意法半導體 (STM) 2012 Q3 法說會逐字稿

Ladies and gentlemen, good morning, or good afternoon.

Welcome to the ST-Ericsson's 2012 Third Quarter Financial Results Investors and Analysts Conference Call and Live Webcast.

I'm Joya, the conference call operator.

(Operator Instructions).

At this time, it's my pleasure to hand over to Mr. Fabrizio Rossini, Head of Investor and Analyst Relations.

Please, go ahead, sir.

Thank you very much, Joya.

Good morning, and good afternoon, to everyone.

Thank you for joining ST-Ericsson third quarter 2012 conference call.

Hosting the call today is Didier Lamouche, ST-Ericsson's President and Chief Executive Officer.

Also joining him on the call today are Carlo Ferro, Chief Operating Officer; Marc Cetto, Head of the Smart Platform Solutions product sector; and Gerard Cronin, our Head of Marketing.

This call is being broadcast live over the Web and can be accessed through the analyst section of the ST-Ericsson Website.

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

Today, we will be making forward-looking statements during the call.

These statements are based on our current expectations and certain planning assumptions, which are subject to risks and uncertainties.

The actual results may differ materially due to factors mentioned in today's press release and discussed in this conference call.

We encourage you to review the safe harbor statement contained in the press release that we issued with the results.

As a usual reminder, during the Q&A session that will follow the presentation, please, limit yourself to one question and a brief follow-up.

And now I would like to turn the call over to Didier Lamouche, ST-Ericsson's President and Chief Executive Officer.

Thank you very much, Fabrizio.

Good afternoon, and good morning, everyone.

And thank you very much for your attendance to this call today.

Certainly, when a company exhibits negative bottom line and cash flow, one cannot call the results good, by far.

However, recognizing where we are coming from, I'm very pleased to report today the excellent progress that one can note this quarter in executing our strategy, in improving on our results, and, especially, in accelerating the pace of the changes.

And for the third quarter in a row [that] we meet our guidance and internal forecasts.

I think we must acknowledge this progress.

Again, it has been another quarter of progress towards the objectives that we have set for 2012 as a whole, which is, really, to stabilize the Company.

I suggest you refer to page 5 of the presentation that you might have with you.

If you go on this page, you will notice that, back in February this year, I showed that chart already.

We first talked about the necessary steps behind the transformation of our Company.

And we have identified four main axes that we needed to address aggressively in parallel.

This quarter again my ambition is to give you some proof points that we have executed, that we have put in place concrete, executive milestones on all of those four axes -- the product axis, the customer axis, the Company organization, and the culture.

In terms of strategy, we have communicated our focus on ramping our NovaThor ModAp platform.

In Q3, we have continued to see steady progression in terms of volumes for our NovaThor platform.

And, if you refer to chart number 6, you will see on the graphic, right-hand part of the diagram, that, in Q3, our shipments of ModAp -- NovaThor platforms have grown from 5.3 million units in Q2 to 7.4 million in Q3.

Our sales level has increased by 4% on a sequential basis, slightly exceeding our guidance.

The revenues we must say this quarter also include an IP licensing transaction for an amount of $35 million.

This shouldn't be a surprise to you.

We have said in April during the publication of our strategy that our goal was to turn around the Company as fast as we could financially-wise and that, for that (inaudible) direction, we were looking for partners or other sources of revenue, including IP licensing.

This is one of the examples of the action that we are aggressively pushing forward.

We also continued, obviously, to see a significant portion of our sales coming from our feature phone, traditional, and legacy business, which, this quarter, represented about 40% of our total sales in Q3.

As far as our outlook is concerned, we expect our net sales in Q4 to be approximately flat.

As you see also on the graphic part of the chart, of course, we are not yet totally and by far satisfied about our revenue development, but at least we have been able to stabilize somehow the revenue progression of the Company.

If you go to the following slide, and, here, I will touch upon the customer and the product aspects of our strategy, you will see -- you will recognize, again, a chart that we are used to show you now since three quarters, illustrating the penetration into the marketplace of our NovaThor platform and families.

This quarter, another -- another solid quarter, where we have put on the market, I would say, six different devices, from Lenovo -- from Chinese customer, Lenovo, mMax, and also from a very important customer to us.

It's name is not mentioned on the chart.

But I just got the green light a few minutes ago to disclose it.

It's HTC, which is using a customized NovaThor solution in three of the phones that they are just launching in China.

Obviously, this customer is a very important customer to us.

It's a Tier 1 customer, and we expect significant traction in terms of volume coming from those phones.

The second key element behind this customer is that, if you notice on this diagram here, the first phone and the latest -- the last phone that we produced and put on the market for this customer was actually in 2011.

So we are very, very glad to have been able to regain confidence and trust of this customer to incorporate a customized version of our NovaThor platform into their newest devices.

Turning again on the customer side and in terms of expanding our customer base, which was one of our focuses, if you remember, we have continued to make progress for new and existing customers.

I mentioned before Lenovo, who is introducing our platform inside their new product called LePhone S899, a smartphone designed for China Mobile.

This is the first smartphone from Lenovo which is built around and powered by ST-Ericsson high-performance application processor, the Nova 9500.

And, also, as I mentioned before, we are happy to add a new customer to our list, mMax, who has announced a phone and a tablet at the same time, powered by our ModAp platform.

Now, if you go to slide 8, the news that you might already have [picked] in the press and we are extremely proud of.

This is our latest baby.

I cannot resist the pleasure, although it's not belonging as, per se, to Q3 announcements, again, to repeat that we have with our customer, Samsung -- we have announced the fact that the newly announced -- newly released Samsung Galaxy S III mini is powered by our NovaThor ModAp platform.

This is a compact version of the flagship smartphone Galaxy S III that has just been launched on the market.

We also believe that our highly integrated NovaThor ModAp platform, which is, indeed, demonstrating an excellent power performance ratio, is really ideally suited for compact and efficient device buildup.

We are extremely happy to have been selected by Samsung to power their flagship phone -- smartphone for the Christmas sales.

One element which you should note that goes, for me, beyond the technical performance.

We are extremely proud to have won this flagship device, again, especially coming from the market leader of this industry.

And this is also, as you will note, the first flagship product from this customer ever containing our full solution.

To me, and beyond the volume and the business we expect and beyond the commercial success itself, it is sending to us a very important information.

This selection from Samsung is coming on behalf of the market leader, a company which is renowned for its excellence in delivering, its aggressiveness in executing, and, for me, it's clearly, again, beyond the commercial success, a tribute to the progress that ST-Ericsson has made in the last quarter on executing on our roadmap.

So this is a key proof point of the progress we have made internally in delivering upon our promises.

Our focus, being closer to customer, as we said before, and engaging with market [shaper], has led me also to an important organizational decision, and that one you probably already know.

But I want to insist again it's -- I suggest you go on page 9. I'm pleased again to inform all of you who don't know yet that we have just appointed our new Head of Sales and Marketing, Peter Oaklander.

You can see his face on page 9. Let me -- before I disclosure more about him, let me explain the rationale behind this decision.

We clearly want to realign our sales efforts to take into consideration the changed customer dynamics around us and a strong focus going forward that we want to put and I want to put on the Asian and on the US markets while still considering that Europe remains, however, an important region for us.

Clearly, future developments will have to come from Asia and US.

That's why we think that Peter will be a perfect fit to meet our objectives.

Peter will report to me.

He's joining us from Intersil, where he held a major position of Senior VP of Global Sales and Head of the Power Management business.

And, prior to that, he spent two decades in key sales and product positions within Analog Devices, a very competitive and very brilliant company.

And, during that experience, he has focused primarily on Asian and US markets.

This is the reason why I believe Peter is a very solid and very important addition to the senior leadership team of this Company.

Allow me also to say a few words on Pascal Langlois, who is a former VP of Sales and Marketing.

Based on a mutual decision between our Company and himself, Pascal will leave the Company during the fourth quarter, after the handover with Peter of the sales activity.

While I warmly welcome Peter on board, let me also take some time to thank Pascal on behalf of the whole senior management team, on behalf of our customer base, on behalf of the whole Company for his contribution since the start of the Company.

Now, together with our Chief Operating Officer, Carlo, let me provide you with an update on our progress on operational excellence and execution of our program.

And, of course, I will talk about the programs, and I will let Carlo talk about the numbers.

I wills start, briefly covering the products and the technology part, and then I will turn to Carlo.

In terms of execution for our new products, the focus is clearly on our LTE portfolio.

As we talked, again, back in February, we are on track to sample our next NovaThor ModAp LTE-based platform, which is called NovaThor L8540.

And this platform will come in two flavors in terms of technology, in bulk CMOS, like most of our competitors are doing, but also in a new technology version which we believe is going to make a breakthrough on the marketplace.

And this technology version -- you're familiar with it now -- is the FD-SOI version.

Both products have taped out early this quarter, and we expect very quickly now to have some samples to be able to characterize them and being able to deliver and sample to key customers before the end of the year.

Our single-chip LTE multi-radio-access technology modem, code name 7400 -- on this one, we have also made significant progress.

As you know, today, the market is dominated by only one company, and we certainly aim at capturing a significant portion of our share of the market going forward.

As explained before, this is a revolutionary modem as opposed to an evolutionary step, and it requires extensive testing and qualification phases around the world.

We are now coming into the last stretch of those tests, and the M7400 is in evaluation at multiple customers going forward.

On that aspect, I just want to mention one feature during the last quarter that we did successfully.

We successfully ran what we call VoLTE, voice over LTE, capability and interoperability testing on the Alcatel-Lucent network.

This feature, we believe, we are very advanced compared to the competition.

We are probably among the market leaders.

And it's a very important feature for operators who wish to shut down their 2G network and carry voice over the new LTE network for cost savings and quality reasons.

So the coming months are going to be extremely challenging for us because we believe that, if we bring this technology on time, we have a very good chance to take a significant part of the market on that business.

Now, let me turn over to Carlo, who will give you a bit more color around our numbers.

Thank you, Didier.

Good afternoon, or good morning, everybody.

So, as you said, Didier, really, we made progress in all the financial performance for the Company, but there is still a lot to be done.

So, to introduce the numbers, I would ask, please, to look at slide number 10 in the presentation on our Website.

And you may see that our P&L clearly marked its inflection point after the first quarter of this year.

In both the second and the third quarters, we posted steady improvements in the operating results.

In the third quarter, we reported $148 million adjusted operating loss.

This is still a large number.

And, be sure, we are not at all happy with this result.

However, it shows a progression well in line -- I would say even ahead in executing the plan announced in April.

Indeed, the operating losses is in the third quarter are $87 million lower sequentially and are half of where they were two quarters ago.

We have, effectively, halved the level of our first quarter operating loss, one quarter ahead of the expectations at the ST investor day back in May.

The results reflect improvement in all the metrics.

The revenues, already commented, $359 million for the quarter, 4% sequentially, reflecting (inaudible) platforms shipment increased to [7.4 million], as well as a $35 million fee from an IP license of a non-LTE modem technology, so a mature modem technology.

Gross margin was up even before the benefit of the license.

Gross margin was up before and excluding the effect of the license.

The operating expenses reduced by 16% sequentially as a result of the portion of savings achieved so far through the restructuring plan we have announced in April.

In two quarters, we have reduced net operating expenses by about $90 million.

Let me underline this point.

While, through the prior 12 quarters since the Company's inception to the first quarter of 2012, expenses overall [increased].

The use of cash.

This is still high, $156 million (sic-see press release "$146 million") negative net operating cash flow in the third quarter.

Also, we managed to improve it sequentially by $103 million thanks to a better EBITDA and thanks also to a standard factoring of facilities that we have been able to access (inaudible).

Our parents continue to support ST-Ericsson financially, having increased their facility to a $1.6 billion line with $1.39 billion drawn at the end of September.

Before working out from the numbers, you may want to see also where we are in the execution of the ongoing site transformation plan and the related cost restructuring initiative.

We started the year with 44 sites, and we are progressing in executing our strategy while continuing to focus on delivering the R&D programs.

Based on the sites already closed or transferred or sites that have been announced for closures in the next months, the number of sites will be sure to go down below 30.

You may have also noted the recently announced agreement concerning the transfer of the activities and resources of our R&D center in Linkoping in Sweden to a subcontractor.

And this is the kind of agreement that allow us to continue to progress on the site and resources strategy but, at the same time, ensures continuity for both the jobs, our program execution, as well as savings in the cash restructuring costs.

In terms of headcount, including contractors and services, we have reduced the workforce by about 1,200 since the beginning of the year.

So we are today -- to give you a reference in respect to the plan announced in April, we are today where, in April, we planned to be by the end of the year 2012.

In terms of expenses, in Q3, we achieved a savings of $38 million in respect to the cost structure of the fourth quarter 2011.

These savings are visible in our P&L as they are computed net of our temporary participation to the application process or effort which is now in ST, and, as we have anticipated, with temporary [share].

We are at about 47% on an annualized basis of the total $320 million savings expected at the end of the plan.

Let to remember that the end of the plan is end of 2013.

So, in summary, we confirm our plan announced in April, which aims to expand the revenues and margin with new platform and substantially reducing the cost base and lowering the breakeven point of our Company below $600 million revenue third quarter.

And we are ahead in timing to execute it.

So now I will hand back to Didier for his conclusion.

Okay.

Let me briefly conclude.

I think today's results show that our management and employee focus is clearly well positioned, despite -- let me make a comment -- despite the fact that rumors and speculation are clearly around us, clearly, the results we are posting, I believe, are showing that those are not distracting us from our goal, which remains to deliver sequential improvement on all profit and loss metrics and to continue to timely execute on our programs.

If you allow me, I would like to recap some of the progress that has been managed last months but also what's still ahead of us.

In the last nine months, we have repositioned the Company's strategy, and we have showed solid progress on execution.

Execution is really the motto inside the Company now.

We have put in place a full organization, including now the last step that I mentioned to you, which is the sales reorganization to aggressively execute upon the strategy.

We have ramped and delivered NovaThor platform in volume, and we will continue to do so.

And, for me, beyond all, we have demonstrated repeatedly our capability to customize and deploy our platform for very demanding time-to-market-driven customer on time.

This is, for me, one of the best proof points of the progress that we have made so far.

We are catching up, clearly, on execution of our advanced LTE platform and not only to follow the leaders but also to leapfrog and demonstrate that we have additional value add.

We have taken the risk to pre-announce and to start to deliver upon our FD-SOI silicon platform technology in order to support or differentiated, new platform roadmap.

We are executing with sense of urgency on cost realignment in a predictable manner.

I think the numbers that Carlo described to you show that we walk the talk.

We save costs as fast as we can.

And, when we go faster on our targets, we do it.

We have delivered on key elements of the strategy, such as the application processor partnership with ST, which we have executed also on time.

And, of course, we are moving forward on the site consolidation strategy.

If you remember, we mentioned that 44 sites was not manageable not only for cost reason but also for time to market reason.

And, as Carlo mentioned before, we are going to very soon cross the 30-site linen and go below that.

However, we never hide it would be painful work and long work, recovering in an aggressive way from past delays in decision making and poor execution.

So, ahead of us we still have significant work, recovering from, still, our losses towards profitability and financial sustainability.

We still have some work to do to go back to this breakeven level.

We have to continue flawless execution of current and future platforms.

This remains our priority focus because our customers are extremely demanding.

The market is extremely competitive.

And not only we need to develop very demanding product, but we need to put them on the market on time.

And, finally, let me remind that the market remains extremely competitive.

And, obviously, we are also dependent on our customers' success and also on our customers' products' success.

This is why you gain, just to finish on a positive point, the latest announcement by our number-one customer to dedicate their latest flagship product with its Galaxy S III mini is so important to us because, hopefully, we can run on the back of their success.

And, with that, we, with Carlo and Marc, are ready to take your questions.

(Operator Instructions).

Sandeep Deshpande, JPMorgan.

A couple of questions, if I may.

Carlo, maybe you can enlighten us on how we should be modeling this improvement in profitability.

Clearly, you've had a substantial change or reduction in losses.

I mean, how much of that came from operating expense changes to how much of that came from a better product mix which changed your gross margin structure?

Secondly, despite this clear improvement that you're seeing, you're guiding to a flat revenue line in the fourth quarter.

Clearly, you've got major design wins.

You've talked about the Samsung Galaxy S III mini.

You've got some other design wins you've also talked about.

So why, in a strong period in the fourth quarter, particularly while the seasonality always was very strong fourth quarter -- why you're seeing this flattish trend into the fourth quarter.

And then, finally, could you make a comment on inventory and that there is no risk -- sorry -- not inventory -- I should correct myself -- about the legacy.

How much risk?

Is there any further risk to your business from legacy associated with Nokia, et cetera, that is still falling off?

Thank you.

A lot of questions, Sandeep.

A lot of questions.

Maybe, before Carlo takes on your first question, I go on the revenue part of your question, which is, I think, your second question.

Why do we guide the way we guide?

Clearly, you have to read our revenue development in two ways, one, which is, of course, the push and the growth behind our new platform development, NovaThor, et cetera.

And you're right.

The fact that we are successful in winning new sockets and at critical customers is a positive.

However, we are, for this quarter, ramping up that.

And I want to be a bit more secure on the volume.

I want to see customer acceptance before, I would say, committing further growth or too-optimistic growth.

That's the first element.

As I said before, at the end of the day, the final customer will make a product successful or not, so we must see a bit more the numbers out of the stores before taking it to the bank.

That's the first element.

The second element is don't forget that we have also still a significant portion of our revenue coming from legacy and entry products.

I think we gave you the numbers somewhere in the charts.

It's still 40% of our revenue.

On that, clearly, we don't expect at all any growth.

We are even subject to price pressure, to market pressure, especially coming from China and Chinese customers.

So you need to consider that that business -- that part of this business is aimed at decreasing in a pretty substantial manner in the coming quarters.

So we need also to take that into consideration.

So every new product we introduce needs to have the top line but also compensate for the decrease in our legacy business growth.

And, on top of that, you have the natural price pressure that this market is traditionally operating under.

So those are the elements, qualitative elements, that I can give you, Sandeep, in order to understand our Q4 projection.

I will let Carlo comment on the savings.

Your question is -- how did we move from $297 million losses in Q1 to $148 million losses in Q3.

And, believe me, we did not do by design to go exactly half, 50%, as this number -- this anticipation was, instead, for the fourth quarter.

Frankly, the short answer is that this is mostly due to sales and margin, excluding the license, and the OpEx reduction, excluding the exchange rate effect.

To give you more color, sales and margin, excluding the license, contributes to about one-third of the improvement.

And the license itself is not so significant in the comparison between the first quarter and the third quarter, as, in Q1, we have reported the benefit of one-time [NRE for the discontinuity] of certain activity.

Mostly, the Symbian was about -- the Symbian platform for Nokia.

That was an amount slightly below the $35 million.

So the two substantially wash each other.

So we have about one-third of the improvement contributed by sales and margin, excluding the license.

And we have half of this improvement which is the result of reducing the operating expenses, excluding the currency impact.

The currency impact has been positive.

That is about $4 million.

And, on top, we have another, about, $10 million for a one-time gain made in the quarter that makes the overall balance.

Thank you.

And then your third question is about the risk on inventory for legacy product and, in particular, those for a specific customer you have mentioned, for Nokia.

Now, I would say there is no risk for a given reason that an agreement exists whereby what we have built in inventory will be consumed by the customer.

Thank you, Carlo.

Just to give credit to Carlo, the agreement does not exist.

It has been negotiated.

Stephane Houri, Natixis.

I've got questions, if I may.

The first one is on the IP licensing deal.

I wanted to know if we can have more details on what's in this deal and, well, to be clear, if it is becoming a kind of recurring activity if you have a backlog on that.

And, if you can, communicate on the amounts of the deals that you have in the target.

That's the first question.

And the second question would be about the departure of Pascal Langlois and his replacement by Mr. Oaklander.

Does it mean that your current commercial dynamic is not where it should be according to you, despite some nice announcements recently?

And I'm not completely sure to understand what it is going to trigger as a change when you talk about attacking the U.S. and Asian customers.

Thank you.

Very open and straightforward question.

First, on the IP licensing, again, aid before, we made very clear in April that we were looking every possible way to turn around as quickly as possible the Company.

And turning around the Company is getting close and is turning more.

So everything we have the intention to sell we are investing hundreds of millions of dollars of R&D every year.

There is not many companies, even in this industry, investing in R&D so heavily.

So we need to find a way to monetize that.

Okay?

To give you some color on those $35 million, I cannot give you much details, except the fact that it's a licensing which is concerning a prior-generation modem to a specific customer.

That's all I can tell you.

And, again, if you remember what we said in April, we said that we are open to licensing agreement, especially on that type of product line.

Is it purely one-off?

Again, I repeat.

This is something we intend to continue to do.

This is not purely recurring, of course, by definition, like the product sales can be.

But this is not also purely exceptional one-off and then it disappears for a century.

No.

I mean, we continue to push and to find opportunities to sell our technology this way not only through products but also through IP this way to everybody that might be interested.

So I'm sorry to make you an answer in between, but that's exactly what it is.

That's exactly what it is.

Okay?

Okay.

Second, on Pascal Langlois, I think I told -- I explained, but maybe I was not clear enough, Stephane.

Our market is clearly developing in the US and in Asia.

It's clear to us.

It's clear today when you see our customer profile and even the business.

It's clear where the customers are.

So we need, clearly, to redeploy our focus.

Okay?

And, having somebody in the team who's understanding very well those markets because, on one hand, he has been a successful sales leader in American companies addressing existing American customers.

He's an asset.

On the other hand, maybe I did not insist enough on that, Peter has spent 12 years living in Asia, in Japan, in Korea, in China.

And, without -- I'm sure he will allow me to give a secret of his private life.

But his wife is also Korean.

Plus, on top of that, he has an excellent track record in sales, marketing, and product development in good companies.

So, if we are able to attract such skills, I think this is a positive message to our engineers, to the market, to our customers.

And I count on Peter to also develop positively and even more aggressively than Pascal was able to do our top line.

Don't read anything else behind this.

I mean, I'm trying to get the best people in the team to do the job we have to do.

And the fact that he's coming from mainly analog companies and you're not an analog company -- is it an issue according to you?

Well, no.

Of course not, because, otherwise -- no.

But that's a very good question.

He is coming from companies -- I wouldn't say analog.

He's coming from companies who are more focused on component selling than on platform selling.

That's exactly right.

That's exactly right.

Why is that?

Because I think we have enough skill in our Company platform-wise.

We have all the skills we need platform-wise.

I think we need to continue -- we need to reenergize a bit also our sales effort on the component side, which is something maybe we have dropped too quickly.

And that -- we need to complement our top line growth.

That's a key element.

That's the way you should read Peter's CV.

I don't know if I'm clear.

No, no.

Very clear.

Thank you very much.

Andrew Gardiner, Barclays.

I was just interested if you can shed some light on the impairment charge that your parent has taken with which -- sort of writing down the value with which they carry your business on their books.

You clearly haven't made a similar move this quarter.

You haven't done [a test].

But can you describe what changes you may have made to your long-term outlook for revenue and margins that have led to them making such a change and that's why it's not been done at your level as well?

Maybe I'll take your question, Andrew.

You know, ST-Ericsson is a private joint venture owned by two public companies.

For an interim period like the third quarter, those matters like an impairment are relevant to public companies, not relevant for an interim period of a private company.

So our shareholders have requested to run the intangible impairment test at the parents' level.

We very much respect the decision.

This is a [fair decision].

So I guess -- I'm sorry.

The question is not for us.

What, at the end, we do here at the management of ST-Ericsson really is focused on running the Company, executing the new strategy direction announced last April.

And we can confirm we are substantially in line with what we have announced in April.

We are focusing on that.

Then, if you ask an opinion, a takeaway about this announcement at the end of the day, and I heard my friend Mario answering the question of you or some of you two hours ago upon this adjustment, the value of ST-Ericsson in the balance sheet of ST remains a substantial, positive amount.

Okay.

Thank you, Carlo.

Also, just a quick follow-up question.

You alluded to your number-one customer.

I was just wondering if you can reveal roughly what percent of sales they represent at the moment.

I don't think we reveal that number.

We do not disclose that number.

Gareth Jenkins, UBS.

Hi.

It's David Mulholland.

I work with Gareth.

Just two quick questions.

Firstly, on the licensing deal that you've done here, is this something we should expect that there will be similar deals done in Q4 and that this revenue could continue?

And then I have a quick follow-up.

I thought I had answered that question a bit already.

Maybe I will try a different way.

Again, as I said in April, we are definitely trying to get revenue and profit in any way we can, through, of course, product sales but also through selling our intellectual property.

A company which is investing more than $700 million or $800 million R&D per year is, by definition, generating a lot of IP.

And this IP might be of interest for any company in the world who are operating in our marketplace.

So, yes, this is definitely an aggressive move that we are doing in trying to sell IP any way we can.

So, yes, it could be that we can generate additional IP revenue in Q4 and in the following quarters.

Is it a permanent, steady-state revenue?

Of course not.

By the nature of the deal and the type of activity you can have one quarter and not the following quarter.

But, if your question is -- do you intend to continue to sell your IP, the answer is yes.

Very clear.

Just in terms of follow-up, then, in terms of how should we be thinking about the -- in terms of the operating losses into Q4, given you have had some benefit from the licensing deal in Q3, will this still improve into Q4?

Or is it dependent on some licensing deals as to where the operating loss comes in in Q4?

You know, at the end, [Gareth], we don't offer specific guidance on the operating results quarter after quarter.

But you know we work to reduce these losses quarter after quarter, considering the revenues, considering (inaudible) the further progression on the operating expenses reduction we are optimistic to improve also in the fourth quarter.

That was great.

Thanks very much.

[Amit Arcendani], Citigroup.

I just wanted to get your thoughts on the progress that you're making or looking to make outside the Android ecosystem, particularly in Windows, given that one of the three partners who was originally slated to work with Microsoft seems to be a bit de-focusing away from wireless application processor development.

Absolutely.

Maybe the best is -- as we are lucky to have Marc on the phone, maybe I can let Marc answer to that question.

So, we have decided, and we are still -- and I think we had that question on our last quarter already.

We are focusing our operating system on Linux and Android.

At the moment, we are prioritizing that with -- it's the right thing to do, given where the market is today.

However, our next-generation products, which are hitting the market next year, are capable, hardware-wise, of operating the Windows phone operating system.

So, would we decide to accelerate some development for Windows, we would be -- we could be quite fast to market, which is different from a situation a year ago, where our hardware had some limitations to support the Windows phone operating system.

But, for now, as we speak, our priority and focus is Linux and Android.

Okay.

And, as a quick follow-up, if I may -- if I was to just try to understand clearly your major market progress in terms of the design wins for the NovaThor platform -- if I was to just understand in your own view what are the differentiators that are allowing you to put your NovaThor platform into the phones vis-a-vis the competition.

Do you want to continue, Marc?

Yes.

I can take that as well.

Well, in our view, I think we offer a very solid dual-core performance with a quite high multimedia performance.

If you look at all the benchmarks on the Web that people are hunting -- I mean with phones based on our products and the others, you can see that we consistently come up higher in performance than our competitors.

And we offer that in a very mainstream cost segment.

So that's the first thing, I think -- dual-core performance, higher multimedia than competition because we -- there is quite a lot of IP and things we have in our products that are actually coming from our STMicro heritage, things that are used in set-top boxes and so on.

So we put some of that there, and we have a special sauce in multimedia.

I think that's making the difference.

First point, performance.

Second is we always have been very power conscious.

We've been designing products for cell phones from the three companies we are originating from for 10 to 15 years.

So we typically always come below our competitors in power, and that matters more and more in smartphones.

And the third is bill of material.

We come from a very frugal heritage of doing feature phones, 2G feature phones, where we started a lot of our business in the past.

And, when you do that, especially driven by the customers that are driving this business, you tend to be very careful for, you know, $0.05 here or $0.10 there, cheap PCB, maximum bill of material integration.

And that is starting to matter now in smartphones.

It did not, maybe, matter a year or two ago.

But, now, when you talk about mainstream smartphones at $200, $300, or $400 retail price without subsidy, that starts to matter.

So these would be the three things why some of our customers are choosing our solution.

Okay.

Thank you, and well done on a solid quarter.

If I can add, Marc, on top of what you say, I think your team and the rest of the team has come a long ways this year in delivering in a predictable manner to very demanding customers.

When I see between January and now what you are capable to do and what we are capable to do for our main customer on the Galaxy S III mini, this is an incredible improvement compared to where it was a year ago, clearly.

We have established support (inaudible) around the world.

We have established for Samsung what we call a (inaudible) support team in Europe but also in Korea in order to help them around the clock debug their platforms and fit our products into their form factor.

And that's essential today, where time to market is really a critical element of the customer choice.

Thank you.

Didier Scemama, Merrill Lynch.

Three quick questions, maybe, first, for Carlo.

If I do the math right, it feels like your OpEx, ex the IP, were about $336 million in the quarter and the gross margin in the mid 40s.

Is that the right ballpark?

I'm not sure how you confuse it, Didier, since the license itself is not having any effect on the OpEx.

It is the revenue.

It has an effect on EBIT, so I worked it back.

Absolutely, but not on OpEx.

I guess the number of OpEx you have mentioned is quite high.

We do not -- I appreciate the try, but, at the end, we do not necessarily each quarter give a gross margin (inaudible).

But I guess you said something about -- what did you say?

$330 million of OpEx?

No.

It's very high.

We are well below.

Okay, great.

Fine.

And then a second question is -- obviously, you've got a growing and, in fact, strengthening relationship with Samsung with the S III mini and, who knows, maybe some more models going after that.

How should we think about the relationship on the manufacturing front because I see you have signed a foundry deal for a 32-nanometer (inaudible).

Is that helpful to win business, particularly in the context of maybe Samsung utilization rates in logic being a bit under pressure on sort of a 12- to 18-months' view?

That would be my second question.

Let me make sure -- let me rephrase to make sure I got your question right, Didier.

Is your question the following?

Is the fact that we, ST, as a foundry relationship with Samsung, helping ST-Ericsson to make business with Samsung?

Is this your question?

Yes.

The answer is no.

The answer is no.

I'm not saying it's not helpful.

I'm not saying it doesn't help.

I'm not saying it's not helpful.

I think it's neutral, honestly.

Neutral?

Okay.

It's totally neutral.

It happens that I personally have good relationships with both sides because, coming from the ST side and coming before from the IBM side, I know the Samsung VLSI portion of the Samsung business well.

I remind you that Samsung LSI is embarked since 2004, if I'm not mistaken, into the IBM so-called ISDA alliance in Fishkill and in Albany.

So, of course, that helps to build up the relationship.

That has contributed, also, to build up the relationship between ST technology and Samsung LSI.

But I would say, looking now at the wireless business of Samsung, those are two, really, separate entities.

So, to be clear, you don't fab anything at Samsung at the moment.

That's a different question.

That's a different question.

We have products running at Samsung LSI at the moment.

Yes, we do.

We do.

But this is based on technology availability and competitiveness rather than on anything else.

Got it.

And then, on the appointment of the new Head of Sales, if I summarize, basically, what you've said or what you've tried to say -- if I understand correctly, the first point is you clearly want to focus much more on China.

So my first question would be --

Asia.

I mean (inaudible) Korea, so -- okay.

So maybe Japan and China.

But, I mean, in China, how do you compete against -?

Asia.

Okay.

In the specific Chinese market, how do you compete against MediaTek, (inaudible), in particular?

They've got a very, very specific business model for these customers.

So I appreciate you won Lenovo and (inaudible).

But, if I go to Shenzhen, there are probably 150 or 200 white box manufacturers, and the vast majority work with MediaTek.

So how do you break into that market?

And then, for the North American market, should we understand from your comment that the new Head of Sales is going to focus on selling more power management and maybe audio chips to the North American customers than, perhaps, platform?

Okay.

There is a few different angles (inaudible) your question.

First, in order to sell even complex products, it's important to have competitive products.

It's important to deliver.

But it's important also to have the relationship with the customer.

And I think we should not neglect the relationship aspect behind any sales activity, even in our highly technical business.

The relationship, the knowledge of the customer, the knowledge of the decision making process inside a customer is extremely important, especially in a highly competitive environment, Didier.

So that's why having someone who knows well from his past life, very well, those markets and those customers is essential.

I'm not going to give you any specific name.

But it's very essential.

Second, I mentioned China.

The Chinese market is a very important market to us.

But, today, this is not the only one.

The Japanese market is important too.

You have noticed probably recently that some changes at one of our major customers, which went from a joint venture into a fully owned customer, based in Japan -- so having someone who knows a lot the Japanese market is also an asset, and Peter knows.

And he knows specifically the customer I am talking about and I don't want to name.

But I'm sure you know who I mean.

And, third, having someone who knows very well the component business is an addition to the team.

I think, for years, we have put a lot of focus inside the Company on our platform business, which remains, by far, the number-one growth fuel and growth engine of our business.

But I think also we have maybe too quickly turned the focus away from the component business, which is a more traditional business.

But, when I see the landscape of some competitive companies, competitors to us, do extremely good business through selling components to our customers.

So having someone, especially in the sales, who know that business is a complement to the team.

So that's how you should read the move.

One thing I forgot to tell you, which I think I didn't say before, is Peter will be based in Geneva for the first year because he needs to understand the Company quickly, and the best way is to be based in Geneva.

But, after the first year, he will be based in one of the two regions.

We have not decided which one yet.

But he will be based in one of the two regions that I mentioned before, and that's also a signal I want to send to the market and to our internal resources.

Thank you very much.

I really appreciate the comprehensiveness of your answers.

Marc, do you want to add something on China maybe?

Yes, I can.

Just on your question on Shenzhen and are you seeing us a lot in Shenzhen, the answer is no.

China is very important for us, but we are not playing yet -- I should say yet in that market going for turnkey solutions, for hundreds of customers.

The Chinese smartphone market today, if you look at the top four smartphone vendors in China, they are Samsung, Coolpad, Huawei, and Lenovo, in that order, last time we checked.

And you notice that three of them we know quite well.

And three of them are even shipping phones based on our products today.

So that's one part of (inaudible) the Chinese market is to work with the Tier 1s who are our customers and expand our Chinese business with them.

And the second part is we are placing some efforts very focused -- a company like Shanda -- I don't know if you know them, but they are one of the Web media providers there who are doing their own phones and subsidizing it a bit like the model of Amazon.

And we are partnering with them to do that.

And then we are starting with two platform providers or reference design manufacturers, which are (inaudible).

So that's our current strategy in China.

And we have those two [passes].

But we are not going in a frontal attack against our American competitor and our Chinese competitor to guard as much market share as quickly as possible in Shenzhen.

That's not what we are doing.

Okay.

Many thanks.

Kai Korschelt, Deutsche Bank.

I had a couple.

The first one was -- I know it's early days, but maybe looking into the beginning of next year, Q1 is normally, seasonally down.

Obviously, it seems like you're pretty hopeful of seeing continued ramp-up of the 8500.

Just wondering if you had any color on seasonality, whether you would hope to outperform that in Q1 based on the visibility on design wins that you currently have.

And then my second question was, really, on the legacy revenues.

I seem to recall that the number was well below the 40%, I think, that you just mentioned earlier this year.

It had declined a lot by then.

So I just want to confirm what the number was in the third quarter.

And maybe your definition has also changed slightly.

So does it include, still, 2G connectivity and other stuff?

If you could maybe just share with more color around that, please.

Thank you.

Okay.

Certainly.

On Q1 seasonality, first, I will take -- you will admit it's really early in the game to be able to give you any visibility, especially given the environments in which we are living in.

You see around the economic uncertainty, including in China.

So it's already difficult to predict one quarter away.

Two quarters away I wouldn't risk.

And, second, as I said before, At the end of the day, the end customer is deciding if a product is successful or not, and I like to have a few weeks of sales.

Clearly, for example, the Galaxy S III mini is going to be in the store for Christmas, meaning beginning December.

So I need to wait a few weeks inside December to have a feel of the volume we can expect.

So that's -- I'm sorry to tell you, but that's really too early.

Of course, you know, there is strong seasonality in Q1.

But I cannot tell you more at the moment.

On our legacy business, Carlo, while I was talking, is re-computing the numbers and will give you some color.

Okay.

Thanks for the question, since this offers the opportunity to clarify that, when referring to and about 40% of our sales on legacy, it is encompassing both the component, the standalone component sold from a prior business model, and this is mostly one customer, as you know, and the entry business, which is the feature phone business.

So it's for the two of them.

It's not, instead, including, to clarify, the connectivity.

So, indeed, we have a legacy and entry phone division.

And the legacy -- we call, normally, legacy the component when sold as standalone.

When components are sold as part of a kit, we include these revenues in the platform business.

And then we have the entry business, the feature phone business, which is also a part of this 40%.

Both of them have been very significantly declining year over year.

But, as you may expect, the end of the entry business has a bit more resilience than the legacy component.

Okay.

That's great.

Thank you.

(Inaudible), Liberum Capital.

I was wondering.

You've made quite a lot of progress on reducing your losses and bringing down your cost structure.

And, given your success in getting top-tier design wins like the Samsung Galaxy S III mini, it does suggest that you will be able to show a reasonably good top line trend as well into the future.

So, given all of that, is there still -- going back to the question of your strategic review and your ongoing evaluation of where your business is growing and further steps, if required, et cetera, does that mean in light of ST-Ericsson's management, regardless of what an external advisor or your parents may think -?

Are further steps required, like partnerships or things like that, to get you to a breakeven?

Or do you think what you have today is sufficient to get you to that level?

No.

No.

Clearly, we are -- you see where we are today.

We need to -- again, as I said before, the design wins that we are making are at the same time growing the top line but also compensating the part of the business which is eroding, which maybe we should have been focusing on before.

Okay?

-- protecting and so on.

So I don't think we ever said that what we have in hand is enough to go to breakeven.

We need to continue to make further progress in our cost structure.

This is well engaged, as Carlo mentioned.

I think, on that aspect, all the critical actions have been engaged.

Yes, I can say yes.

The program that we called the horizon program aiming at reducing our operating expense on the full-year basis by $320 million a year is well engaged in terms of its definition.

It's not completely executed, as you know.

We will finish that program through 2013.

Now, for the top line, every action we take day in and day out is an action that we decided in order to improve the situation.

For example, [did I knew] when I announced the plan in February or April that the sales organization strategy was to hire a new salesperson?

No.

We decided in between.

I decided in between, looking at the market evolution, looking at our strength, looking at our weaknesses, that we needed to improve on that point.

So you will see further action and further improvements going forward, and we need more.

Do we need to continue to discuss with potential partners for IP licensing, for cost sharing, for development sharing?

Yes.

Yes, definitely.

And we are doing so.

We are doing so.

Okay.

And a short follow-up.

The HTC design wins -- are they for [TD], or are they for normal 3G?

Marc, do you want to answer?

I mean, I know the answer, obviously, but can you give some color?

Three phones have been launched in China, one for each of the three operators.

Okay.

Thank you.

(Inaudible).

Okay.

Thanks a lot.

Jerome Ramel, Exane BNP Paribas.

One question, Didier.

You said LTE is going to be a strong focus for you.

You told us about tape-out this quarter and sampling by the end of this quarter.

I just want to make sure I understood correctly.

When do you expect to ship the 9540 and the 7400?

Is it Q1 next year or Q2 next year?

Do you have any -?

Do you have already in your design wins -?

To be clear, I said we taped out last quarter or beginning of this one -- beginning Q3, Jerome.

And we plan to have the first samples available shipping at customer end of this year in both versions, the FD-SOI version and the bulk version.

Okay?

That's exactly the strategy that, if you remember, I present -- we presented in Barcelona in February.

So we are exactly on that line.

Now, in terms of customer engagement, are we engaged?

Yes.

We have a few customers already.

Yes.

In terms of volume ramp, we are targeting more to H2 2013.

Do you think LTE could represent a significant part of your revenues in second half of next year?

Material, yes.

And the second question, just to come back to -- you said you see many opportunities to leverage all the IP you got internally.

Just coming back to the former question, is there any chance you're going to leverage both the connectivity and the power management outside of your current platform?

This is not excluded.

Absolutely.

And you already see some interest from clients?

Every [people] we are spending the time to talk to, by definition, are interested.

Yes.

Of course.

Of course.

But, again, you're asking two different questions.

On connectivity, certainly.

On power management and on components, that's an activity we need to restart activity from a sales perspective.

So we need to (spoken in French), as we say.

We need to [fill the funnel] again.

But, clearly, there is opportunity.

Again, as I said, when I see some of our competitors revenues they make on component selling, including to our customers, I think there is no reason why we could not take our fair share, given our technical assets in the domain of that business.

Jerome, to add some information that you may be already aware as to talk for the potential of licensing and connectivity, you may remember that the Company in the third quarter of 2011 has licensed a connectivity IP for an amount of $40 million.

I guess that's been disclosed -- the license fee has not been disclosed.

The subject of the license has been already disclosed.

Okay.

Thank you very much.

[Monica Tarantino], JPMorgan.

My question would be -- what was your equity as of September 30, 2012?

And are you planning a capital injection or a debt-to-equity swap by your parents?

Once again, Monica, just to recap the numbers --

The equity at the end of September was $46 million.

And are you planning a capital injection or a debt-to-equity swap by your parents?

I guess, Monica, this is more a question of our parents, as you have noted also from my part of introduction.

At the end, the parents have extended the parental facility to an amount which currently is $1.6 billion, out of which, we have drawn, at the end of September, $1.39 billion.

Then, what is important is that the (inaudible), the support of the parent to financially support the Company.

And, then, what is the form between parent line or equity.

I believe it's more a matter of technicalities and (inaudible) to the parents.

And (inaudible) is their business more than ours.

Okay.

Thank you very much.

Lee Simpson, Jefferies.

I've got a quick one and, then, maybe just a follow-up one that's more generic.

The quick one is, really, on HTC.

I was trying to get a sense for the nature of the design in here.

Is this a straight upgrade from the former win that you had in 2011?

Or would you describe this as displacing, let's say, the incumbent platform provider there -- and whether or not this was a feature set attraction for HTC or maybe even a price-driven win for yourselves?

Marc, this is -- you own this one.

So you deserve to answer this one.

Yes.

I'm afraid we cannot give you all the details you're asking for here.

But it's a different platform than the one that was from last year.

So it's clear that you probably went up against a rival on this platform, and you won out in some feature sets perhaps.

Yes.

Maybe (inaudible).

Again, they are mass-market, mainstream smartphones, so that's the place we target our products to.

Understood.

Understood.

Great.

Thanks.

Maybe just as a follow-up, I just wanted to try and ask a question about some of the manufacturing cost benefits with FD-SOI.

If you look at some of the commentary around FinFETs right now, there are some good, higher, parametric yields.

And, overall, the yields are actually surprisingly good at 22 nanometers.

With FD-SOI, I think you get lower wafer costs and lower mask steps, et cetera.

But can you maybe give us a steer for how your processes are yielding and where it puts you guys from a competitive cost position for 28-nanometer and, potentially, for 22-nanometer processes?

And maybe as a follow-up to that, I'm wondering if you can give us a feel for what the relative strength might be for the supply chain for FD-SOI and what you might be doing here to help strengthen things with supply chain partners.

Okay.

That's a very, very good question.

First, your question relates to FinFET versus FD-SOI.

I can tell you in terms of complexity and dependency, of course, you can read because there is a lot of marketing push here -- there is a battle here, clearly, on which technology will win.

There is, by no way, no comparison in complexity between FinFET and FD-SOI in the sense that FinFET is much more complex.

And, [must counts] I wouldn't give you too many numbers.

But I think, in must counts, you are talking, I would say, at least, 15% to 20% more mask in the FinFET current technology than an FD-SOI.

Okay?

Two reasons for that.

The current FinFET 1.0 technology is, by far, not optimized, not a good one in terms of leakages.

And it's pretty clear now, if you (inaudible) you will need an upgrade of the FinFET in order to do the job it's supposed to do, which is called FinFET 2.0.

This is why, for example, the IBM consortium when talking about FinFET as adopted FinFET on SOI technology -- okay?

-- to alleviate the leakage problem that the FinFET 1.0 generation had.

A second reason is for the cost difference coming from the FD part of the FD-SOI technology.

The partially depleted SOI technology is pretty costly.

Because it is partially depleted, the channel is more complex to build, to form.

And that creates additional masks, additional (inaudible), which are increasing the cost of your technology.

The fact that we are capable now to produce fully depleted, meaning very thin channel technology, is also simplifying the SOI process.

This is why the FD-SOI cost is equivalent today, more or less, and the bulk cost, because the price you pay with the SOI wafer you recover in the factory through a much simpler process.

So, all in all, globally, the FD-SOI process cost is globally equivalent to the bulk cost.

Okay?

-- which is much lower than the FinFET cost.

Okay?

I guess I answered your first question here.

Right?

Yes.

The second question, on the supply chain.

So supply chain, yes, on FD-SOI, probably, today, I would tell you, if I would be on the FinFET, I would worry more about my supply chain.

And, if I would be on FD-SOI, to be honest with you, because I don't think anybody, maybe except Intel, is having the available the FinFET technology.

On FD-SOI, though, we are relying on a few sources.

For initial volume, prototype plans, prototype qualification, and initial manufacturing ramp, we are relying on ST Corp., which is partly captive supply chain.

And this is one of the key differentiating elements we have vis-a-vis most of our fabless competitors, including the largest one.

Second, for volume manufacturing, ST has reached an agreement with, as you probably know, GlobalFoundry to provide the second-phase volume ramp on the FD-SOI technology.

And, if needed, we can also get the support, technically speaking, from the IBM alliance.

So that's, for the moment, how the supply chain is looking like going forward.

And, purely on SOI -- maybe that was your question also.

On SOI, today, we have on the market the three sources.

So we take, by far, number one but also [SHE], which has a license for the SOI and FD-SOI technology, and also MEMC as (inaudible).

Perfect.

So I think we are pretty much covered.

Didier, thanks very much.

It was a very full answer.

Thank you.

Didier Scemama, Merrill Lynch.

Last one to squeeze in.

Is there anything you can tell us about the IP licensing deal?

I mean, is it 2G?

Is it 3G?

Is it connectivity?

We understand it's not LTE.

It's 3G but not (inaudible).

[HSB plus 21]?

You're asking me too much.

Okay.

Thanks very much.

I'm not saying yes.

I'm not saying no.

Thank you, everyone for your questions.

Didier, I'll turn over to you for some closing remarks.

Yes.

Thank you, Fabrizio.

Thank you very much for your continuous flow and very abundant and very detailed and precise questions.

Really appreciated.

I hope that we -- in this hour and a half we spent together, we convinced you that, also, lots remains to be done.

As we said, the vectors are pointing in the right direction.

I tell you the team has done fantastic progress in executing on all fronts in those last three quarters, recognizing that we started from a very, very critical point earlier in the year, clearly.

However, we must earn our victory every day, believe me, day in/day out.

Our revenue, our cost reduction, our designing -- every day when we wake up, we need to win.

So that's why we still have a lot of work in front of us.

However, answering more deeply into one of these questions before, I can tell you that we are committed to do whatever it takes -- whatever it takes to turn this Company around.

Every day, we have new action that we need to put on the table in order to (inaudible) action which are not fulfilling 100% of what we expected, every day.

But, even if an action is not successful, we (inaudible) in order to achieve the end result that we have targeted.

This is the way you need to read all the actions we are implementing.

This is the way you need to read the actions behind the organization, in the (inaudible) organization.

This is what we are committing to do.

This is the way you have to read our action behind IP licensing, trying to find ways to turn the situation around as quickly as we can.

I hope that we convinced you that the team is on their toes to achieve that.

And looking forward to talk to you soon either privately or through this open global session.

Thank you very much.

Talk to you soon.

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