意法半導體 (STM) 2015 Q2 法說會逐字稿

Ladies and gentlemen good morning.

Welcome to the STMicroelectronics second quarter 2015 earnings results conference call and live webcast.

(Operator Instructions).

The conference is being recorded.

(Operator Instructions).

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, everyone, for joining our second quarter 2015 financial results 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, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Georges Penalver, Chief Strategy Officer; Carmelo Papa, EVP and General Manager of Industrial and Power Discrete Product Group.

This live webcast can be accessed through ST's website.

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

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

We encourage you to review the Safe Harbor Statement contained in the press release that was issued with the results this morning, 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.

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

Carlo.

Thank you, Tait.

Thank you for joining us today on our second quarter earnings conference call.

As usual, we will start with the financial and business review of the second quarter and then of our two product segments in details.

We will then turn to our third quarter outlook.

So let's begin.

Looking across the key financial metrics revenues -- gross margin progression, operating margin and free cash flow generation -- all of these were substantially in line with our expectations.

Revenues totaled $1.76b, increasing 3.2% from Q1 with most of our product groups contributing to the growth and with DPG flat.

On a year-over-year basis, net results decreased 5.6%.

When excluding a negative currency effect and the mobile legacy products, net revenues decreased instead 1.1% year over year, with AMS and MMS registering growth and with APG substantially flat.

As about 15% of our total revenues are euro-dominated, currency effects negatively impacted net revenues in the second quarter by $14m on a sequential basis and $66m on a year-over-year basis.

For the first half of 2015, currency effects negatively impacted total net revenues by $108m.

We continued to diversify our customer base and expand in the mass market with distribution channel sales at 33% of total revenues in the quarter, driven by the Americas, which achieved double-digit growth in point-of-sales on a year-over-year basis.

Our gross margin was on target at 33.8%, improving sequentially by 60 basis points with several positive contributors including, as anticipated, currency, lower unused capacity charges and the product mix.

Moving to expenses, we are performing well here.

As anticipated, combined R&D and SG&A increased sequentially $8m to $599m with currency benefits essentially offsetting the longer number of days in the quarter.

Also, we registered some additional savings from our EPS cost reduction plan which will be completed this month.

Net of R&D grants, expenses were at $564m, so again at the low end of our net operating expense range of $550m to $600m.

Restructuring costs in the quarter were $21m, compared to $29m in the first quarter, largely related to our EPS cost savings program.

Our operating income before impairment and restructuring costs increased to $33m from $10m in the first quarter and it improved by $31m compared to the year-ago quarter excluding the effect of the Nano2017 catch-up.

As you may recall, the European Union approved the funding for the Nano2017 R&D program for the period 2013 to 2017 in June 2014.

As a consequence, we recorded in the second quarter of last year $116m for grants related to prior periods.

More importantly, we see further progress both from products and operational improvements as well as currency benefit.

Excluding existing hedging contracts, operating margin would have been about 3 points higher than the reported 1.9%.

In the second quarter, income tax including a one-time income of $32m associated with the remeasurement of a local tax provision.

Reflecting this benefit, on a sequential basis our net income improved to $35m for the second quarter.

Finally, we have seen another progressive improvement in our free cash flow which rose to $53m from $41m in the first quarter.

And on a year-to-date basis, it is a positive swing of $244m to a positive $94m in the 2015 first half.

Let's now turn to SP&A and EPS performance during the quarter.

Beginning with SP&A, net revenues increased to $1.16b, or 3.6% on a sequential basis, with all product groups contributing to this increase.

More specifically AMs grew in MEMS and microfluidics, IPD in power discrete and power transistor products for mobile and industrial markets, and APG in microcontrollers, infotainment and advanced safety product sales.

Currency effects on SP&A's net revenues had a negative impact of $11m sequentially and $52m on a year-over-year basis, mostly affecting APG as over 20% of the Group's revenues are euro denominated.

SP&A operating margin was 6.6%, improving from the 6.4% in the first quarter.

Due to hedging, SP&A is not yet benefiting in the quarter from favorable currency effect of about 290 basis points.

Within SP&A our industrial and power discrete group recorded net revenues of $444m -- $448m, an increase of 4.2% on a sequential basis, despite softness in components of PC applications and market conditions in China.

During the quarter, we had a number of achievements across the four growing application areas where we are focused.

In power conversion, we won multiple designs for a 16-channel LED driver for panel displays with an important American OEM.

We gained several design wins for low-voltage power MOSFETS in DC-DC telecom converter applications with a number of global manufacturers.

We also continued to broaden our high-voltage portfolio adding a 1200 volt IGBTs that are the industry's best low-frequency performers.

And we launched easy-to-configure controllers to simplify digital power conversion.

In automation, we introduced our power step driver that delivers compact motor control design for applications at high power and we continue to gain traction and extend our customer base with the silicon carbide rectifier diodes.

In portable applications, we continue the fast expansion of the RF baluns within Internet-of-Things applications using either sub gigahertz or Bluetooth Low Energy connectivity solutions.

And we ramped production of AMOLED drivers for the latest smartphones of a major Chinese customer.

And in our fourth focus area, energy management, we have been awarded sockets for the new gapDRIVE galvanic isolation family on a platform for the hybrid electrical vehicles of a market-leading US auto maker.

In our analog, MEMS and sensors groups, revenues in the second quarter totaled $273m, a sequential increase of 7%, driven by our diversification activities combined with products in our traditional areas of strength.

In motion MEMS, we ramped production of our ultra-low-power 6-axis sensor in some of our latest Samsung Galaxy smartphones, as well as in the smart watches from leading global manufacturers.

The product diversification initiatives with key customers allowed us to increase shipments of MEMS microphones, FingerTip touchscreen controllers and pressure sensors.

In terms of new products now generating revenue streams, during the quarter we ramped up shipments of our Bluetooth smart network processor in devices for fitness applications for leading brands.

We also continued to ramp shipments of our micro-mirrors and associated control devices which, as we announced last quarter, were chosen by Intel.

We also saw our automotive sensor business continue to grow.

Even if the business is still small today, the contribution of our MEMS technology is another important step is ST's leadership in smart driving.

Continuing with our position in smart driving and turning to our automotive product group, net revenues in the quarter were $438m, up slightly from the first quarter.

We continue to leverage the strength of our broad-based portfolio doing business in areas of strategic focus.

In active safety, through our partnership with Mobileye we remain positioned as the leading supplier for vision-based active safety systems.

During the quarter, we added three car makers and nine car platforms to the design wins obtained with the EyeQ3 system for production start during this year.

In 32-bit microcontrollers, we continue to see solid growth driven by our existing design win pipeline.

In addition, we captured a new design win at the global leader for a body-control module for a European car manufacturer and earned an award from a US manufacturer for a navigation module.

In car infotainment, we gained a socket for our Accordo2 -- a fully integrated audio subsystem for a telematics box -- with a large Chinese customer and won business from a global automotive parts supply company for a connected radio.

We have also been awarded multiple design wins for our multi-satellite GNSS products in China, in emerging markets and also in the mass market.

And finally, in smart power, we earned an award for body-control modules from a large European Tier One with our vertical intelligent power technology.

Turning now to EPS, second quarter net revenues increased 2.4% on a sequential basis driven by general purpose microcontrollers in MMS and ASIC products in DPG.

By group, MMS increased 3.8% and DPG's revenues were stable on a quarter-to-quarter basis.

EPS negative operating margin was reduced to a negative 7% in the 2015 second quarter from a negative 11.1% in the prior quarter, driven by product mix, lower unused capacity charges and favorable currency effect net of hedging.

In addition, the EPS-cost-savings program, which we are completing this month, will to contribute with the full benefit to come in the fourth quarter.

In the digital product group, revenues in the second quarter were $207m, representing 12% of total ST revenues.

As I mentioned, revenues were stable sequentially thanks to growth in ASICs, offset by the decline of commodity camera module products due to their phase out.

Operating results were still negative, also reduced both on a sequential and year-over-year basis.

We continue to explore options for our digital product group and we expect to give you an interim update on our progress at our Q3 2015 earnings call in October.

During the quarter, we unveiled in France Canal+ market deployment of Technicolor's innovative Hybrid Over-the-top ultra-high-definition broadcast set-up box based on our Cannes SoC family.

In our imaging business, we captured multiple design wins for our Time-of-Flight photonic sensors at several leading Asian smartphone manufacturers with more than 10 phone models with this technology now available on the market.

We were also awarded 28-nanometer FD-SOI ASIC design with a networking customer and we recorded several wins in mixed product ASICs for optical transmission projects.

Moreover, our 100-gigabit-per-second silicon photonics technology gained traction in optical transition projects for large data centers.

Moving now to our microcontrollers, memory and secure MCU group, net revenues were $388m, a sequential increase of 3.8%.

This was driven by general purpose microcontrollers where we reached another record during the second quarter shipping our one-billionth STM32 device.

In the STM32 family, we began delivery of our new STM32F7.

This is the first microcontroller coming to market featuring the ARM Cortex M7 core and a set of advanced peripherals which ensure developers can get maximum performance for the applications.

We introduced the new variance of our popular STM32F4 family which enables smartphone-like graphics for wearable devices, smart appliances and other Internet-of-Things applications.

We also captured several design wins for the STM32 ultra-low-power families in mobile phone, fitness, healthcare and industrial markets.

We also had a number of wins with our EEPROM portfolio.

We began ramping EEPROM products for a major smartphone OEM and we landed wins for 2 megabit EEPROM in wafer-level chip-scale packages for server modules for a global leader.

Finally, we also earned a win for a secure microcontroller in a major electronic identification project in Asia.

Now, let me conclude with our third quarter outlook.

Based upon our visibility and current assessment of mixed market conditions, specifically components for PC applications and the overall economic environment in China, we expect revenues to increase sequentially by about 2.5% at the midpoint.

We expect gross margin to increase to about 35% at the midpoint, mainly thanks to manufacturing efficiency and currency, partially offset by usual price pressure and an amount of unused charges similar to Q2.

All in all, we look to continue to make further sequential improvement in revenues, gross margin, operating margin, free cash flow and to further advance our focused product and technology initiatives.

My colleagues and I would now be happy to take your questions.

Thank you.

(Operator Instructions).

Kai Korschelt, Merrill Lynch.

Yes, good morning, gents.

Thanks for the question.

I had one on the automotive side.

It looks like in China we're seeing a mix change, German car OEMs losing share to the local brands.

I guess that's probably bad for the mix so I'm just wondering how you're seeing that or would you have any other regional color for the automotive business please.

And my second question was on the gross margin improvement in the third quarter.

I think you're guiding at the midpoint for almost 150 bps with very modest growth.

So I'm just wondering if you could walk us through the driver, is it FX, is it restructuring, mix, all three of these?

A bit more color would be appreciated.

Thank you.

Yes, well, I think I'll take the first question on APG and then Carlo will go through the mechanism of the gross margin.

I would say that overall what we see in terms of demand on the premium cars is strong.

Now, of course, it's very difficult for us to understand how much of this is related to the significant improvement in Europe of car registrations and how much is export to China.

But we see a good demand in the automotive on premium cars with, for us, important opportunities in advanced safety and microcontrollers that are the most recent products that we have introduced.

In Asia overall, the situation is weaker, particularly I would say in Japan, but in China we had a material growth in our automotive business moving from Q1 to Q2 and we expect another more modest growth in the automotive business in China moving from Q2 to Q3.

I think overall we expect automotive to, despite seasonality to contribute to the growth moving from Q2 to Q3.

I will leave the second question to Carlo, Carlo Ferro.

Thank you, Carlo.

Good morning, everyone.

So on the gross margin evolution from the second to the third quarter, indeed at midpoint we forecast 120 basis points of progression.

Here of course currency contributes as progressively we are reabsorbing the hedging effect and this is about 0.5 point of the progression.

Another important point at the end is in the second quarter some of the progress has been offset by inefficiency in the fab in the first quarter, you remember first quarter has been quite weak for us in loading and manufacturing that have negatively affected.

The efficiency has improved significantly in the second quarter and so the inventory cycle grows to benefit the gross margin progression for the third quarter, and this is the second-largest positive contributor to the gross margin progression towards the midpoint.

And finally, I believe it's a quarter where we have natural price pressure with also some progression on the product mix and the combination of the two this quarter is still negative but a better balance.

So overall, let me also remind that both the second and the third quarter gross margin includes about 40-basis-point negative impact of charges for unused capacity.

Thank you.

You're welcome.

Thank you Kai.

Next question.

David Mulholland, UBS.

Hi, thanks for taking the questions.

Just firstly, I guess in comparison to what TI was saying last night on linearity through the quarter, I wonder if you'd give a comment on what you've seen?

I guess they said it was quite weak in April and then improved through Q2, I wonder if you could give us some update there.

And then just secondly on DPG, I know you said you'll come back in Q3 with a more concrete update, but I wonder if at this point you could let us know if there's anything that you've already ruled out in terms of strategic options as you progress through the planning stage.

Yes, I ask Tait to --

Yes.

David, your first question was just about the progression in the quarter?

Yes

Of what?

Of bookings, demand or in general?

Yes, demand in general.

Demand in general.

No, I think we have not noticed, I mean bookings improved, there was an improvement quarter over quarter if we compare Q2 over Q1 the overall booking improvement, I'm talking about the control of the CFO, it was 7%, this was the sequential improvement of the bookings moving from Q2 to Q3, less than what we expected but still a material improvement.

And I do not remind any specific pattern month-by-month that is to be underlined.

I think the situation in July is similar.

I think of course we also have frame orders from our customers that are the normal way that we have when we deal particularly with key customers in certain areas that need to be transformed into real orders.

So we have not seen a specific monthly pattern that is important to underline, clearly we had expected stronger booking evolution.

I think geographically there is a difference.

America remains very, very strong.

I think I mentioned this before during my initial address, in America, for instance, what we saw in terms of PoS from our distributors was very, very healthy with certainly a double-digit increase.

In Europe, in the currency euro, the PoS was not bad either, I would say high-single-digit PoS evolution, while overall the PoS was weaker in Asia, this is more from a geographical point of view to give a sense of the evolution of the market.

That's great, thanks.

Then just on DPG.

The second question is on DPG.

No, I prefer, again I prefer not to comment.

I said that we'll come back in October.

We are exploring a number of options but I think it will be not appropriate and even counterproductive to talk about any of these options at this time.

Thanks very much.

Thank you.

Thank you, David.

Next question please.

Sandeep Deshpande, JPMorgan.

Thank you for letting me on.

My question would be regarding the earlier question, Carlo.

You have seen better trends on the order book than your competitors.

Do you see that the better trends on orders that you're seeing is because you're gaining share in some segment in particular?

So is this a new product that somewhere you've gained share?

Because if you've seen the comments from your peer group in the US, they've all been much more cautious than your indications, particularly for instance we have seen in the mobile market we've seen very weak indication.

Secondly, I have a question for Carlo Ferro on OpEx.

Can you give us an indication of how you see OpEx development in the third quarter?

Yes, well, I -- Sandeep, did you refer specifically to mobile or more in general?

I mean the first part of your question was --

No, I just mentioned mobile but I'm interested more in general essentially.

Yes, more in general.

Well, I think there is a clear, as I said, there is a clear, let's say, diversified pattern in terms of geography, this is for sure.

I think America is strong or even very strong.

Europe, if we neglect the fact that of course we have a massive (background noise) in terms of euro-denominated sales, I mean I read before that Q2 over Q2 in one year for this part, for the billing, of course then on the P&L there is an advantage, but for the billing there is $66m penalization on the top line due to the effect of the euro-denominated.

I think Europe is not bad either and in general Asia is weaker.

Of course we do not see the result from Europe because a very material part of them, about 50% of what we do in Europe in euro-denominated.

So if we go market segments, well, maybe let's start with mobile.

Clearly what we see is that we have one major OEM that is going, I would say, pretty well.

And then there is the rest of the market that is more under pressure, this is what we see.

If we move to automotive, I just want to repeat what I just said, we see a strong demand on the premium cars, particularly thanks to digital products, and these indeed are new products, like the advanced safety, the microcontrollers.

And we see a weaker demand from Asia, particularly from Japan.

If we now are going to power applications, for instance, certainly there are areas that are very important and new for us, like the products for data centers and servers, but we have important weaknesses in the areas of personal computers that, as you know, for us is related to battery chargers, power supplies and also hard disk drives where we have an important presence with our modular control solution.

I would say that the overall situation, the best way to define it is mixed, so it's mixed and we'll see the evolution during the next weeks.

Your second question, Sandeep, is on the operating expenses.

Well, I believe here really they're well under control.

The second-quarter operating expenses net of grants has been $554m, so towards the low end of the $550m to $600m range.

Third quarter is normally a good quarter in terms of seasonality given the vacation period in Europe and then we have an additional step to come from the savings from the restructuring plan that EPS has announced last October, which is completed in these weeks as we told.

And so overall we could expect for the third quarter operating expenses net of grants well below the $550m low end.

It's obvious that this is very transitional because of a third quarter, on the quarter/quarter we said in this case the accounting calendar plays on the other direction as Q4 this year is even particularly longer than other quarters.

Some of the effect, for instance, of the inflationary dynamic, we have the salary increase mid of the year that are not visible yet in the third quarter because of the vacation and it becomes evident in the fourth quarter.

So overall at this stage, add to the current level of exchange rate and also considering the advantage of progressing and taking advantage of the exchange, I would expect for the fourth quarter expenses net of grants level with the second quarter actually.

Thank you.

Thank you, Sandeep.

We'll move to the next question.

Achal Sultania, Credit Suisse.

Hi, thanks for taking my questions.

Two questions.

First, just a follow-up on that OpEx question.

Given that you're still going to see some benefits from cost savings from digital and also the FX benefits, could we actually see a situation where next year your OpEx on an average quarterly run-rate basis could actually be below your guidance of EUR550m to EUR560m?

Well, of course it's not euros, it is US dollars.

Yes, sorry.

So I think, no, I think we confirm what we said and then of course there is evolution quarter by quarter, for instance, this year will be materially lower than $550m but the range is $550m and $600m and our ambition is to stay in the area as much as possible close to the $250m -- close to the $550m sorry.

Okay and just to follow up, so obviously I think last quarter you said that there is going to be about 440 basis points of impact to your operating margins because of the currency, and now you're saying that there was 300 basis points impact to your Group margins this quarter.

So is it fair to say that you've already seen 150 basis points of FX benefit in your numbers in this quarter and there is another 300 basis points yet to come as we go forward?

Well, this I leave to Carlo.

Yes, plus or minus it's correct, then considering also that the reference exchange rate is not always the same.

So I have in front of me a computation now done at 1.10, which by the way is very similar to the exchange rate as we talk and here what we could expect is between 2 and 2.5 points of improvement to the operating income to come from the second quarter towards the full effect and the full impact.

Okay.

Maybe to give a number I think is in the P&L, if we take the second quarter our hedging loss was $56m.

Okay.

Okay thanks a lot, it's helpful.

Thanks, Achal.

Next question.

Francois Meunier, Morgan Stanley.

Hello, Carlo and Carlo.

Hello.

The first question is on inventories which went up $50m during the quarter.

Is that cautious enough given all the negative news we're hearing at the moment?

That's the first question.

The second question is about your microcontroller and other stuff division, I think you call it MMS now.

It's moved to negative growth, down in Q2 versus Q1.

Could you explain what happened here?

Is it microcontrollers?

Is it the memory part?

Is it pricing?

What happened?

Thank you.

I'll take the second one and Carlo I think will comment more in detail on the inventory.

I think if we look at MMS, frankly -- and it's not an excuse -- excluding the exchange rate effect, of course a very material part of microcontrollers that we sell in Europe, the growth year over year was, let's say, 1.4%.

I think we see good prospects; we have good prospects on this family for the rest of the year.

And these good prospects are covering basically the three product divisions that we have in MMS.

I repeat, the most important of course is general purpose microcontrollers; the second is secure microcontrollers and the third one is (inaudible) memories that is the EEPROM family.

So Q2 was -- net of the currency effect, year over year was 1.4% increase.

Sequentially, I think the increase was 3.8% if I remember well and we expect a good trend in the future not only as a total MMS but also in line per line -- line by line on the three divisions composing MMS.

The second question -- good morning, Francois -- the second question about inventory, you pick the increase from the first to the second quarter.

Indeed we have increased then we have decreased in Q1 so overall if you look at from the beginning of the year it's not a big change, the $27m reduction on the inventory value, continuing to run at similar terms on revenues.

There are also ingredients that are specific, for instance, new products coming in certain areas, for instance, for microcontrollers, and of course normally it's quite seasonal in second quarter to prepare something for the third quarter as fab activity in Europe in the third quarter is also a bit impacted from the vacation period.

So I see nothing special there.

Thank you for the question as obviously inventory turns 3.8 is not where target to be and then progressively the objective is to accelerate inventory turns.

Of course, the first priority these days is to serve revenues growth for the new products and to keep an eye on the saturation of the fab as well.

All right, thank you.

Thank you, Francois.

Next question?

Janardan Menon, Liberum.

Good morning.

Thanks for taking the question.

Just to clarify on the currency benefit point, you said that there's still about 2% to 2.5% of benefit to come from the currency hedges rolling off and about 50 basis points you're getting in Q3.

So the remaining roughly 200 basis points, will most of that come in Q4 if the currency stays at 1.1 or is it going to roll -- is the majority by Q1 next year, as I think you said at your Capital Markets Day as well?

Can you just give us that linearity on how many quarters it's going to take to get that full benefit?

And also many of your peers have talked about industrial weakness and that's where we are seeing commentary from Linear, TI and all that.

Can you say -- are you seeing much weakness on the industrial markets and if you are what is compensating in your case?

Is there specific product ramps that you're seeing which is helping you gain market share and if so what are those products which are helping you do well versus the others?

I take the first one and I also thank you for the question which helps to clarify the answer to the prior question about the progression in margin due to currency referred to the fourth quarter.

So the 2 to 2.5 points improvement to come is from Q2 towards Q4.

Q4 will be a quarter with still some effect of outstanding hedging as we hedge on a 12-months horizon so carrying on under the current exchange rate still some negative impact of the hedging.

So to complete the full effect to take advantage of the exchange rate at about 1.10 you can add an additional 1 point or less than 1 point benefit, say between 0.5 to 1 point additional benefit.

But in the previous answer you said that you're getting 50 basis points in Q3.

Out of the 120 basis points of gross margin increase 50 is from currency.

So should I assume therefore that you will get about 150 plus basis points Q3 to Q4?

And then of course there is the impact in COGS, there is the impact on OpEx so I believe it's a fair assumption that the 2 to 2.5 points to come from Q2 towards Q4 may basically easily materialize in Q3 and Q4 progressively.

Okay.

On the other one, a small point.

Sometimes when we have products like battery chargers, power supply, in our industry we consider these industrial products, even if at the end the final market is personal computers.

So this may be -- so clearly on this area we see a weakness.

There is no discussion.

But it's more PC related, even if it is power supplies, those kind of power management products that are considered as industrial.

Now, Carmelo, do you want to comment on the industrial?

Well, just one comment.

Also here and there there are different situations.

Overall, for instance, we hear from our customers that the lighting market is (inaudible), in particular driven by the LED lighting conversion.

Still in this precise moment some customers are complaining about the high level of stock, but this doesn't change the perspective in the lighting.

This is in -- in this very moment for instance.

Motor control is going very well for instance.

Again we have products for power supply, a range of new products for data centers, for servers.

These are I believe important opportunities and --

Also for the new technology, silicon carbide.

Because we have new technologies both for the ICs but also for the discrete part.

Yes.

So I think what we are seeing here is newer technologies for applications like data centers and servers but also for the support industry 4.0, the robotics.

All of this is increasing and we see (background noise) on the more traditional lighting part of the business, the traditional battery chargers for personal computers, etc.

So of course our focus is to make sure that we are -- that we become stronger on the higher end, thanks to the combination of smart power and also new discrete technologies.

One area that we normally do not touch but I believe is becoming material is the RF baluns and the RF baluns is of course the integration of multiple passive components and that is very much using Internet of Things and also (multiple speakers) and RF applications.

And we see an excellent area of opportunity starting this year.

Understood.

Thank you very much.

Thank you.

Thank you, Janardan.

Next question?

Andrew Gardiner, Barclays.

Good morning.

Thanks very much.

I just had a question on the digital products group.

You mentioned it was flat quarter on quarter with ASICs growing and camera modules down.

I was just wondering if you could help us a bit more in terms of the magnitude of these moves and also any comment around the trends of set-top box products in the quarter?

I think -- now, Carlo, do we have the exact numbers on the camera modules -- I think this is a business that we have decided to phase out.

So we are moving from $20m, $25m per quarter -- $20m per quarter in Q4 last year but this is the overall -- we try to give you the precise number.

This is a business that in Q4 last year was about $20m and it's going to be zero because it's the phase-out that we have decided by Q4 this year.

So very close to zero.

So this is the impact of the phase-out of this part.

I have to say that in this unit we also have the former ST-Ericsson products that are also being phased out.

So now for us to -- after the discussion we had one quarter ago and certain new opportunities that did not materialize, of course for us remaining flat means to replace this business that is phasing out with new products and I think there are two areas that I would like to mention in terms of new product opportunities.

One is the ASICs and the other one is our Cannes and Cannes and Wi-Fi and the combination of high definition new products but also the ultra high definition.

So this part is in these quarters, in these two quarters is of course the one that is compensating for the decline of the ST-Ericsson and the decline of the camera module, commodity camera module.

Another area that is contributing to this growth is what we call BabyBear or the Time of Flight silicon photonics.

This is now becoming more pervasive in Asia, particularly in the area so far but we have new opportunities of auto focusing.

And we have now a number of phone makers in Asia that are using this new technology for a better auto focus.

I have -- I think I have got the number for the overall camera module business.

I suppose this was in Q4 last year right?

No, this is 20 -- $20m, Carlo, is the reduction in revenues from Q2 2014 to Q2 2015 and then this is $28m while the overall imaging business headline revenues by $9m in the same period.

So in one year on this, I mean in the last 12 months we're saying on this camera module business we lost about $30m and I think we have another $10m or so to go.

But it will be zero in Q4 this year.

Understood.

Thank you.

Also you mentioned the ultra high definition products.

Is that -- earlier in the year you were concerned that that wasn't going to ramp quite as quickly as you anticipated.

Would you say that you're on track with those perhaps lower expectations?

Well, I think the deployment is much slower than what we expected, I confirm.

Of course I think our aspirations, as you know, were much higher here.

So now what is happening in these two or three quarters is that we are replacing this business that is legacy products like the commodity camera module and also the legacy of the ST-Ericsson.

We are replacing this part of the business with new products that are related to the Cannes, the Cannes Wi-Fi, and the initial start of the 4K solutions and also, as I mentioned, with some new ASICs and the Time of Flight.

Understood.

Thank you very much.

Thank you, Andrew.

Next question?

Amit Harchandani, Citigroup.

Good morning, gentlemen.

Amit Harchandani from Citigroup.

Thanks for taking my questions.

Two if I may.

Firstly, if I could just go back to the bookings answer earlier and I was wondering if you could just give at least a comment on how you are seeing the overall book to bill shape up, where does it stand and if any further color across the different segments?

And secondly, in terms of the seasonality, as we think about moving from Q3 to Q4 it usually tends to be, at least the way we see it over the past three years, around flattish to slightly down.

How do you -- what's your best case assumption for seasonality at this stage based on the visibility you have from Q3 to Q4?

If you could share any initial thoughts on that?

Thank you.

Overall again when we talk about book to bill it's always better to understand what is inside and what is not inside.

So what we have inside is of course all the bookings, all the firm order bookings, that is real bookings from customers, plus we have all the materialization of the pull from customers and for this piece of business the book to bill is mathematically always 1 because we book at the moment we bill.

So overall I think we have a book to bill in the quarter that is below the parity.

In fact it's about 1.1 which is a positive bill to bill let's say.

Now I think if we look at the mixed market conditions, frankly I think it would be not prudent to tell you what are our expectations.

Of course we are very, very -- we are very keen to make sure that all the opportunities that we have will materialize but I think it's premature to give you an assessment of the way that we see the market moving from Q3 into Q4.

Thank you.

And if I may just quickly slip in a follow-up.

Any update on FD-SOI traction during the quarter?

Yes.

So this --

Jean-Marc speaking.

So as Carlo said during his speech, we have been awarded an additional 28 FD-SOI on ASIC for digital networking which is confirming the good momentum of this technology.

And then another important recent event is the announcement of Global Foundries moving to and offering now a 22-nanometer FD-SOI technology.

Just for the sake of accuracy, 22-nanometer FD-SOI technology in fact is the implementation of our second generation transistor device in FD-SOI, so what we call for us the 40 nanometer.

Fourteen.

The 14 nanometer, sorry, but in 22-nanometer-like geometry for interconnection.

The main advantage is that this technology will be processed in a 22-nanometer fab class so offering generally a very good cost.

So ST is seeing this move very positively because it will strengthen the momentum again in the ecosystem.

Thank you, gentlemen.

Thank you, Amit.

Next question?

Jerome Ramel, Exane BNP Paribas.

Good morning.

Good morning.

One question for Carlo.

Could you rank for the guidance for Q3 in terms of revenue, so on average 2.5%, could you give us a ranking between the divisions which one is going to grow faster and which one is going to be the lowest one?

And maybe one question for Jean-Marc.

On the 22-nanometer node from Global Foundries, are they using double patterning or not?

Thank you.

Well, maybe while Carlo Ferro is working (multiple speakers).

No, I can take.

It's easy since at the end I will -- I'll give you the ranking, starting from the fast growing sequentially.

And the ranking is microcontrollers, APG, DPG, IPD, AMS.

So we were very accurate.

Any of them going down?

This we do not comment today.

(multiple spekaers).

So the second one is on what?

(Multiple speakers).

On the -- no, I think certainly this is for Jean-Marc.

Okay.

Jerome, I think it would be much better if you check with Global Foundries but again the key driver of Global Foundries is really to offer technology with a second generation after the 28, improving really the performances, so both the capacity to enable a processor at a higher speed but mainly with a very good dynamic power consumption and possibly with a very low leakage for Internet of Things applications.

Then they really would like to maximize the interconnect cost, really minimizing the usage of multiple patterning.

As far as I know, I guess there is one level, only one level using double patterning, no more than that.

But overall, believe me, their solution is well optimized in terms of manufacturing cost and yield learning curve and really minimizing the usage of complex lithography like double patterning and [edging].

Thank you very much.

Thank you, Jerome.

Next question please?

Gianmarco Bonacina, Equita.

Yes, good morning.

A few questions.

The first one on the CapEx.

I saw Q2 you had basically double the amount in Q1.

Can you give an idea for the full year?

Then on the OpEx, you mentioned in the report that in Q2 you had some one-off R&D expenses.

If you can quantify this amount?

And then the last is just on the -- if you can remind on the sensitivity for the currency because you mentioned before that you are expecting about 0.5 points of benefit from the currency in Q3 but I read in the report that you expect euro-dollar of 1.16 in Q3 and it was 1.17 in Q2.

So it's just $0.01 of improvement, nonetheless you are saying that you will improve the gross margin by about 10m from FX, which I think is about double your normal sensitivity.

Maybe it's rounding, I don't know, but if you can clarify again this sensitivity.

Thank you.

Okay, so maybe I start with the one-off in R&D and this is about $8m which at the end has been on the second quarter 2015 R&D expenses.

The second question is on the CapEx.

I will not consider the evolution Q1/Q2 particularly different from what we have planned for the year.

We have been executing the plan.

It's obvious that we are carefully monitoring the evolution of demand and the specific need to support revenue growth.

The plan we started here was for CapEx in the range of $600m for the full year.

We are now considering the modularity of the execution and for sure we will not exceed this amount and eventually, depending on demand, we could be possibly below this amount at the end of the year.

And finally on currency, again you guys may decide which prospect you may want to have.

There are many angles, one is the rule of thumb of the impact, the other one is the impact of the hedging, the third one is I directly tell you what is the overall impact actual and the one to come.

I repeat, the one expected to come is between 2 to 2.5 points at operating margin level from the second quarter to the fourth quarter.

This is not fully absorbing the effect of the hedging still partially affecting the Q4.

So there is another 0.5 to 1 point to come after Q4, assuming the exchange rate stays at 1.10.

And out of the evolution from Q2 to Q4 it's fair to consider about half in the third quarter, half in the fourth quarter.

This encompasses the impact on the revenues, the impact on the gross margin, the impact on the COGS and the impact on the operating expenses.

Thank you.

Thank you, Gianmarco.

Next question please?

Robert Sanders, Deutsche Bank.

Yes, hi, good morning, everyone.

Thanks for squeezing me in.

I was just following on from Francois's question about MMS.

You talked about positive trends in Q3.

There's a lot of press around the bit two smartphone makers exploring embedded SIM in 2016.

I was just wondering how you could see that affecting your secure microcontroller business.

Do you think you could be a net beneficiary of the introduction of embedded SIM in 2016?

Well, of course, it's very difficult for us to predict this evolution.

Of course there is a lot of -- there are a lot of (inaudible), etc.

I think overall we have been traditionally very strong in the area of secure microcontrollers and we also have traditional business in what in the past was finance smartcard business.

We were present in the past; we are present today; we have good technology in terms of silicon technology with good embedded flash but also I think we have good security on our STM32.

So I think we are well positioned but of course this is a very general comment.

How the market will evolve is very difficult for us to assess at this moment.

Certainly ST is a Company that has been always working in a leading position in the smartcard and since there is the secure microcontrollers I think we are also in a leading position there.

So we are ready to take the opportunities.

Great and just a quick follow-up, Carlo Ferro, if you could just give the update on the utilization both in Crolles and across the Group into Q3 and Q4 if you can?

Thanks.

Certainly.

So on the fab utilization second quarter, at the end it materialized as expected.

Indeed the overall utilization of standard line capacity has been 84% and this, as mentioned, has resulted in $9m of unused capacity charges to the COGS of the quarter.

For the third quarter we expect to improve and to increase the utilization rate in 8-inch but to have a bit lower utilization in the 12-inch.

In the 12-inch we now expect a saturation level in the range of the 70s percent of the overall capacity.

So on this respect the unused capacity charges in second quarter and third quarter will be substantially similar.

Then looking forward, frankly Q4 very much depends on the evolution of demand.

We may have a lower activity in 12-inch and in this case this could result in higher unused capacity charges in Q4.

So obvious that in the 300mm fab it's important the overall loading.

For us also it's very important to progress on evolving the technology mix in the fab and in this respect a good sign is that we expect to end the year with Crolles 300 loaded with embedded non-volatile memories for over 50% of (multiple speakers).

Even 60.

Yes, about between 50% to 60% of the overall capacity.

That's great.

Thank you.

Thank you, Rob.

Next question?

Gunther Hollfelder, Baader.

Thank you.

I have a first question on your distribution business which grew in the second quarter.

Do you expect here a decline or a stable trend in the third quarter?

And could you also disclose what's the approximate share of Asia here of your distribution business?

Well, I think we don't want to give a detailed split by region.

I think it's -- there are also global customers here in distribution, as you know very well, in fact, (technical difficulty) two or three global leaders.

But I would say that overall the point of sales of our distribution business, including the negative effect of the euro-denominated part that is material because of course we are in Europe, we are a European company.

I think the overall growth of the point of sales Q2 over Q2 one year including the euro-dollar effect on the top line is 3%.

And this 3% of course I cannot report the POS evolution by region.

It would be too many things also for our competitors.

It's much stronger, much stronger in the United States with a double digit, a good growth in Europe taking into consideration that the biggest part of the distribution business in Europe of course we sell in the currency euro, and a weaker performance in terms of POS evolution in Asia.

So this is what I can say about the overall distribution business.

Of course our motivation is to keep going with the POS growth and what we are trying to do here is to exploit as much as possible our very strong presence with the microcontrollers and try to sell chipset products around our microcontrollers.

And for this purpose we have introduced in November last year a new system to promote our products that is based on a microcontrollers development board plus a number of expansion boards with all the other technologies so that means basically three other things.

One is of course analog sensors, the other one is everything that is needed in terms of radio frequency in connectivity and the third one is about power, motor control, for instance, or power management.

So we have introduced this approach but (technical difficulty) our distributors and particularly of course, more importantly, for the customers of our distributors, everything is centered around our STM32 but with a number of expansion boards that make much simpler the life of our customers to design and run their R&D not only using our microcontrollers but using chipset products around our microcontrollers.

Okay, thank you.

I had a question also on the automotive business.

Here on your 77 GHz radar sensor and also the camera sensors for automotive, what's the timeline for these products right now?

Do you -- are you assembling a 77 GHz product today or do you already have design wins?

And the same maybe also, you said that camera sensors probably your sales are zero in the fourth quarter.

Are you still trying here to leverage special camera sensors into the automotive market?

Yes, I know that this initiative on the radar is a very, very important initiative.

I have to say that I prefer not to give any comment here because my comment may not be completely accurate.

So we'll come back to you after we get complete information, better information on the design win status and the assembling.

I know that it is a very important initiative for us and we come back to you with the information on this one.

If we -- the other question was on --

The image sensors for automotive.

Well, I think this is the kind of diversification that we want to push.

I think yesterday I was at a major car makers and I would say that our sensors is in production and this is a differentiated -- of course it's not a commodity camera module, it's a differentiated imaging device and that is an integral part of our system around advanced safety where, as you know, you need sensors on the car to monitor.

So certainly it's an important area.

We also have image -- similar processing solutions for automotive applications.

So it is a massive effort, this one, around advanced safety.

It's of course our cooperation with Mobileye but it's also the special image sensors for automotive is -- our ISP for automotive applications is very much centered on our FD-SOI technology and I think is certainly one area of priority for ST.

But to be specific on the camera, we are in production already.

Okay.

Many thanks.

Thank you.

Thank you, Gunther.

Next question please?

Maxime Mallet, Natixis.

Good morning, gentlemen.

Just a quick question; it was a follow-up actually.

You mentioned that MMS was up 1.4% excluding the ForEx impact.

I was wondering if you could give us the figure for the other segments excluding the ForEx impact year on year?

I think we can give, yes, not as detailed as MMS but I think overall SP&A was up about one point if we exclude the exchange rate.

And I think -- so SP&A was up about 1 point, MMS, as I said, is 1.4 points and DPG overall is below (multiple speakers).

In APG there is zero currency impact.

In DPG.

In DPG there is zero currency impact.

In revenues of course, we are talking about revenues.

Yes.

So SP&A is plus 1 net of currency, MMS is better, 1.4, and DPG is -- also due to the ST-Ericsson former products and the camera -- the commodity camera module discontinuation is minus 20.

Okay.

Thanks.

Thank you.

Thank you, Maxime.

Next question?

Adithya Metukuk, Merrill Lynch.

Hi, it's Adi from Merrill Lynch.

A quick question -- a quick couple of questions.

Firstly on the set-top box business, could you comment on whether this grew in the quarter?

Secondly, in the banking card market can you describe how demand is trending, especially in the US, and how big of a growth driver do you think this will be in 3Q within MMS?

And then could you give some commentary on if any divisions see their revenues decline in the third quarter and if so by how much?

Thank you.

Set-top box, then banking cards and then --

(Multiple speakers) about the set-top box what --

You were just basically asking about how the market is moving.

And did your revenues in the set-top box business, did they grow in the quarter?

Revenues for set-top box.

The revenues for the set-top box are let's say slightly improving quarter after quarter, certainly not at the pace we want it, but they are slightly improving.

But what I think is even more important to underline is the change of mix because we have about -- we are about to finally exploit these new technologies and products that is the Cannes, the Cannes Wi-Fi, the 4K, etc.

So the mix change is also material to the division.

The other one was about --

Banking cards.

The banking cards is clearly an important opportunity.

I think you mentioned US.

For us it's also -- US is certainly also a material opportunity for MMS in the second half of this year.

I have to say that it took a while but I think we also have some opportunities to grow in China in the area of the banking -- in the banking business.

So certainly this is an area that is important for us.

It's one of the three divisions that we have in what we call secure microcontrollers.

One division is about banking, one division is about identification and one division is about of course mobile.

So these are the three areas.

As usual at the end we don't want to specifically guide on revenue growth product group by product group.

We have already addressed the question one way.

The other way eventually and the complementary information we want to give you is we see microcontroller and automotive with a solid growth, perhaps above the overall blended average of the 2.5% at midpoint.

For the other groups we see lower-than-average evolution or eventually not growth.

And then of course this reflects the market conditions, reflects the [PC] market, reflects the mobile market in Asia weaker than expected and reflects a number of specific situations that also are under evolution and monitoring in the course of the quarter as usual when we plant the quarter.

Okay?

Okay.

I think at this point since we've run a little long we'll go ahead and close our second quarter conference call.

Thank you all for participating and we look forward to speaking with you soon.

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