意法半導體 (STM) 2014 Q1 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon depending on where you're coming from.

Welcome to the STMicroelectronics first quarter 2014 earnings results conference call and live webcast.

I am Joya, 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, Joya, and thank you to all for joining our first quarter 2014 conference call.

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

Joining Carlo on the call today are Jean-Marc Chery, newly appointed Chief Operating Officer; Carlo Ferro, Chief Financial Officer and Executive Vice President, Finance, Legal, Infrastructure and Services; Georges Penalver, Chief Strategy Officer, Executive Vice President Strategy, Communication, Human Resources and Quality; and Carmelo Papa, Executive Vice President, General Manager of the 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 release 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?

Thank you, Tait.

First of all, I would like to thank everyone for joining today's first quarter financial result call.

Overall, the macroeconomic environment and the business dynamics in the quarter positively evolved as expected.

Looking briefly at our financial results and key metrics, revenue and gross margin were well within our guidance.

Operating expenses were well in line with our financial model.

Operating income before impairment and restructuring charges was a positive of $8 million, representing a year-over-year improvement of $188 million.

Power CapEx investment represented about 6% of total revenues in the quarter.

Our financial position remains solid and dividends paid in the quarter represented a yield of about 4%.

Despite this progress we still have much more work ahead of us to achieve our target financial model of about 10% operating margin and our main area of focus is the Embedded Processing Solutions segment, which I will discuss in detail shortly.

Looking at our financial results, first quarter revenues were $1.83 billion, down 9.4% sequentially.

As anticipated, legacy ST-Ericsson products revenues decreased sequentially by about 50% to $63 million.

Including this, ST's first quarter revenues grew 0.7% year over year and decreased 6.4% sequentially.

From a product group perspective, MMS and APG led the groups with year-over-year revenue growth of 15.6% and 15.5%, respectively.

And from a channel perspective, Distribution represented 30% of total sales in the first quarter, up from 25% one year ago.

In addition, point of sales, meaning the sales of our products by our distributors, grew double digit year over year.

Also in the first quarter ST recorded a one-time licensing revenues of $15 million related to the second round of proceedings with InvenSense.

Gross margin in the first quarter was 32.8%, up 150 basis points year over year.

On top of the one-time licensing revenues, the improvement has been driven by a better situation in manufacturing, both in terms of loading and manufacturing efficiencies, despite price pressures.

In manufacturing, as we outlined last quarter, structural changes and other initiatives are underway to help to progressively move our gross margin into a target range between 36% and 38%.

And the key levers here include the reshaping of our manufacturing footprint in mature technologies with the upgrade of our front-end fab in Singapore to 8-inch and the consolidation of our backend activities in China; another, a better situation of manufacturing capacity, particularly in our fabs serving embedded processing solutions; product migration into new technologies and thinner [retography] nodes; replacing low-margin legacy ST-Ericsson products with higher sales of our streaming products; and the pruning of low-margin mature products, in particular within IPD and AMS.

Turing to operating expenses, combined R&D and SG&A totaled $606 million, representing a decrease year over year of about 25%.

Over the past 12 months we have successfully completed a number of cost reduction programs, yet we remain vigilant in controlling our costs going forward.

In comparison to operating expenses in the fourth quarter, a portion of the difference relates to a lower number of days in the first quarter.

Importantly, we have not yet benefited from the Nano2017 R&D grants which are now expected in the second quarter pending European Union approval.

Now let's move to our product segment results starting with Embedded Processing Solutions.

The first quarter of 2014 was important as it represented a bottoming in revenues for EPS.

Mainly due to the phasing out of legacy ST-Ericsson products and lower sales of set-top-box products, revenues decreased 27.6% year over year, driving the improved but still negative operating results.

As anticipated, legacy ST-Ericsson products revenues in the first quarter decreased to $63 million and we expect them to again decline by over 50% in Q2 before stabilizing at that level.

Importantly, our set-top-box business is expected to grow in the second quarter as it transitions to ARM-based solutions.

On top of this, we expect growth in microcontrollers in Q2.

As a result, we expected the Embedded Processing Solutions segment to grow sequentially.

While these dynamics currently translate into suboptimal loading for our fabs serving the EPS segment, we are encouraged by the restart of the growth overall in EPS in the second quarter.

Going now into more detail into the EPS dynamics for the quarter, first we had strong year-over-year growth in microcontrollers where our general purpose microcontroller business enjoyed the fourth consecutive quarter of record revenues.

Looking at the combined general purpose and secure NCO market, according to IHS we climbed from the fourth position in 2012 to the second in 2013 basing on our comprehensive range of industry-leading ARM-based products, the rapidly developing ecosystem we are assembling and our broad reach through distribution partners.

Second, we just signed a strategic agreement with a top tier foundry for 28 nanometer FD-SOI technology.

This agreement expands the ecosystem and ensures the industry of high-volume production of ST's FD-SOI-based IC solutions.

ST's unique FD-SOI technology is well on its way to become a significant revenue generator for 2015 and beyond and strengthens the business and financial prospects of our Embedded Processing Solutions segment.

And third, I can confirm that our Digital Convergence Group is now reaching an inflection point with a revenue ramp starting to show traction with the first wave of new products, the high-volume deployment of our 40 nanometer chips for broadcast set-top-box and further market penetration of our ASICs for networking.

Our roadmap to double DCG revenues by Q4 2015 in comparison to Q4 2013 is confirmed.

Moving to our Sense & Power and Automotive segment, on a year-over-year basis it delivered revenue growth of 5.7% driven by our Automotive and Industrial and Power & Discrete product groups.

Automotive revenues increased 15.5% year over year driven by strong market conditions, the expansion of our customer base, product innovation, as well as market share gains in Turkey to beat automotive-grade microcontrollers.

In IPD improving market conditions and dedicated regional marketing campaigns for distribution in the mass market have supported a revenue growth of 3.1% compared to the year-ago quarter.

A major area of focus for AMS is the ramp of new products such as high-performance microphones and high-accuracy pressure sensors and the diversification of our MEMS and sensors towards a broader set of applications.

In the area of AMS it is also extremely important for us the start in production of our new fingertip solution for portable equipment.

Sense & Power and Automotive operating margin improved to 8.7% in Q1 2014 compared to 7.7% in the prior quarter even with seasonally lower sales.

It also improved year on year from the 5.1% operating margin recorded in Q1 2013 reflecting leverage on revenue growth, product innovation and manufacturing performance improvements.

Moving forward we expect margins to improve further thanks to revenues coming from new products.

With expenses well aligned, gross margin improvement initiatives underway and the solid roadmap to growth for EPS evolving, let me share some perspective on what we see ahead with respect to our product portfolio to enable ST to deliver quarter-on-quarter revenue growth for the remainder of 2014.

Let us start with our microcontroller business.

In general purpose microcontrollers we ramped the production of the STM32 for three new Samsung smart watches that were unveiled at the 2014 Mobile World Conference.

We also expanded into the mass market with an impressive number of wins in many devices, such as detectors and sensors, writing applications and gaming accessories.

Building a strong ecosystem is a key element of our winning strategy and during the quarter we took a major step forward with making our STM32 development platform more widely available, affordable and easier to use with the launch of the STM32 Nucleo board and the STM32 Cube software suite.

In just two months from the launch we shipped over 17,000 boards to developers around the globe.

An amazing result, I believe.

Moving to our Secure Microcontrollers business we captured a flash-based Secure Microcontrollers win for a major smartcard health program in Europe.

Our Automotive business achieved important wins in infotainment, active safety and positioning.

We had two key wins in audio amplifiers.

We signed an exclusive agreement with a market-leading manufacturing of audio sound systems and a breakthrough deal for the Japanese market.

We continue our relationship with Mobileye to supply an FD-SOI-based vision processor for their fourth generation advance driver assist system.

And finally, we recently were confirmed as the number one player overall in Automotive in China.

Our Digital Convergence business is progressing in building a solid design win pipeline.

In our set-top-box and ARM gateway business we continued to build the global momentum, collecting several design wins including HEVC high definition, HEVC ultra high definition and DOCSIS 3.0 sockets with our Cannes and Alicante product families and other wins with our Liege family.

In our ASICs business we added two design wins for 28 nanometer FD-SOI for consumer applications through our growing pipeline of business.

Moving now to Analog, MEMS and Sensors, we maintain momentum with our [commercial] MEMS with wins at four leading smartphone manufacturers in Greater China and the launch of a new 9-axis movement and position sensor.

In addition, we made good progress in a number of areas that we highlighted in January as our revenue boosters for 2014.

For example, our touch-screen controllers ramped production for the new Samsung smartphone launched in the quarter and we gained momentum with additional big wins in tablets in Asia.

Another booster, our environment sensors took a step forward with a 100% share in all pressure sensors with a leading consumer brand in Asia and the launch of a new pressure sensor ideal for wearable applications.

Our diversification into other areas continued with wins in accelerometers for automotive infotainment market from top players across the globe.

To sharpen our focus on the wearable market we also announced a broad portfolio of analog devices for creating innovative wearable applications.

This complements our complete offering of sensors, microcontrollers and low-power connectivity solutions for this market.

In imaging our time-of-flight photonic sensor, another of our revenue boosters for this year, was selected by a leading smartphone manufacturer for an innovative camera system.

Also, within IBP our momentum in silicon photonics is continuing with a new project and transceiver chipset with a key customer for FibreChannel used for high-speed data storage applications.

And closing now with power and smart power management products.

Also during this quarter we continued to focus on the three main growth areas; power management for portable, industrial automation and smart grid.

In portable we landed a number of design wins in portable devices for filtering and protection which will contribute to the ramp of the business this year.

And in industrial we secured qualifications from several power supply manufacturers for low-voltage MOSFETs and earned a first win from a large Chinese manufacturer for high-voltage IGBP for a telecom application.

Finally, we launched a complete configurable plug-and-play street lighting solution to address the growing digital power management market.

Looking forward we are encouraged by, first, the signs of improvement in the general macroeconomic environment; second, by the forecast for the semiconductor industry that continue to show positive momentum; and third, by the specific product dynamics we see evolving over the next several quarters.

As a result, we are anticipating a sequential revenue increase of about 2% plus or minus 3.5%.

This includes the anticipated reduction in legacy ST-Ericsson product revenues of more than half of the $63 million posted in the first quarter.

Excluding legacy ST-Ericsson product revenues and the first quarter one-time licensing revenues, our second quarter revenue guidance at the midpoint equates to sequential growth of about 5%.

Key revenue drivers in the second quarter include microcontrollers, automotive, industrial and power applications.

Moreover, we will begin to see initial recovery in revenues of the Embedded Processing Solutions segment.

Gross margin, driven by manufacturing efficiencies, is expected to be about 33.6% plus or minus 2% in the second quarter.

To conclude, we are working towards our 2015 financial model goal of 10% operating margin and, as we mentioned earlier, we still have much to accomplish.

We are continuing to build a solid pipeline of design wins across our portfolio and this should enable us to deliver quarter-on-quarter revenue growth for the remainder of 2014.

Based upon our financial position, performance and market outlook our Supervisory Board is recommending to shareholders to approve -- the approval of a $0.10 per share cash dividend for each of the second and the third quarters of this year in line with our intention to continue to return value to shareholders.

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

Thank you.

(Operator Instructions).

Stephane Houri, Natixis.

Actually, I've got one question.

If you could come back on the FD-SOI strategic agreement and help us understand how important it is for you and maybe give us some color on the capacity now at your disposal and how you're going to split the quantities between you and your partner and how much design wins you have, etc., etc.

So if you could give us some color, it would be very helpful.

That's the first question.

Thank you.

Yes.

So Jean-Marc will take the question; also considering the fact that we just signed the agreement.

I think I can repeat only the three points of what we have said.

(Inaudible) in previous strategic agreement with a top Tier 1 foundry a 28-nanometer FD-SOI.

It will expand the ecosystem, of course.

It will strengthen our business and financial prospects.

And really, both partners are engaged to communicate regularly within a few weeks.

And I don't want to say more at this instant.

So may say more generally, though, right?

(Inaudible.) (Multiple speakers)

But you can say (multiple speakers).

Sorry?

Can you repeat the question, Stephane?

No, I was just saying you may say a bit more at the Analyst Day in New York, I guess.

Absolutely.

With reasonable (inaudible).

Yes.

Yes.

Okay, okay.

But to (inaudible) the second part of your question, yes, it is important also.

Of course is the credibility as is important for us to have a second source.

Clearly it is important.

We have several customers now.

Is also important because we can work with the right balance between internal manufacturing and external manufacturing with the proper flexibility in terms of loading and also in terms of capital investment.

Right.

Okay.

And I had a second question about the gross margin evolution, because you are showing a bit of improvement in the second quarter, but still you are targeting 36% to 37% to be able to do the 10% EBIT margin.

And the other assumption is to get to $225 billion and this part of the assumption, given the outlook for the second quarter, it looks a bit far.

So the question is are you able in your view to improve the gross margin higher than the 36%, 38% that you target and, if yes, how would you do that?

Or would you play more on the OpEx line to go below the $600 million?

What's your favorite view on that?

Well, already commented on -- from the sales point of view because we also mentioned the top-line evolution.

And then I think on (inaudible) we go in detail to talk about the gross margin evolution in the second quarter and further on.

Clearly, on the top line I would say there are two blocks.

One block is -- how can we say, the business as usual.

For instance, in the second quarter on the product -- on the core business of ST the midpoint is centered around 5% sequential growth.

But really the two blocks is, one side, all our activities in the area of microcontrollers, power, analog, MEMS, etc., so this is one block where of course we want to grow quarter after quarter.

But on the other side we expect, of course, and we are working on a strong acceleration of our DCG business and which this shall make a very significant addition in terms of revenues as we have detailed.

There are two block of products.

One block is clearly the set-top-box and the home gateway.

But very much with the new products, the products that we have launched in September last year at the IBC in Amsterdam, Alicante, the Cannes, the Monaco, and this for cable, this is for satellite.

It is very much for the market in Europe and for -- also and for us is really key for the market in the United States.

So, this is one part of the products.

And the other part is the -- back to the FD-SOI products where, in addition to the traditional ASICs for communication infrastructure, we have won very important projects, high-volume complex products for consumer applications.

So this is important, this continuity.

So really, it is a part of the Company where we believe we can grow.

Of course our ambition is to also [flood] the market with our microcontrollers, the power, the analog, the MEMS and the automotive.

That's -- we expect a very strong acceleration thanks to all the ARM-based products for DCG, the cable market that we can now address, and of course all the FD-SOI ASICs in major turnaround in this part of the Company.

Now, I just have now the word on Carlo, but clearly today on the digital part, why we are not in heavy [on circulations] conditions, we are not running at an optimal level of loading in the digital fabs and this is one of the elements of the gross margin improvement, but I leave Carlo to comment on the progress of the gross margin in Q2 and further on.

Certainly, Carlo.

Good morning, good afternoon, everyone.

Indeed, at the end of the gross margin evolution, both the actual for the first quarter and the guidance for the second quarter is absolutely in line with what we did expect and what we said three months ago when we met in Paris.

At the end of the first quarter, took a benefit from the product mix which is important, including an initial step of the reduced exposure on the former ST-Ericsson products and not yet completed as you see.

And took the charge of manufacturing inefficiency that we have anticipated already from the fourth quarter due to the lower loading at the end of last year of the fabs.

You see progress in the guidance for the second quarter at a midpoint of 33.6% and here again we effect some good contribution from the product mix, maybe not totally compensating a usual price pressure but significantly offsetting it, and a significant improvement from the manufacturing cost, also, based on improved loading, especially in the area of the Sense & Power and Automotive fabs and improved manufacturing performance in general and in general manufacturing costs during the period.

As we said, that again, the roadmap to improve the gross margin towards the 36% to 38% model remains unchanged.

All the key form factors that we are progressing and executing are moving on and all the potential essentially remains to be achieved as an opportunity.

I would eventually remind what they are at the exit from ST-Ericsson and there we have now maybe less than 1 point still to come in term of improvement to the gross margin.

The manufacturing initiative, notably the evolution of manufacturing in Singapore from 6- to 8-inch and the closure of the plant of Longgang for (inaudible) testing and this is expected about 1 point to come.

So far the effect is very negligible and will be evident at the end of the -- when the initiative will be completed.

The one from the (inaudible), here we have made some progress.

I will say that about one-third of the expected progress have done, but it remains about 1 point still to come as an improvement to the gross margin.

And as Carlo said, all these initiatives of technology evolution, a loading of the fab and efficiency in 8-inch, in 12-inch, particularly in the fabs servicing the embedded processing segment and in assembly still have to generate all their potential and this is over 2 points of opportunity on the gross margin.

So, really the long answer or the short answer to your question, Stephane, is that at the end where instead the 36% to 38% is confirmed where instead we have opportunity in respect to the model as already anticipated is on the expenses line where we continue to target expenses net of grants at the low end of the $600 million to $650 million range.

Okay.

And just to be clear, you expect FD-SOI product revenues at the end of the year or we'll have to wait at the beginning of 2015?

No, it will -- I think this will -- I think we reconfirm what we said in general.

IN act, I think the major volume will start in production in the second quarter of next year.

So this will be very material as we said, because these high-volume products for consumer and is complex product so is high ASP products and so this will be really for 2015, starting from introduction in Q2.

Thank you very much.

Thank you, Stephane.

The next question, please.

David Mulholland, UBS.

Thanks for taking the questions.

Just if I may, firstly, I wondered if you could talk about OpEx and what you're thinking into Q2 on gross OpEx and into the rest of the year.

Obviously, still question marks over the R&D grants, but just what we should be expecting on an underlying basis for the rest of the year would be very helpful.

And then secondly, I wonder if you could just give us some color around what you've seen in terms of bookings levels and book-to-bill through Q1.

Okay.

So maybe I start on the booking and then Carlo will go in details on the expense and the expense model.

I think in Q1 it was a relatively short quarter for us.

It was also a quarter impacted somehow by the Chinese New year.

That is an element that is also taking some impact.

And overall, our book-to-bill was 1. This is overall ratio.

I think we have seen some form of acceleration of a (inaudible) in the recent weeks.

There are areas and I would like to mention really two major market domain.

One is everything that is around distribution, industrial, small- and mid-size customers.

That of course is our IPD products, but very, very importantly for us, also microcontroller and some analog products.

This market traditionally we serve through distribution we see a good momentum, including the resale of our distributors.

This is a good momentum.

And then we see a very strong demand that is accelerating in the recent weeks in the area of Automotive.

On other products we use more -- and for instance, DCG of course is mostly new products, is mostly new design win.

But overall, I would say that the book-to-bill in Q1 was at the level of parity and we have seen an acceleration of the bookings in the month of April driven by the Automotive, driven by Industrial and the mass market area.

Now in terms of expenses, Q1 was a short quarter.

We will go into detail about one point here.

We have not yet accounted for any of the grants Nano2017 that we now expect to start in Q2.

I can -- I'll try to help you how to model the expenses growth, how to model the grants going forward on the next quarter and obviously starting from where we were in the first quarter.

In the first quarter R&D and SG&A expenses totaled, as you see, $606 million and this is a number which really in terms of gross expense took benefit of some of one time.

The calendar for the quarter has been -- as usual is based on -- our 5-4-4 weeks calendar has been shorter than a normal quarter.

Additionally, there have been a number of other one-time ingredients.

So frankly, should I have to normalize the level of expenses where we are today, this is more in the range of $630 million.

And then if you model -- and this is well in line with our objective.

Is well reflecting all the actuals that have been, I guess very, very gently, executed within the cost structure of the Company and then the end reflect where we will go going forward.

You may consider maybe some solid increases.

I would recommend to refer to a range between $630 million to $640 million gross expenses per quarter for the next couple of quarters.

And similarly for Q4, plus some addition because the fourth quarter is expect higher in term of number of days.

Then the grants.

The grants, as Carlo said, do not include yet the benefit from Nano2017.

(Inaudible) made the recurring part.

We do expect these programs to be final approved in the course of the current quarter, so to start the benefit of these grants on the recurrent basis in the course of the second quarter on top of the one-time benefit of the catch-up.

If I take what we have today, which in the -- for the first quarter, which also include a recurring part and a nonrecurring part, I would say that after the approval of Nano2017 program the recurrent amount of grants in the overall P&L, including all the programs, could be in the range of $30 million to $35 million overall.

So again, if you compare the gross expenses and the grant opportunity, you see that really we are now running at the low end of the $600 million to $650 million range.

And even in a quarter with a bit higher gross expenses due to the longer calendar, we are very comfortable that we remain well within the $600 million and $650 million range in that.

That's great.

Thanks very much.

Thank you, David.

Next question, please.

Sandeep Deshpande, JPMorgan.

I have a couple of questions.

Firstly, Carlo Bozotti, you mentioned in your initial remarks that if you adjust for something that the overall growth in the second quarter was at the average of 5%.

I can understand you adjusting for ST-Ericsson, but are you saying that ex-ST-Ericsson your growth is 5%?

But I can't come to this calculation, so if you could help us on that.

Secondly, so is the conclusion, Carlo Ferro, from the earlier comments that you've made that, despite whatever changes through the year, your OpEx will remain at the current levels virtually through the year so that as your top line grows you will see leverage on your earnings because your top-line growth versus your gross margin growth, etc.?

And then finally, regarding DCG, I mean your DCG performance in the first quarter was worse than the fourth quarter.

I mean we've been -- I mean clearly things are -- you're talking about the improvements in DCG being a really important driver now for your target operating income plan for 2015.

What level of confidence do you actually have that this revenue will double given that there have been promises on DCG for a very long time, but this business has disappointed repeatedly over the last few years?

Thanks.

Yes.

So maybe at this time we ask Carlo to go in details on the 5% and I will comment on the expenses.

I think it's very simple.

I think what we want to do is -- of course, with longer calendar days within Q3 and Q2, and then in Q2 normally we have some benefits from the vacation in Europe and then in Q4 there will be a longer calendar day.

But if you take Q2 as a reference, that is a good reference.

I think we should have something that is in the range between $630 million and $640 million gross.

And then we see on this line where we have the grants.

That is the line Other Income and Expenses.

A part of Q2 where there would be a big number, we expect, because there is the (inaudible).

I have -- we should run that line in the second part of this year at about $30 million to $35 million positive.

So indeed, what we want to do is to keep as much as possible this level and to stay very, very close to $600 million net that is on the lower end of our range and enjoy the leverage in terms of phase growth and enjoy the level as in terms of, of course, gross margin improvement with the strict control of the expenses.

But we shall not forget that we have redeployed important product design resources that are instrumental to boost the effort on the core business we will see from ST-Ericsson and this hopefully quickly -- and quickly -- will pay off in terms of growth.

But this is an important element for the leverage.

I think one comment on DCG.

what is really important here for us is the migration to ARM.

I think we started early in the process.

We are now paying the fact that the legacy products are going down, but we have important traction with the customers with material design wins.

And now this, of course, we pay off step by step with our set-top-box ARM products.

These products are 28 nanometer products, are good products.

We have (inaudible) with major operators in Europe, in the US, so we have a number of products.

So here there is a very important traction and the traction is demonstrated, really, by the formal award that we receive from these customers.

And the second element, again, is our (inaudible) activity.

Traditionally, our (inaudible) activity was for communication infrastructure.

This activity is -- we can say it is based normally on high-complexity products with low volume.

Now, with this very low-power performance of the FD-SOI we have managed to win very high-volume products for complex products, for complex applications.

So, this is products with a significantly higher ASP than other products and of course this will pay off when the production volume starts, as I said before, in Q2 2015 with a number of important customers.

So this is the model.

This is what we have described.

Of course, we understand this is very critical, but we are committed to execute this roadmap in terms of new product introduction, continuing with the traction and expanding the customer base and win more business with the FD-SOI.

Now, if we move to the second quarter guidance, I think Carlo will describe--.

Yes.

Sandeep, I believe the math is quite easy.

The other ingredient on the reconciliation, the ingredients in the reconciliation are two.

One is, as we've mentioned, the revenues generated from the former ST-Ericsson product, which were at $62 million in the first quarter and anticipated to be below half of that, to say below $30 million in the second quarter.

And the other one is the $15 million of proceeds from the settlement of the litigation with InvenSense, which are included in the first quarter revenues.

So if you take 1825 from Q1 and take out these elements, the starting point is 1748.

And if you move from the midpoint of the guidance minus the $30 million, or less and than $30 million in wireless, you see that the difference is about 5%.

So, hopefully the math (inaudible).

Yes.

The other consideration is--.

Thank you very--.

The other consideration is that with this further (inaudible) wireless, today the visibility is that we shall be (inaudible) $30 million.

Then there will be a number of quarters where we will see kind of a -- let's say continuity at this level of revenue.

So starting from Q3, then we shall not experience further significant drops in what we define as the legacy wireless business for a number of reasons.

Did we get all your questions, Sandeep?

Yes.

Thank you.

Thank you.

Next question, please.

Tristan Gerra, Robert W. Baird.

A couple of questions on your MEMS business.

First, could you talk about the growth outlook that you see for this year, year over year, on the basis of some of the wins that you mentioned?

And where do you think your market share is right now in the smartphones, the pressure sensor, given the wins that you've announced and what do you think the adoption rate will be this year?

Well, I think overall, as you know we are expanding in terms of products.

Now, if you take the gyro, per se, that is one device.

We have seen a reduction of the market share.

I think on the other hand we have important addition in terms of market share on the pressure sensor.

We have won very, very important programs on the pressure sensor and also on the analog microphones.

So overall, we see good opportunities to complement what we do in most MEMS using the same technique, the same technology for environmental MEMS and also acoustic MEMS.

We have important opportunities, particularly for the second half, for a number of new products for very high-volume applications.

I mean this is not yet completely now (inaudible), but is an opportunity, of course, that we'll try very, very hard and is -- as I said, it's not just one product at this time but is more products, from motion to acoustic to pressure, etc.

On top of this there are other two elements that I think is important to mention for AMS.

The first is the starting production on the fingertip.

This is a new business for us.

I think the product is a good performance product, is high-performance products and this new contribute and we believe we can expand starting from the recent wins.

One of them is also a prestigious win.

And we want to expand this product line.

I think we have some good -- let's say performance advantage with this new product, with this new family.

And finally, I'd also like to mention the pruning, because in the area of AMS we also have some legacy products that we manufacture today in the [Amokio J9] in Singapore that will become, in fact, the fabs dedicated to one specific business for one customer in the era of microfluidics.

And for the last we are disengaging and, as a consequence, there is and there will be some more pruning that is specifically for AMS and for IPD, as I said before.

So overall, IPD is a larger base of products.

Of course, gyro remains very, very important for us.

We have a new technology that is very, very competitive.

But is still important for us that we have the new products.

We are doing now with our [development] with our acoustical products, with the touch, with the fingertip family.

And equally important is the differentiation of the customer base.

I think we are making good progress in China overall.

And we are making also a strong effort in Automotive with our accelerometer so far.

We have a major customer.

In fact, is a major automotive player and we can expand from there.

So as you see, plenty of opportunities.

So it is a moment, as you can see from the figures, that we are not enjoying the growth that we have in the past, but is also a moment where we are really producing a lot of new products that is not only the traditional motion MEMS, but other MEMS functionalities and we expect that this will turn in good growth opportunities for us in the second half of this year and for sure in 2015.

Okay.

And then as a quick follow-up, any way to quantify the magnitude of the wins or share gains that you expect in the set-top-box business in the US with HEVC and what is the outlook for next year?

Do you also have opportunities in cable or is it mostly satellite at this point?

No, we have a major win in cable.

We cannot name the customer, but is a major win.

It is the result of the effort that we have done, first of all, to get the certification from the case lab in the United States on our DOCSIS 3.0.

Also, we have other specific piece of (inaudible) that is intended for this market in the United States, like the (inaudible) and so this is now a very, very important reality for us.

Why that?

Because this is a very important business.

I mean this is a very important market.

This is a market in the United States that is in the range between $1 billion and $1.5 billion.

Of course this includes satellite in the US, but the cable is the major contributor there.

So is not always satellite.

It is both satellite and cable.

And it really is not only for Europe.

Is Europe and -- I think at this point we have at least four -- yes, I mean we are working with a number of operators, but I would say three to four operators in the United States.

To quantify this, we have tried, of course, three months ago in Paris.

I think this we believe is material.

Starting from the very low level that we have today, our vision that we can -- exploiting these new products, new wins, new customers, new markets in the set-top-box, but also exploiting the FD-SOI ASICs.

Our ambition is to double the DCG business moving from Q4 2013 to Q4 2015.

Thank you very much.

Thank you, Tristan.

Next question, please.

Adithya Metuku, Bank of America Merrill Lynch.

Good afternoon, guys.

Thanks for taking my question.

My question is again on the DCG Group.

I was just looking at the increasing compensation in the set-top box space, especially in the over-the-top part, content distribution space with Amazon producing its premium device recently.

I was just wondering, how do you see demand for traditional set-top-boxes in the US trending over the next few years?

Do you still think there will be demand by the time you introduce your products?

Adithya, can you repeat the question?

That was a little unclear here.

Oh, sorry.

Can we talk about Amazon?

Yes.

No, we're talking about the DCG Group demand trends, basically.

And I was just talking about the introduction of a -- of the over-the-top streaming device by Amazon.

Considering that a lot of the people are viewing content using over-the-top devices, I was just wondering how do you see demand for traditional set-top-boxes like cable or satellite trending over the next few years.

Do you still think there will be the same level of demand as there is now for the Tier 1 set-top-box design wins that you're talking about?

Yes.

Of course we understand the trend here that -- the trend that you are mentioning, but from what we see working with our customers, but also really spending a lot of time with all the major operators in the world, we see this as a good market opportunity.

And I think I would leave George the opportunity to comment here because, indeed, this is a significant market today and we believe it will remain a significant market opportunity.

And in terms of semiconductor competitors, is true there are important competitors, but also I believe is true that most of the operators we are dealing with, they're all the most prestigious names.

They really welcome the presence of an important player as ST with innovative new products and innovative new solutions.

But Georges, please.

Yes, Georges speaking.

You're right.

I mean, there are a lot of new ways to distribute content and over-the-top, many, many different over-the-top way to do it.

And this doesn't imply, obviously, set-top-box.

But on the other hand, the market for protected content, for high-end content, for premium content is still very strong and is still controlled by the operators, the cable operators, satellite operators, IP TV operators and we still see a strong market.

I again remind that the market this year was 265 million set-top-box in the world and it is expected to be in 2014 up to 285 million, while the average selling price remains at the same level.

Meaning just like Carlo said, this set-top-box encompass more and more features, more and more memory and more and more processing power to improve the user interface, to incorporate gaming.

So in other words, I mean, as a conclusion we are very confident in this set-top-box and home gateway market.

Okay, that's clear.

Just a follow up.

Where do you see the demand in these units coming from?

Is it -- where is it coming in terms of geographies?

Yes.

It's coming from the existing market, American market, Europe and America both.

North American and also South American, which is more dynamic, I agree.

European market.

And Chinese market is still -- its quantity is huge, but not very still dynamic in premium boxes.

Okay.

Okay, thank you.

Thank you.

Next question, please.

Francois Meunier, Morgan Stanley.

Yes.

Actually, all my questions have been answered and I'm conscious of the time as well.

Thank you.

Thank you, Francois.

That's a first time.

Do we have a next question?

Kai Korschelt, Deutsche Bank.

Yes, thanks.

I'll try and make up by asking two.

The first one was on DCG.

So it looks like you've moved about $50 million in quarterly revenues from IBP into DCG and I think you're moving another $25 million or so in wireless revenues into that division.

So I'm just wondering, obviously the guidance that you gave us to get to about $300 million in revenues by the second half of next year, should we assume that this is a moving target and should in reality be higher now given that you have just increased the products that count as DCG?

That would be my first question.

The second one was on the 10% margin target.

So I didn't see a formal reiteration in the release.

I just wanted to confirm that that target is still there for middle of next year.

And then also as a follow-on to a previous question, to be a bit more specific here it seems you need about 20% growth in revenues from your guided Q2 level, which seems quite ambitious to achieve in the next 12 months.

So, I'm just wondering if your view on the probability of achieving your target has at all changed?

Thank you.

Okay.

So, Carlo, if you can start commenting on the transfer.

I think it's about $10 million.

Yes.

The transfer is a transfer of a (inaudible) margin (inaudible) line has been done more for (inaudible) better location and utilization of resources as opposed to another (inaudible).

For sure not the one you have mentioned.

And is very marginal.

At the end of the day, revenues of this division are $10 million and would expect going forward could be more likely less than more than $10 million.

So, it's not at all contributing to the achievement of the revenue growth for DCG.

Okay.

And then the model that we have not reiterated on the--.

On the model, I believe we had.

I believe we have.

If we have not, we want to do so.

Certainly at the end of the day we talk about the revenue, we talk about the gross margin, we talk about the expenses during these calls and we reiterate that the objective of reaching about a 10% operating margin by middle of 2015.

And that belief, by the way, reading again the introduction of Carlo today call that has been already said, but good to repeat it.

Yes, yes.

And again, I think (inaudible) indeed but, as I said, is really two blocks.

One is more a normal piece of business.

That of course is the bulk of what we do today with microcontrollers, automotive and analog MEMS and power.

This is a block.

I think we intend to grow this year quarter after quarter with this block.

But then we expect an accelerated growth, first with the set-top-box new products and starting then from mid-next year also with the FD-SOI ASICs in DCG.

And here is not a continuity.

This is important to discontinuity, a positive discontinuity.

So this is -- and there is no news compared to what we have described in January on this and I think is really these two major blocks.

Of course, from a certain point of view is really three markets.

There is the automotive market.

This is a market that is going well.

We are growing and we have important opportunities now also in microcontrollers.

Then there is other block that is industrial power, microcontrollers, where the mass market and the distributors and there's more customers that is really playing an important role.

And of course one element of aggregation here is our microcontrollers and all the products that we have around the microcontroller in many, many different applications.

And the third area is the specific case of DCG where we expect an accelerated recovery.

Okay, thank you.

Thank you, Kai.

Next question, please.

Bernd Laux, Kepler Cheuvreux.

Thank you very much for taking my question.

I'd like to get back to the matter of FD-SOI.

You announced that you collected two new design wins for the first quarter.

Is it correct to assume that at least one of them is related to smartphones?

And what area is the other in if I'm right?

Thank you.

Well, we said that there are two in DCG, if I remember well.

I think I mentioned another one that is in automotive.

So, indeed is three and nobody -- and none of the three is for smartphones.

Okay, thank you.

A bit.

One -- yes.

But again, then if we get into the details we need to talk about customers.

But the automotive we could describe.

This is our running cooperation with Mobileye and this is the next generation of products.

Is very advanced solution.

I believe is very successful and the new generation will be based on our FD-SOI technology.

But the other two are not for smartphones.

Thank you.

Thank you, Bernd.

The next question, please?

Gianmarco Bonacina, Equita SIM.

Considering the good booking development during the Q4 and the -- let's say a little bit higher than expected seasonal decline in Q1, is the second quarter growth of 2% in line with what you expected or basically there is some delay in the orders versus the -- for the quarter?

And then a related question.

I didn't understand if -- you mentioned -- let's say for DCG and IBP already a stabilization and let's say a return to growth from the second quarter or that will be later on during the year?

Thank you.

Carlo Ferro speaking.

I'll take the first part of your question, Gianmarco, to confirm that at the end what we currently see under I'll say a recurring business (inaudible) is 5% sequential growth from the first quarter to the second quarter.

2% at midpoint for the reported revenues number, 5% when readjusted excluding one-time revenues in Q1 and beside portfolio core ST-Ericsson product.

This 5%, does it fully reflect the demand and the level of booking?

Almost, yes; not totally as we are in a situation under (inaudible) technologies to see delinquency on requested days by the customer higher than normal level as I believe in general the industry is experiencing in particular in area of Automotive and Industrial Power.

Thank you.

And the second was--?

DCG and--.

Yes.

Yes.

So about DCG I (inaudible) in Q2 thanks to the fact that we are moving to the 40-nanometer ARM-based solution we will start to roll off (inaudible) activities.

Okay.

Thank you.

Thank you, Gianmarco.

Next question.

(Inaudible) from AM Capital.

Thank you for taking my question.

I have two questions on product (inaudible).

First one is on your 9-axis movement censor.

Could you elaborate a bit on design win process with that particular product?

Could we expect anything major coming up with that product by second half of this year under volume terms?

And the second one is on the design (inaudible) market platform.

I think you have mentioned something about that.

What is exactly there and do you expect this one to go outside Europe in sometime this year?

No, I -- so the first question is on the 9-axis sensor and the second--.

And the smart grid.

And the smart grid.

The smart grid.

On the smart grid I think we -- maybe Carlo can comment here.

We have a new project that we have been awarded recently.

I do not -- in Eastern Europe.

I do not believe we can mention --.

Cannot disclose.

Disclose.

But I think is potentially is a good program.

I believe overall we have a good technology on the smart grid.

We are present in several countries.

Of course, the deployment has been massive in our -- in Europe in the recent--.

We have a full range of solution, from (inaudible) to ASICs covering wireless or power-line modem with (inaudible) inside.

So this is the strong point.

So (inaudible) and there is this new design win in Eastern Europe that is in addition to what we have and hopefully will be a successful program.

And then as far as the 9-axis, well, this is a product that is more for a wide range of customers rather than for one specific customer in general.

I think we expect a stronger growth in this area with our acoustical MEMS, with our environmental MEMS and also with the fingertip.

This product is more for a variety of customers, mid-size customers and not necessarily one specific high-volume opportunity.

Okay, got it.

Thank you.

Thank you.

We'll take one more question, please.

Amit Harchandani, Citigroup.

Good afternoon, gentlemen.

I'm Amit Harchandani from Citigroup.

My question's related to the earnings first.

They have more or less been answered, but I had a question related to a development earlier this month.

I came across some news reports about researchers that were originally being laid off by Micron approaching STMicroelectronics for jobs.

I think related to the Numonyx joint venture.

I was not quite sure what to make of those reports, but some suggested that ST would be taking those employees back.

Could you maybe clarify what the situation was all about?

And if indeed you are hiring back people, which division would they be going into?

Thank you.

Yes, Amit.

Carlo Ferro taking your question.

Thank you for the question.

Since at the end I have to clarify (inaudible) there were a lot of rumors spread and articles have been written.

At the end, in short ST had not at all any kind of obligations of commitment under his legacy with the former flash memory business and the former Numonyx joint venture.

However, at the end the situation raised of a number of expert researches, people that came available on the market.

And considering our recurrent (inaudible) in these kind of profiles we experience normally in the site of (inaudible) and the site in Italy, considering the profile of these people we enter into an agreement with Micron and we took commitment to hire about 140 people, possibly 170 depending on the available profiles that are technical profile only totally meet the requirement of our groups in Italy to replace (inaudible).

And under certain terms agreed with Micron -- how say we came to a fee with -- how say -- relief of cost in the initial period, making at the end what I believe is a win-to-win solution, a win solution for of course the people continuing to have a job opportunity in the technology environment.

And for us and our group leveraging on expert resources, possibly even act as a cost that take in account the starting up with us and the learning curve.

Okay.

And would these resources be spread across the group or any particular segment where you see their expertise being--?

This is mostly for Automotive, Industrial & Power and, to a certain extent, (inaudible).

And this is over a two-year period, by the way.

We will start to hire these people in the course of the first quarter of 2015.

Okay, very clear.

Thank you, gentlemen.

Absolutely compatible with our legal resources, with our financial model, with improving profitability for the overall company.

Okay, thank you.

Thank you, Amit.

Joya, at this point we'll go ahead and close down the conference call.

I would like to remind everyone that we will host our Investors and Analyst Day in New York on May 15th, so that's coming up in a couple of weeks.

If you need any additional information, please contact Investor Relations and we hope to see you in New York.

Thank you very much.

Ladies and gentlemen, the conference is now over.

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