activity are all based on the ARM platform, which was not the case in the past.

So --

Thank you.

Just a few words.

The additional cost will be compensated by synergies and in the short term, there will be, of course, also compensation, cash compensation from ST-Ericsson to ST.

This is not changing at the level of operating income, but is changing, clearly, at the level of the net income for ST after the minority interest and, on top, I did mention on the new products, not on the products that are running today, but on the new products, there will be a stream of royalties from ST-Ericsson to ST to use our application processors in their ModAp.

Thank you.

Thank you.

Thank you, Sandeep.

Next question, please?

The next question is from Mr.

Simon Schafer from Goldman Sachs.

Please go ahead, sir.

Yes, thanks so much.

Maybe just a clarification, I guess.

We've heard from ST-Ericsson yesterday, but just to clarify how much cost you're actually taking on from the ST-Ericsson apps processor burden and then how much of these synergies are -- you may be able to extract over the timeline that ST-Ericsson has talked about?

Yes, I think it's very simple.

There are two numbers here on the table.

One number is the $320 million that has been clearly spelled by ST-Ericsson yesterday and we will enjoy, of course, 50% of this in ST.

This is obvious, because now what we are importing in terms of activity, we believe, is in the range of $90 million, $95 million and we expect that this is compensated by synergies that we will extract merging the activities and focusing on similar products and the same platform.

Got it, thanks.

And my second question would be from what I saw on your gross margin guidance, I think you're basically saying that some of these un-utilization charges down to Nokia will fade into the second quarter.

I wonder what gives you the confidence to say that.

Is there something else that is going to fill that particular fab that allows you to get rid of these un-utilization charges quickly?

Yes, it's MEMS.

I mean, the problem in -- the problem, I will not mention any customers today, but the problem with our major wireless customers is -- of course, it's significant.

It's very material.

And it's very material in terms of a decline of revenues and it is even more material in terms of comparing with the forecast that is not -- as I said, it's, after all, not many months ago.

And the real big opportunity that we have and that we are exploiting today is our MEMS because when we sell a gyroscope, there is a micro machinery portion and this micro machinery portion is produced in Agrate, where we are fully separated on our MEMS lines and, in fact, we are continuously expanding the capacity to serve our customers.

But there is a companion chips that is a digital chip.

It's a kind of CMOS analog and this is very, very similar to the products that we are and were producing for our wireless customers for radio frequency and power management applications and, of course, we also hope and we are confident that ST-Ericsson can expand the customer base and very happy to see this new phone, Galaxy phone from Samsung.

It's a great phone.

Initially it was for the emerging market, now I understand it's for all the markets.

I saw the phone in Europe now, also.

And, of course, we also plan to fill these fabs with the new wireless customers.

But an important contribution is also given by our MEMS growth.

That's very clear.

Thanks.

And just a clarification on your OpEx.

I'm sorry, just, I guess, the one thing I'm trying to understand better is that on a flat FX year over year your cost is up a lot, both on a sequential basis -- just your OpEx is up, both on a sequential basis, as well as year over year in what is clearly a declining revenue environment.

And so, maybe, just to clarify as to what's happening to the underlying OpEx run rate in the core business?

Thank you.

Yes, overall, I think as we said already thanks to ST-Ericsson there will be a significant reduction in the OpEx in the second part of this year.

As far as the second quarter is concerned we a kind of stability in our OpEx, pretty flattish in dollars, I would say, of course, with a significant improvement in terms of expense to sales.

Yes, if you compare with last year, in ST-Ericsson we also had some, let's say, contribution from our other partner to support the R&D programs for ST-Ericsson and this, of course, positively impacted Q1 of last year and this was not the case for Q1 this year when comparing year over year, because I think this was the thought of your question, also.

Thank you.

Thank you, Simon.

Next question, please?

The next question is from Stephane Houri from Natixis.

Please go ahead, sir.

Yes, hello.

Good afternoon.

Two questions, if I may.

The first one is, obviously, on ST-Ericsson.

What was not really clear for me on yesterday's conference call from ST-Ericsson is how ST-Ericsson is going to increase its revenue, because you are talking, actually, about doubling the current revenue to get to breakeven and the follow up would be what kind of deadline do you give yourself, to yourself, to decide if you give up in the wireless space or not?

And -- or if you take any other steps?

Thank you.

Well, I think I will comment, first of all, on the revenues of the first quarter.

I would not consider the first quarter of 2012 as a base of business.

We believe that is really the bottom and already in the second quarter ST-Ericsson has announced a growth that is slightly above double digits, right?

So, when you look at that, it's probably better to consider what we have in Q2 this year as a starting point.

Also, I believe that there -- the announcement, the initiatives that have been announced is opening the way to more steps and, in fact, this is important to underline in terms of partnerships on certain products as we have underlined yesterday in our press release, I mean, the ST-Ericsson press release, and also during the conversation.

Plus, of course, is the new customers.

This is, obviously, a very difficult time for us, because our European base of customers has basically collapsed during the recent time, but the progress that we see -- again, I want to mention Samsung, because I can mention Samsung.

This is the first of a family of phones and so there will be more to come.

The success with Sony, now, so all of this is giving us the comfort that the turnaround will happen.

And I also would like to mention the strong focus from management to make sure that the size of the company is compatible with the top-line realities that is not, unfortunately, what we expected.

So, the combination of these things will turn ST-Ericsson around.

I -- it's obviously, however, that the turnaround must be done.

And we will not allow this to drag on forever.

And so what is the kind of reasonable target to get back to breakeven?

Is it in 2013?

Well, as you know, we are not communicating on this and I think what is real is that we can work on the two layers, the top line and the cost base, and I think there are important opportunities on the top line and I'm sure there are, if needed, additional opportunities on the cost base.

In fact, the management is continuously focused to improve on the cost base.

This is an important step.

So, with the combination of the two things, we do not disclose what is the breakeven, the moment of breakeven at this point.

Of course, as I said, we are strongly motivated to make this happen as soon as possible.

Thank you very much.

Thank you, Stephane.

Next question, please?

The next question is from Francois Meunier from Morgan Stanley.

Please go ahead, sir.

Yes, thanks for taking my call.

Yes, just a question, first, on the JV.

Obviously, I was wondering, now that the main assets you put into the JV, when was it, three, four years ago, is now back to ST, you still have 50% in the JV.

Would it make sense, now, that a potential buyer, like, probably the guys you've been talking to recently, like TI or Broadcom or Samsung, could -- eventually could look at it as maybe an easier business to buy?

That would be my first cheeky question.

The second one is about the dividend.

So, yes, it's more a question for Mario.

I mean, I think I'm -- everyone is doing his numbers today and it's difficult to find a big EPS number for STMicro this year and next year and it looks like the dividend will not covered.

How important is the dividend for you?

Because the consequence of that is, if you keep on paying dividend and it's not covered -- your cash flows, yes, have improved, but it's not likely to be positive this year -- then you might have to raise some money.

So, basically what do you prefer?

Do you prefer to pay a dividend or do you prefer to be more flexible on your balance sheet?

I prefer to do two things.

I prefer to pay dividends and I prefer to increase the net financial position of the Company at the same time and this is exactly the program that we have this year.

The program that we -- even in Q1, the net financial -- that, unfortunately, was a very poor quarter -- the net financial position of the Company improved by $100 million.

And after, of course, having paid our $0.10 per share of dividend.

So, we are absolutely committed and this is very clear to the management of the Company, of course, we are committed to move on with this level of dividend.

But at the same time, we want to improve the net financial position of the Company despite the big effort that we are doing on ST-Ericsson.

In Q1, it happened.

In fact, our net financial position has improved and we will make sure that the net financial position of the Company is protected during the course of 2012, improved during the course of 2012, despite $352 million of dividends that we pay.

Now, to respond to your question on what we transfer, what ST transferred, basically, to the joint venture was not the application processor.

What ST transferred to the joint venture was a device that was called Mont Blanc that is now called U8500.

And this device is exactly the same device that is now ramping in high-volume production in one of the top line in Samsung.

This was our contribution to the joint venture and I think it was an important contribution and it is an important -- it is the fundamental part of the joint venture today.

Okay.

So, maybe, a follow up on this one for Philippe, who is also on the call, because basically the digital business didn't do so well in Q1.

When do you expect the smart TV to ramp up now?

Is it going to be Q2, Q3 this year with the Olympics or it's going to be delayed?

And maybe what size, what type of customers?

Yes, thank you for the question.

Yes, you're right, it was not a very good quarter for the digital sector and, by the way, the main reason why it was such a low quarter compared to last quarter is actually not related to TV or set-top box.

It's more related to Imaging revenues in a particular wireless customer we already mentioned.

Now, regarding your question, we are ramping up in several places already the digital TV platform.

It's not a massive ramp up yet, however you may have noticed that we have reported a design win in one of the top tier TV manufacturers now, which is a project which will ramp up at Christmas.

So, we have a limited ramp up at the moment, with bigger volumes coming later.

And we now have a top-tier design win.

So, it's more a Q3, Q4 thing than Q2, Q3?

To be material, yes.

Okay.

Thank you, Philippe.

Thank you, guys.

Thank you.

Thanks, Francois.

Next question, please?

The next question is from Janardan Menon from Liberum Capital.

Please go ahead, sir.

Yes, thanks for taking the question.

I have just two clarifications, actually.

One is on the previous question.

You've had quite a big falloff in both Power Discrete and in the Digital area over the last three, four quarters, especially in the last quarter, which is due to the wireless customer that you mentioned, which is a situation which ST-Ericsson is also facing.

I was just wondering, do you need to take any actions in those two divisions?

Because that revenue may not come back easily any time soon.

And so, is there a need to reduce the cost structure there or do you think there is enough of a ramp from other customers that should bring you back to historical levels of profitability, even with the loss of this customer?

The second -- a clarification on the transfer of the apps processor development to ST.

You said you will extract synergies.

I'm just curious to -- can you just be more explicit on what these synergies are?

When you say "extract," does that mean that you will costs of your existing non-ARM-based development activity which is currently inside STMicro?

Or does "extract synergy" mean that you will get additional revenue on the back of this development activity, which will compensate for the cost?

Well, I suggest that, just because otherwise I'm the only one talking, Philippe and Carmelo will cover the evolution of the digital business and the evolution of the discrete business.

Carmelo is also on the phone.

I think he's in Asia.

And Philippe will also cover what we are planning to do in terms of extracting synergies from the merging of the two applications on -- the application processor activates.

So, maybe, Philippe, you start?

Sure.

As I mentioned already, the reduction -- I will first answer the question on the business situation in Imaging and the fact we're losing revenue from one customer.

Now, the plan has been, for a while, to diversify the customer base and to diversify the application base, so not to be focused only on smart phones and phones, but to be -- to use that optical sensing technology in other applications.

So, that plan is well underway and although this quarter and, most probably, next quarter we're going through a phase of rather low sales in that area, we have recorded very, very significant design wins in several applications and not only phones.

Although we do have some very good design wins in the smart phone sector with customers who are going in very high volumes, we've also recorded very good design wins in other areas, in Consumer, in Automotive, for example, which make us extremely optimistic for 2013.

So, this year, yes, we are not enjoying a particularly good short-term outlook, but we have succeeded in diversifying our customer base and diversifying our application base.

So, that's the good news and we look forward to much increased sales in the near future.

So, that was for that situation.

In terms of the synergies that we will exploit, there is some positive synergies, I mean, sales opportunities and some synergies related to avoiding to do twice similar things, yes?

By unifying the resources, the teams, between ST-Ericsson and ST inside ST, we will avoid duplications.

We will avoid doing things twice and we'll be a lot more efficient and clearly we'll be able to save costs, internal costs inside ST, R&D costs, but also costs of third parties because if we have to do only one software porting of a given platform, it saves a lot of money rather than to do it twice.

So, that's pretty obvious and, of course, we will extract cost synergies.

Now, on the top-line synergies, I want to say something, which is the application processor market is estimated to be more than 2 billion units per year by 2016 and smart phones is only half of that market.

So there is, of course, a great opportunity in the smart phone space and working together with ST-Ericsson, of course, we'll capture as much as we can in that particular half of the market, but the other half is where ST is strong, yes?

It's Consumer.

It's Automotive.

It's Industrial.

It's Medical.

There's a lot of applications for application processors and we do intend, with this combination, we do intend to exploit, also, top-line opportunities.

So, that's also part of our strategy and that's a very important reason why we are unifying on a single platform and we will offer that platform in all the markets, not only wireless, not only set-top boxes, but across all segments.

Thank you.

Now, Carmelo, if you want to cover your point.

Yes.

So the question was on Power Discrete, let's say, and I'm right now in Taiwan visiting customers.

I can tell you that one good reflection of how the quarter goes depends on distribution, which is a good channel of our sales and they are confident Q2 will be much better than Q1.

There still remains the fact that there is no long-term visibility for Q3 and Q4, which leads us to be still cautious for the remaining portion of the year, but Q2 will be much better than Q1, according to some distributors in that business.

This leads to -- also me to say that if the market rebounds, our level of profitability will go to the level that we were used before, which remains our medium-term commitment.

Also, because we will get rid of the unused capacity that has impacted us in the past and also because our product portfolio has never been so healthy as today.

We have the second half of the year considerable sales in modules with IGBTs, with MOSFET, with high-voltage discrete overall.

We will have this discrete complementing our smart power technologies in the smart grid applications, not only photovoltaic, but also power metering and then there will also be new design-in coming for iPad that had been suffering a lot in the last three quarters.

So, all in all, distribution visibility and also OEM customers make us confident that Q2 will be better, cautious on the second half of the year because we do not have this long-term visibility, but committed and capable to reach the level of profitability that we used to perform in the past.

Yes, and I'd like to -- because, of course, you mentioned one -- the problem we had with one customer.

There are also some good news in this respect in the sense that we have some other major, major customers that will take the place in the second half of this year, replacing what we used to do with our major customers of the past.

And this is important to highlight, because, of course, life is moving on.

What we had in the past is not any longer there, because it is what it is.

I mean, for us it's difficult to digest so quickly, but we are and in the second part of the year we will have major, major growth on both protection products and power MOS at certain very key customers for ST now.

Is that non-wireless or is that wireless?

I cannot say.

I'm sorry.

It's both.

But it is for real.

So, it's very material, yes.

Thank you very much.

Thank you, Janardan.

Next question, please?

The next question is from Mr.

Amit Harchandani from Citigroup.

Please go ahead, sir.

Hi.

Thanks for taking my question.

My question is centered around the Automotive market.

How do you see the dynamics panning out for Automotive in terms of end demand in Q2 and going forward into the second half?

And, as a follow up, could you also comment on the recovery in the demand for Industrial products?

Thank you.

Yes, I think in Automotive we grew 40% two years ago.

We grew 18% last year.

I think the visibility that we have with our customers and, in general, in the area of Automotive we have, as you know, long backlog.

I mean, backlog covering several months, so pretty good visibility from the point of view of the administration of the business.

The supply chain system is very, very much aligned between ourselves and our customers with methodologies that are based on control inventory and then pulling from the inventory.

So, we believe that despite the situation of a certain part of the Automotive market -- it's not black and white -- certain parts of the Automotive market today, we believe that Q1 is clearly the bottom and we expect a growth quarter after quarter, but not at the same level that we have enjoyed during the last two years.

So, there will be somewhat mitigated growth, but still a growth.

So, I think we are starting from $390 million.

I think this is now reported, so I can mention this and this will improve quarter after quarter, but not in an explosive manner as it was in 2010 and 2011.

This is for the Automotive.

Industrial, as you know, is wider.

I think Carmelo mentioned the smart metering initiatives for -- that are very, very important for us.

We are now a big way starting in China.

This is a fantastic opportunity for ST is our own success and -- but it's also very much related to our distribution, power distribution business, and much has been done during the last two quarters to reduce inventory at our distributors and I have met recently our -- I mean, the CEOs of our key distributors and there is a moderate optimism in the sense that clearly we believe Q1 is the bottom and we should go back to much stronger, much stronger position in the second quarter and in the rest of the year.

But, of course, this depends more on the macroeconomic situations and this is why we -- again, we need to remain cautious, particularly in terms of capital investments, because at the level of macroeconomics there are still uncertainties.

But what we see today is much better.

Inventory has been depleted.

Distributors started to buy again.

The POS is improving.

This is the kind of visibility that we have and this is important for the fragmented, wide Industrial market.

And on top, there are new products.

For instance, we never talk about our IGBT.

This is a new family for us.

This year we make a significant jump, but Carmelo can and must do much, much better on IGBT.

Carlo, if I may add, one other thing which is coming, visiting OEM customers, the lighting market that is very important for Discrete devices, it has been dragging for many quarters now, is starting.

They seem some visible signs of a restart of this market due to many factors, the housing, the other things, so this is one good sign, as well, for the general market.

Okay, thank you.

Thank you.

Thank you, Amit.

Next question, please?

The next question is from Mr.

Jerome Ramel from BNP Paribas.

Please go ahead.

Yes, good afternoon.

One quick question on Automotive.

How do you explain the 500 bp of EBIT margin gap between you and your main European competitor?

And the second question would be, what was the CapEx (inaudible) rate and how do you forecast it to be in Q2?

Yes, as far as Automotive is concerned, I think that the main difference is on the digital products.

I think we have started a few years ago now a new family of products and this new family of products does not yet play any significant role in the P&L of our Automotive business, but is a great family.

I think today we have in excess of $1.3 billion of design wins on the new -- what is the terminology?

Fine, I mean, of course, it's the power PC microcontrollers.

And this is not yet playing.

And what we have today, what we are shipping today, building today in the area of microcontrollers is somehow reducing the profitability in our Automotive business.

So, this is, I would say, the key difference.

But we have been working during the last few years in cooperation with Freescale, as you know.

And we are very happy about this cooperation and I would like to mention, again, this, of course, is the $1.3 billion of design wins on this kind of new microcontroller is along the life of the products.

Of course, it's not per year, but we are enjoying yet the result of this effort in R&D.

And our (inaudible) level will be slightly above 80% in the course of the second quarter from slightly below 70% in the course of the first quarter.

Thank you, Jerome.

Next question, please?

The next question is from Mr.

Gareth Jenkins from UBS.

Please go ahead, sir.

Yes, thank you.

I guess one clarification and one question.

The question is, just I wondered -- you touched on this within Industrial.

I just wondered whether you could give a sense of how your channel inventory is shaping up, by area, what you're seeing at the moment and how tight things are or otherwise?

And secondly, in terms of the OpEx guidance, I just wanted to understand, you're saying that you thought the OpEx expense could be flat quarter on quarter, despite the adoption of $90 million to $95 million of additional cost from ST-Ericsson.

Did I understand that correctly?

Yes, as far as the channel is concerned, I think it is not exactly the same when comparing in the various geographies.

I think we have noticed that the situation in Asia is cleaner and more ready to restart strongly and while we see POS improvement basically everywhere in the various regions, I think we do not have the same degree of healthy, not yet completely healthy situation in Europe and in the United States.

And as far as the addition of the resources, as I said, you will not see an increase of expense in.

First of all, it's not in Q2, so the problem is from the first of July, but you will not see an increase, because, basically, this will be compensated by a cost-sharing mechanism, which, in other terminology, means cash from ST-Ericsson into ST to compensate for the transitional design activity.

That's great.

And just with one follow-up question, just, again, a clarification that you expect the Digital business to be up quarter on quarter every quarter this year?

Yes.

This is what I said.

I think materially up, this is what we believe and this despite the situation in Imaging.

This is what Philippe was saying before.

Our real problem today is dependence on a couple of wireless customers -- in this case, it's a couple of wireless customers -- on Imaging.

And as we were saying before, we have been working to compensate, of course, and I cannot mention the customers, of course, but we have now -- we have now an important new customer in the Imaging business and it's time -- this is the part of the Digital Sector that will not really contribute to quarter-over-quarter improvement during the course of 2012 and -- in 2012, but there will be a very significant improvement in Imaging next year, for sure.

And while the contribution is very significant in the area of ASICs and the contribution is very significant -- I mean, the contribution to the growth, quarter over quarter, is very significant in ASICs and is very significant in the area of set-top box and TVs.

Thank you.

Thank you, Gareth.

Next question, please?

(Operator Instructions).

The next question is from Mr.

Jurgen Wagner from MainFirst.

Please go ahead, sir.

Yes, thank you for taking my question.

I have a question on financing of ST-Ericsson.

By how much are you willing to raise the credit line and -- that you will provide to ST-Ericsson and second question, could you please update us on your CapEx plans for this year?

Thank you?

Yes, I -- what we are doing is every quarter we, of course, discuss with ST-Ericsson and my comment is clearly related to the second quarter.

I cannot provide the number, of course.

But it's the same methodology that we have used in the past is an increase of the credit line the two parents are supporting to finance the operation of ST-Ericsson.

So, it will be exactly the same methodology that we had for the second quarter, exactly the same methodology that we have had in the past.

And CapEx will be significantly lower than last year.

We have done $125 million in Q1 and it is definitely below 10%.

We do not have the need, after the investment of MEMS in Automotive last year to have other major programs this year.

So, I think likely it will increase from the $125 million of Q1, but not too much, and will end up at, maybe, 8% to 9% CapEx to sales ratio.

For the full year.

Okay, thank you.

Thank you.

Thank you, Jurgen.

Next question, please?

The next question is from Mr.

Kai Korschelt from Deutsche Bank.

Please go ahead, sir.

Yes, thanks for taking my question and apology that I (inaudible) a bit later.

So, excuse me if this question has been answered before.

I just want to follow up on the net cost savings from ST-Ericsson on an ST Group level and it seemed to be indicated yesterday that perhaps a quarter or maybe slightly more of the cost savings would be moved back to STMicro.

So, I'm just wondering how we should think about the net savings on an STMicro Group level over the next 18 months that could materialize.

Should we be thinking about $200 million, $250 million, that sort of range, or would it be meaningfully higher or lower than that?

Thank you.

No, it's simply 50% of what ST-Ericsson has announced yesterday.

So, ST-Ericsson yesterday has announced $320 million and we have a plan to full enjoy our quota of the saving and our quota, of course, is 50% and this is what the plan is.

And the plan, of course, is based on, first of all, ST-Ericsson executing on the reduction of the number of sites, STMicroelectronics executing on the 25% SG&A cut, but also is based, as far as the portion of restructuring that is related to the transfer of the application processor that I had even quantified before in the range of $90 million to $95 million, this portion will be compensated by two things, in a very short term, by cash compensation from ST-Ericsson for the transitional work and in, of course, as soon as we are together, starting from the first of July, we will work very intensely.

And Philippe Lambinet will work with strong determination to extract all the possible synergies from the fact that we have in ST a Consumer business that the new products are ARM-based and the future products are ARM-based.

The same is for ST-Ericsson application processors and merging these activities we will develop less products.

We will reduce software development cost, et cetera, et cetera.

So, it is exploiting the synergies.

So, our plan is to enjoy fully the 50% of the revenues -- of this savings of ST-Ericsson.

Thank you.

Thank you.

Thank you, Kai.

Next question, please?

(Operator Instructions).

The next question is from Mr.

Martin O'Sullivan from Cenkos.

Please go ahead, sir.

Yes, thank you.

I'm just wondering what is there to say about your extreme analog high-margin products in terms of expansion of the customer base and product milestones for this year?

And is MEMS, potentially, a $1 billion business this year?

Thank you.

Well, I have seen just some statistics from iSuppli.

We are number one in MEMS now for all markets, I mean, globally.

Last year was -- in fact, we were -- iSuppli's reporting includes microfluidics that is, of course, another form of MEMS, in fact for us was even the seed to start with the MEMS business.

So, last year was $900 million and, yes, I think we should exceed $1 billion, yes.

And I think it's mainly new things.

I think it's, first of all, the microphones that I have just mentioned in my address before, but is also, for instance, the pressure sensors.

This is another important program.

It is the expansion of the MEMS into the Automotive business.

It is the expansion of the MEMS into the wireless business, like the Nike applications.

It is the expansion of the MEMS into (inaudible) navigation systems.

It is the expansion of the MEMS for image -- I mean, for the stabilization of the image -- optical stabilization.

This is a great new opportunity that we see in Japan.

So, it's mainly new things and I believe it is -- we will move on with the strongest determination to keep the lead here.

But I would like to mention other products, which are, maybe, less glamorous than MEMS.

I mean, recently we have introduced a new family of advanced analog, a more traditional family of advanced analog like operational (inaudible) and comparators is, maybe, less known and less visible, but we are working very hard on a number of priorities, including, for instance, Medical, including high-end analog products.

So, it's not only MEMS here.

So, customers?

Yes, we're continuously working to expand the customer base.

Of course, take, for instance, the microphone and we did not have the microphone.

So, we will have to gain all the customers in the microphones like we have done for the gyroscopes and the accelerometer or the sensor pressure -- the pressure sensor.

We were not in this business, so -- and we will gain all of these customers.

We are very confident on this business.

I think what we should do here is -- and work very hard is to repeat the success story of the gyroscope and the accelerometers in new MEMS families for new applications and also for other, as you said, extreme analog products, and we have a number of focus areas, very specific, but potentially very-high-volume solutions.

Okay.

Thanks very much.

Thank you, Martin.

At this time, we'd like to go ahead and close the conference call.

I would like to take the opportunity to remind everyone we will host our annual Investor Day and Analyst Day in New York on May 23rd.

So, with that, we would appreciate that we'll send out information very shortly thereafter.

So, Carlo, if you have any closing comments?

No.

The closing comment is just on the determination, the determination to fix the ST-Ericsson problem.

I mean, this is a -- of course, it's a challenge.

It's a challenge because our customer base in Europe disappeared and is not -- this was not planned, but we are confident that with the drive of Didier and Carlo, we will resize this company and we will turn the company around quickly and this is a real priority for us.

And we are working with the strongest determination to make this happen, as I said, very rapidly.

Thank you.

Carlo.

Thank you.

Thank you, Moira.

We'll conclude the call.

Thank you very much, ladies and gentlemen.

The conference is now over.

Thank you for choosing the Chorus Call facility and thank you for participating in the conference.

You may now disconnect your lines.

Goodbye.