意法半導體 (STM) 2013 Q3 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon.

Welcome to the STMicroelectronics third quarter 2013 and nine months' earnings results conference call and live webcast.

I am Goren, 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 to all for joining our third quarter and nine months' 2013 conference call.

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

Joining Carlo on the call today are Carlo Ferro, Chief Financial Officer, Executive Vice President, Finance, Legal, Infrastructure, and Services; Georges Penalver, Chief Strategy Officer and Executive Vice President of Strategy, Communication, Human Resources, and Quality; Jean-Marc Chery, Executive Vice President, General Manager of the Embedded Processing Solutions segment; and Carmelo Papa, Executive Vice President, General Manager of Industrial and Power Group.

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, 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?

Well, thank you, Tait.

I would like to thank everyone for joining today's call.

But, before I start, I would like to welcome back Carlo Ferro.

He has rejoined the Company at the beginning of August after his service in ST-Ericsson, first as the COO and then as the CEO of the Company.

And as you know, we have now completed the breakup of the ST-Ericsson activity.

Thank you, Carlo.

So, our financial performance in the third quarter was mixed.

And there was a direct reflection of the changing demand in the semiconductor market, which has clearly slowed.

We posted progress in the third quarter towards our business and financial goals, although somewhat less than what we had envisioned.

So, let me first discuss the changes we saw in the semiconductor market environment and then move to our third quarter financial results in more detail.

In the market, on one hand, we experienced a few negative developments in the third quarter.

In Asia, there was a softening of demand, specifically impacting the mass market and across many applications with the exception of automotive.

In addition, within the Asian cellular phone market, feature phones and the mid-tier smartphones outpaced the high end, leading to a much less favorable product mix.

And finally, in India, the demand for our cable set-top box solution was reduced due to the postponement of the country's cable digitalization program.

On the other hand, the point of sales in distribution remained solid in all the regions.

And our inventory position in the channel is healthy.

Furthermore, automotive products demand continues to be strong across the portfolio in powertrain, body, safety, and infotainment and in all the regions.

Let's move now to our sales results, where third quarter revenues were $2.013 billion, and net revenues, excluding wireless product line, totaled $1.88 billion.

Based upon available WSTS market data, we believe our year-over-year growth of 3.9%, excluding ST-Ericsson products, will outperform our served market thanks to growth in imaging, microcontrollers, MEMS, and automotive.

On a sequential basis, net revenues, excluding ST-Ericsson products, also slightly increased, driven by the performance of the same key product families I just mentioned.

Operating income before impairment and restructuring charges in the third quarter was a $54 million profit, improving by $118 million on a sequential basis.

This was due in large part to the sale of ST-Ericsson's global navigation satellite system business along with significantly lower operating expenses.

Now, let me move to our two product segments.

Within our sensing, power, and automotive product segment, net revenues were stable quarter to quarter.

Automotive and MEMS increased slightly.

And we anticipate further strength in the fourth quarter, benefiting from both increased volume and penetration of our products.

Industrial and power products experienced lower volumes than expected due to the current market dynamics.

Importantly, overall, in sensing, power, and automotive, we saw a progression in the operating margin to 6.2% from 3.5% in the previous quarter on higher gross margin and lower operating expenses.

Turning to our embedded processing solutions segment, revenues decreased sequentially.

The decline in wireless was significant, but lower than expected.

In set-top box, sales decreased as well.

However, we are encouraged by the traction at our customers and design wins with our new products and technologies.

The growth in imaging and in microcontrollers was significant.

Embedded processing solutions' operating loss was negative $18 million.

And excluding the $75 million gain from the sales of the asset, mainly the ST-Ericsson GNSS business, EPS's operating margin improved 130 basis points to negative 11.5% on reduced operating expenses.

Turning to the gross margin, we had a sequential decrease of 40 basis points to 32.4%.

This decline principally relates to a negative mix effect with the higher weight of legacy ST-Ericsson products combined with lower-than-expected sales of products from our core businesses.

Moving to our inventory, the total stood at $1.32 billion, a decrease of about $20 million from the second quarter.

Our inventory turns remain at a good level of 4.1 turns or 88 days, so stable quarter to quarter.

With respect to our capital expenditures, we invested $166 million net in the third quarter and about $400 million year to date.

We anticipate a much reduced level in the fourth quarter.

So, we are now on track to spend about $500 million in 2013, which is well within our targeted CapEx-to-sales ratio of 10% or below.

At the end of the third quarter, ST's liquidity was $1.53 billion.

And we had a net cash position of $739 million.

Based on this solid financial position, the resolution to distribute a cash dividend of $0.10 per outstanding common shares for the fourth quarter of 2013 and the first quarter of 2014 has been submitted for shareholder adoption at the extraordinary general meeting of shareholders to be held in December.

We have a number of highlights to share with you this quarter, which illustrate the positive momentum we continue to have with design wins and new product launches.

In addition, with the completion of the transaction to split up ST-Ericsson, we are strengthening our product development in key areas, where we see important customer expansion opportunities, including embedded processing, radio frequency, analog, and power.

In microcontrollers, we achieved record billings, driven by general purpose devices.

We ramped production of our STM32 for Samsung's latest wearable devices and smartphone.

We earned a number of sockets for other wearable devices as well as a socket in a new generation of fitness product from a leading brand.

Moreover, in secure microcontrollers, we earned the secure element in the showcase smartphone from a major OEM.

And we have achieved the bankcard test center certification for our secure microcontroller for dual interface banking in China.

In power and smart power products, we won significant business with two new custom chips with extended lifetimes from major European automation companies, as well as another for a dedicated power supply for utilities metering.

Moving to our imaging business, during Q3, we started deliveries of a new dedicated image signal processor to a leading consumer brand.

And in our diversification effort, we sampled a new image signal processor and image-sensor combo chip to a leading automotive supplier for safety applications.

In our set-top box and home gateway business, we launched, in September in fact in Amsterdam at the IBC, our new ARM-based 28-nanometer devices that support the ultra-high definition and HEVC video recording.

These products are ideally suited for client box, our Cannes family, and home server, our Monaco family, applications.

And we have already achieved a major design win with a tier one operator.

At the same time, we continue to demonstrate strong momentum with our low-power, high-performance FD-SOI technology with seven design wins to date and a sustained high level of customer interest.

Turning now to our analog, MEMS, and sensor products, in Q3, we started high-volume production of our latest gyroscope and digital microphone for a major consumer electronics manufacturer.

We launched a new family of gyroscopes specifically optimized for image stabilization in mobile phones and cameras.

And we earned a design win for a new environmental sensor from a leading Chinese smartphone manufacturer.

We are also working on smart sensor systems.

In Q3, we launched mass production of one of them, the combination of an accelerometer, a gyroscope, and a microcontroller, for a handheld gaming system from a major consumer manufacturer.

This kind of integrated solution is something we see playing a growing role in the deployment of the Internet of things.

We are also working on the connectivity needed by smart connected things and began sampling the industry's most energy-efficient Bluetooth 4.0 network processor for smart applications.

Finally, let me conclude with our automotive business.

We won a socket in a body gateway and control system and one within a transmission system from leading European automotive equipment manufacturers.

We also earned major awards from multiple suppliers in Europe and in Korea for our successful car lighting products.

And in car infotainment, we won the new-generation baseband chip for digital satellite broadcasting at the Sirius/XM satellite radio, of course, for North American applications.

So, to conclude on products, I believe our progress and momentum continues.

Now, let me move to our fourth quarter outlook.

Based on the more muted environment we saw in the third quarter, we anticipate a relatively flat sequential revenue performance.

From a gross margin perspective, we anticipate some positive sequential progression as we expect to be at about 33% at the midpoint, positively impacted by manufacturing efficiencies and negatively impacted by about 1 point for currency and unused capacity charges.

Turning to our cash flow, we expect to generate a substantially positive free cash flow in the fourth quarter.

And, of course, it will continue to be a top priority for us in 2014.

We continue to aggressively pursue our objective to reach an operating margin of about 10%.

Our initiatives to reduce costs, such as achieving our net operating expenses target and improving our manufacturing, are on track.

However, the timing for us to achieve our operating margin target will depend greatly on our level of revenues.

Based on current visibility, including market conditions, reaching this operating target is now expected in mid-2015, about six months later than originally expected.

My colleagues and I are now ready to take your questions.

Thank you very much.

We will now begin the question and answer session.

(Operator instructions).

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

Please go ahead, sir.

Yes, thanks so much.

Just want to ask on this decision for you guys to alter your profit goal timelines for the 10% figure.

I understand the point about softening demand, specifically on the smartphone side.

But, in order for you guys to really take a view as to whether you can do 10% operating margin in the end of 2014 or mid-2015, you really must be taking a fairly explicit view on the duration of this inventory adjustment period that we're going through.

So, anything more that you can share on that decision to offer such a change in guidance today, when we're talking 12 to 18 months from now.

Thanks.

Well, as I said, clearly, (inaudible) experiences (inaudible) in -- particularly in August and September.

And this is very much centered in Asia.

Obviously, the situation in India with the set-top box is very specific.

But, the two major points is the smartphones and not really the quantity.

It's more the mix.

It's the mix between the low-end products and high-end products.

And the mass market situation I think is -- from our distributors in Asia, there is the expectation that their POS will decline in Q4.

And as a result of this expectation, bookings were reduced.

Billing in Q3 was reduced.

And of course, billing in Q4 will be reduced.

On the positive note, the POS of our distributors in US, in Europe, and also in Asia was pretty good during the third quarter.

And inventory position that we have in the channel in all the regions is healthy.

We have a stock turn that is ranging from four to five, depending on the regions.

So, we consider this pretty healthy for the product portfolio that we have.

So, personally, also talking to our distributors in Asia, of course, and we believe that this is more a short-term demand correction.

And this is, of course, something that we will then -- we will get more confidence during the course of the quarter and the next weeks.

But, at the moment, with the visibility we have, talking to customers, particularly talking to our distributors in Asia, we expect a decline of the point of sales of our distribution in Asia in the third -- in the last quarter of this year.

And this has impacted Q3 and, of course, will impact Q4, but then a more positive momentum starting from next year.

So, clearly, we need to be vigilant here.

We will monitor the booking situations during the next few weeks.

But, this is the best visibility that we have today.

Forgive me.

I get the point about Q4.

But, the question is, you guys put this time forward in May at the Capital Markets Day.

You reiterated it in July.

Correct me if I'm wrong, but some of the fundamental challenges as it relates to price point adjustments or mix skew towards the lower end was sort of a similar dynamic that we saw then compared to today.

So, what has fundamentally changed that would make you think that the inventory adjustment is going to take that much longer?

Can you repeat on the Q2?

What we had anticipated in Q2 was a poor mix in the -- or a poorer-than-expected mix in the smartphone.

This was what we anticipated in Q2.

We have reconfirmed this I think in Q3.

This is what we have experienced.

It was a little bit more than what we have experienced.

What was the change in Q3 is really the bookings, particularly in the mass market in Asia.

And this is what is new for us compared to what we had at the beginning of the quarter.

And this is visible in terms of bookings.

It's visible also in terms of, for us, billings.

I think our guidance to be flat in Q4, of course, takes into consideration this decline of bookings on the mass market in Asia.

But, talking to our customers in Asia and talking to our distributors in Asia, what we have from them is that this is an adjustment that is in between Q3 and Q4 this year.

And then they foresee to restart again with a more positive momentum.

Thanks, Carlo.

And my follow-up question is it's good to see that the CapEx budget's sort of navigating around $0.5 billion now.

But, fundamentally, as you look out 2000-and -- sort of three to five years, are you guys still reducing that capital intensity significantly, or are you still very focused on continuing to expand (inaudible) capacity and then also the shrink roadmap?

Thank you very much.

Yes, maybe I take the question, Simon.

Carlo Ferro speaking.

Good morning, good afternoon, everyone.

The CapEx model of the Company remains the one that has been indicated standing below 10% of revenues in capital this year.

As you noted, the number will be totally in line with (inaudible) and absolutely well below this target.

And frankly, for next year, based on current visibility, it was (inaudible).

Of course, during the year, we will [reduce] the number we may expect to spend in the order or slightly above this order of magnitude, so remaining well below the 10% of revenues for next year as well.

Got it.

Thanks, Carlo.

Thank you, Simon.

Next question, please?

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

Please go ahead.

Yes, hello.

Good afternoon.

Quick question on the gross margin, if I may.

The underlying assumption of the 10% EBIT margin, still, to get back to 37% gross margin, and if yes, according to what is today the most important element for you to achieve it?

Is it loading?

Is it mix?

Is it ForEx?

If you could specify your utilization rate at the moment and also, lastly, if you could tell us how much was the negative impact of ST-Ericsson during the quarter on gross margin?

Thank you.

Yes, well, I will leave then to Carlo to comment on the loading and to provide the very -- the accurate loading numbers for Q3 and Q4.

The most important negative effect that we had in Q3 that is still there in Q4 is mix, is product mix.

We have a level of revenues coming from ST-Ericsson that is above or even well above the expectations.

I think, for us, this business is, of course, a business that we want to support because it's generating cash and supporting our customers, very important customers.

But -- and the line, again, is generating cash.

And however, it's very dilutive in terms of gross margin.

So, overall, the major element, ingredient, for us to improve gross margin is a significant improvement in the mix of products that clearly will come with the natural reduction of ST-Ericsson products and also thanks to the improvement of the mix of ST core products.

This is, I would say, the first ingredient.

I would like to mention a very -- second very important ingredient is the manufacturing plan that we have announced in the month of July, with the phase-down of two 6-inch fabs.

One is more rapid in Singapore.

That is happening today.

The second one is to follow soon after, is the 6-inch activity that we have in Catania, and the ramp up, both in Singapore and in Catania, of the 8-inch activities.

This is a second important element in driving our gross margin up.

In terms of the unsaturation and loading, I would -- we are far from being in an optimal situation.

But, it's not too -- I think Carlo will comment here.

Yes, that unloading for the quarter is in line with anticipation.

The percentage of loading overall is between 86% and 87%.

However, this is not going to continue, given the market demand (inaudible) in the fourth quarter.

We expect fourth quarter below 86%.

However, this is very much differentiated by technology.

And in particular, we have a couple of fabs in 6- and 8-inch, where we expect loading below 80%.

And in 12-inch, loading is anticipated around 84%.

Of course, we're taking actions to mitigate the economic impact of this level of demand with reduced activity already planned, especially around the period between Christmas and New Eve.

However, this will result in the quarter in unsaturation charges that we do estimate in the range of $10 million per quarter.

So, you see the impact to the gross margin evolution from Q3 into Q4 is quite visible.

And overall, I will say, between exchange rate and the additional unsaturation, we lose about 1 percentage point of gross margin from Q3 into Q4.

Then looking forward, Q1 is expected between 86% and 87% with a better loading in the 12-inch.

We still anticipate some unused capacity charges, but significantly lower than what we expect for the fourth quarter, so an improvement in Q4.

And then from the second quarter on, at this point, we see a normalized utilization under the current visibility.

But of course, as Carlo said, we remain vigilant on demand evolution.

All right.

Does it mean that, basically, you're suggesting that Q1 gross margin could see an improvement compared to Q4?

This, frankly, is not what I said.

We need also to consider, as you are familiar with ST model, that when you have some unloading, you have also not excellent efficiency with the fab.

Q3 has been a very good quarter for manufacturing.

This reflects a margin progression in the Q4.

With Q4 could not be the same level of efficiency of manufacturing for the reason I said.

So, frankly, it's early to give a guidance for the first quarter gross margin at this stage.

We -- I have not anticipated what you said.

Okay.

Thank you.

Thank you, Stephane.

Next question, please?

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

Please go ahead.

Yes, thanks for taking my question.

The first question is for Carlo Ferro about the dividend and the dividend cover for next year.

I think everyone is doing a back-of-the-envelope calculation for next year, and it looks like it's going to be quite difficult to have a proper coverage of the dividend for next year.

I know cash generation is very important for you.

But, what is the plan to have a structurally covered dividend going forward?

That is the first question.

The second question is for Carlo Bozotti.

Hello, again.

What -- yes, you've been talking about design wins for the (inaudible) and MEMS and that sort of things for wearable technologies.

Is it going to be enough to compensate for some lost market share in MEMS to still have growth next year in MEMS?

Thank you.

Maybe I start on this, and then I leave Carlo to elaborate on the first question.

Well, of course, there are two axes.

One axis is the new applications.

So, the new applications we said is wearable products, healthcare products, but also automotive products.

Now, automotive, it takes time, but it's a very big market.

We are absolutely committed to the MEMS market in the automotive.

And we have some, say, prestigious design wins with major customers, including the ramp up in manufacturing, with prestigious customers for MEMS in the automotive.

So, these are the new market.

But, one of these new markets is small and developing, which is the wearable products.

The other one is big, but it takes time.

So, but, now, let's go to the back of the business.

And here, I want to make clear a point.

Our MEMS family is really centered on three axes for smartphone applications.

One is motion MEMS.

We do not dream to be 100% market share everywhere.

The second one is environmental sensors.

And the third one is acoustic sensors.

In my little address before, I mentioned that we started production with major OEM customers with a new gyroscope and a digital microphone, for example.

So, for us, these three lines are all coming from the same technology.

That is our micromachinery technologies, our MEMS technology.

And it is important for us, of course, to have the highest possible market share on the accelerometer and the gyroscopes, but also to expand in the environmental sensors and in the acoustical sensors.

In addition, there is a new family that is gaining a lot of traction in the smartphone that is our new touch sensing solution, is another form of sensor.

This time it's not micromachinery.

It is more on traditional technology.

But, it's a very innovative solution.

And this also we believe will contribute to the growth of our sensor offer.

So, you see, yes, these new applications, but one block of new applications, wearable and healthcare, is developing, but is still relatively small.

The other one is huge in size.

But, the way the automotive business is working, it takes some time.

We are confident.

We are very committed.

We are strong in automotive.

And therefore, we will succeed in MEMS in automotive, but it will take some time.

But, on the smartphones, it's not just the accelerometer.

It is the accelerometer.

It's the gyroscope.

It's the combo.

It's the sensor.

It's the sensor apps.

It's the digital microphone.

It's the environmental sensors with the recent addition of the fingertip for touch sensing applications.

And now the dividend.

Thanks, Francois, for the question, which also allows us to remind that ST distributes a dividend out of distributable reserves.

And our balance sheet shows over $4 billion of distributable reserves.

So, the net earnings of the year itself is not at all a relevant factor on the dividend decision.

As you rightly point, this is more about the overall financial situation and capital structure of the Company.

We closed the quarter with $1.53 billion of available cash that limited the difference between that and cash results into a net cash position of $787 million.

On top of that, we carry about $1 billion of available credit facility as a combination of the European investment bank facility and the number of the [Kappa] committed lines.

So, at the end of the day -- and more importantly, as Carlo already mentioned, we plan to turn to generate a substantially positive cash flow next quarter.

So, all conditions exist to continue the current level of distribution of dividend.

Okay.

Thank you, Carlo and Carlo.

Thanks.

Thank you, Francois.

Next question, please?

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

Please go ahead.

Yes, hi.

Thanks for letting me on.

A question I'll ask to Carlo Bozotti would be, is there any more restructuring that needs to be done to be able to lower the breakeven point of STMicro so as to reduce this impact of short-term movements in the market on your margins that you remain in positive margin territory, even when there are, as we see at the moment, a short-term impact in the market?

And then I have one follow up.

Yes, well, of course, today, we are executing two fundamental programs.

At the beginning of this year, there were three, now are two.

So, at the beginning of this year, we had the ST-Ericsson breakup.

We had our $600 million initiative, expense initiative, and very importantly, also, the manufacturing structuring initiatives.

Just to give you a sense of where we are, of course, the ST-Ericsson breakup was completed.

The $600 million initiative is so far executed at the level of about one half, 50%.

So, we are still working on this.

We already clearly defined the target for Q1 next year.

Of course, so far, we do not have any contribution from banks, not in Q3 and not in Q4.

But, we expect, of course, after the agreement with the French government and with the clearance of European Union, to start benefiting from this.

And the initiative on manufacturing we started in July.

And the initiative of manufacturing is closing two 6-inch fabs and increasing capacity in the two same locations on the 8-inch activities.

As I said before, in Singapore, we go faster.

It is something that will be completed overall.

This is very big 6-inch fabs, is a program that will be completed by -- at the end of -- by the end of next year, Q3, Q4 next year.

This is a major activity for us and then is the closure of the 6-inch fab in Catania.

So, we believe that these are important programs for us.

I am convinced that we do not need new initiatives.

I am convinced that we need to focus on these two initiatives, execute on these two initiatives, and extract all the benefit from these two initiatives, both in terms of expenses and in terms of manufacturing efficiencies.

Thank you.

And then, Carlo, just a quick follow up on the ongoing situation from -- based on what your comments are is that you've seen a more broad-based weakness in orders, and it's not necessarily only handset specific, which is where the fear was, that the more high-end handset market is weak.

Based on your conversations, any recent conversations you had with customers, why do you believe that this is only short lived?

Clearly, there is no inventory issues in the supply chain at STMicro itself.

But, is it from your customers that you're hearing that there could be a -- this could be only short term, and this will go away, say, in a quarter, a quarter and a half, or two quarters?

Absolutely, it's from our customers.

And as usual, we are trying to report as much as we can.

Of course, we cannot always make the names of the customers, what we see from customers, and what we hear and discuss with customers.

Let's talk, for instance, just to be very straight, let's talk about the distribution in Asia.

The POS or our distribution in Asia during Q3 was good.

The POS is the sales of our distributors on our products.

It was a good performance.

And however, they have anticipated a slowdown of their POS for the fourth quarter of this year.

And as a consequence, booking was reduced.

And as a consequence, billing was reduced in Q3.

And we managed to [kept] inventory under control with these measures because our inventory in ST and also in the channel is -- I believe is healthy.

And of course, there will be an implication on Q4 sales.

But, talking to the same customers, so the same customers and the same distributors that are telling us that there will be a decline in Q4, and there will be a reduce in billing in Q4 and already in Q3 to adjust on the inventory, is talking to the same customers that we hear that they expect that there is nothing that is dramatically impacting the macroeconomic situation.

And this should be a short-term demand correction.

So, we are just reporting what we have.

I believe you know in terms of macroeconomic -- you know better than us.

I think, what are the implications?

I believe that listening to our customers is, for us, fundamentally, is the best way to manage and also to report to you.

In addition, we want to continue to gain market share.

This year, the semiconductor market that we serve is declining.

Now is already nine months.

I think we have a better visibility.

But, based on all the data that we have from WSTS and the institutions, the market is expected to decline this year by, let's say, about 2%, 2 percentage points.

And without the ST-Ericsson products, we will grow.

This is clearly less than what we had anticipated in, for instance, at the beginning of this year.

But, we will grow.

I think we will grow probably 3% in the year, including a year-over-year growth in Q4 similar to what we have achieved in Q3 of the year.

So, we expect to continue to outperform the market.

Our target, as we have described to you, is to outperform the market by 50%.

So, if the market, as expected now by WSTS, will grow 5.1% next year, we expect to outperform this market.

I am convinced that, this year, we are doing better than the market on the product that we serve.

And of course, we are very, very committed to continue to do so next year.

Thank you very much, Carlo.

Thank you, Sandeep.

Next question?

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

Please go ahead, sir.

Yes, good afternoon.

Thanks for taking my question.

Actually, Carlo Bozotti, just wanted to bounce on your last point that you say ST is going to grow 3%, excluding ST-Ericsson for the full year.

So, I was just -- my question was, could you guide us maybe on your growth sequentially, excluding ST-Ericsson?

It feels as though you're guiding effectively flat.

Is that correct?

And I've got a follow up.

Thanks.

Listen, we have -- now, we have consolidated ST-Ericsson, it's already difficult to give one guidance.

It's even more difficult to give two guidances.

But, overall, and -- the expectation is to be pretty flat on both ST and ST-Ericsson in Q4.

That's -- this, again, is not a precise guidance.

But, now, the ST-Ericsson products are part of ST.

ST-Ericsson is not there any longer.

We want to be flat on our products.

I believe that being flat with our products is definitely better than the average that what we have seen in these days from our competitors.

And the fact that these -- flat in ST-Ericsson is a consequence of the strong demand that we have from certain customers on feature phones and low-end smartphones.

This is good from a cash point of view because we are generating cash, of course, from this business.

It is dilutive, significantly dilutive from a gross margin point of view.

But, moving into Q4, what we expect at this moment is to have some strength in products like automotives, automotive and MEMS, some weaknesses in other products, and to have overall a situation of being flat, both in ST and in ST-Ericsson.

Great.

That's great color.

And then my follow up would be on the digital convergence group and emerging group.

So, maybe starting with digital convergence, so you've highlighted some of the headwinds that you're facing in India, which are obviously temporary by nature.

But, when I look at the longer-term picture for digital convergence, that's a group that has been shrinking almost 50% over the last few years.

And the outlook is a bit tricky.

So, I was wondering, to what can you do to really turn this business around, I would say, in the next 12 months outside of what you've already highlighted, the cable gateway market, which proves to be very, very elusive?

And the second point is on imaging.

Can you explain what are the drivers for the very strong growth that you've shown in Q3 because you've talked about new customers, but clearly, we know three of your customers, HTC, Blackberry, and Nokia, none of which seems to be particularly doing well.

So, I'm just wondering, is it really a gaming console that is driving your uptake in Q3?

And how much of that is it really sustainable into next year?

Thanks very much.

Well, I will ask to Jean-Marc to comment.

And then I -- if Jean-Marc allows me, I will also comment on this because, of course, it's very, very important for us to turnaround DCG.

And we will turnaround DCG.

But, please, Jean-Marc.

Yes, thank you, Carlo.

So, (inaudible) on DCG, I think we have to split the group in two, so the ASIC and the set-top box.

So, first, let's speak about the ASIC.

So, our strategy in ASIC is quite simple.

So, it's to gain market share in complex ASIC for communication equipment.

And the second one is to enter into consumer high-volume ASIC.

So, thanks to the additional resources we have now from ST-Ericsson and thanks to FD-SOI technology, well, this growth, we will achieve it because, as mentioned by Carlo during his speak, we have won seven designs, and all in ASIC, so thanks to the FD-SOI.

And this additional business will start second half next year, most probably end of Q3 or Q4 and massively next -- the year after next, so in 2015.

So, in ASIC, okay, we are really confident to grow this business, both winning market share in complex ASIC for communication equipment infrastructure, but for high-volume consumer as well.

Now, let's move to the set-top box.

Set-top box, okay, if you remember well, our strategy is to remain number one out of US and to reenter in US docsys data cable gateway.

To remain number one out of US, our strategy is to protect our position when we address the market of, let's say, basic (inaudible) and interactive DVR.

And here, okay, the main driver is, of course.

So, now, we are in a product transition, moving from 55-nanometer to 40-nanometer and then in 28.

And the second main growth driver for the set-top box is really to win market share in connected box, connected client box, [entry] server, and then gateway.

And as told by Carlo during the speech, here, we have a very, very strong adoption from our Cannes family for connected client, our Monaco family for entry server.

And as a continuity, okay, we start to see a very good adoption on our future gateway.

Again, here, we expect to grow this product, starting end of this year.

And as mentioned, we have already major design win from a tier one operator and against a major competitor.

So, we are really confident with [DG] to grow, of course.

The next two quarters or three quarters, basically, we do not expect growth.

We will remain flat, except seasonal effect.

And we start to grow second half next year and massively in 2015.

Then coming back to imaging, imaging, well, of course, you mentioned the three customers.

But, we confirm that, okay, our imaging strategy is based on, let's say, three major product families, so the imaging sensor, the imaging signal processor, and the proximity sensor.

So, again, in imaging signal processor, so we have -- in Q3, we have growth with a major [brown] customer.

And you know that imaging signal processor is a strong growth driver and more and more in the future will request strong power at the lower power consumption.

And here again, the 28 FD-SOI will allow us to grow.

Imaging sensor, we are in a recovery for our technology.

So, we expect to gain market share as well, on top of the customers you mentioned, another customer.

And then proximity sensor, okay, this will be the key for the near future.

And here again, we strongly expect to win a major design within a major player.

Yes, we cannot make the name of the customers.

It is different market segments.

It is at least three different market segments.

One is consumer, really consumer products.

The second one, of course, is smartphones, but with a very, very strong ambition to be in the proximity sensor market.

And the third one is automotive.

Again, in the automotive, we have a good solution now.

We have won a major contract with a major automotive player.

So, it is a diversification strategy.

And the fact that we want to be in at least three different marketplaces with three different kinds of products, of course, the signal sensors, but also the DSP for imaging, and also the proximity sensor.

One word for DCG.

I am personally visiting a lot of operators, a lot of operators.

They are all major operators in the US and in Europe.

The two products, the family, the new family that we have launched at the IBC in Amsterdam are very good products.

One is more for clients.

The other one is more for servers.

We see a lot of traction.

We have a major win already.

Again, I cannot make the name.

But, it is a very, very prestigious operator in the world.

And we expect more.

So, the situation is difficult today for DCG.

However, we have the confidence thanks to the win on ASICs, and this is very much related to the FD-SOI technology, and thanks to the transition that we have anticipated on ARM products, thanks to these two important assets to turn it around and to reach a level of revenues that is what we deserve from the technology that we have in this business.

Brilliant.

Thanks very much.

Thank you.

Thank you, Didier.

Next question, please?

The next question is from Gareth Jenkins from UBS.

Please go ahead, sir.

Thank you.

Yes, a couple, if I could.

Just firstly, I wondered if you could talk about the autos business, where you're seeing the strength, and what the book to bill looks like within autos currently.

Yes, in the automotives business, speaking about the book to bill is sometimes a concept that is -- because most of the business, particularly with the major customers, is through [pool] systems.

So, there are [frame] orders.

And then the billing and the bookings from a financial point of view, they happen at the same time.

So, typically, it's close to one.

So, the indicator that for us is very important is the evolution of the backlog.

And the evolution of the backlog in the automotive is very strong, is very strong in Q4.

We have a strong backlog.

We expect to grow in Q4 in the automotive.

And this is broad range, is broad range, both from the product point of view, so it's microcontrollers and power products or smart power products and also infotainment products.

But, there's also broad range from a geographical point of view, so does include China, for instance, or our major customers in Europe, of course, very much centered in Germany and in US.

So, I think, in general, it's a good momentum in the automotive.

And as I said before, during the course of Q3, we have not seen a correction of -- in terms of demand.

And the backlog has continued to grow in Q4.

So, we expect to have a positive last quarter on automotive products.

That's great.

Thank you.

And just another follow up on MEMS.

I just wondered if you could give us a sense of the size of that business alone this year in terms of growth and also what's happening on pricing.

Obviously, we've seen some shifts in terms of market share at major handset vendors.

I just wondered if you could talk about the pricing environment, some of the standalone I guess older products, the standalone discrete accelerometers, etc.

Thank you.

No, overall, it's important drivers for us.

Of course, there are more competitors.

This is obvious.

I think, for us, what is important is to continue to innovate at the pace that we had during all of these years.

I think important drivers for us are all the combinations of motion sensors in one package or in one module.

This is one.

Another one is the gyroscope for image stabilization.

This is a completely new field.

It's very promising field.

Another area is environmental sensors.

Another area is the acoustic sensors.

So, we have now products in all of these.

And of course, we are entering customers.

And we are working with customers and expand our presence on these new products.

We also want to be in the accelerometer per se.

We may have lost one socket.

But, we never give up.

So, I will not be surprised that, one day, even on the single accelerometer, but apart this, I think that it is an important driver for the Company.

But, on the other hand, there are competitors.

And we do not dream to be single source on everything.

Therefore, must expand the customer base on non-smartphone products, which we are working diligently, particularly in automotive.

That is a very big market.

But, we also want to expand in terms of products.

And allow me to finish again with the fingertip.

This could be very good one because we believe we have a good technology here.

And we believe that we can extend this business with high-volume applications.

Thanks.

Thank you, Gareth.

Next question, please?

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

Please go ahead, sir.

Thanks.

Good afternoon.

Thank you.

I just had a question around the medium- to long-term targets again.

You've clearly indicated it's going to be a bit more challenging to achieve that 10% target.

But, your statement seems centered more around the slower revenue ramp, $2.25 billion quarterly revenue run rate.

I was just wondering if you can touch on the FX impact as well.

Your 10% target was based at an effective rate of $1.30.

We're 6% richer than that now for the year.

So, isn't it also going to take significantly more quarterly revenue in order to achieve 10%, or are you -- are there other things you can do on the cost side to try and mitigate the currency impact at the moment?

Yes, maybe I take the question, Andrew.

Carlo Ferro speaking.

You are right to point also on the exchange rate impact that, of course, is different from when the model has been presented.

However, again, at the end, this is something -- it's target that the Company aggressively pushed.

So, we intend at the end that we intended to achieve.

The current outlook of reaching the model in the mid of 2015 is based on $1.34 exchange rate, the one that we see.

I'll say that maybe a couple of figures in respect to this number is something that we can raise, manage, and digest in the execution and some further initiative and further actions.

Of course, not all could be valid for any kind of exchange rate.

So, at the end, an exchange rate at $1.40, we need to talk unfortunately again.

However, under the current visibility, the difference between the exchange rate when we prepared the communication in the last 10 days and the $1.37 of this morning is something that, in the six quarters, six, seven quarters of execution, we are sure we can (inaudible).

Okay.

Thank you, Carlo.

The guidance for the fourth quarter, I think we have given with an effective rate of $1.34.

Thank you, Andrew.

Next question, please?

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

Please go ahead.

Yes, good afternoon.

Carlo, just you mentioned you expect to gain market share this year.

And if we look at your guidance of flattish revenues in Q4 versus Q3, indeed, it's better than most of your peers.

But, if I look at your performance in Q3, especially in analog MEMS, even automotive and industrial, it has been much lower than most of your peers.

So, I just want to understand where you're (inaudible) gaining share because the gap between Q3 and Q4 doesn't seem that obvious for me.

And I have a follow up.

Yes, well, we have the numbers from WSTS through -- I think it's the end of August, right?

And through the end of August, we have -- and we are rigorously taking the number of WSTS.

Then we have another criteria in Q4.

We benchmark with our -- we have a selected number of competitors that we've benchmarked with.

It's 10 competitors.

And then, for these 10 competitors, we take the numbers from their release, from their results.

They're all listed companies.

So, the WSTS number through the end of August of this year is a decline in the market that we serve that, of course, does not include the modem and does not include the (inaudible) of the smartphones and does not include the DRAM and Flash memories.

But, this is obvious.

That is a decline of 3.4%.

This is through the month of August and have rigorously number coming from the WSTS.

We have grown in the first three quarters because we have the numbers for ST, of course, for the first three quarters of this year.

We have grown by 1.9% so far in the year.

And quarter over quarter, Q3 over Q3, we have grown 3.9%.

But, with the guidance that we have given, we expect quarter over quarter to also grow, is -- within the market is about 4% again.

And there is in all the information that we have, we have information coming from WSTS and what we have achieved in three quarters, and what we expect to do in Q4 is to grow in ST and with a market that clearly will not grow.

I think, if I take the WSTS numbers now for the year, and of course, this is a forecast, is more in the range of minus 2.3%.

Okay.

And kind of follow up, concerning the MEMS, I know you don't disclose the margin per subdivision.

But, there's a lot of concern among investors that -- division which wants to be -- used to be very profitable is now a little bit under pressure.

You mentioned price pressure at the end of Q2, some market share losses.

Plus, you're not the only one to have an 8-inch fab for MEMS anymore.

So, could you just give us an idea if, on the long run, the MEMS is a low teens margin, the mid-teens, the high teens, just to get the sense because that would be an interesting message for investors?

Yes, well, I think, again, we do not provide figures by product groups in terms of profitability.

And we do not provide figures for subfamilies.

But, the target that we have for sensor, power, and automotive is to stay between 10% and 15%.

And I think that the contribution that we expect from MEMS is on the average better than the average of sensor and power in automotive.

I think, as I said last time, our target for Q4 this year was to achieve 10% in sensor and power and automotive.

We expect an improvement in the sensor, power, and automotive, but due to lower-than-expected revenues -- we expect an improvement vis-a-vis Q3 but due to the lower-than-expected revenues, we will not be yet at 10% in Q4 this year.

But, in general, if we take the sensor and power, automotive with our goal to be systematically between 10% and 15%, well, the contribution of the MEMS families to this group is higher than the average.

Thank you.

Very useful.

Yes.

Thank you, Jerome.

Next question, please?

The next question is from Janardan Menon from Liberum Capital.

Please go ahead.

Hi.

Thanks for taking the question.

I just want to dig a little bit deeper into two of your divisions.

One is the industrial and power discretes division.

And the other is the wireless division.

In the wireless division, the revenues are flattish -- sorry, declined less than you expected in the quarter.

And you're saying it'll be flattish into the next quarter.

I was just wondering, what does is the residual mix in that division right now?

And what is the sort of bottom revenue that that can go to?

I understand that not all of that is modems.

And assuming that all the modem business goes away, what is the sort of low level, just from a point of trying to find out how much of a downside effect it can have on your next year's revenue growth.

Second question is on the industrial and power discretes.

Specifically on that, can you just give us an idea on how your order progression was through the quarter in terms of when did you see the weakness start?

Is it predominantly from the distribution channel in Asia, or is it also from major industrial OEMs around the world?

And is that segment still weakening, or have you seen any signs of stabilization there as yet?

Well, I think the part concerning power and discrete -- this is Carmelo Papa speaking.

Specifically, on your question about the orders, we saw some softening, middle of August and all of September.

And if you want to know continuation of the story, we don't see any major different direction right now.

So, it's a kind of stabilization in that direction, started in middle of August, I would say.

And since my business with distribution is a big portion of ST, I've been struck by this, let's say, new way of -- new behavior of distribution worldwide that order with very short-term lead time and almost stay back-to-back orders.

So, with excellent turns, they still do not order.

And this is the major reason why I've been impacted by this.

And it's mostly in Asia.

Yes, mostly in Asia, correct.

Yes.

Okay.

But, we -- just to make the point, yes, we see some stabilization.

Yes.

This is a fair statement.

You talk about stabilization.

I think we see some (inaudible).

But, we start growing again.

And what about the bigger industrial companies?

Is there any weakness from them as well, or -- ?

-- They are not behaving entire like distribution.

Everybody's cautious because it's a general environment.

But, we have also some good doings in some major industrial customers.

Got it.

And on the wireless question?

Yes, on wireless, maybe I take the question (inaudible).

At the end -- on August 2nd, as you know, at the end, wireless business has been split.

Ericsson took over the LTE, [thin modem], and multimodal modem.

And ST took over all the other legacy products.

At the end, these other legacy products substantially concentrate in two areas.

The (inaudible) what remains on the existing design win, which is particularly on a number of phones you're very familiar with at the [Korean] customer and the entry and the platform for entry (inaudible).

All the rest are, frankly, at the time of moving into ST remain somehow marginal.

There is still some [5730] modem, the [CGHSDA] modem.

But, these remain now with [ones for] customers.

So, it's quite marginal, and the bit of connectivity solution other than the global navigation satellite system that we sold to Intel.

So, at the end of the day, as you see from the existing product (inaudible) on legacy phones and a platform for entry in futures with no development of a new phone and with no participation to LTE platform as we expected at the end, these revenues will progressively phase out in the course of 2014.

The revenues for the third quarter you read on the press release were $135 million and that Carlo has already mentioned what we would expect for the fourth quarter is to remain at that level.

This is a bit higher than what we were previously expecting.

This also is coming with some continued price erosion, as you could expect on mature product, which quarter after quarter erodes margin on this product, so good for cash, bad for the gross margin.

So, there are -- we have two families here that is coming from ST-Ericsson that, for us, are very important for the future.

And one is the -- what we define as RF-SOI is -- this is a technology for RF products.

It's from ST-Ericsson.

And this is an area where we believe we will expand our business in future.

And another area, of course, is power management.

This is also technology that is coming back from ST-Ericsson.

I think we have already won new products, new sockets with important customers here, particularly, of course, for portable products.

We had our own power management activities for industrial applications.

What came back from ST-Ericsson is the technology, the technical -- the resources, the designers to develop power management products.

So, here, these are, of course -- now, one is managed by Carmelo in the power management activity.

And the other one is managed by Jean-Marc as part of his ASICs activities.

But, they are important technologies for us.

And here, we want to exist and develop new products and grow from what we got back from ST-Ericsson.

Got it.

But, everything in the $135 million right now is platforms and modems, which will effectively go to zero over the next five, six quarters.

Zero is probably -- it's too pessimistic.

Close to that or somewhere around there.

We'll see.

Okay.

Thank you very much.

Thank you, Janardan.

Next question, please?

Question is from Amit Harchandani from Citigroup.

Please go ahead.

Good afternoon, gentlemen.

Amit Harchandani from Citigroup.

Thanks for taking my question.

I had a question around your margin progression and the target that you've shifted out now to mid of 2015.

When I look at your Q3 operating margins, [SPA] being around 6%, and if I take out the effect of this sale, EPS was still I think minus 12%, if I calculate correctly.

So, clearly, you have a way to go in terms of improving profitability.

And given the comments around revenues for the DCG group as well, would it be fair to say that, at least when it comes to EPS, that will probably be more of a drag as you go towards the 10% profitability?

I'm just trying to get a sense of, how do we build a bridge going out towards mid-2015 in terms of how your profitability improves across the two segments.

Thank you.

Yes, absolutely.

So, I think, compared to what you see in Q3 and then Carlo, of course, complements because [he's here, is mostly] -- so, still, we have a very important part on expenses.

This is clear.

And this is -- in Q3, we improve our expenses compared to Q2 I think by about $50 million.

The reduction of expenses was about $50 million.

But, we still need to move on here.

In Q3, we do not have any grants, for instance.

This will be material when we will see.

In terms of mix, the mix of Q3 was poor, was a poor product mix.

We had ST-Ericsson at $135 million with a gross margin that was pretty low.

And in general, we did not grow on other products where we wanted to grow.

And therefore, the mix was pretty poor.

So, this, as I said before, is an important driver for us.

And finally, the realization from our -- the effort that we had in manufacturing to close the two 6-inch fabs and to ramp up the two 8-inch this year is also a very important program.

Overall, the -- of course, as we already said in the past, the model will not be balanced.

But, we'll have a significantly higher profitability from what we see.

And this is, of course, in the sensing, power, and automotive.

This is closer to the 15% in our model.

And we have the sensing, power, and automotive that -- with the new ASIC programs that are very material, particularly in digital consumer applications, and with the new products from the set-top box, continuous growing of microcontrollers and the diversification in imaging, this will get closer to 5%.

So, this is for you to model.

And so, the initiatives are still on expenses, on manufacturing, and very importantly on product mix.

But, of course, growth is fundamental and the evolution of the top line.

And the indication that we can give today in terms of the two major segments of the Company is closer to 15% for sensing, power, and automotive and a slight (inaudible) 5% for the embedded processing solutions.

That's pretty helpful color, Carlo.

And as a quick follow up, maybe, do you see -- you've talked about stress -- you've stressed upon continuing upon your current initiatives.

But, do you maybe see a potential maybe to do, say, an M&A or any other activity that would help you shore up or maybe accelerate a recovery or improve your product portfolio on the EPS side and help you become more competitive?

Yes, no, we do not want to -- at this point, to play on or to count on any non-organic initiatives.

I believe, of course, that there are areas where we have stronger interest to look at and how can we say to be vigilant and address opportunities if they may come.

But, this is certainly putting forth what we already have and not to expand at all, just to be very, very clear here.

So, it's to -- if needed, it's to reinforce.

And if I have to select areas is -- I would say is more in the sensing, power and rather than in the digital.

And this is, however, as I said, something that is not on the table is something that we do not assume as an ingredient in reaching our profitability targets.

That's helpful.

Thank you.

Thank you, Amit.

Next question, please?

The next question is from Bernd Laux from Kepler Cheuvreux.

Please go ahead.

Good afternoon, gentlemen.

And thanks for taking my question.

I would like to come back to one of the replies you made earlier.

You mentioned that, should the product mix not improve the way you want and the foreign exchange drag persist, you could envisage additional action.

Can you be more specific on what you have in mind in that respect?

And the second question is regarding the MEMS business.

You have not mentioned the pico projector in your comments before.

Can you talk about the customers' reception of that product and your ambitions for the pico projector?

Thank you.

Well, I think Carlo will take on the first part.

And I will take on the pico projector.

Yes, again, a clarification on the (inaudible) were there at the end, we have a clear what I defined as structured plan to reach the 10% of profitability mid-2015.

We have refreshed this plan recently with a reference exchange rate that was in the range of $1.34, $1.35 when we have developed the plan.

I see, frankly, in the seven quarters of execution not particular issue should the exchange rate be at the today level of $1.377.

What I said is that, of course, if the exchange rate continues to deteriorate and structurally deteriorate, at the end, this may call for a further initiative in order to allow the Company to maintain the breakeven point as currently envisaged and the appropriate level of sales to generate the about 10% of target profitability.

Thank you.

On the pico projector, I -- today, we have an activity that is very much centered with some leading Asian customers that I cannot mention.

I -- of course, is for portable solutions.

The -- this is kind of a three-party activity because, here, there is, of course, a complex module to deliver the overall solutions, including lasers, as you know.

And there is our own direct contributions that is the micro mirrors for reflecting the light.

And there's also an ASIC, digital ASIC, to control the solution itself.

So, we are working with some major customers in Asia in cooperation with another company that is -- ultimately will provide the complete system to address this application.

I would also like to mention at this point that, as part of our MEMS activity close to our MEMS activity, we see interesting developments in the area of our micro mirror technology.

And this is a new area that we are addressing, is another example of what we can do with micro machinery.

And this is -- it is not per se the pico projector, but these new applications where we can use our micro mirror technology.

Thank you, Bernd.

We'll move onto the next question.

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

Please go ahead.

Hi, good afternoon.

Could you talk a little bit about the product printing that could be -- that could take place as a result of the fab consolidation that is ongoing, any product that could be impacted outside of standard product and anyway we could quantify the impact, the potential impact?

And also how long will it take for the process to be completed?

Well, we want to -- as I said before, the program that we have in [AMK9] is the one that is more importantly driving our product pruning activity.

And this is something that has started in July with the decision to go.

And we would like to land on a situation where we do not have anything else in AMK9 with the exception of our [DEFMOS] activity that we stay there.

That is a very specific technology for a very specific customer.

So, this is a big fab that we are closing.

And this is an area where we have several products and several technologies for a number of groups.

And I think it is not really at the level of the product family.

What we are targeting here is to make product pruning at the level of products.

And this, of course, is an action that we have in place in the Company.

There are groups that are more involved than others, but is an important initiative that is running in parallel with the manufacturing activity, so is not a product family per se, but is products that are part of certain families where, because we are closing the fab and because the margin structure is considered not adequate, we do not expect to move into 8-inch, for instance.

And therefore, as a consequence, they will be pruned.

This is an activity now.

Of course, we have a quantification of what we expect from this program.

But, I would prefer not to provide the quantification.

It's an important element in shutting down these fabs, is an important ingredient in this initiative.

And for me, it's important to underline that it's not product families, is not -- but is product by product.

Of course, there are many, many products belonging to various families.

And it's a pretty important program that we have.

Okay.

Thank you.

And then a quick follow up on the CapEx outlook.

You mentioned on the call well below 10% of revenues.

If we assume revenue growing in the low to mid-single digits over the next couple of years, where will that take us in terms of CapEx as a percent of revenue?

And also, where are you in terms of your fab-light strategy?

Well, I -- your question to -- well, we affirm what we already said in the call at the end that, this year, we have delivered well below the 10%.

Next year, we expect to deliver CapEx below the 10%.

This would be, of course, modular that progressively, depending on the evolution of demand.

Then, frankly, going forward, what is for us important is our model, our strategy, which is comprised of mastering technology and manufacturing advances in [most] technology [of course] combined with a significant outsourcing from foundries as a combination of the two.

As we close the third quarter, the percentage of silicon from foundry is the 10% overall for the overall company.

The overall model for the Company is more around the 20%.

So, in the model to support revenues growth going forward in the next three, four years, increasing sourcing from foundry is still an important ingredient together with updating technology and moderately growing capacity on [internal FX].

Thank you, Tristan.

We'll take just a couple more questions, please, since we're running a little long.

That last question for today is from [Mr.

Brad Simpson] from [Merit Research].

Please go ahead, sir.

Yes, thanks very much.

I had a couple of questions on nano 17.

Maybe first for Carlo Ferro, can you talk a bit about how you're booking the cash from the grant here?

Is it evenly split over the quarters?

And is it booked against COGS, or how does it work?

And for Carlo Bozotti, can you lay out what specific commitment ST's making to raise 12-inch leading-edge manufacturing capacity at Crolles as part of this five-year plan?

Thank you.

I can start, Carlo, with some guidance on the accounting for grant at the end is for now 2017 but is the same criteria we have always adopted for any R&D grants for the Company.

First of all, we do not start to recognize grants in the P&L until the contract is finally formalized on all these steps, which irrespective of having already started the activities, so in 2013, in the current quarter, at the end, we run, of course, the activities that are part of this program, encompassing the period 2013/2017.

However, as the contract is assigned with the French government, but spending clearance at the European Union, we will start to recognize it after this clearance is assigned.

Once recognized, the benefit goes to the line other income and expenses against R&D spending that obviously is underlying R&D.

And what we do normally recognize is a sort of (inaudible) progression program by program on -- based on the execution of the program.

In general, for modeling, I'll say that, if you divided the total amount by the number of the periods, the amount per quarter is in the -- in the back is substantially correct.

This is about the P&L impact.

Of course, the cash impact is different.

The cash impact is based upon filing, reporting incurred expenses and progression of the programs, which occurs over the life of the period.

And normally, in respect of cash, we do with this kind of contract collect within a six- to 12-month period [from standing].

Yes, and as far as the second part of the question, the nano 2017 is an R&D program.

So, there is a commitment from ST to develop certain products and certain technologies in the area of Crolles and Grenoble, technology in Crolles, of course, and products in Grenoble.

This is our agreement.

The agreement does not relate at all to any manufacturing activity.

And in fact, the grant's in the line other income expenses and is compensating the R&D cost.

So, this is a reduction of our R&D cost.

So, this is our -- this is the contract.

This is our commitment.

And of course, there are important milestones from an R&D point of view and is -- and also from the product development point of view, but again, is an initiative that is fully centered on R&D.

And maybe just a follow up on FD-SOI since that's linked to the nano 17 five-year plan.

Now that you no longer have ST-Ericsson in the portfolio, and FD-SOI was -- is largely benefiting portable products, low-power products, what specific products inside ST really takes advantage of the benefits of FD-SOI?

And ultimately, how big do you think FD-SOI's going to be for ST in the years to come?

(inaudible).

So, for the short term, this is clear that the product will benefit from FD-SOI, mainly ASIC.

So, that's the reason why the seven design wins we have in the field of ASIC, both for complex ASIC, for communication equipment infrastructure because, really, the customers, they would like to optimize the performance versus the power consumption.

With big data booming, energy will become crucial.

So, to deliver devices which are able to perform well but consume less is a key differentiating factor.

But, of course, in digital consumer ASIC, big volume definitely to consume less, to optimize the battery life is a key differentiating factor as well.

Then in the near future, if you remember well, we have always said that FD-SOI is a technology which will be simpler than the complex [3D] one.

And of course, to address the future 40-nanometer mode for all consumer applications, to deliver this technology which will have less cost of ownership is a key competitive advantage versus the 3D one.

So, this is basically, okay, (inaudible).

So, so far, the seven products are custom products.

The first product from ST will be our (inaudible).

That is expected to be available in the second quarter in terms of sampling and is our flagship for home gateway and set-top box.

And this is the first product that not only will be on ARM but will be on the FD-SOI, so really three applications, so the portable consumer ASICs, the communication infrastructure ASICs, and our own, of course, home gateway products starting from the (inaudible).

So, just to complete, okay, our [both] answer, in term of perspective, so, in terms of the next generation of products, we will take benefit of the FD-SOI is imaging signal processor because, okay, with more and more sensors, you will have to process more data.

And here, again, the ratio of performance versus power consumption is key for ESP.

And then in a second step, when you will see the booming of connected device, connected device, again, will request to deliver some [damage], but at a very, very low power consumption.

And you know that one of the key feature of the FD-SOI is a capability to operate at very low operating voltage with very, very low power consumption but delivering in (inaudible) to connect any object you would like to connect in the famous Internet of things.

Thank you, Brad.

I think, at this time, we'll go ahead and close the call.

We appreciate everyone's participation.

If you have any follow-up calls, feel free to call the Investor Relations Department.

Thank you very much.

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