意法半導體 (STM) 2014 Q2 法說會逐字稿

Ladies and gentlemen, good morning.

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

I'm Joya, the Chorus Call operator.

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

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

(Operator Instructions).

The conference must not be recorded for publication or broadcast.

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

Please go ahead sir.

Thank you for joining our second quarter 2014 financial results conference call.

We hope that this new timetable for the earnings release and conference call is helpful.

We have also decided with this change to combine both the investment community and press participants on one call to share our commentary and answers to your questions all together.

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

Joining Carlo on the call today are Jean-Marc Chery, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Georges Penalver, Chief Strategy Officer; Carmelo Papa, Executive Vice President, General Manager of the Industrial & Power Discrete Group and a familiar voice to the media, Claudia Levo, Corporate Vice President, External Communications.

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 may 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 and also in ST's most recent regulatory filings for a full description of these risk factors.

Also, to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up.

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

Carlo?

Thank you Tait and welcome to our second quarter earnings conference call.

For the benefit of all, the agenda today includes a review of our financial highlights and of our two product segments, further details on our product groups within the segment, and then our outlook for the third quarter.

So let us begin.

Our quarterly results were well aligned with our guidance.

Revenue came in at the midpoint of our outlook of 2% sequential growth.

Gross margin was 34% above the 33.6% midpoint of our range, improving both quarter to quarter and year over year.

Operating expenses were again well on track with our financial model and we returned to a net profit at the bottom line.

We also further strengthened our capital structure and significantly enhanced our financial flexibility to boost growth with the $1b convertible debt offering completed in July which will be visible in our third quarter balance sheet.

ST simultaneously launched a buyback program for 20m shares in order to meet the Company's obligations in relation to its employee stock award plans.

Moreover, we returned capital to our shareholders with the payment of a quarterly dividend of $0.10 per share or $90m in the aggregate.

Turning to the second quarter results in more depth, revenues came in at $1.86b, up 2.1% sequentially.

Excluding legacy ST-Ericsson products and one-time licensing revenue in the first quarter, this represents a sequential progression of 4.7%.

In our sense and power and automotive product segment, the key drivers of our top line growth were the industrial and power discrete and automotive product groups.

IPD and APG increased 7.4% and 4.2% sequentially respectively.

And in our embedded processing solutions segment, EPS, our microcontrollers, memory and secure microcontrollers grew 14.5% sequentially.

So all three of our largest groups performed very well.

Our customer diversification across market channels continued.

Distribution represented 31% of total sales in the second quarter, up from 26% at this time last year and slightly increasing from the first quarter.

Gross margin improved sequentially, up 120 basis points, thanks to manufacturing efficiencies, a favorable product mix and product pruning.

So we continue to move towards our target range of 36% to 38%.

Turning to operating expenses, we are well aligned with our objective.

Combined R&D and SG&A totaled $626m in the second quarter with the sequential increase mainly due to higher number of days in the quarter.

Year over year our operating costs are significantly lower, due to the exit of ST-Ericsson and our cost reduction programs.

Also in the second quarter, the European Union approved the funding of EUR400m for the Nano2017 R&D program.

This funding, granted by the French authorities to ST for the development of new technologies in the Nanoelectronics sector, is for the period 2013 to 2017.

Apart from the catch-up of the Nano2017 program recorded in the second quarter, going forward, and in combination with other smaller programs, R&D grants are expected to total about $30m per quarter.

This is helping us to keep our net operating expenses at the lower end of our target range.

We also posted a significant improvement in our operating income before restructuring of about $52m year over year on a comparable basis, excluding the impact of the Nano2017 grant catch-up in the second quarter this year and the Ericsson portion of the ST-Ericsson result during the second quarter of 2013.

Now let's move to our product segment results, starting with embedded processing solutions.

With the second quarter, we have begun what we anticipate being a positive growth trajectory for EPS.

EPS revenues increased 4.6% on a sequential basis.

This is mainly due to growth in MMS and DCG, the latter when excluding legacy ST-Ericsson products.

As expected, legacy ST-Ericsson revenues decreased to $34m in Q2 compared to $63m in Q1.

Our digital consumer and ASIC business grew 4.2% sequentially after reaching an inflection point in the first quarter, although not yet at the pace we are expecting for the coming quarters.

In the set-top box business we expanded our ecosystem around 4K ultra high definition TV.

This is the right place to be since the industry expects 4K TV sets to account for 5% of the global TV market this year and to rise to 42% by 2018.

Overall, in the connected client server and home gateway families we now have about 30 designs with major customers and operators.

During the quarter we also secured wins for cable chipset in new generation high definition zappers from several operators.

Interest and momentum in next generation ASICs is also continuing with two major design wins, one for computer peripherals and one for communication infrastructure in FD-SOI.

Turning to IBP, our photonic sensors for proximity sensing applications based on our FlightSense technology are well suited to a wide range of applications.

During the quarter we began volume shipment of our time of flight proximity sensor for the LG G3 smartphone that began its global rollout from the second quarter of 2014.

We also started volume shipment for the mass market driven by Internet of Things and robotics applications.

In MMS this was another record revenue quarter for our general purpose microcontrollers, the fifth in a row.

These strong results reflect our success in the mass market which represented in the quarter about 70% of total general purpose microcontroller sales and with key OEMs.

For example, we ramped production of our STM32 for a new Samsung smartphone that was launched in the second quarter of 2014.

We also captured STM32 design wins in a mobile phone accessory at another major OEM and in a new platform for a major actor in the metering industry.

Finally, we sampled our latest secure MCUs to ID and banking customers and revealed our latest STPay dual interface product line for the US EMV banking card migration.

From an operating margin perspective, EPS saw an improvement both sequentially and year over year, largely reflecting the catch-up of funding for the Nano2017 R&D program.

Let's now cover the sense & power and automotive segment, starting with our automotive product group, APG.

APG increased 4.2% sequentially and 11.3% year over year and it achieved a record quarter in terms of billing, the highest ever in ST's history, benefiting from solid execution of our strategy combined with healthy market conditions.

In fact, during the first half of the year light vehicle sales were up almost 4% versus the first half of 2013, driven by China but showing also improved conditions in Europe.

Let me share some of the highlights for automotive in the quarter.

First, we saw continued expansion in infotainment where we are either number one or number two in each of the main sub-segments.

Here our latest generation car radio processor earned its first important design win at a major Chinese customer as well as wins in Europe and in US.

Second, our strategy of partnerships with car makers to address radical innovation is progressing.

In Q2 we announced a partnership with Changan, the fastest-growing Chinese car maker with over 40% car sales growth year to date.

We also signed another significant partnership with a European premium car brand in addition to those partnerships that we had already disclosed with Audi, Hyundai Autron and Great Wall.

Third, I would like to mention some wins in automotive microcontrollers for parking assistance and transmission applications for European customers, as well as our continued expansion overall in the US for car body with design wins at a large American tier one supplier.

Industrial and power discrete products, IPD, increased 7.4% on a sequential basis and 1.9% year over year.

Here we are seeing improving market conditions and are benefiting from our marketing efforts in the mass market and distribution.

We captured a number of design wins in some of our focus areas.

For example, we landed a design win with IGBTs for an air conditioner application with a leading manufacturer in Asia.

We won sockets in server power supply applications from a global leader for ultra high performance silicon carbide diodes and we earned a design win for a fully integrated motor driver in a new project for textile equipment.

And we qualified high voltage MOSFETs for power supplies and LED lighting applications with numerous top tier vendors around the world.

Results for analog MEMS and sensors reflect the diversification phase we are in as we ramp up new promising products, expand our offering towards a broader set of customers and applications, and prune low margin products.

Our new products, including microphones, touch controllers, 6-axis gyroscopes and pressure sensors, have been recently selected in different combinations for forthcoming flagship smartphone models.

In terms of market diversification, we expanded our business in China and Taiwan, supplying MEMS products to Asus, Lenovo, Oppo, Meizu among others.

We also enjoyed high volume ramp-up of our 6-axis MEMS combo in Huawei Ascend P7 phone and started to ramp up 6-axis smart sensors with Xiaomi.

In our analog business we are seeing good traction with our Bluetooth low energy solution with over 700 design registrations since we started sampling the product during Q1.

The broad interest and success in the mass market will deliver revenues in the second half of this year, alongside our other low power RF solutions for the Internet of Things.

Overall, SP&A's operating margin improved again this quarter to 10.5% from 8.7% in the first quarter and was up substantially from a year ago quarter level of 3.5%.

This is in line with our previously communicated expectation of margin improvement, thanks to increased revenues from new products, a favorable product mix, low margin product pruning and manufacturing efficiencies.

Let me now comment on our outlook for the third quarter.

The general macroeconomic environment has been improving and is strong in certain areas such as automotive and industrial.

So we begin with a favorable backdrop.

From ST's perspective we see sequential revenue growth in all areas of our product portfolio.

MMS, which has led the way with record revenues quarter after quarter, will temporarily slow in Q3, although we are still expecting sequential growth.

IPD and APG will perform better than seasonal, thanks to both favorable industry trends and the solid market positions.

Importantly, AMS and DCG will become again significant contributors to ST's growth.

Looking at our specific guidance for the third quarter, we expect net revenues to grow by about 3% at the midpoint.

Based upon our revenue growth outlook as well as product mix between analog and digital, we anticipate that our third quarter gross margin will increase to about 34.4% at the midpoint, despite a higher level of unused capacity charges as our manufacturing capacity in digital technology is not yet fully utilized.

Excluding the second quarter one-time effect related to the Nano2017, we anticipate further improvement in our operating margin in the third quarter.

Last, but not least, in the third quarter we expect to return to positive free cash flow generation.

So to conclude, ST made solid progress in the second quarter from many perspectives.

Revenue and gross margin improvement; a solid pipeline of design wins across our products; important steps towards DCG's turnaround and AMS renewed acceleration; a further refocus of our portfolio and ultimately financial return.

But for sure more has to be done.

This is our continued focus and commitment in order to continue to generate revenue for all of our stakeholders.

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

Thank you.

(Operator Instructions).

Sandeep Deshpande, JPMorgan.

Yes, hi.

Thanks for letting me on.

My question would be on top line growth.

You've seen in the second quarter Samsung had a softer second quarter.

Samsung is an important customer to STMicro.

Also based on your mid next year 10% margin guidance, you need to grow revenues from the current level by about 17%.

So do you see that progress towards that point?

And particularly associated with DCG where you've talked about the biggest level of revenue growth over this period and how is the progress on that front?

And I have one follow-up.

Yes indeed, I think we are progressing and I think DCG, as we said, is going to be an important contributor to the growth during the next few quarters.

We also have, looking at the third quarter of this year, an additional decline of ST-Ericsson that we are not communicating any longer.

So if you take Q2, we had sequential growth on our core business of 4.7% and we will have another step in Q4.

I believe we are encouraged by the progress in DCG when looking at all the new design wins, customer traction.

Also the 4K -- as I was mentioning, the 4K pervasion in the area of TV.

Of course we are not in the TV business, but for us it's the set-top box business.

And this is higher end chipsets and we expect that the pervasiveness here will go from about 5% this year to more than 40% in the year 2018.

So the progress is significant in terms of design wins for the set-top box but also in terms of ASIC products on the FD-SOI.

On the other hand, we are also pruning products.

I think I want to underline this.

This is, as already announced, is part of our strategy.

Of course it's not helping the growth, but it's important because ultimately we want to land in a model where our gross margin is in between 36% and 38%.

Clearly today a part of the Company, if we look at the manufacturing activity, is in a good loading situation.

But there is a part of the Company, the digital technology fabs that are not yet at an optimal level of loading and this is another opportunity in terms of gross margin expansion.

So Q2 is a step.

We will make another step in Q3 and we are all working hard and we are committed to move on the trajectory to our financial model target.

A follow-up on the gross margin to Carlo Ferro.

Carlo, you've talked about this roadmap on the gross margin, 100 basis points from ST-Ericsson, then something from the fab loading, something from the product pruning.

Can you give us an update on that at this point?

Clearly the ST-Ericsson seems to be almost gone, so maybe the 100 basis points from ST-Ericsson is already in the number.

So what is now the upside from here, from the 34.4% that you have guided in the third quarter, the upside to the middle of next year?

Good morning Sandeep.

Good morning everyone.

Yes, you refer at the end of a roadmap very well a decline in respect to the various contributors to improving the gross margin: the rundown of ST-Ericsson products, the restructuring initiative in manufacturing, the pruning of low margin products, the efficiency and the better loading of the fabs.

Indeed, in respect to the former ST-Ericsson products, you are correct that the weight on revenues is much lower.

However, meanwhile the gross margin has even deteriorated for the obvious erosion on these legacy products.

So we have made progress, but we still see about half a point of gross margin progression coming from replacing the ST-Ericsson legacy products with the average products of our portfolio.

The other block is the one of the manufacturing initiative.

This is about the conversion from 6 towards 8-inch in Singapore, the phase-out of the assembly manufacturing in Longgang and here at the end, as said, the benefit will be evident at completion of the initiative.

And this is about half to 1 full point of benefit still to come.

The third block is the one of the product -- low margin product optimization.

Here, as Carlo has mentioned, we made some good progress, also maybe at the cost sometimes of lower revenue growth, particularly for AMS.

And what we see is about 1 point to come from this block.

And then the better loading and the efficiency starting from the situation of the second quarter still are going to be an important contributor.

Net of the expected price effect and mix in the period, we do anticipate over 1 point of benefit from this other block of initiatives.

Thank you Carlo.

You're welcome.

Thank you Sandeep.

Next question?

Andrew Gardiner, Barclays.

Good morning.

Thanks for taking my question.

I was just interested in diving a bit deeper into some of the product areas.

Firstly, on AMS and in particular within that in MEMS, we saw a bit of pressure on AMS revenue in 1Q; that's clearly accelerated in the second quarter.

You're now saying you're looking for Q on Q growth again in 3Q.

I was just interested in understanding a bit more about what's going on with MEMS within that.

I think in the Analysts Day in May you confirmed that competitive intensity had increased, but that you aim to offset that by a broader portfolio of products.

And if I recall correctly, you said there was still the potential for growth in MEMS in 2014.

But given what you've just reported, I wanted to see how you think things stand today and for the rest of the year around the MEMS business?

Thanks.

Well, I think that clearly AMS is at the bottom in Q2.

It is also the group that has been most impacted by the product pruning on certain families and products, like for instance standard logic and certain standard linear products.

And we have also worked a lot on differentiation in terms of products and in terms of applications and in terms of customers.

I believe that and I was mentioning just a few minutes ago, we have now a family of new products from microphones, including analog microphones, fingertip, a new family of gyroscopes, and also new environmental sensors like our pressure sensors, that are going to be very good products.

They have been selected by major customers for their flagship models.

I think we are also working, as I was saying, on the diversification from a geographical point of view, with a major, major effort in China.

We have now -- I was listing some of the key customers that we have in China.

We are progressing in the automotive with new wins in the automotive business also in China.

And ultimately, I think growth is important but, as I said, the pruning here is also impacting.

And ultimately we want to have AMS as in the past contributing to the overall operating income of sense & power and automotive where we have, despite a limited sales growth during the last 12 months, a very significant improvement in the operating income, moving from 3.5% in Q2 last year to 10.5% in Q2 this year.

This is not enough.

As you know, we want to make another step in the top line and also in terms of operating income.

But AMS, first of all, will start growing again in the next quarter.

And it's very, very important that we move on also with our product pruning activity and making sure that the overall AMS contribution to the operating income of SP&A will continue as in the past.

Okay.

Thank you for that explanation.

Also just quickly on wireless, as you highlighted in some of your comments, you haven't detailed your expectation for where that goes from here in the press release.

It did halve in the second quarter; we're at a pretty low level in the $30m range.

But can you give us any sense as to where that will go in the second half?

Are we going quickly to zero?

Is it end of lives or does it drag on for a little longer?

No, there will be another step-down.

Of course we do not want to report any longer because we also need to be -- this is really the last quarter that we report on all our wireless activity.

But there will be another decline in revenues.

I think in Q2 we have done about $34m.

I think ultimately we will end to about $50m or so.

So there will be other steps down.

But again, we do not want to report this any longer and also to make our numbers simpler and to move on from where we are now.

But indeed, there is another $20m to step down here.

Thank you Carlo.

Thank you.

Thank you Andrew.

Next question?

Marie Mawad, Bloomberg.

Yes, good morning everyone.

My question is about your outlook.

Basically your Q3 outlook is broadly in line with what the consensus is expecting or as we've seen more generally in the industry lots of optimism coming from some of your rivals, expectations were below what some of them announced as a forecast.

Can you explain a little bit why that is and what that means for the coming quarter in terms of market share?

Thank you.

Yes.

Overall we see a good traction in important markets for ST.

If we look at the automotive industry, it is an area where we see traction across the board from an application point of view, customer point of view, geographical point of view.

So Q3 clearly will be above seasonal in the automotive.

So we have a strong backlog and good momentum.

Industrial, industrial is the same.

If there is an area that is really strong today, it is our performance in distribution.

And of course industrial is the main area of focus in distribution with a wide -- a very wide number of customers, fragmented, and this is an area where of course we also track our inventory at the distribution level.

And I can say -- I can report that it is in a healthy situation.

So these are areas where there is strong traction and a strong momentum.

In other areas of course it's more customer specific.

This is -- if you take wireless, of course it's more customer specific.

Of course the smartphone industry is an important -- is a very important industry.

We are not present any longer with the digital core but with a lot of peripheral products.

Something that I would like to underline is this new proximity sensor that we have recently introduced, it's a very nice phone of LG.

And this for us is a new business and may become a material business in the next future.

But clearly here it's more customer specific.

The general trend -- of course the weight of the Chinese is increasing.

So we need to make sure that we are present in China in covering all the market there where the fragmentation in terms of customers is pretty high.

And I would say in the area of the set-top box, that for us is the area in the consumer where we are present.

Really what is very important for us is the pervasiveness of the 4K screens, the 4K displays, the evolution where we believe there will be a strong growth.

And we want to be there and we want to be there with new products, that is higher value -- our higher value products.

So overall, the momentum is good.

I think in industrial, in the automotive it's very much driven by the market.

There's a good trend, there's a good traction, and of course this is important for ST.

If we look at other businesses, it's more customer specific but I believe it's a good momentum.

And the inventory position I would say is pretty healthy everywhere.

Would you think globally that your outlook -- that you took a cautious stand on the outlook or that you've left yourself room for a good surprise there?

No.

We always give a realistic number.

The outlook of course is the result of many, many things: growth, transitions, ST-Ericsson going down, product pruning.

So ultimately what is important for us is to make another step in terms of operating income and making sure that we have progress, that we are on the right trajectory.

But we always give realistic figures.

Thank you.

Thank you.

Thank you for your question.

Next question please?

Gareth Jenkins, UBS.

A couple, if I could, please.

I just wondered, your revenues are down 2% year over year if we exclude wireless.

I just wondered could you give a sense of the total impact that pruning has had in the quarter, just so that we can get a sense of how much is proactively being managed down?

And secondly, I just wonder if you could comment -- you've talked historically this year about a very good book to bill and the bookings improving.

Could you talk about the bookings environment and related to that, utilization rates please?

Yes.

So I will cover the part of the bookings and then Carlo will cover both the evolution year over year and also the loading situation in our fabs.

I think booking in Q2 was good.

We had a positive book to bill.

We have -- we saw also for instance a good month of June.

June was pretty good I think.

In fact June was the best month in the quarter in terms of bookings.

And very much across the board.

This was a global trend that we see by product family and also by geography.

So it was a good booking momentum.

I think from this point of view I have nothing new to report.

This was the same trend that we had before.

I think the book to bill is positive and I can say that the month of June was pretty good, better than May and April.

Carlo?

Okay, Gareth.

I guess you have two questions, one is on the year-over-year revenues dynamic.

Yes, the product pruning has somehow mitigated the year-over-year dynamic.

We could estimate in the range of 1.5 points at least the impact.

So you see that out of that at the end and excluding the phase-out from the former ST-Ericsson legacy products, revenues are substantially flat.

This at the end very much reflects different trends, as you noted, by product group.

For sense & power and automotive, if we exclude the effect of the product pruning, before the effect of the product pruning, revenues year over year grew.

And they grew as a result of a very strong growth in automotive and a dynamic that this year for many reasons we said was not positive for AMS.

And then in the area of the embedded processing solutions, at the end revenues excluding the ST-Ericsson former products did not grow year over year.

And again this is a little different trend with microcontrollers having experienced a very strong growth and the area of the digital convergence which is facing the transition in its product offering.

Your second question is about the utilization rate.

Utilization rate for the second quarter has been in average 87%, 88%.

So in line substantially with the expectation, resulting in some but mild impact of unused capacity on the gross margin.

We estimate in the range of 20 basis points.

And then for the current quarter, what we see overall on all the fabs, on all the technology we expect a similar level of overall utilization in the range of 87%.

However, this includes technologies and especially those in the mixed-signal and analog technologies, with a very high utilization rate.

While we have in 8-inch two fabs below 80% expected utilization this quarter, but more importantly, in 200-millimeter, we expect utilization below 70%.

And this overall may result in about 80 basis point negative hit to the gross margin already, of course, incorporated in the gross margin outlook for the quarter.

Very clear, thank you.

Thank you, Gareth.

Next question, please.

Francois Meunier, Morgan Stanley.

Yes, thanks for taking my question.

The first question is about Carlo, the comments you made about Bluetooth low energy.

You said you had more than 700 product registration for this product.

Is it like design win or is it like people downloading the development kit?

No, no, no, no.

This is formal design wins with our distributors.

So there is a process -- there is a precise formal process and because of course then there is also some form of design protection for our distributors that are helping us to design in these products.

No, no, it is the formalization of design-win effort.

Of course, it's very fragmented, and I have reported what we have done in distribution.

So this is the design activity that we have run with our distribution that we track formally, because it's also one of the area where there is a recognition to our distributions in terms of design registration.

Okay, thank you.

Maybe now a question more for Carlo Ferro and it's about the new convertible bond you've issued this quarter.

I would like to understand a bit more what is the plan to use this $1b.

Is there any debt you could reimburse quite quickly, given the interest on this one is quite low?

And what's going to be the impact on the share count of this convertible bond?

Thank you.

Francois, thank you very much for the question.

I hope that at the end you appreciate the transaction.

Really what we want at the point has been really to take opportunities existing on the capital market, in a form as much as possible friendly to the equity investors.

And at the end, as you have noted, our issuance is substantially neutral in term of equity dilution, as the combination of the net share settlement options, the ability of redeeming in cash the principal amount, and the simultaneous launch of a share buy-back program at the end make it substantially neutral, the impact on the number of shares.

Then to answer the third of your question, under accounting for EPS perspective -- earnings per share, in this case, not embedded processing -- the EPS perspective, there will be no addition on the share count to the extent that the bond remains below the conversion price, which I would remind you is of -- in the range of $12.

So no addition to the denominator of the EPS.

In term of use of proceeds -- in term of use of proceeds at the end the rationale behind the issuance is basically to raise funds when the market make it available, at a very appealing condition, as opposed of, on as needed basis.

So there is no specific need.

This is for general corporate purposes.

This, for sure, offer a lot of flexibility for the Company to boost growth and strengthen the capital structure, also reinforcing our objective of return of capital to shareholders for dividend distribution.

There is no opportunity, frankly, to use the proceeds to redeem outstanding debt, as the outstanding debt at the end is mostly with the European Investment Bank and his term and cost remains very appealing.

So again, and -- finally the cost of [carrying] would be really none, or very minor, as you may note the cost of the instrument is very minor.

We have issued the 5-year tranche at zero yield/zero coupon.

To my knowledge this is the first one issued, the zero yield/zero coupon in US dollar since before the credit crunch in 2008.

And the 7 years at 1% yield equals, on a floating basis, a LIBOR minus 210 basis points.

So basically very little cost, ability of some use or yield from the use of liquidity, and the opportunity to get the flexibility for future opportunity of growth.

Okay, that's very clear.

Thank you, Carlo and Carlo.

Thank you.

Thank you, Francois.

Next question, please.

Stephane Houri, Natixis.

Yes, hello.

This is Stephane Houri, from Natixis.

I have a question about FD-SOI.

You've said that you had two new major design wins.

Can you specify if those design wins are still in 28-nanometer, or if they are in 14-nanometer?

And if you start to see some traction for 14-nanometer FD-SOI, can you remind us how much design win you have in FD-SOI so far?

And looking at the DCG division dynamic, from which side are you expecting more?

Are you expecting more from set-top box, ASICs or from FD-SOI to achieve your target to double the revenues by the end of 2015?

Thank you.

So, Jean-Marc Chery speaking.

Good morning.

So first, okay, about the two new design wins, one is in bulk technology on 28-nanometer and the second one is for communication infrastructure, it's on the next generation of FD-SOI.

You mean 14-nanometer?

This is 14-nanometer.

So overall okay, now we are at 18 design wins overall on FD-SOI.

Coming back to DCG dynamic, if you remember well what we always state that this is dynamic will be in two waves.

So the first wave is this year, encompassing the broadcast set-top box on 14-nanometer, and then during the last quarter on communication infrastructure using 32-nanometer technology.

Then next year we will start to take benefit of the 4K2K [proposition] on set-top box, which will be basically on both bulk technology and FD-SOI technology.

And during the second half of next year we will start to enjoy the FD-SOI growth and all the ASIC, so both for networking, communication and consumer ASIC.

So basically we will have two waves and well-spread between bulk technology and FD-SOI technology.

Okay.

And just looking short term, I heard you say that the growth -- sequential growth in Q2 for DCG, excluding ST-Ericsson, was about 4%.

And you said this is not yet what you are expecting.

Do you mean that you expect an acceleration over those plus 4% starting in Q3 already?

Yes, this Carlo will take, [Mr.

Ferro].

But you know, Stephane, at the end, giving a guidance quarter after quarter on growth by product group is a bit of granularity, in respect to the way we do normally guide and outlook.

I believe here the message is the digital convergence group really reached the inflection point in the course of the first quarter.

We experienced -- they experienced, as Carlo said, a [4.6%] growth in the second quarter, sequentially.

And we do expect the third quarter to grow again.

Then to quantify it, give us the [patience] of three months to tell you.

Yes, okay.

And just precision -- sorry for coming back to that -- but did Jean-Marc say 14-nanometer, one four?

Yes, yes.

Yes.

Okay, thank you very much.

Thank you, Stephane.

Next question, please.

Janardan Menon, Liberum Capital.

Hi, thanks for taking the question.

Two questions, if I may.

One is, Carlo, just on a top-down perspective, the semiconductor industry, especially in areas like industrial automotive, has been doing quite well for quite a few quarters now.

And there's always a feeling in the market whether that may be reaching a cyclical peak of any sort, and concerns of that nature.

But your comments were that you saw very broad-based booking strength accelerating into June.

So from where you are seeing the industry right now, what would be your view?

Is it that this is something which is still quite a long way to go that we are still in an accelerating trend, and you will -- the semiconductor industry including STM is likely to see quite a few more quarters of strength?

Or have you seen any kind of warning signs in any part of the business, including some of the more consumer types of the business, which might give room for caution of any sort?

Then I have a small follow-up after that.

Yes.

No, we have not seen any sign.

I was mentioning before, for instance, of course we have been attentive.

I -- we have a number of indicators that are important to us.

Now, the first indicator is the evolution of our backlog and this we do systematically, daily, and we cover the next few quarters.

So there is nothing that is not indicating here other positive steps in Q3 and in Q4.

There is also another important indicator, that is the point of sales of our distributors, and the inventory position of our distributors.

And those are -- here what I have to report is the point of sales in Q2 was very good -- was good.

And the -- sequentially it was a big, big step forward.

I think we have -- we have seen a sequential increase in the POS of our distributors that is above 15%, which is pretty strong.

Of course we measure the activity of our distributors based on the point of sales, and not what we ship to our distributors, but what they sell of our products.

Importantly also, the inventory of our distributors we believe is healthy, including in Europe.

We had a recent review, I think the situation of the inventory in Europe is pretty healthy.

Another indication, for instance, is the information that we have from our automotive customers, car makers, etc., about their activity during the course of Q3 that of course and certain reasons is vacation time and it's a positive indication.

So of course what I'm reporting here is what we -- is what we know, what we saw, and so far there are no signs of a specific -- of specific weaknesses.

In other sectors, if you take wireless, for instance, it's maybe more customer specific.

I already mentioned the trend before; we see the weight of the Chinese smartphone makers increasing, so -- but so far so good.

Okay, thank you very much.

And just a brief follow-up on the operating expenses modeling.

Carlo, you were guiding -- including the $30m which you will now get from the Nano2017 funding that you will be at the low end of the range.

So should we -- excluding the grant, will you see an increase from the $626m that you had in Q2?

Is that the way we should look at it?

And then you put in the additional money, and so you'll come back to close to the $600m level?

Is that the way we should be modeling it for the next few quarters?

Maybe I take -- Carlo Ferro is taking your question, Janardan.

I would say we should eventually make some difference between the third and the fourth quarter, for also some reason of different length of the accounting calendar in Q4, and the obvious reason of seasonality between the two quarter.

For Q3 you may expect gross expense is similar, or a few million dollar different from the $626m gross we experienced in the second quarter.

So net of the grant, that will be at the low of the range.

For the fourth quarter we have some increase due to the seasonality and the longer number of days in the accounting calendar.

However, on the net, you may expect net operating expenses around the midpoint of the range -- of the $600m to $650m net OpEx range.

Thank you very much.

You're welcome.

Thank you, Janardan.

Next question, please.

Johannes Schaller, Deutsche Bank.

Yes, hi there.

Thanks for taking my question.

Just on secure microcontrollers, could you maybe quickly remind us how much of the MMS segment that roughly accounts for at the moment?

And then just over the course of this year share some of the dynamics there with us.

I think attach rates for embedded secure elements seem to have come down quite a bit.

Some of your competitors are also quite vocal on share gains in embedded secure elements.

I was just wondering how we should be thinking about the segment.

Are there some more positive dynamics that help supporting growth?

Should we maybe think about declines over the course of this year?

Thank you.

Yes.

No, first of all I think I cannot provide the detailed number for -- this is one of the divisions that we have for MMS.

And I think -- here I believe there are areas where we see a very, very strong momentum.

Everything that is around banking, for instance, we see a positive trend.

In America, but also in China, this is a positive trend.

If we look at -- if we look at the smartphone, I think there is a number of opportunities in the smartphone, and some is related to the sensor hub.

This is a good opportunity.

Another one is related to the secure SIM.

A third one is related to the secure element.

Some of our customers, they decided not to include the secure element solution in their flagship model, in the vast majority of their volume for 2014.

But this is in fact more a Q2, let's say, impact.

We see a good trend, a good opportunity with the near-field communication, also in this area.

So I think overall for us it's a good business.

Of course there are situations that are specific to customers, but I believe we have excellent technology here and the so-called secure microcontrollers are contributing positively to the overall MMS performance.

Clearly, banking will be important here, in the next quarter.

I believe secure SIMs will be important; near-field communication will be important.

So I think this is continuing the contribution that this business unit is giving to MMS.

Okay, that's helpful.

Just a quick follow up.

So there is obviously at one of your customers as you've said a, let's say, reduced tax rate.

But is my understanding right that the remaining volumes, you are still shipping the embedded secure element?

Is that correct?

This is too much of details.

And it's really, really customer specific, so I cannot comment here.

Understood, thank you.

Thank you.

Thank you, Johannes.

Next question?

Jerome Ramel, Exane BNP Paribas.

Yes, good morning.

Just a quick question on Q2.

I just would like to understand how you have allocated the catch-up of the grant from Nano2017, between the SP&A and EPS division, just to help to fine-tune the model.

Okay, Jerome, Carlo Ferro is taking your question, and I'm quite prepared as I have all my fellow colleagues and managers of the Group are very keen on the same question as well.

The answer is very easy.

At the end of the day, we do adopt a rule based on technical effort and future utilization of technologies to allocate the process technology effort to each of the product group.

On top of that, of course it's easy to allocate the R&D cost for the product design programs that are directly attached to the Group.

As the grant follows a specific program, the allocation of the grants exactly mirror the allocation of the related R&D cost.

Okay.

And maybe just a follow-up on what Jean-Marc said on FD-SOI.

You got 18 design wins, but with how many clients?

We took on the clients -- several clients.

Yes, several clients spread between --

(Inaudible).

-- communication infrastructure and consumer.

But it's more than two clients?

Yes, of course, yes.

Okay, thank you.

Thank you, Jerome.

Next question, please.

Adithya Metuku, Bank of America, Merrill Lynch.

Actually, my question has been answered.

Thanks gents.

Thank you.

Next question, please.

Bernd Laux, Kepler Cheuvreux.

Good morning, gentlemen.

Good morning.

Most of my questions also have been answered, so there's just one left.

It relates to the announced exit from the joint venture 3Sun.

Is this now completely behind or should we anticipate any follow-up cost?

And in terms of restructuring, you had this $20m in the second quarter.

Should we model roughly the same for the next few quarters or will that come down?

Thank you.

Bernd, thank you for the question, as you give us the opportunity to expand on this subject, which at the end we have communicated, together with the earnings, as we signed the agreement just yesterday.

Again, the decision to exit 3Sun is part of our strategy to focus on the core business.

At the end, as you have noted from a prior period, the result of the joint venture is not delivering the expected return.

It started also to become a detractor to the P&L and to the cash flow of the Company.

Additionally, more recently, the shareholding partnership had overall to be re-considered, given the recent evaluation of the corporate situation at one of the three partners, at Sharp.

And frankly the joint venture vision fits much better with the one of Enel Green Power and their value chain.

They have committed to continue the industrial operation in Catania on this joint venture.

So at this point we thought it appropriate it is better to all the stakeholders to exit the 3Sun joint venture.

The second-quarter P&L impact capture the definitive impact of 3Sun for us, so there will not be any next sale in this respect.

This includes the impairment, the write-off of the shareholder loan, the loss of the second quarter, a contribution to the buyer against the full release of ST from any future liability and any current obligations.

And as you know there is a total charge of $51m, out of which the largest part is not cash.

Thank you.

Thank you, Bernd.

Next question?

And there was another question on the restructuring costs for the following quarters.

Oh, I'm sorry.

On the restructuring for the following quarter, you may expect some follow-up on the ongoing initiative, I would say in the size of a few million dollar; up to $5m for each of Q3 and Q4.

Thanks.

Thank you.

Next question, please.

Lee Simpson, Jefferies.

Thanks -- thanks for taking my question.

Maybe just a quick one on free cash flow, if I could.

If I've got the calculation right, [2%] growth in revenues, 34% gross margin, $625m let's call it OpEx, $30m for the funding and about $5m, as you've just said, for the restructuring, you're looking at $50m to $60m operating income.

And with that in mind, where -- tax of course being whatever it is -- the -- and let's say the capital intensity stays at 6%/7%, the gap here is -- what happens in working capital?

So you've got inventories at [3.7 turns].

One assumes that you're not going to allow working capital to grow that much in 3Q, to make free cash flow positive.

I guess what I'm asking is, am I thinking of this correctly from a mathematics perspective and, secondly, is it working capital here that will be the focus this quarter?

Well, it's quite elaborate and please understand we could not validate or discuss any of the individual ingredients of your model there in the call.

But at a high level I believe to project our cash flow for the next couple of quarters, you correctly consider that we are going to have some substantial recovery in working capital.

Also taking account that there are ingredients like, for instance the grants, the (inaudible) for tax, the R&D tax credit in France that at the end happen to be collected normally on I would say, [batch] event during the year, as opposed of [relatively] during the year.

And of course this reflects then on the full year as well.

And the other important ingredient I wanted to reiterate is we are on track on our capital expenditure plan, and we reiterate the guidance of CapEx in the range of $510m to $530m for the full year 2014.

Thank you very much.

And maybe as a quick follow-up, if I could, on the DCG growth, in particular as it relates to set-top boxes.

I'm just trying to understand end-market dynamics, and how they tie through to the growth that you see.

Are we looking specifically for signs of upgrade cycles, particularly in Europe for set-top boxes or are we looking for a specific competitive swap out, maybe say in US cable?

Maybe just as we touch on the US, can you give us a sense for how your end-customer consolidations, especially as I say in the US, is affecting any design-win progress there?

Thanks.

Well, clearly the driver for us in the 4K; this is clear.

I think in the short term we also have the expansion of our, as I said before, zapper set-top box, with what we define as the new [class two] that is a 14-nanometer family.

But the real driver here is very much related to the 4K evolution and, for us, to a new business.

And the new business is the American market and in particular, the cable American market where today our presence is marginal.

I think we have -- we have already won a number of important operators and, of course, the customers that are serving these operators and making the boxes.

But in the short term, as Jean-Marc was saying before, the growth this year is more related to the 14-nanometer product than it is for the traditional set-top-box devices.

And -- but the real focus is two things.

Number one is the evolution in terms of TV screens and evolution of the 4K and number two is the American market.

It's a very important market.

It's a market of $1.3b.

It's a market where we are participating only marginally today.

Now you mention -- you mention certain M&A activities, ready to -- to the United States.

In fact I -- for us is important to be present in all operators.

And of course we do not expect that these mergers would have any impact on our recent designs with the most important operators there.

One area that for us is also new is -- and becoming important -- is really -- is a device that we define as Alicante.

It's the name of a city but it's really the interface with the cable.

It's a DOCSIS 3.0 that is a completely new business for us, that we are certified by [Cable Labs] in the United States and we are focusing now the next standard that is the DOCSIS 3.1.

So I'm trying to give you the drivers and these are higher-end products and, for us, of course it's very important to move on with designing them, enjoy good (inaudible) during the course of 2015.

Great, that's very informative.

Thank you very much.

Thank you.

Thank you, Lee.

Next question, please.

Amit Harchandani, Citigroup.

Hi, good morning gents.

Amit Harchandani from Citigroup, thanks for taking my question.

Just two quick clarifications, if I may.

Firstly, in terms of the catch-up contribution, R&D funding, could you confirm if that's included within the cash flow that we have for the second quarter?

No, we recognize the P&L impact.

We have not collected yet, so zero effect on the cash flow of Q2.

Okay, thank you.

And secondly --

(Multiple speakers).

-- just to clarify, are you still reiterating your targets for hitting 10% margin by third quarter 2015 and doubling your DCG revenues by fourth quarter 2015?

This remains the target for the Company.

Fantastic, thank you very much.

Thank you, Amit.

Next question, please.

Gianmarco Bonacina, Equita SIM.

Yes, good morning.

A couple of questions.

One on AMS, just because the performance in the first half, if I look year over year, was quite weak.

You mentioned some portfolio pruning and some, let's say, recovery thanks to new products in the second half.

But just to understand for the full year, is it fair to say that full year 2014 in terms of revenues will be somewhat lower than full year 2013, because even if I'm assuming some recovery in the second half, probably that's not enough to offset the decline in the first half?

And then the second question, about the recent convertible bond.

If you can -- I understand that you don't have any short-term plans to do acquisitions.

But just in the mid-term, is this bond issue also can be used to do some bolt-on M&A?

And, if yes, in which areas do you see the opportunity to, let's say, to make some target acquisitions?

Thank you.

Okay, the answer to question number one, Gianmarco, is yes -- it's substantially correct understanding.

Answer to question number two, is of course a little bit more elaborate, as at the end when we talk about flexibility for future growth there are many ingredients of organic growth, of development, of capabilities and capacities in our own infrastructure, and on possible M&A.

Frankly, at this point, who do we have identified, any specific target?

We will not talk about future flexibility, [who would have] been more explicit on this respect.

So I believe unfortunately there is very little to add to what we said so far on this respect.

We remain vigilant.

We have a clear understanding that each of the two segments wants and has to be self-spending under the financial standpoint.

And, if possible, M&A has to deliver the appropriate return, both in term of acceleration of growth and in term of accretion of earnings per share to the overall company.

Thank you, Gianmarco.

Thank you.

We'll move to the next question, please.

Guenther Hollfelder, Baader Bank.

Hello, thank you.

One question on the automotive strength; better than normal seasonal patterns, what you were expecting in the third quarter.

Could you provide some color what of your products driving this strength in Q3, and also, from a customer perspective, what regions or what segments?

Thanks.

Yes.

I think in Q3 the driver are more the core automotive products.

Everything that is related to [power train]; everything that is related to [body], for instance, and a little bit less in terms of car infotainment.

But, as I said before, we have momentum in the four regions where we operate, in all the regions.

And of course microcontrollers is becoming more and more important.

We have -- and we have already anticipated -- we have already anticipated the commodities, failure of the design wins with the new family of microcontrollers that we started to develop in now six, seven years ago that was -- is now starting to pay off.

So it's a material growth this year.

And finally, safety.

Safety, there are a lot of new applications, strong traction.

So I would say that all the core of the car in Q3 is contributing, maybe a little bit less infotainment part during the course of third quarter.

Any comments on premium versus low and medium range, what you are seeing right now?

I think I have to say that our presence in Germany is very, very strong.

So this is typically -- this is typically contributing a lot and this is more on premium car.

But we are good -- we are making good, very good progress in China.

In China we are number one, in fact, in automotive, and -- but clearly the weight of the premium car is important and our presence is Germany, with all the German ecosystem, is of course is a very, very important driver for the growth.

Okay, thank you.

Thank you, Guenther.

At this point we'll take our last question.

Francesco Previtera, Banca Akros.

Yes, thank you for taking my question.

It is about cash flow generation.

What are the elements that can improve the capacity in the coming quarter in terms of cash flow, the free cash flow generation?

Well, of course, first of all, the fundamentals.

I think we are now back to profit and we want to improve from where we are there, in terms of the net income, so the net income.

Clearly an important ingredient here will be working capital in the second part of the year, and Carlo has already mentioned this.

But I want to underline the fundamentals.

I think our EBITDA is improving and, for us, this is top priority of course.

And we want to move on from here and we expect an important turnaround in the cash flow in the second half of this year.

Okay, thank you.

Thank you.

Thank you, Francesco.

At this point I think we'll close and, Carlo, any comments?

Okay.

At this point Joya will close the conference call.

Thank you everyone for participating.

Ladies and gentlemen, the conference is now over.

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

You may now disconnect your lines.

Goodbye.