意法半導體 (STM) 2013 Q4 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon.

Welcome to the ST Microelectronics fourth-quarter and year-end 2013 earnings results conference call and live webcast.

I am Alice, the Chorus Call operator.

(Operator Instructions).

The conference is being recorded.

(Operator Instructions).

At this time, it is my pleasure to hand over to Mr. Tait Sorensen, Group Vice President, Investor Relations.

Please go ahead, sir.

Thank you.

And thank you for joining our fourth-quarter and full-year 2013 conference call.

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

Joining Carlo on the call today are several Executive Vice Presidents: Carlo Ferro, Chief Financial Officer and Executive Vice President of Finance, Legal, Infrastructure, and Services; Georges Penalver, Chief Strategy Officer, also overseeing Communication, Human Resources, and Quality; Jean-Marc Chery, our General Manager of Embedded Processing Solutions; and Carmelo Papa, General Manager of Industrial and Power Discrete 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 information that involves 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 release last night and also in ST's most recent regulatory filings for a full description of these risk factors.

Also, as a reminder, we hosted a presentation in Paris this morning.

The presentation is available on our website, as will be the webcast for the full event.

So with that as a reminder, please limit yourself to one question and a brief follow-up.

And I would now like to turn the call over to Carlo Bozotti, President and Chief Executive Officer.

Thank you, Tait.

First of all, I would like to thank everyone for joining today's call and to those of you who also joined us earlier today at our year-end earnings presentation here in Paris.

And turning first to our fourth-quarter results, revenue and the gross margin were well in line with the outlook we shared with you entering the quarter.

In fact, all the key metrics were well in line with our expectations, including a positive operating income before impairment and restructuring charges of $18 million, and the substantial positive free cash flow of about $90 million in the fourth quarter.

Moving to the full year 2013, it was a year of execution.

We made solid progress in executing the strategy that we announced in December 2012.

And, of course, we still have much to accomplish, but let me share a few highlights of the year.

First, with respect to ST-Ericsson, we accomplished our major goals.

We exited ST-Ericsson as planned from a timing perspective, with the split-up of the joint venture completed in August.

From a cost perspective, we managed the ST-Ericsson exit at lower cost than our original and revised-down estimate.

Currently we estimate our remaining wind-down cost to be about $30 million to $40 million.

This is the remaining wind-down cost.

As a result of the split-up, we added some of their competencies and strengthened our product development teams across every product group.

The transfer of resources is starting to deliver a wave of new products that we will discuss more in detail shortly.

Second, looking at the year in total -- still excluding ST-Ericsson -- grew 3.2%, while the market served actually declined by about 1.7%, which is good news, although we must also say that the overall market decline was worse than we were expecting, based on industry analysts.

This did slow the progress at our top line and gross margin that we had been planning.

Third, our operating expenses have come down substantially along the year.

Exiting 2013 we have successfully lowered the breakeven point of the Company by another $400 million compared to the fourth quarter of 2012, with breakeven point in the range of $2 billion of revenues per quarter now.

This is thanks to the significantly lower operating expenses, mainly due to the exit from ST-Ericsson.

The improvement was progressive as we generated non-GAAP profit of $18 million in the fourth quarter of 2013 compared to negative $66 million and negative $100 million, of course, negative losses in the fourth quarter of 2012 and in the first quarter of 2013, respectively.

This represents a significant improvement when considering the material reduction of about $640 million in revenue contribution from the former ST-Ericsson products in 2013.

In addition, we entered our target quarterly net operating expense model range of $600 million to $650 million in the fourth quarter of 2013 -- so one quarter ahead of our plan.

I can share that we are now targeting the lower end of this range to adjust to lower-than-expected revenues following the softening of our market.

Also, we signed a key frame agreement with the French government to support our research and development work for CMOS-derivative technologies called the Nano2017 program.

We anticipate the significant R&D grants to become effective during the first quarter of 2014, pending European Union clearance.

As a reminder, we are [indegrents] our part of our net operating expense model range target.

Fourth, in 2013 we initiated gradual structural changes to our manufacturing footprint, which in combination with the other execution initiatives are designed to improve progressively our gross margin to a target range of 36% to 38%.

And I will spend more time on this later on.

As we had signaled in October, we slowed capital expenditures in the fourth quarter, bringing us to a total investment level of $531 million for 2013.

This represents a capital investment to sales ratio of 6.6%.

ST has maintained a strong cash position and solid capital structure despite the full figures here in 2013.

Our net cash balance was $741 million exiting the year, and thus the distribution of $0.40 per share or $346 million in dividends to shareholders.

At our Extraordinary Meeting of Shareholders in December, a dividend of $0.10 per share to be paid in the first quarter 2014 was approved.

While the dividend is subject to the decision of the Supervisory Board of ST on a semi-annual resolution, management considers the dividend as an important vehicle in returning wealth to shareholders.

Turning to our two product segments, in 2013 the sensors and power and automotive revenues increased 2.3% year over year, led by automotive and industrial and power discrete.

Operating margin decreased to 5.7% compared to 8.8% in 2012, principally due to increase R&D efforts.

Moving to our embedded processing solutions segment, it is clear we have a steep curve ahead of us to an acceptable financial performance level, as revenues have decreased 14.6% compared to 2012.

As I mentioned, it has been a difficult challenge to replace the revenues lost due to the wind-down of ST-Ericsson.

However, we started to show some initial positive signs exiting the year.

Excluding ST-Ericsson legacy products, revenues for EPS increased 3.4% year over year, mainly thanks to the growth in microcontrollers.

While DCG sales are lower, we see the potential for a significant turnaround starting in the second half of 2014, and with substantial growth in revenues by 2015, as we'll discuss later in my remarks.

From an operating loss perspective, we have brought this down significantly to a negative 12.2% from negative 23.1% in 2012.

And now let's turn to a discussion of our products and key revenue drivers for 2014 and 2015 as we move quarter to quarter towards our operating performance objectives, beginning first with embedded processing solutions and our digital consumer group.

2013 has been a critical year for our set-top box and home gateway business.

Our revenues dropped much more than expected due to legacy products phasing out faster than expected and weakness in certain markets.

During the year we put in place the foundations for a turnaround, and we are encouraged by the important design wins, including the size and dimension of the project and traction with worldwide operators.

The feedback that we received from customers at the Consumer Electronics Show a couple of weeks ago -- this feedback was very positive and supportive of our growth goals.

First, our early investment in ARM is now paying off, allowing us to create industry-leading products, such as our new client and server portfolio for ultra-high definition.

We have seen a strong traction and early customer adoption for this family and multiple design wins, of which -- five in Q4 alone, including the US cable market.

Second, we advanced our plans for the US market with DOCSIS 3.0 certification for cable data gateway and interactive set-top box drivers.

And third, our unique FD-SOI technology is well on the way to become a significant revenue generator for 2015, with a total of 15 active designs, including multiple design wins for custom chips for networking and consumer.

These achievements give us a solid basis for the turnaround of this business, which targets to double revenues by Q4 2015 in two waves.

The first wave will tie volume deployment of our 40-nanometer chips for broadcast set-top box and further market penetration of our custom chips for networking; and then the second half of 2014, with the new client and server and ARM gateway portfolio and the start of production for our FD-SOI design wins.

In imaging we are working hard to diversify our portfolio.

This year we will deploy a new generation of image processors and the ramp-up of production of our proximity sensors.

We also expect to continue our stronger momentum in silicon photonics while generating business with our RF-SOI technology for cellular and Wi-Fi systems.

In microcontrollers our 32-bit products, including general-purpose and secure MCUs, almost doubled in 2013 compared to 2012 to over $600 million in sales.

And we will continue to push our successful expansion strategy by broadening the STM 32 microcontroller family for both cost-effective, higher-performance and very low-power applications.

In secure microcontrollers we will ramp our products for banking in Asia and introduce a new contactless chip with embedded memory for the ID and banking markets.

Now moving to MEMS and sensors, there is a major diversification effort in place toward applications beyond mobile.

This year we will continue to grow our business in high-performance products, ramp the production of our new smart sensor family for mobile and wearable devices, and start production of high-performance touchscreen controllers with hovering function.

Moving now to power and smart power management products, this year we expect significant growth to be supported by the overall macroeconomic improvement, in particular in industrial and housing.

We will benefit from the investment made during 2013 with the launch of promising new power management products, including an expansion to the server market, thanks to additional competencies we took on board from ST-Ericsson.

We will also ramp up production of our design wins in smartphones and tablets.

Last but not least: our automotive business that has contributed strongly to growth in 2013, with solid performance across all applications, thanks to the continuously increasing semiconductor content in cars.

Looking to this year, we see two main revenue growth drivers for automotive.

First, our ability to support the development of three automotive systems will enable us to reach a broader customer base.

And second, we expect to continue to gain market share in 32-bit automotive-grade microcontrollers with the doubling of our revenues.

We will also ramp up production of products in leading-edge technologies and will continue to focus on higher-margin products, such as those for infotainment, active safety, and positioning.

Now I would like to move to our 2014 expectations and our specific outlook for the first quarter.

We believe 2014 will be a year of market expansion based upon the various economic and industry data.

Currently WSTS anticipates our SAM, the market that we serve, to grow by 4.2% in 2014.

We are encouraged by our product leadership in sense, power, and automotive and embedded processing solutions; and we expect to capture opportunities that will enable us to grow faster than our served market from our product portfolio as well as from our initiatives to expand our customer base and sales channels.

In the first quarter we expect overall revenues to increase sequentially by about 9.5% plus or minus 3.5%.

First quarter revenues reflect, on top of seasonality, a substantial decrease of ST-Ericsson legacy products in the order of 50% -- in fact, more than 50% compared to its sales of $133 million in the fourth quarter.

Based upon this revenue range we expect the gross margin to be about 32.4%, plus or minus 2 percentage points, impacted by suboptimal loading of the fabs.

Finally, let me share how we see our progress towards our target operating model goals advancing during 2014.

First, we have already reached our quarterly net operating expense target range of $600 million to $650 million one quarter earlier.

Net operating expenses in the fourth quarter were $622 million net of the $28 million revenue grant.

We are now targeting the lower end of our range.

Second, we expect to see continued solid performance across a number of product families all along the year.

We can confirm our long-term growth will be driven by the five growth drivers of microcontrollers, MEMS and sensors, automotive, digital consumer, and ASICs and smart power.

For example, we expect two waves of new products to drive doubling of DCG revenues from Q4 2013 to Q4 2015.

That revenue ramp will start to show traction in the second half of 2014.

Third, gross margin is currently at 32.9%, so we need about 4 points to reach our financial model.

This increase is targeted to come from, first, the phase-out of the former ST-Ericsson products.

This will contribute over 1 point, with the revenues to be replaced by novelty products in EPS and SP&A; the ongoing manufacturing initiatives for another point, another percentage point; the product pruning associated with the lower capacity in mature technologies, about 1 to 1.5 point; and finally, the technology evolution is better loading in 8 inches and 12 inches; and assembly, for another couple of points.

Of course, we will need to manage the price erosion, net of product mix innovation, which is typical of the semiconductor industry.

While a number of performance parameters, like the performance of the semiconductor industry and currency exchange, are outside of our control, we expect to achieve our operating margin target in the year 2015 -- which is, if we see changes in the environment or traction of products, we are prepared to take a combination of actions to reach the track to timely deliver our financial objectives.

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

Thank you.

(Operator Instructions) Sandeep Deshpande, JPMorgan.

Carlo, could I ask you about the gross margin guidance for the first quarter?

Despite a big revenue drop into the first quarter, the gross margin doesn't seem to be impacted as much.

So are we already seeing a positive impact on the gross margin in Q1 from the manufacturing initiatives or any of the other three other initiatives Carlo has already just talked about?

And secondly, my question is on the digital conversion group.

You are talking about a doubling of revenues in the digital conversion group from the fourth quarter of 2013 level.

This revenue was doubled, the current level, in Q1 of 2011.

This business has been a problem business for you for a very long time, part of which you have solved by getting out of TV, et cetera.

But why is it that you continue to support this business despite the financial data on its continuing to be extremely poor?

I would assume that if you remove this business from your overall mix, your overall EBIT in the last reported quarter would be substantially better than what you actually reported to the market.

Thanks.

I take first the question on the gross margin evolution.

Indeed, at the end, that is not yet a significant impact of the manufacturing initiatives that are started and on track.

This is about driving a progression more through the 2014 year.

And this, as you said, this about the conversion from 6- to 8-inch in Singapore and the progressive -- the phase-out of the plant in [Longanda], which will be completed at the end of the year, I think, Q4.

So when looking at the gross margin progression from the 32.9% of prior quarter to the midpoint of the 32.4%, the guidance for the current forecast, with the usual 2 points plus or minus, at the end of the year there is a targeted ingredient is about some of the effect of the reduction of the weight of former ST-Ericsson legacy product on the total sales of the Company.

And this has the mix impact.

And then there are two important detractors.

One is the exchange rate, and we have a few tenths of points, basis points of gross margin loss on the euro/dollar exchange rate and now assumed average effective of $1.35 for Q1.

And the other one in the most important is about the efficiency.

Again, through the inventory cycle we sell in Q1 what has been manufacturing in Q4, and we sold in Q4 what has been manufactured in Q3.

And as we have commented three months ago, the manufacturing performances have been very efficient in the third quarter, also taking advantage of a more -- better loading.

And as we had anticipated three months ago, the loading in the fourth quarter in the fab has been suboptimal.

And this also resulted in less efficiencies that impacted the margin for this quarter.

So as far as DCG is concerned, I think -- I believe this is a business that, with all the effort that we have done during the past -- in fact, indeed, the last two years, to move and advance into ARM, and to move on what I believe is today a close and good technology with the endorsement, the firm endorsement, of major leaders, major industry leaders in especially infrastructure and in the consumer is our FD-SOI, of course.

I think with the effort that we have done in the last three years, I believe this business can contribute now very significantly to our growth.

Clearly last year the deterioration on the legacy products was faster than what we expected.

However, the class of the products that we have developed in the last couple of years and the products that we have introduced is also clearly contributing to higher gross margin for the Company in the high-end products.

And mainly, these new sockets that we have won in the last two quarters is really a combination of high ASP products, so high-margin products, but combined with high volume.

So I think we have done a significant investment here.

Clearly we did not expect the deterioration of the legacy business so rapidly, but this is really a new class of products, both in terms of ASICs and in terms of platform for the home gateway.

And these are products that will be significantly accretive in terms of gross margin for the Company.

And we believe today this is a good business to push for us.

And we are committed to make sure that this business is contributing to significantly to the gross margin and to the financial performance of the Company.

It was a major effort.

It was a big change, because we moved from a position of lower-end products more for the Asian market to products that are now clearly intended for the most prestigious operators in the world, including in the US and important industrial leaders in consumer.

But they are very complex products, and they are high-value products.

So we believe -- I believe this is a good business to push after the effort that we have done during the last two years and move on from here; and, of course, growing rapidly.

Francois Meunier, Morgan Stanley.

Actually, the first one would be around the MEMS and analog, because I understand there was an inventory -- type of inventory correction in Q4.

But if you look at Q3 and Q4, Q3 and Q4 together were down year on year.

So I was just wondering: is there anything else going on in MEMS?

Who is taking market share?

Is it one guy taking market share, or several people taking market share?

And then I've got a follow-up for Carlo.

Thank you.

Well, I think overall it is a combination of a few things.

Clearly there is more competition in MEMS, and I will not comment on the competition.

That is a more competitive business, and we have been working very, very hard to make sure that we have a wider portfolio that we can offer to our customers, including environmental MEMS and acoustic MEMS.

This is just one reason.

Of course, the competition is also -- call it some almost price pressure.

There is another reason here that maybe is less known and more specific to us.

In AMS we did -- we have MEMS and we have sensors, but we also have a product family that is in analog.

And we have decided, in fact, we have started as part of our manufacturing repositioning and the restructuring to prune some of the more mature.

And in AMS we started to prune in Q3, and we will continue, also.

Of course, it is not only for AMS.

I think in AMS it is more visible -- for instance, as we discussed this morning in Paris, we decided to prune the family of the old, the mature Standard Logic devices.

So this has also an impact.

So I think overall, clearly, is more competition.

It is also the mix of the products of our customers, as we have discussed in the past.

But there's also the pruning.

The pruning is -- for the size of what we have in AMS is a material correction.

Now Carlo, if I may, maybe a more personal question.

If you had a dream or a vision for STMicro for 2020 ahead of starting your next five-year mandate, what would your dream be?

I don't have any dreams for 2020.

I have a dream for 2015 that we want to make sure is becoming reality.

And this is for us to be at 10% growth by mid-2015.

I think, of course, in the Company we had to absorb a major swing in wireless.

This is, I would say, a brutal swing.

And I believe -- of course, this is specific to us, but I believe that it was really unfortunate for us, is that this major swing is at the same time as one of the most difficult recessions in the industry and macroeconomic challenges.

So we had the combination of the two things.

I think we that are now getting out.

I have to say that the fourth quarter for me is the first quarter of the tough ST-Ericsson.

And, of course, I am encouraged to see that there is a significant progress in the attributable operating income moving from Q4 2012 to Q4 2013.

This is in the range of $85 million improvement.

And I think that -- what I want to stress is that my determination, that is, of course, the determination of the management team in ST, to get into the financial model that we had described one year ago by mid next year.

So this is my dream.

And I clearly believe it is more than a dream.

I think we have the ingredients to make this happen.

But, of course, takes a lot of determination.

We have done many things last year; we need to do many more things this year.

But I believe we are on the right trajectory.

Tristan Gerra, Robert W. Baird.

On the manufacturing front you have talked about the conversion to 8-inch in Singapore and the phase-out of your plant.

Could you elaborate a little bit on your fab-light strategy: where we are today, when you think you can achieve that 80%/20% target?

And what does it take for you to reach that target?

I'm assuming that the weak environment has postponed that plan, because you need to basically load your fabs first.

But if you could elaborate on that.

Thank you.

I will take the question, Tristan.

Of course, first, in terms of purchasing from foundries, I guess, is your question is domestic, about our asset-light strategy; or whether another important metric even more important for us is the CapEx to sales ratio -- is at the end of the day, we have a model of asset-light and flexible integrated device manufacturer which aims for flexibility on one side and to mitigate the capital intensity of the business model.

DGR -- in last year we spent 6.6% of revenues in capital expenditure.

And this year, as we said this morning, we plan in dollar to maintain the same amount of the prior year.

After that -- in 2012 the CapEx to sales ratio was 5.6%.

So you see that that we have three years in the row with CapEx to sales so that whatever is your model for revenues is substantially below the 10% model.

While talking about the sourcing in foundry, the model remains unchanged.

The target is a 20% average sourcing from foundry.

And about two-thirds when moving on the leading-edge CMOS technologies.

But whether -- of course, the percentage at the end depends on demand.

And we do prioritize, obviously, the loading of our internal fab.

So as you could expect, and to go to the number you have asked at the end, the percentage of a purchase from foundries in the fourth quarter 2013 have been in rounded average 9%, and in advance of CMOS, over 30%.

Didier Scemama, Merrill Lynch.

I have got two quick ones -- and, well, and three quick ones, so I will be quick.

First, on the automotive side, very, very strong performance in Q4 on the year-over-year growth rate, which is, based on my calculation, outpacing the global car production by about 17 points.

So I'm just wondering how much of that is, in your mind, share gains, increasing content, and realistically restocking in the channel; and how much of that continues into 2014?

The second part, going back to, I guess, the thing that got everybody excited today, which is the doubling of revenues in the stock convergence: if you look at it at a high level, your customers in this segment are essentially losing subscribers aggressively to over-the-top solution.

So I'm just wondering why they are going to pay a very high price for a very expensive yet extraordinary solution for cable gateways when the EBITDA margins are under pressure.

And then the third point is on the gross margin.

If I do the math correctly, to get to about 10% operating margin, as you highlighted, Carlo, you are looking at maybe 37.5% gross margin, which is a level you haven't done for a long, long time.

And I understand, obviously, a lot of that is due to the manufacturing; obviously, delivering; and the pruning of the buffer, et cetera.

But the reality is a lot of that will have to be given up to customers in price pressure.

I'm just wondering if you could maybe elaborate on these three points, just to understand what this going to get the gross margin to that sort of level?

Thank you.

Well, maybe I start from automotive, and then we come to the other points.

So automotive: we acknowledge that -- we have evidence overall that we have gained market share.

Now, I think, we don't have the numbers from WSTS -- 2 at the end of November.

And based on the number coming from WSTS, the markets that we serve declined by 1 percentage.

And we grew, of course, without ST-Ericsson that is phasing out, 3.2%.

And most of our product groups, with the exception of DCG, contributed to the market share gain.

The automotive gain is, I believe, the second in the ranking.

I believe that --

50, 60 basis points.

I think is in the range of 50, 60 basis points.

The second, microcontrollers, where we gained 2 percentage points of market share.

And the assembly group -- that, as I said, did not contribute to the market share gain in DCG.

I do not see restocking in the auto market at all.

We see a demand that is pretty strong.

We have built up our budget for next year -- sorry, for this year -- based on certain assumptions of car registrations.

But, of course, I cannot disclose this number.

But this is a number that we have shared with our major customers.

Very importantly, the content is continuously increasing.

We do not see accumulation of stock on the other end.

We see a good continuation of the booking trend with the strong demand across the automotive products and across the board.

Now, if we move to the DCG part, clearly DCG is two blocks.

We have one block that is set-top box and the 100 ray, and the other block is ASICs for the -- ASIC needs, though it's really not contributing in terms of software, and the architecture design is done by our customers.

And we provide, of course, all the IP that are required; the design capabilities; the integration capabilities; and, of course, the technology.

Now, if I look at this, I think we see that our mature products -- they are targeting, clearly, a lower-end market and more and more really intended for Asian, for Asian customers.

And there is a big opportunity for us in the United States.

I understand your point, of course, on the trend of the market, but I believe this is a market that is very fragmented.

It is a market where there are -- and I believe, we believe there will be several players.

And looking at the evolution of these products, we believe that there is also a good market in terms of margin opportunities for us.

So I think this is an area where it will remain, for sure, despite the pervasion of other techniques, it will remain a very good market for a long time, both in the United States and Europe.

Now, in Italy, if you look at the FD-SOI, this is a moderation of ASICs that values the technology.

Today I can say that we went from a phase where we were talking about opportunities into a phase where we are now talking about design win and execution of new product development for real products that we lead to the market in 2015.

This is important for us, because it is high-volume products, but it is also high-ASP products.

They are all prestigious customers, and today we have 15 custom products on the way.

And we have more opportunities.

So this is the other part of DCG.

So I believe there is a very important market to address there.

And I think it is up to us to address this market aggressively and rapidly, of course.

And for the gross margin, I think Carlo it will take it.

Yes, certainly, Carlo.

Our model, at the end, as already said several times, assumes a gross margin in the range of 36% to 38%.

So starting [a parameter to 2.9] of prior quarter, we need to add 4 basis points -- 4 points there.

And I believe this has been already somehow presented by Carlo in his introduction, but let me repeat on what are the four key drivers we are planning and that we are intensively working on to move the gross margin up.

The first one is the result of the former ST-Ericsson legacy products.

When replacing this level of revenues with a novelty product in EPS and SP&A, even thinking only of the reference of the average margin of the rest of the ST portfolio, you may make the math easily contribute over 1 point of improvement in the gross margin.

The second one, the manufacturing initiatives, restructuring initiatives -- and these, as I said in our prior conversation, target to bring about another point of improvement in the gross margin.

These initiatives also translate into lower capacity in both 6-inch and in low-end technology SIM.

This lower capacity at the end has also -- how say -- higher flexibility in translating product, in this technology, in particular.

For instance, the leaner discrete from low-margin product into either becoming a high-margin product if we can leverage on price or not be any longer part of our product offering as far as assuming initiative.

And this is a big opportunity.

This is an opportunity whose impact is estimated for about 1 to 1.5 points.

The fourth one is, I would say, the exiting from the current situation of customer loading of the fab, which, by the way, at the end will play in at least a half a point of negative impact to the gross margin each quarter.

But moreover, on in improving overall the efficiencies in 8-inch, in 12-inch, in that family, I would say a tighter capital expenditure that we have noted in 2013 and we plan for 2014 we'll also continue.

Then the technology evolution, when moving, for instance, product -- and make an example: embedded non-volatile technologies for both the market of microcontrollers in terms of millimeters.

All of these is a fourth block named at contributing another couple of points.

At least it's more than the 4 points, since obviously there is to take also in account the normal and typical evolution in our business of price erosion irrespective to the product mix improvement with product innovations.

That is very helpful.

Simon Schafer, Goldman Sachs.

Just wanted to go back on this topic of digital revenues.

Thanks for offering that perspective of the ability for that revenue to double.

Just wondering: if you can achieve that goal, is that enough to take that business back to operating profitability?

Yes, absolutely.

Of course, this is also a business where, as I said before, the contribution in terms of gross margin in these kind of products is pretty good.

And yes, this is the level that we need.

So based on that color, are you suggesting that it's much closer to the average that you are aiming for for EPS at 5%?

Or is it still -- I would suspect it's still going to be slightly dilutive.

You just stated that I think MMS is running at a 10% margin.

So I was just trying to understand the structural profitability prospect of the digital business, assuming that you can double the quarterly run rate.

Yes, absolutely.

I think at $300 million, we will be positive but clearly dilutive compared to the microcontrollers activity.

But we also have other families that -- for instance, we have [ISCO throng]; we have imaging.

You know, we have the by CMOS kind of ASIC.

So we have many, many businesses here.

But I think at the level of $300 million per quarter, with the ambition in terms of gross margin that we have here on these high-end products, I think this is turning the point for DCG.

But clearly --.

And my follow-up question would be actually on imaging and the IBP business.

I think in the middle of last year, you commented that you were hopeful that you could double the revenue run rate of -- I think in the beginning it was roughly $80 million.

It has come up.

It has improved 50%, so that is obviously a great starting point.

But perhaps some of the diversification efforts that you were alluding to haven't quite yielded the upside that you were hoping for.

So I was just wondering how you look at that business going forward, then, with an eye towards further diversification?

Yes.

Well, I think this is one of the problem that we had last year.

When we started the year we had strong ambition in terms of top-line evolution.

And I believe that -- in fact, if I go back in December 2012, where we had an estimation from WSTS for the market growth, the market that we serve, in the range of 4.6%; and unfortunately, this did not materialize.

Now the problem for us is that we have gained market share, but clearly the top line, as I said before, is not what we expected.

And of course we need to be more aggressive and more determined to move on with our road map.

Imaging is a part of it.

I think it is a combination of markets.

I think from an execution point of view, I am pretty happy on the diversification.

There are areas, for instance, the proximity in sensor area that is a pretty good one, because the area of the image single processing for a variety of consumer applications is also moving on very well.

So the design win with automotive customers is also progressing.

So we are -- but, clearly, we also had setbacks, particularly with certain customers now I think is useless to mention -- for instance, Blackberry, that today we have -- in this first quarter we have practically at zero in terms of revenues.

So I think it is a combination.

But in terms of the diversification, what is important for us is to boost through the effort on the proximity sensors, the effort on the imaging VSPs; the effort on the RF solutions; the mixed technologies, ASICs and these kinds of products.

Kai Korschelt, Deutsche Bank.

I had two.

I just wanted to connect on the previous question.

I think the main driver, you say, of your doubling in DCG revenues is design wins; and yet I seem to remember also when you were guiding us $460 million in revenues in imaging by Q4 this year.

I think you missed that by about 25%.

Most of it was also based on design wins.

So my question is: how much of that doubling in DCG revenues assumes a market or end-demand recovery?

And how much visibility do you really have, just based on your market share, to achieve that doubling?

That is my first question.

And the second one is really on the target model.

Carlo, I am just wondering if there is any change, or whether we should still think about the revenue level required to do 10% margins of 2.2%, 2.25%.

Because if that is still the revenue level, then that would require you from Q1 excluding wireless to grow by about 25%, 30% -- your revenue base about $2 billion annually within something like 18 months.

So obviously we can see DCG design wins.

I'm just wondering: what are the other drivers that you think will contribute that much to the revenue uplift?

Thank you.

I will start from the second one.

No, I think when you confirm the model, it is the same.

I think there are two major contributors to design wins that are linked to the top-line growth.

One is DCG, as we discussed.

And here I believe is a combination of quality of the products, but also the traction with customers and the fact that many of these programs are high volume and with high (inaudible) on the products, so high-ASP kind of products.

But the other area where we expect to grow significantly -- this is more related to the overall macroeconomic situation.

And this is IPD.

In IPD we are today at the level that is below our standard.

Of course, in IPD we have many, many products that are for the housing market, for the industrial market, lighting, home appliances, industrial controls.

This is the second big block where we expect significant growth.

And this did not happen in the recent quarters.

Now, if you now go to the first question, I think in the case of imaging, of course there was a base on what we said -- that it was more related to diversification in custom products.

I think there is another fact that is more related -- it was more related to the CMOS sensors for wireless applications.

And of course, we did not have the crystal ball, and we always want to make sure that we have not underestimated the risk.

But in the case of DCG, it is more related to specific customers and with specific operators.

And also, much more diversified from a customer point of view compared to what we had on imaging.

Lee Simpson, Jefferies.

Maybe if I could just ask a follow-up question on the set-top boxes.

We noted back in September at the IBC trade conference that competitors were winning a rash of design wins for current-generation boxes.

I just wondered if the move to better pricing power, I guess 40-nanometers inclusive there -- that the dynamic is changing, and that perhaps the feedback at CES was around that dynamic, that your pricing power had improved, and that your long product cycles for 2014 are late 2014, not just 2015?

Maybe second to that or associated with that, I think I heard you call out DOCSIS 3.0, or US cable guys, in particular.

And I wondered if you could maybe give us a suggestion as to where you think the share is for ST in the shipment of existing platforms in North America, or whether your subsequent design -- whether your wins are really in Tier 2 guys beyond the X1 platform?

Well, I cannot say the names of the customers.

So clearly the cable market in the US is a target for us.

I think this is an important market in terms of volume.

Today we have all the ingredients.

And thanks to the efforts that we have done within the last year to get to the, of course, the certification and the certification from the cable labs on the DOCSIS 3.0, and also our efforts that we had in other connectivity products for the markets in the US, like the MoCA.

For instance, if you take our Alicante device, it has been certified by the cable labs on the 3.0 DOCSIS.

It is these things combined with the products that we have introduced that is the base on ARM.

And I would say very convenient is also the performance of the image.

The quality of the image of our products drive, for instance, 4K displays that has convinced a number of customers, in terms of manufacturers and box makers, but also operators, to select our products.

And this is for the cable in the US.

But we also have other examples on the satellite.

So indeed, it was a turning point, starting first of all with the introduction of the new ARM family, and then with the assembly of new products at the IBC in Amsterdam in September.

And then attaching to these products all the key ingredients to succeed in the US market, like 3.0 DOCSIS certification, the MoCA, HEVC, 4K.

So it is all these ingredients that has then allowed us to really win these targets with important customers in the US, but satellite, also, in Europe.

Now -- but on top of these products, what we see in the short-term is HD on top of 40-nanometer for the set-top box.

But in the second half of this year, we have some of these customers with the new generation, the new family of ARM gateway products starting; and then there will be a higher and more pervasive utilization of our products in 2015.

Bernd Laux, Kepler.

I also have two.

The first one is related to FD-SOI.

You are consistently repeating the advantages, and your design wins on the technology are increasing.

And I suppose that is no secret to your chip alliance partners.

Why isn't there more support from the other alliance members for this technology?

And the second question is related to the free cash flow.

Do you believe 2014 free cash flow will be enough to fully cover the distribution of the same dividend for four quarters of this year?

Thank you.

So I will ask Jean-Marc to cover the first one, even if we cannot of course, disclose all the -- but we have -- I would like Jean-Marc to comment on the first one.

And then, of course, Carlo Ferro will take the part on the dividend distribution.

Jean-Marc?

Jean-Marc speaking.

So on the first one -- first of all, okay, from the partner on the alliance there is a strong support.

We have improved, and we have developed some specific part of the process and specific features at 28-nanometer and 14-nanometer, because soon we will be ready to make some prototypes on 14-nanometer.

In the course of our participation to the International Semiconductor Development Alliance, and basically -- we have made advanced research developments in Albany around this block of technology.

So this is a point number one.

But then, about the point number two: I am sorry for that that today I cannot disclose, but I confirm to you that soon we will be in position to announce we will have a major foundry player acting as a major source for us and acting as an open source on [NDSR].

This for us is important, because this is also part of our outsourcing strategy.

It is mitigating the effort in terms of capital investment internally and is also giving a lot of credibility to our effort.

And today we have a very important wave.

We have two new projects here running on this technology.

And some of them is a complete change of structure, but some of them is really very high-volume consumer product -- complex, high-volume products.

I would like Carlo to comment on the distribution of dividends.

The question, I guess, was about cash flow and distribution of dividends; and thank you for the question, since it's also an opportunity to remind that investing in ST shares is at current share price at 5.2% is on.

So the cash flow in 2014 -- the free cash flow will be positive.

And frankly, I would like, as usual, not to give a specific guidance on the full year around [NEDA, VIZA] or other mandates and express that to the amount, that will be positive.

The dividend distribution of the Company at the end -- and I believe we have proved it in 2013, and also sometimes in prior year -- is substantially also somehow related to the specific short-term profit or cash generation of a given quarter of a given period for two main reasons.

Reason number one is that the distributable profit of the Company and similar regulation are several billions of dollars.

So there isn't (inaudible) limitation based on the earnings or loss of the quarter.

And the second reason is that the structure of the Company is very solid.

So in answer, the $41 million of net cash balance exiting last year, with $1.9 billion of liquidity; and in addition, about $120 million of undrawn, committed credit facility.

So on this basis there are all the ingredients for a dividend distribution in line with the prior period.

Having said that, let me repeat what I believe also Carlo said in the introduction.

At the end of the day, the dividend is targeted at the decision of the Supervisory Board of the Company on a semi-annual.

And management considers the dividend really as an important vehicle in returning wealth to shareholders.

Janardan Menon, Liberum Capital.

I just want to go back to the two waves to drive up the DCG revenues.

Between them, which are you relatively more bullish on?

Is it the gateways in set-top box?

Or is it going to be more ASIC-driven?

And roughly what will be the timing of each of them?

The second-half recovery you are talking about, will that be driven more by the gateways or by the ASIC side?

And within the ASIC business, what kind of products are we really talking about to drive this upside?

Is it predominantly telco equipment, likely the Alcatels and the Ciscos of the world?

Or are you branching out to a new -- a much wider category of product, which you think is going to drive up your revenues over the next 18 months or so?

As a small follow-up, can you confirm that the imaging by CMOS silicon division, the photonics division, is actually profitable in the quarter?

Yes, so -- and Carlo will take the second one on the photonics division.

I think that, really, what we see in DCG -- and this is what we have tried to discuss during the course of today -- is two measure waves.

There is this year starting from the bottom that I believe is Q4 2015/Q1 2014 is the first wave is on our 40-nanometer products for set-top box.

And those are new ASICs for communication infrastructure.

So this is the first wave of growth.

And then starting from the last quarter of this year, we have a second wave, which is more based on, let's say, the ARM-based solutions for home gateway, including the one for cable applications.

And on the other hand, the set-top of the [SPA sly] volume production, with a deep growth, then, in the second part of 2015.

So if we look now from where we are today, and if we move into, for instance, two years from now, this is what we said.

I think it is -- there is clearly a very significant contribution to two blocks.

I think in ASIC, clearly, we will more than double from now to the end of 2015.

So probably, in relative terms, ASIC is a little bit more.

But the contribution on the set-top box, on the 40-nanometer, and on the new products for cable, also, on the home gateway is also very material.

So it is an important contribution for the two families of products, with ASIC contributing a little bit more, particularly in the second part of 2015, where we have several committed customers at this point.

And is that growth coming predominantly from carrier-grade products?

Or is it across even just smaller, consumerish networking products?

Let's put it this way.

I think, clearly, the phase one -- what is happening this year on ASICs is the communication infrastructure products.

The characteristics of these products is typically very high price but lower volumes for applications such as routers, such as switches, et cetera.

If we move then into the second wave of ASICs, this is more for consumer; it is a variety of applications, portable and nonportable applications.

And also much higher volume, but still pretty complex products.

Are you going to give me an example of that second category of product, just to get a better feel for what you're talking about?

What I cannot give you the name of the customer.

No, I cannot.

I cannot -- we see a good traction.

We are reporting what we see, and also we are reporting what we have won, because they are formal -- they are work here.

But I cannot mention the size applications.

Of course, it will be -- well, it is impossible for me to say.

Your second question is about the profitability of the photonic products.

Indeed, photonic products are for us are part of a larger division, which at the end encompasses several products that are ASIC, based on mixed processor technologies.

And most of those at the end that goes to telecom infrastructure customers.

And so this is in part to make clear our IBP product group and represent less than 30% of the total sales of IBP.

Here the profitability is very high.

The overall profitability at an operating income level is very high.

In the divisional profitability we are very happy.

I was actually asking about the overall profitability of the IBP division.

Is that profitable?

IBP -- the one of IBP you mentioned about the photonics.

On the IBP we are a bit less happy.

On IBP overall we are not yet at the right level, and we are not profitable yet.

At this point we will take two more questions, please.

Gareth Jenkins, UBS.

A couple of quick ones, if I could.

Firstly, I just wanted to see if you could give us a sense of utilization rates from the backend in the quarter, and where you see that going into the early part of this year.

Secondly, I think you very helpfully talked about 20% quarter-on-quarter improvement in order bookings.

I just wondered if you could give us a sense of where the book-to-bill stands currently.

And then finally, just on MEMS, I just wondered if you could give us a sense of the profitability within the MEMS business, and perhaps the growth rate underlying ex-the pruning of the businesses over the last year?

Thank you.

Well, I think I will take the -- maybe the (inaudible) in general, and then I leave to Carlo the rest.

I think in Q3 we had a slowdown, a significant slowdown, particularly driven by the mass market in Asia.

This was hitting our Q3.

And as a consequence, particularly on IBP, the (technical difficulty) our distributors, they had a significant concern of a slowdown in the market.

And they expected a lower point of sales -- so not us selling to them, but their sales to their customers in Q4.

Well, here is a slowdown in the US.

This first thing did not happen.

In the POS of our distributors, we hit a record high performance in Asia, in Europe, and also in the US.

And the situation -- the overall situation of inventory at the end of last year is pretty healthy in all the regions.

So as a consequence, the growth of POS in Asia was also pretty good.

The booking we started very strongly, and we had a significant increase overall of the bookings during the course of Q4.

The growth was about 20%.

And as we said, the overall book-to-bill is in the range of 1. And this is excluding ST-Ericsson.

So there was an important positive correction.

I have to say that an area where, particularly when moving from Q4 to Q1, we see, let's say, some reduction is, in general, smartphones.

We know that this is seasonal -- possible, while on the positive side we see a continuous strong demand for product to market.

Now I talked about the positive correction in the Asian mass-market in Q4.

This is continuing also in the first month of this year.

So we see a good traction in general for our industrial and power products.

So I think it is more encouraging than what we had at the end of Q3 and is also, as I said, across the regions that we see.

I think now, as I said, we have an expectation for the market to grow about 4%.

I believe at this time this expectation that is coming, of course from ST, but from the various market research institutions, is better supported by the expectation, for instance, from the International Monetary Fund on the GDP evolution, the global GDP evolution.

And this for us will [cycle off] certain businesses, particularly in the area of industrial, in the area of housing, et cetera.

Anyhow, 20%-plus quarter to quarter; a book-to-bill at 1; and a good trend, particularly in mass-market distribution and automotive.

Your second question is about molding.

Loading in Q4 has been below 85%, I would say well below 85% overall in average.

And the resulted into $6 million of charges for unused capacity.

And just on MEMS, please?

MEMS?

What was the question on the MEMS?

Just the level of growth and profitability for that business.

I think in the past you have said it's close to your closest competitor on the margin front; should put you about 20% at the EBIT level.

I wondered if you could give a sense of the profitability in that business.

Yes.

It was a good growth for MEMS in the quarter in terms of the growth and profitability was good.

Good profitability on our MEMS in Q4, indeed.

We will take our last question.

Peter Knox, Societe Generale.

Just in terms of the -- going back to cash flow, over the past couple of quarters there has been actually an increase in net working capital each quarter, despite the lackluster sales base.

That has been largely due to trade payables declining each quarter.

Is that purely related to the closure end exit from ST-Ericsson, or is there something more underlying there?

I would say the underlying factor is mostly the slowdown in the capital expenditures.

So with CapEx actually remaining stable, we should be expecting that number to stabilize as well?

At the end, this number reflects capital expenditure, purchasing overflow from foundry and at the end of the purchase, all the material from the fab and a very little amount of subcontractors.

So here the most relevant drivers of this variable is the level of CapEx received in the quarter and the purchased components.

Thank you, Peter.

I think at this point we will go ahead and conclude our call.

We appreciate everybody's attendance.

And again, if you would like the presentation, it is on our website from today's presentation in Paris.

Thank you very much.

Thank you all.

Ladies and gentlemen, the conference is now over.

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

You may now disconnect your lines.

Good-bye.