意法半導體 (STM) 2013 Q1 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon.

Welcome to the STMicroelectronics first quarter 2013 earnings results conference call and live Webcast.

I am [Loren], the Chorus Call operator.

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

After the presentation, there will be a Q&A session.

(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, Group Vice President, Investor Relations.

Please go ahead, sir.

Thank you, Loren.

Thank you to all for joining our first quarter 2013 conference call.

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

Joining Carlo on the call today are Georges Penalver, Executive Vice President, Chief Strategic Officer; Mario Arlati, Executive Vice President, Chief Financial Officer; Carmelo Papa, Executive Vice President of the Industrial and Multisegment Sector; and Lorenzo Grandi, Corporate Vice President, External Reporting.

This call is being broadcast live over the Web and can be accessed through ST's Website.

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

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

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

As a reminder, ST will host its annual Investors and Analysts Day in London on May 16th.

We hope you can attend.

And please let us know if you need additional information.

So, turning back to our call, please limit yourself to one question and a brief follow up.

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

Carlo?

Thank you, Tait.

And many thanks to all of you for joining us today.

First of all, I would like to focus my comments on four principal areas, our first quarter review and product highlights, the progress towards our first quarter 2014 net operating expenses goal and the ST-Ericsson exit, our cash flow and net financial position, and of course, our outlook.

Let me begin with a brief summary.

First, our net revenues and gross margin were well aligned with the outlook we shared with you last quarter and were at the midpoint of our guidance range.

Excluding Wireless, our revenues expected better-than-normal seasonal performance -- sorry, our revenues experienced better-than-normal seasonal performance in the fourth quarter and again in the first quarter.

Second, we have put in place a new product segment organization beginning with the 2013 first quarter, aligned to our new strategy, sharpening our focus around five main growth drivers within two product segments, Sense & Power and Automotive, representing about 56% of net revenues, and Embedded Processing Solutions, representing about 44% of net revenues.

Third, in March, we signed an agreement with Ericsson to split up the ST-Ericsson joint venture.

Subject to regulatory approvals, we expect the closing to occur during the third quarter, as already anticipated.

Now, while the closing is in the third quarter, we have each begun to fund our respective parts as of March 2nd and jointly fund the wind-down activities.

So, this entails Ericsson assuming the funding of the LTE Modem development activity, while ST is assuming the funding of the existing products and related business, as well as certain assembly and test facilities.

And together, we are jointly and equally funding the wind-down-related activities.

This was an important decision and a key part of our cost reductions.

Now, we can intensify our efforts and focus on the other parts of our new strategic plan.

In the first quarter, we repaid our maturing debt and also entered into a new credit facility with the European Investment Bank, which was undrawn at the quarter end, further strengthening the Company's financial flexibility.

Finally, touching briefly on our outlook, we continue to see some positive signals in the market place and anticipate sequential growth and gross margin improvement.

More importantly, with our key products growth drivers, we see ST gaining shares in 2013 in our target growth areas independent of the market environment.

Turning now to the first quarter, our revenue results came in at $2.01 billion.

Excluding ST's Wireless product line, our product portfolio saw a year-over-year increase of 1.3%.

And on a sequential basis, we saw better-than-normal seasonality, as we had anticipated, with a decrease of 3.4%.

Looking first at Sense & Power and Automotive Products, net revenues decreased 4.8% sequentially.

We did see growth in Automotive and Industrial & Power Discrete products.

And as expected, there were lower MEMS product sales.

With respect to Automotive, the market is still soft in certain regions, but this is a market where we are very well positioned, from a leadership view in the largest markets, from a product portfolio offering, and from a content perspective, where we are adding more content per car.

Importantly, we have also expanded our presence among the top automotive OEMs, as we have discussed, including with Audi and with Hyundai.

Our operating margin in the quarter for Sense & Power and Automotive Products was 5.1%.

The decrease compared to the 2012 fourth quarter reflected a number of factors, including price pressure on MEMS and Automotive, expected lower sales volumes, and additional R&D resources for the Analog and MEMS businesses.

However, we expect double-digit margins of the product segment during the second half of 2013, driven by growth in Analog, MEMS, and Power products and improved manufacturing performance.

Turning to Embedded Processing Solutions, we saw sequential growth in Microcontrollers, a key growth driver for us.

And we saw a sequential improvement in Digital Convergence products.

Imaging decreased sequentially mainly due to seasonality, but here I see a positive growth trajectory during the year as momentum will return to this area which had been weak for some quarters.

Wireless saw a significant decrease due to ST-Ericsson, and this will continue.

Embedded Processing Solutions operating margin was negative 24.2% in the first quarter of 2013, mainly due to ST-Ericsson.

We expect to see substantial improvement in operating results over the next several quarters driven by the ST-Ericsson exit already underway, our savings plan announced in October of last year, as well as significant continued growth in Microcontrollers and a recovery in sales for Imaging.

Moving to our gross margin, our results came in at 31.3%.

On a sequential basis, we saw a reduction due to no revenues from licensing and the usual price pressure we experience at the beginning of the year, offset in part by lower unsaturation charges.

Specifically, utilization improved from 67% in Q4 to about 72% on average for the first quarter, with even further progress at the end of March.

We saw improvement in both frontend and backend manufacturing, and we expect to return to optimal loading during the second half of 2013.

As we move through the year, we expect to see a progressive improvement in gross margin due to lower unsaturation costs and improved manufacturing efficiencies in Q2, as our outlook indicates, and based upon our visibility on the second half of 2013.

Our inventory level is quite well aligned with where we want to be.

As you recall, we took very aggressive actions in the second half of 2012 to bring down our inventory levels.

And as a consequence, we increased our turns and reduced inventory days.

Inventory came down further in Q1 by about $47 million.

In the first quarter, we were at 4.2 turns or 86 days, somewhat steady with the improvements reached exiting Q4 2012 and a solid improvement compared to last year at this time of 3.8 turns or 95 days.

Turning to capital expenditures, we expect to invest around $600 million during 2013.

This takes into account an improved environment in the second half.

And now, let me turn to our product highlights.

Looking at our Sense & Power and Automotive businesses, for MEMS and Sensors, during Q1 we started production of a six-axis MEMS device for the flagship model of an Asian smartphone manufacturer.

In the Automotive space, we are making a strong push into automotive sensors, of an accelerometer for an airbag.

We also began production of our active noise-cancelation chip for an important Asian gaming manufacturer.

In Power and Smart Power, we earned sockets for our high-voltage products in several large and small appliances with major European manufacturers and in Asia.

Intelligent power modules scored several design wins from home appliance leaders in the US and Europe.

We also began ramping production for a new LED lighting platform for a major US LED manufacturer and the newest AMOLED driver for a market-leading Korean manufacturer.

In Automotive, we further strengthened our position in braking applications with two important wins with two global tier I's.

We also earned an award for a full chipset for a gasoline direct-injection engine controller with an important Chinese OEM and landed a win, the first resulting from a cooperation with a strategic Asian customer, for an injector driver for a gasoline direct-injection engine controller.

In Navigation and Infotainment, we started production of a Teseo II-based antenna for navigation systems for a Japanese OEM, began production of an advanced telematics systems of Teseo II for a major European carmaker, and ramped the new power-amplifier ICs for the newest model at Alpine and other major Japanese car audio makers.

Turning to our Embedded Processing Solutions segment, in Microcontrollers, we saw increased design-in momentum for the STM32, which earned wins for, among others, an automotive voice recognition system at a Japanese OEM and in a display card at a world leader in digital security.

We also saw growing adoption of the ST31, our secure 32-bit microcontroller, in contact and contactless banking applications, and we ramped production of an embedded ST33 Secure Element for a high-end smartphone at a key OEM.

In Digital Convergence, I am pleased to say we earned important design-ins in FD-SOI advanced CMOS technology, the next-generation process technology that ST is pioneering.

We also captured a significant design win for Orly, for the Orly platform, in a home-gateway application for a large European manufacturer.

And as we just announced, Orly was selected by Sumitomo Electric Networks for the Advanced Generation of Smart IPTV Set-Top Boxes.

And in Imaging, we began volume shipments to camera integrators of our leading-edge image sensors using ST's proprietary backside-illumination technology and are shipping the matching high-performance digital-imaging-processing chip to a leading smartphone manufacturer to support unique imaging capabilities of some of their handsets.

Let me now switch topics and move from revenues to our net operating expenses program and initiatives.

And that is presently ongoing.

As outlined, we are resizing our net expense base to be within the range of $600 million to $650 million by the beginning of the first quarter in 2014.

The exit from ST-Ericsson will significantly reduce our R&D expenses, and we started to see this in our first quarter results with R&D expenses declining sequentially by $52 million, benefiting principally from the ongoing restructuring initiatives at ST-Ericsson as well as, starting March 2nd, the charge-back to Ericsson of the LTE Modem expenses.

SG&A expenses mostly benefited from the internal cost reduction initiatives that we have had in place.

And this is visible on a year-over-year comparison with SG&A lower by 10% to $279 million.

Let me turn now to our cash flow and net financial position.

Free cash flow was negative $65 million in the first quarter, principally related to ST-Ericsson.

In mid-March, we shared with you that our estimated total cash costs to exit ST-Ericsson, including covering the joint-venture's ongoing operations during the transition period and in Q1, of course, and its restructuring costs related to the ST-Ericsson wind-down, were at between $350 million and $450 million.

In Q1, we funded $83 million under the ST-Ericsson parent facility.

During the next two quarters, we expect our cash flow will be negative as we complete the exit of ST-Ericsson.

Therefore, we anticipate a return to positive -- sorry, thereafter, we anticipate a return to positive free cash flow.

As a result, our net financial position will decrease in each of the next two quarters as a result.

But, again, this should revert back.

And we anticipate at year end to be in a still healthy net financial position based upon current market assumptions.

In the first quarter, the Company paid $455 million to repay at maturity our outstanding 2013 senior bonds using available cash and distributed quarterly cash dividends of $89 million to shareholders.

Now, before concluding let me turn to our outlook.

As we mentioned last quarter, we continue to see some positive signs with bookings, excluding Wireless, showing progressive improvement.

Within that context, we see a second quarter where net revenues are expected to grow about 7% at the midpoint, excluding Wireless.

This is, again, better than seasonal performance.

Based upon our visibility, we see broad-based strength, thanks to Imaging, Microcontrollers, Analog, and MEMS products.

Wireless, meaning the ST-Ericsson activities, is expected to decline significantly, resulting in total revenue growth of about 3% at the midpoint of our guidance.

Our gross margin should benefit from improved loading and manufacturing performance, as I indicated earlier in my remarks, leading to a gross margin outlook of about 32.7% plus or minus two points.

While not part of our guidance, R&D in particular will again see a significant reduction in expenses.

To conclude, in a separate press release issued last night, ST's Supervisory Board will propose to shareholders a resolution on the distribution of a cash dividend of $0.10 for the second quarter and of $0.10 for the third quarter, stable with respect to previous quarterly dividend distributions.

Furthermore, the quarterly dividend distribution will be decided from now on semiannually instead of annually.

This change will better align to industry practice, bringing greater flexibility to ST.

The fourth quarter 2013 and the first quarter 2014 dividend will be decided during the fourth quarter of 2013.

Overall, I see progress for ST with our product portfolio and five key growth drivers, in taking important actions on turning around our financial results by resizing expenses, in our channels with our efforts with customers and in improving our distribution channel opportunities, and in managing our cash resources to continue to reward our shareholders.

And now, my colleagues and I are ready to take your questions.

Thank you.

We will now begin the question-and-answer session.

(Operator Instructions).

The first question is from Mr. Stephane Houri from Natixis.

Please go ahead, sir.

Yes, hello.

Good afternoon.

The first question would be on OpEx to understand about the OpEx decrease in Q1.

What is the share of the decrease coming from the cost transferred to Ericsson?

And what is the share coming from the restructuring?

And also, where do you see the OpEx coming down in Q2 because you have talked about a significant decline in OpEx in Q2?

And I have a follow up.

Thank you.

Yes, so, in Q1 is about 50-50.

The $52 million decrease is about -- 50% of it is about the result of the restructuring initiative.

And the other 50% is -- about the other 50% is the cost that is allocated out starting from the beginning of March.

Now, we are not giving a precise guidance for the second quarter.

However, you know that our target is to move from the $812 million in net operating expenses in Q1 this year -- we had no contribution on the line other revenues and expenses in Q1 -- to the target range that we had disclosed for the beginning of next year.

And this will be achieved progressively quarter after quarter, so from $812 million to $600 million, $650 million range at the beginning of next year.

So, of course, this will be done progressively in the course of the next quarters.

Okay.

And another question if I may.

Listening to what you're saying, is it fair to assume that ST-Ericsson is going to go down sequentially at least to at least, let's say, 20% this quarter again?

And if yes, in your view, how long would it take to wind the Wireless business completely down?

Thank you.

Yes, of course, it's mechanically calculated or in this ballpark, the decrease of ST-Ericsson during the course of the second quarter.

Now, in terms of wind-down, the contract will be closed during the course of the third quarter.

And progressively, the idle cost will be -- either will disappear, of course, or as soon as we have the visibility of the detailed manufacturing restructuring plan, which is really detailed at the maximum granularity, when this plan is fully formalized, these costs obviously will go into the restructuring cost line.

And again, this will happen progressively during the course of the second quarter and the third quarter.

So, here, legislation by legislation, there are different procedures, different constraints.

Clearly, this part will be worn down.

And as soon as the granularity's perfect, we can include this into the restructuring cost.

And we plan to do this during the course of the second quarter and the course of the third quarter of this year.

Yes, okay.

And if I understand correctly -- I'm sorry to come back on that -- on the sales level, when the joint venture will not exist anymore in Q3, do you continue to deliver your end customers, meaning -- ?

-- Of course, we are not -- absolutely.

We are not taking any action with our customers to call any end of life.

Okay.

So, we will go on supporting the customers as long as needed.

All the contributions of all the products of ST-Ericsson is now for ST from the 1st of March.

And even if, legally, the products will be in the, let's say, joint venture bucket, the contribution is 100% for ST from the 1st of March.

And we do not intend to call any end of life.

On the other hand, we want to support our customers and, as much as we can, to prolong the life of these products.

Okay.

Thank you very much.

Thank you.

Thanks, Stephane.

Loren, next question, please?

The next question is from Mr. Tristan Gerra from Robert W. Baird.

Please go ahead.

Hi, good afternoon.

Your revenue and distribution increased.

So, your distribution revenue increased as a percent of revenues year over year.

Wanted to know if this is a function of ST shipping ahead of some demand in your Analog business or if there is a change in the business model.

And also, is your gross margin guidance for Q2 implying that you're shipping to distributors in line with demand or that there is some inventory replenishment in the channel?

I think, overall, we are pleased of the evolution of the -- of course, we are tracking the point of sales.

This is what is important for us is the resales of our distribution.

We are pleased of the evolution of the POS.

It's a positive evolution in any of the countries, in any of the regions, let's say.

In some regions, it's stronger.

But, it's positive in any region.

And we believe that, overall, the inventory and distribution is clean, from my point of view is sometimes even very clean.

And we believe, of course, that the focus must be on the POS.

This is the way that we measure this business is distribution is an important channel.

But, ultimately, it's customers.

And we want to drive this mass market initiative in ST and through our distribution very aggressively and pleased to see that, in terms of percentage of our business, we moved from 21% to 25% in Q1 this year.

And we see this with a positive view.

But, it's a priority to focus on POS, is a priority to be -- to expand our presence in the mass market, also thanks to the organization, the geographic -- the new geographical organization that -- within sales and sales and marketing during the first quarter of last year.

Okay.

And then what utilization rates are you expecting in Q2 from the 72% level in Q1?

Also, what is the reduction in unsaturation charges in Q2 that you expect?

And then finally, how much of a contributor will MEMS be for your Q2 revenue outlook?

We plan in Q2 to have a significant improvement in the loading, not yet optimal.

Our view is with -- today with the manufacturing machine that we have, we shall be around 90%.

This is our target.

I think that, in Q2, we'll be about 85%, let's say, fab utilization.

And we do not expect to incur a significant unsaturation cost during the course of the second quarter.

But, of course, this is an important contribution to the gross margin.

The other contribution is the manufacturing -- is coming from the manufacturing cost of Q1.

And the manufacturing cost in Q1, of course, was impacted overall by lack of loading.

And then the MEMS?

The MEMS was -- ?

-- Tristan, your question was on MEMS on the outlook?

Yes, how much of a contributor is it to your Q2 revenue guidance?

There is a contribution.

I think the big jump on the MEMS would be in H2.

But, I think, already in Q2, the contribution I think is in the range of 10% or so.

Yes, Lorenzo speaking.

Yes, the MEMS will contribute in Q2 to improve our revenues.

Let's say, overall, between Analog and MEMS, we see something in the range of 10%.

But, yes, the biggest jump, it will be in the second part of the year for this product line.

Very good.

Thanks a lot.

Thank you.

Thank you, Tristan.

Loren, next question?

The next question is from Mr. Sandeep Deshpande from J.P. Morgan.

Please go ahead.

Yes, hi.

I have a few questions, couple of questions.

Firstly, on -- Carlo, you talked about I think in the press this morning that you expect a much bigger second half.

Particularly in the Automotive Industrial business, there have been some signs of automakers in Europe talking about a significant slowdown.

Have you seen that?

And in those businesses exposed to those customers, do you expect a weaker 2013?

That's the first question.

The second question is that you took -- .

-- Hello?

Excuse me.

It's the operator.

We lost the question.

Can we take the next question, sir?

Yes, and then we'll put Sandeep back in when he calls back in.

Thank you.

Okay.

The next question is from Mr. Francois Meunier from Morgan Stanley.

Please go ahead.

Yes, I hope my line will not be cut.

Actually, so, I will ask a good question.

So, yes, I just wanted to understand a bit more about the Automotive relative strength in Q1 if I may.

There is a bit of a disconnect between what the chip makers and you in particular are saying and what the OEMs.

So, why are you doing relatively well?

The second question is about actually MEMS.

And there seems to be quite a bit of litigations at the moment in the MEMS space, seems like you have a litigation with InvenSense, which is going okay, a litigation with Nokia, which is not going so well.

What's the plan there?

How do you see the competitive landscape evolving?

And do you see any guys in analog trying to get into the MEMS market, like -- I don't know -- Maxim or someone like this going forward?

Well, let's start from Automotive.

I think there was a contribution.

There was some growth in Automotive in Q1.

I think it was not a major growth.

But, we have enjoyed some growth.

We expect some further growth in the second quarter in the Automotive.

Today, the demand is strong.

And I think to be concise, of course, what we all read and what we know from the carmakers, I think there are three reasons.

Reason number one is I believe there is some form of inventory adjustment after the cut in Q4.

Reason number two is I believe the increase of the electronic content per car.

And reason number three, personally, I believe that we are also gaining share in this business.

So, there will be another step in Q2 because we do not reconcile today perfectly what we see from the tier I and our OEM customers and the position of carmakers.

We are not projecting a continuous growth in the second part of the year in the Automotive.

So, we expect growth in many other products in the second part of the year, but not in the Automotive.

If I would look just at the backlog that we have today on the Automotive and the demand from our tier I, we would be more aggressive.

But, of course, we will be ready in case this demand -- we continue to support our customers.

Now, going to the MEMS, I think, indeed, yesterday, a decision was rendered by the Amsterdam Court prohibiting ST to sell specific microphone on the upper market.

And we intend to appeal this decision.

And of course, in the meantime, we are ready to propose alternative solutions on this specific device.

As far as the litigation with InvenSense, I believe this is an important area for us.

We have important portfolio of IPs.

And of course, we want to extend our interest and exploit our inventions.

And I think we continue.

Okay.

Thank you.

Thank you, Francois.

Next question, please?

The next question is from Mr. Sandeep Deshpande from J.P. Morgan.

Please go ahead.

Welcome back.

Yes, hi.

Can you hear me?

Yes, yes, very well.

Yes, hi.

No, my -- I don't know whether you -- because I got cut off, the question which is not answered is associated with -- you had $29 million that you charged back to Ericsson in Q1.

So, would that be three times in Q2 because that was only in March that you charged back, so in Q2 and onwards that you can charge-back more?

That's the first question I have.

And then secondly, I think you answered some parts of the Automotive question that I had.

But, the question I have overall is that -- what is the bases of your expectation that second half of the year will be much better?

Is it because you got substantial new design wins which will ramp up, or are you just at this point expecting that, cyclically, things are going to be looking better in semiconductors in the second half of the year?

Thank you.

Yes, you're referring to Automotive or in general?

No, in general, yes.

In general.

Okay.

So, yes, of course, we expect to significantly reduce our expenses.

We had net expenses in the range of $812 million.

We had net expenses of $812 million in Q1.

And we will end in the range that we said $600 million, $650 million in Q1 next year.

And therefore, we will have material steps.

Indeed, the calculation that you've done is correct.

But, there -- .

-- Yes, maybe I can add some color on this.

Lorenzo speaking, again.

Of course, you have to remind that yes, it's true that we will have the impact of the invoicing of the modem development activity.

Don't forget, too, for the expenses is, of course, in term of seasonality a little bit worse than Q1.

And there is the salary increase.

So, in your model, maybe you should take into account these.

But, it's true that what we do expect is -- during the quarter, is to have a significant reduction of the expenses in Q2.

Absolutely, and we will go on, of course, also in Q3 and Q4 because we will end at a much lower level at the end of this year, beginning of next year.

Now, if we look at -- going to the second question, I think, first of all, it's bookings.

Our booking trend today is good.

Since the beginning of the year, there were a couple of weeks in correspondence with the Chinese New Year where we have experienced a slowdown of the bookings, and then bookings restarted.

In April, this is continuing.

So, it is overall a good trend in terms of bookings.

This is across the board from a geographical point of view, including Europe, and also very much across the board on products and applications.

So, this is clearly an important -- this is an important element for us.

Another important element is -- clearly very much related to bookings -- is the evolution of our backlog.

We have today certain visibility for the second quarter with a good increase in the backlog.

But, we have also a preliminary visibility for the third quarter backlog, where we see another important step forward.

I would like to mention also an important indicator related to the mass market.

And as I said before, this is the point of sales or the sales of our distributors.

This has very little to do with inventory management, is on the other hand a good indicator of the requirement of final customers, including the small and midsized customers and that are holding the products when they need the products, so from their distributors.

And the POS trend is pretty good everywhere in the world, better in certain regions, but overall positive in each of the regions.

And finally I think is the introduction of certain new products.

There are areas that are very specific.

I would like to mention for instance Microcontrollers.

One part of this business is for general purpose.

So, it's split up over many, many customers in the world.

But, one part of this business is secure microcontrollers.

And this is a limited number of customers.

And we have gained significant important design wins on our secure microcontrollers.

And we expect a big growth on micro, on secure micro.

So, this is just an example products of the potential in terms of new products and that is less related to the overall macroeconomic trend.

Another example is Imaging, our diversification effort in Imaging, and the new products, the effort that we have done to move from smartphones to include new application sectors, like gaming.

So, we have precise programs that will materialize in the second part of this year.

And of course, we expect a good growth there.

So, it's the combination of the two things.

It's the market.

And we have today certain indicators.

Of course, we will have to prove the booking trend is sustainable.

But, it's booking.

It's backlog evolution.

It's the POS of our distributors.

On the other hand, it's new product introductions with certain drivers.

I mentioned Imaging.

I mentioned Microcontrollers.

But, I think Power Management, for instance, is an area.

So, there are some -- MEMS will be a big rebound in second half.

So, it's the two things together.

Thank you.

Thank you.

Thank you, Sandeep.

Next question, please.

The next question is from Mr. Didier Scemama from Bank of America Merrill Lynch.

Please go ahead.

Yes, good afternoon, gentlemen.

Thanks for taking my question.

And brilliant, great job on the wind-down STE and the OpEx reduction.

That's great execution there.

I think you answered the question I wanted to ask.

I think Sandeep asked the question on the $75 million or so decline in OpEx, $90 million in Q2 and going forward to get to the $600 million to $650 million.

My question is actually more on the top line and gross margins.

So, it feels like, to get to this 10% margin, you need probably about $2.2 billion of revenue per quarter.

Carlo, would you say that, with the sort of the backlog you've got at hand, the design wins you've got, and sort of maybe a little tailwind from the cycle and the macro, do you think you can get there by Q1 next year?

And second question, how much work is left for you to do in terms of pruning the portfolio and improving the manufacturing cost base so that you also get some leverage on the gross margins to get to that I think probably a bit more reasonable number of 40%, given the portfolio that you've got now post ST-Ericsson wind-down?

I've got a quick follow up.

Thanks.

Well, let's go through.

Of course, our ambition is to be there at $2.25 billion.

I already disclosed this.

This is the level that we had pre-debt crisis, European debt crisis.

And this is what we are targeting.

Of course, there are other ingredients.

There is also a big difference between $650 million and $600 million.

So, but, clearly, the level is what we had pre-European crisis, debt crisis, in terms of top line, of course, without ST-Ericsson.

We should not forget also that certain products may stay.

For instance, Power Management, this was an ST-Ericsson business.

And the business was devoted to the platform of ST-Ericsson.

Not, it's becoming the business of ST.

And of course, we will serve all the customers independently on the platform that will -- that is used for the smartphone.

So, this is indeed the level, so is what we had in the first half of 2011.

And it is a little bit higher that what we said.

And then, if we look at the gross margin, I think, for us, what is fundamental is to go back -- and we believe we can -- to a decent stable level of loading.

This is fundamental.

Stability and continuity of loading is a fundamental element.

And I mentioned before that we consider good level above 90%, 90% loading.

And of course, this will allow a much more efficient operation in our manufacturing facilities.

On the other hand, on the products, of course, we will focus more and more on very new products.

But, I'm sure we all understand that it's difficult to do everything at the same time because we want to grow, and we will grow.

We want to drive expenses down, down to $600 million, to $650 million.

And we also want to focus more on the high-end products.

And this is clearly something that is in our mind.

For instance, Microcontrollers is a great area.

MEMS is a great area.

Power Management is a great area.

So, there are areas that we will focus more.

But, of course, the challenge that we have is also to do everything at the same time.

And for us, it's important now to execute the $600 million plan.

For us, it's important to grow on our business outside ST-Ericsson and go back quickly to the $2.2 billion, $2.25 billion that you said.

Great.

And then a quick follow up would be on the Microcontroller side because, clearly, you've got a very strong momentum for now a few quarters.

I was just wondering whether you thought you would be -- or it feels like you're a big beneficiary of the wearable electronics market.

There's been a number of teardowns out there showing your Microcontrollers 32-bit ARM with accelerometers and gyros being used in multiple products in the marketplace.

Presumably, it's not a big part of your business at this point.

But, I was just wondering how much do you think that can be in the second half or perhaps into next year if that's a driver for your company at all.

Listen, it's an important area for us because we have -- well, wearable is an important area for us because there are three technologies that we can contribute.

One technology is a very low power microcontroller because, typically, in these applications, you need extremely low power.

The second contribution that we can give is with our sensors.

And the third contribution is RF because you need to communicate with the smartphone.

You need to communicate.

You need to be connected, right?

So, now, I think that the weight -- the real size is still limited.

But, it's clearly an area that is important.

It's an area that we are focusing on.

We have important wins.

Some are well known.

For instance, I think I can mention the FuelBand from Nike is our own technologies on the three things.

And there are more opportunities.

But, it is not a significant part.

If you look at Microcontrollers, it's really the two blocks.

It's thousands of customers with our STM32, many, many difficult -- many, many different applications, many, many different -- even core configuration is all ARM.

But, there are, as you know, different ARM costs and a variety of peripherals.

So, this is one area.

And so, spreading this is the ecosystem.

Today, if you look at the most known 32-bit microcontrollers (inaudible), for sure our STM32 is in the top list.

It's maybe number one or number two.

This is for sure.

And overall, in microcontrollers, we were number 11.

Now, we are number four.

And clearly, we believe we can become number two.

So, this is one block.

The other block is secure microcontrollers.

And this is more the big customers.

This is more smartphone applications, the near-field communication, is more the banking, both connected and contact and contactless.

So, this is more, let's say, focused with a smaller number of customers, but sometimes very high volume, like the one that we had this year on the secure element.

That's brilliant.

Many thanks for your answers.

And good luck for second half.

Thank you.

Thank you, Didier.

Next question, please?

The next question is from Mr. Andrew Gardiner from Barclays.

Please go ahead.

Good afternoon.

Thank you.

I just had a quick question around something you mentioned in the press release about your business in China and South Asia, where you saw a more notable decrease in the quarter relative to some of the other regions.

And you're talking about business dynamics at certain accounts.

I'm just wondering if you can give us any more detail around what's happening there and whether -- based on some of the other comments you've made about second half, whether you're seeing those sort of trends there improve.

Thank you.

Yes, well, we are reporting what you see in the press release is what we must report, of course.

That is the sales by point of invoice is -- and there are many European and American customers that, of course, are at quarter in Europe and in America with manufacturing activity in Asia.

I do not believe there is any -- I am sure there is absolutely no relation between the glitch that you see on our figures of building in Asia with our Asian customers.

This is driven more from Europe and US on a global customer base that has decided to go to Asia for manufacturing.

That's clear.

Also, just quickly, not to put words in your mouth, but it seems to me the way you're describing your second half outlook is sort of very strong from a bottoms-up point of view in terms of the bookings you're seeing.

But, you're just trying to layer a certain amount of sort of macro-led caution on top of that.

Is that fair, or is there anything more to it than that?

No, I think it's fair.

I think, of course, we need to work on the two fronts.

We need to work on expanding in the mass market, in the small and medium customers, driven very much through distribution.

This is something that we want to do more.

But, here, there is clearly relation with the macroeconomic situation.

I went in detail to describe the Automotive case.

If today I would look just at the trend that we have from the tier I's, our OEMs, our forecast for the second half in Automotive would be much more aggressive.

And -- but, because it's difficult sometimes to reconcile between what we see from our tier I customers and what we know from the carmakers, we are prudent in projecting the Automotive sales in the second half.

But, so, anyhow, there is one part of the growth that we expect from an improvement in the overall situation.

But, as I said, there is also one part of the growth, again Microcontrollers, MEMS, and Imaging, that is more related to specific products and specific new products and customers.

And of course, we believe that this will be also an important contributor -- contribution to the second part of the year performance.

Okay.

Thank you very much.

Thank you, Andrew.

Next question, please?

The next question is from Mr. Simon Schafer from Goldman Sachs.

Please go ahead.

Yes, thanks so much.

Wanted to ask a broader question as it relates to the -- some of the currency moves that we're seeing, just any insight as to or feeling as to how the recent yen move may be translating into some potential pricing advantage from your Japanese competitors.

I know your domestic exposure to that country is very small.

But, more broadly, in a global context, is that something that you have begun to see, or is it too early, or any other thoughts on that?

Of course, there will be more pressure.

And I think there is already pressure.

I think we also have some -- our -- we sell domestically in Japan about at $1 billion.

And we also have opportunities in Japan.

And this is positive.

Our presence in Japan is mostly related to major accounts that are all important in the exports from Japan to other regions.

And of course, this is the positive view.

And then there is what we said, our competitors.

Our competitors in Japan are becoming and, of course, they will become more competitive thanks to the weaker or much weaker yen.

As far as ST is concerned, of course, in terms of currency, for us, what is fundamental is the euro-dollar rate.

And today, all our models, what we have described to you is with an exchange rate euro-dollar of 1.3, which is the assumption that we have taken.

And personally, I believe that this is still -- at 1.3, our American competitors, they are still enjoying.

But, it is what it is.

And we have built up our model based on this assumption of euro-dollar exchange rate.

Understood.

Got it.

Thank you.

And my second question would be just on the distribution channel more broadly.

I know you saw an uptick in terms of distribution channel revenue also on a year-over-year basis.

But, more broadly, I think you alluded to your own inventories being healthy and where you'd like them to be.

But, what is it that you're seeing in the channel, specifically with distribution customers?

Are they still rebuilding?

What sort of appetite are you seeing in terms of pull-through there?

That would be helpful.

Thank you.

I -- we see today -- as I said, we do not believe that the customers of our distributors today are in a position of unhealthy -- I'm talking about the customers of our distributors.

I do not have any evidence that the customers of our distributors today, they are in a condition of (inaudible) inventory.

I believe it's something that our distributors have focused a lot to make sure that the supply chain is clean for us, for them, and for their customers.

This has been an area of focus for our distributors that has been very important during the last few quarters.

Personally, I believe that, considering also the product portfolio that we have, certain distributors, our inventory position not only is healthy but sometimes is even too low.

But, this is, of course, my judgment.

But, I do not have any evidence that the customers of our distributor have an inventory position that is unhealthy.

I think it's something that, as I said, our distributors have focused on very significantly during the course of the last few quarters.

And I believe this is pretty much under control.

Got it.

Thanks, Carlo.

Thank you, Simon.

Next question?

The next question is from Mr. Jerome Ramel from Exane BNP Paribas.

Please go ahead.

Yes, good afternoon.

Two quick question.

The first one is, with the new reporting, if I look at the division SPA and if I look at the EBIT margin Q1 2013 versus Q1 2012, we're talking about 8.4% coming down to 5% with almost the same level of revenue or even higher in Q1 2013.

So, I just wanted to understand where the EBIT margin difference is coming from.

Is it just due to the mix with lower MEMS?

So, that's the first question.

And second question, if you could explain us a little bit the first contract you had in FD-SOI.

Thank you.

Yes, well, as I said before, of course, we plan to go back to 10% or more.

More than 10% in fact is our target (inaudible) rapidly.

I think it's two things.

It's some additional resources.

We have increased R&D on certain of these products.

And as you said, somehow, there is an impact also on the mix.

I think, of course, the weight of MEMS is playing an important role here.

So, we have also the opportunity to have a good turnaround in discrete.

I think Power [MOS] is starting to show a good step forward in terms of margin, not yet the other discrete.

But, we are working to improve also the other part of discrete very, very hard that was hit so much on certain products by our former major customer.

So, it is an area where we expect also a significant improvement.

But, clearly, if I take the two most important things, one is the mix overall among the product families, but also additional resources, particularly in Analog and in MEMS, where we have increased a little bit during the course of last year, but also redeployed resources.

On the FD-SOI, we are working very aggressively on two fronts.

The first front is communication infrastructure.

We believe this is an area where the value of lower power dissipation for the same processing power performance is important.

Sometimes, it's very important.

And we have won the first project for this kind of application.

However, there is another target area that is the portable equipment but not necessarily [is my point].

There are other I would say great opportunities.

And some of these are real important opportunities that is outside the smartphones and outside the tablets, but is very important opportunities.

And hopefully, we will have some more good news in the near future.

And could it be licensing revenues going forward in FD-SOI?

This is something that is possible.

Okay.

Thank you very much.

Thank you, Jerome.

Next question, please?

The next question is from Mr. Gareth Jenkins from UBS.

Please go ahead.

Yes, thanks.

Just a quick one, if I could, on the Imaging space, obviously, a swing factor for you in the second half of the year as well.

And I just wondered whether you could give us a sense of how much of that is just the stabilization in legacy products and how much of it is driving new products like image sensors through to new customers.

So, maybe you could just give a sense of the kind of legacy versus new split second half.

Thank you.

You're talking in general or more specifically to Imaging products.

Just specifically on Imaging.

Only Imaging.

Well, I think on Imaging, I can really go in some details.

In Q4 2011, in the Imaging products, we did $160 million.

In Q4 2010, due to the limited customer base that we had, I would say very limited customer base, we dropped to slightly below $100 million, let's say, around $100 million.

And our plan is to go back to $160 million in Q4 this year.

And this is thanks to two things.

The first is more smartphone customers, of course.

But, there is another important contribution is different applications.

And for instance, the gaming, and there will be a significant contribution in the second part of this year, particularly in Q4, on gaming, but also Automotive.

We know that Automotive is lower.

All of this is customer by customer.

This is not the mass market.

These are specific products.

The products could be chips for module manufacturers of CMOS cameras, could be our own modules for CMOS cameras, could be not cameras but proximity sensors realized with these technologies, and could also be imaging signal processing, which is, of course, more traditional ASIC products but for imaging.

So, and this is really customer by customer, is not very much related to the mass market.

So, this is -- these are the expectations that we have.

For Q1, it was very low.

And we expect quarter after quarter here a significant growth, as I already said, by the way.

Thank you.

And I just wonder as a follow up whether you could talk to what you're seeing in terms of lead times and sort of capacity plans, if there are any areas that you're worried about capacity in the second half and what you're seeing on lead times.

I think one of your competitors said last night very, very short lead times currently.

And I just wondered whether -- and lean inventories, I just wonder whether that sets us up well for the second half.

Thank you.

What we see today is a strengthening of the lead time in the sense that, of course, with the orders, the booking trend is good, as I said, and is a little bit more difficult to respond.

There is also a matter of mix.

You can have a capacity utilization of -- as we had in Q1 of 72%, right, 67%, 72%.

But, still, if the lead times are very, very short, sometimes it's not that easy to respond immediately.

So, we see some, let's say, longer lead time.

I think there are areas where there are a little bit more difficulties to respond.

For instance, in general in power, smart power is a little bit more difficult to respond immediately to the request.

But, we want to go, as I said before, to a more stable positioning in our manufacturing.

And we want to make a big jump in Q2.

This is supported by backlog.

This is supported by orders.

So, we want to go from 72% to about 85% loading, still is not optimal, but this is the step that we want to do.

Now, as we discussed, we need to understand, now we are almost at the end of April, whether this booking trend will continue.

Of course, if this booking trend is continuing, then we already have visibility for good improvement in the Q3 backlog.

So, but -- and in terms of capital investment, in the first half, we will invest about $300 million.

And as usual, we can modulate.

The program today is $600 million.

You may have noticed that is slightly up compared to what we said last time.

But, we can modulate.

We can also decrease if needed.

Today, we do not have any visibility this is needed.

But, we have then the second half that is giving us the flexibility to react.

So, this is a little bit the overall situation.

Thank you.

Thank you, Gareth.

Next question?

(Operator Instructions).

The next question is from Mr. Kai Korschelt from Deutsche Bank.

Please go ahead, sir.

Yes, good afternoon.

I had two, please.

The first one was just on the Digital Convergence business.

So, I think that's set-top boxes and TVs.

I think you have a very high market share in emerging markets.

So, India and China, it looks like some of your Asian competitors are gradually gaining more and more design wins here.

So, I'm just wondering, what is the outlook for this business in the context of the more growing areas that you expect second half this year?

And also, strategically, is that still part of the core now because it seems like it's slipped off the radar a little bit?

And then my second question is just sort of clarity on Wireless.

So, just want to make sure I understand the accounting and P&L dynamics.

So, even after Q3, you'll still have Wireless revenues, but you will not consolidate any OpEx associated with those -- with Wireless revenues, other than the people that you're repatriating.

Is that the right way to think about it?

Yes.

And -- yes?

And then I wanted to double check on the idle costs on the fabs.

Did I understand you correctly in the beginning that you said that the idle charges from the ramping down of the Wireless revenues will not be part of your gross margins, but it will go into exceptionals?

So, are you essentially overstating your gross margins, or is that -- did I just misunderstand it?

Thank you.

No, Carlo Bozotti was not talking about the gross margin, was talking about other resourcing in OpEx.

It's expenses, not the gross margin.

So, they will move from the operational line of expenses into, of course, into the restructuring because, if we would have today a perfect restructuring plan for any single individual (inaudible), this would be already inside the restructuring from an accounting point of view.

Now, this will come with time because of the second quarter and the third quarter.

But, you are right.

Moving into the third quarter and then in the fourth quarter, basically, we will have the revenues, and we will not have the expenses any longer, apart the expenses related to the activity that we have repatriated.

However, these idle costs are not gross margin -- are not other -- are not gross margin related, but is mostly R&D.

So, it's mostly R&D.

R&D and SG&A.

And also SG&A.

So, is this clear?

Yes.

Thank you.

And then on Digital?

On the Digital, I think it still is -- I think we are not mentioning the set-top boxes because we are not mentioning the set-top box this year as major growth drivers because this is the year where we are now phasing down certain products in 55-nanometer and boosting our class two products that is 40-nanometer.

We have tens of new design wins I would -- several tens of new design wins with the class two generation and many more opportunities.

But, because of the phase out, we will not see really an important contribution to the growth this year.

On the other hand, you mentioned emerging markets and low-end products.

But, we are starting to gain, and this we did in Q2 -- in Q1 already, important design wins with our Orly.

And this is not for low-end applications.

This is for high-end applications.

Of course, it is a product that we can use in any regions.

But, it's very important for Europe and is fundamental for the US.

And the US is an area where we are not very present today.

And the combination of our Orly platform with the cable modem solution is now giving us a good opportunity to attack this market.

And this is an important priority for us in this area.

Okay.

But, is it fair to say that Digital remains firmly a part of the core business for now?

Yes, this is for sure.

If this was the question, for sure.

I think it is -- in Digital, we have three things.

One is the set-top box and the ASICs.

That is one product division.

Then we have the Imaging activity.

And we have, of course, the Microcontrollers.

Okay.

Thank you.

The last -- .

-- Next question, please?

The last question for today is from Mr. Guenter Hollfelder from Baader Bank.

Please go ahead.

Yes, thank you.

First, a follow up on the capacity utilization.

Do you think, based on your current plan for the second half, this 85% will be the max this year, or do you think there's further room to get closer to the 90% optimum?

Listen, it depends on bookings, of course.

Our motivation, our aspiration is to go to 90%.

It clearly depends on bookings.

We would love to go to 90% and really, after so many quarters, to stretch a little bit more.

There are no intrinsic limitations that would not allow us to go to 90%.

So, I think 85% is the number for Q2.

Okay.

And I understand correctly that the gross margin guidance you gave for Q2 is not yet fully reflecting this 85%.

For sure, because we saw -- in Q2, we sell that products that we are manufacturing in Q1.

Yes, sure.

And a last question on the MEMS business.

How dependent is your MEMS uptick in the second half on mobile devices, on smartphones and tablets?

If you could provide more color here and also on your customer diversification in the mobile device MEMS segment.

Thanks.

I think it's -- the weight is very important.

Of course, the weight in the smartphone and tablets is an important weight.

I think we are working, first of all, in this sector, the sector of tablets and smartphone.

We have more products, not only (inaudible), but also environmental MEMS.

This is another area that is important for acoustic MEMS.

So, this is one line of evolution.

So, it's more functionalities and more integration for the same application.

And the weight is still very important.

And then there are other applications, like wearable, like healthcare, like automotive, where of course -- like gaming, where of course, we are focused to expand.

But, we also need to consider the market overall because, of course, the volume of smartphones and tablets is overwhelming.

Now, with time, if we look -- but, this is with time and a longer-term evolution, of course, there are other areas, like automotive, where we just started.

The volume is very, very high.

But, as you know, the qualification and also the development, this business is longer.

Okay.

Thank you, Guenther.

Thank you.

Carlo, we'll go ahead and close now.

So, if you have any final comments -- .

-- No, I think just one.

I would like to invite everybody to attend our meeting in London this year.

I think it's on the 16th of May.

So, we would be delighted (inaudible) there.

And see you soon.

Thank you very much.

Thank you, everyone.

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