意法半導體 (STM) 2017 Q3 法說會逐字稿

Ladies and gentlemen, good morning or good afternoon.

Welcome to the STMicroelectronics Q3 2017 Earnings Results Conference Call and Live Webcast.

I am [Moira], the Chorus Call operator.

(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.

Good morning.

Thank you everyone for joining our third quarter and first 9 months 2017 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, Deputy CEO; Carlo Ferro, Chief Financial Officer; Georges Penalver, Chief Strategy Officer.

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 1 question and a brief follow up.

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

Carlo?

Well, thank you Tait and thank you for joining us on our third quarter earnings conference call.

Our agenda today includes an overview of our results followed by a more detailed discussion by product group and then we will finish with a fourth quarter outlook and full-year perspective.

ST achieved a number of important milestones in the third quarter.

Our transformation is progressing with visible results driven by our strong focus on high-growth application areas such as the Internet of Things, industrial, smartphones and smart driving.

Sales in the third quarter were $2.14 billion, driven by a portfolio with multiple drivers of sustainable revenue growth.

Our revenue results came along with a strong improvement in our manufacturing performance bringing our gross margin to 39.5%.

We saw a substantial improvement in the operating performance of all our product groups, resulting in an operating margin before impairment and restructuring of 13.7% for ST in total.

So let's look at the third quarter to understand how our company is performing and why we think our applications focus will enable ST to drive to quarter revenue and net income growth as well as shareholder value.

Beginning with our third quarter revenues, they increased 11.1% sequentially, a better than seasonal performance and 210 basis points better than the midpoint of our guidance with all product groups growing and with an important contribution coming from new products.

All regions recorded a double-digit sequential revenue growth.

On a year-over-year basis, revenues increased 18.9% on double-digit growth for all product groups.

Our customer base continues to be well balanced.

Distribution represented 34% of revenues in Q3 with a year-over-year point of sales growth of 12.2%.

For the first 9 months of 2017, total revenues increased 15% to $5.88 billion.

Manufacturing efficiencies and favorable product mix are the main drivers of our gross margin improvement.

Gross margin was 39.5% in the third quarter coming in 50 basis points above the midpoint of our guidance range and increasing 120 basis points sequentially.

The favorable factors were partially offset by normal price pressure and negative currency effects, net of hedging.

On a year-over-year basis, gross margin increased 370 basis points on significantly improved manufacturing efficiency and better product mix as well as improved fab loading, partially offset by normal price pressure.

In the third quarter, our operating income before impairment and the restructuring charges increased to $292 million and represented an operating margin of 13.7%.

Here we benefited from product and profit initiatives driving operating leverage, better product mix and manufacturing efficiencies.

For the first 9 months, operating income before impairment and restructuring charges rose to $610 million or 10.4% of net revenues.

Net income increased significantly in the third quarter to $236 million and year-to-date reached $494 million.

Net capital expenditures were $365 million during the third quarter and $891 million year-to-date.

Our full-year CapEx plans are consistent with the targeted range of $1.25 billion to $1.3 billion that we highlighted last quarter.

Free cash flow was $80 million in the third quarter and $194 million for the first 9 months, well above our cash dividend of $160 million year-to-date.

Even after a more intensive level of capital expenditure, our net financial position was $446 million at the end of September.

Overall liquidity increased to $2.62 billion, reflecting the $1.5 billion convertible bond offering we completed in July at an overall [zero] cost and with a structure friendly to our equity shareholders.

During the third quarter, we also completed the early redemption of the full 2019 $600 million tranche of our convertible bonds issued in 2014.

In the fourth quarter, based on the notice of conversion already received by bondholders and the notice of redemption issued buy us, we will settle the full 2021 $400 million tranche of convertible bonds.

So by the end of the year we will have completed the early redemption of the full $1 billion convertible bonds issued in 2014.

Adjusting for this redemption of the convertible bonds our pro forma liquidity exiting the third quarter was at about $2.2 billion after $457 million of dividend contribution and share buybacks in the year.

Additionally, in Q3 we strengthened our financial flexibility by signing a new EUR 500 million credit facility with the European Investment Bank.

As a result, we have now over $1 billion of available undrawn credit facilities.

Finally, we were pleased to re-enter the CAC 40 Index in September, demonstrating the progress we have made in the transformation of ST.

Now let's move to a detailed review of our product groups beginning with automotive and discrete, ADG.

ADG revenues increased 2.6% sequentially and grew 10% in comparison with the year-ago quarter.

ADG's operating income improved substantially on a sequential basis, up 30% driving ADG's operating margin to 10.9% in the third quarter from 8.6% in the second quarter.

For the first 9 months of 2017, ADG's revenues increased 6.8% compared to the year-ago period with stronger operating income growth of 19%, leading to an increase of its operating margin to 8.4%.

Moving to ADG's product review, let's start with what we like to define greener driving and car electrification in particular.

This is a clear growth driver for our industry in the next few years with car electrification semiconductors growing more than 3x faster than the average semiconductor content in cars.

During the third quarter, we ramped production of our silicon carbide MOSFET for the electrical inverters and we are delivering in line with our plans.

We are also in the field test phase with a key European car maker for silicon carbide based traction application.

We had additional design wins for the new 1200 volt SiC diodes in electrical vehicles charger platforms from leading Chinese and American suppliers, as well as several design wins with SiC MOSFET for on-board charging.

In our focus on safer driving, we recorded wins in Japan for components in an ultrasonic-sensor interface application and a custom product for hydrostatic braking system.

Our automotive microcontroller business continued to enjoy multiple wins and these included Body and Gateway applications at leading European and Chinese customers, as well as on-board charger applications and ignition systems at leading Japanese and European customers.

In infotainment, we landed sockets in a premium sound system with our Class AB and Class D amplifiers for a high-end car maker and won another socket for our Accordo 5 car infotainment platform for the Japanese market.

In our power discrete business outside automotive, we captured a socket in a game station for our latest generation of HDMI port interfaces at a market leader and we won an award for an intelligent power module from a leading Chinese air conditioner supplier.

We also enlarged our range of chip-scale package protection devices and landed design wins with leading phone makers around the globe.

Moving to our Analog and MEMS Group, AMG, revenues increased 4.2% on a sequential basis.

And year-over-year, AMG's revenues increased 24.8%.

On a sharp growth, both in Analog and in MEMS.

AMG's operating income increased 30% on a sequential basis and almost 4x on a year-over-year basis.

As a result, AMG's operating margin improved very substantially, increasing to 18.1% in the third quarter from 14.5% and 5.8% in the prior and year-ago quarter on multiple drivers, including better product mix, operating leverage and improved manufacturing performance.

Year-to-date, AMG's revenues grew 24.3%, driving it's operating income to $206 million and operating margin to 14.4%.

Moving to AMG's products.

Our sensor business recorded a strong performance.

A clear trend we see here is the adoption of our products in more and more automotive and industrial applications.

This is an important element of AMG's diversification strategy in sensors.

And our ability to build highly accurate sensors, meeting the quality and longevity requirements in key -- in these areas is key to our success.

But of course this quarter, there are also a number of highlights to be mentioned for our sensor portfolio, serving smartphone customers.

For example, the ramp of a 6-axis inertial measurement unit, an optical-image-stabilization gyroscope and a barometric sensor for the Samsung Note 8, and of a barometric pressure sensor for the new water resistant Samsung Gear Fit 2 Pro.

Other successes in the smartphones included, multiple design wins and ramps with our touch screen controller and power management ICs for AMOLED displays.

In smartphones and cities, we announced a modular programmable chipset that simplifies design and deployment of new smart meters, smart streetlamps and home and industrial controllers.

3 top smart-meter manufacturers are already designing solutions based on this new platform.

Our product families targeting smart industry applications such as our STSPIN motor control family and our intelligent power switch solutions.

So solid growth during the quarter across our broad high-end industrial customer base.

In the industrial market, we also had success with power conversion products such as our ViperPLUS family of high voltage AC/DC converters as well as switching regulators and DC/DC converters.

In our general purpose analog business, our precision op amps were designed into products by a broad customer base for applications, including wearable, home and building automation.

We also introduced a software kit for Bluetooth Mesh Networking for connected smart-lighting and automation applications to support designs based on Bluetooth low energy solution.

Now, let me share some highlights on our Microcontrollers and Digital ICs Group, MDG, which continued to deliver a strong performance.

MDG's revenues increased 14.6% on a sequential basis and 19.4% year-over-year, led by our general purpose microcontrollers, which continued to post record quarterly sales results.

Digital sales also increased sequentially.

MDG's operating income grew sharply on a sequential basis, driving its operating margin in Q3 to 17.9% from 11.6% in the second quarter.

For the first 9 months, MDG's revenues, operating profitability and operating margin were up substantially.

Its net revenues grew 13.7% accompanied by an increase in its operating income of [$208 million], driving its year-to-date operating margin to [13.5%] from 2.9%.

These results reflect both a strong improvement in our microcontrollers operating performance and a significant turnaround in digital.

Moving to MDG product highlights.

Our general purpose STM32 microcontrollers, which are used across a very wide range of products and applications, reached a particularly notable record in terms of unit shipment.

A few of the STM32 design-wins include a solution for a next- generation home control, using LoRA radio connectivity with a key home automation OEM, fingerprint modules with a major PC OEM and a high-volume consumer application.

We also earned design-wins in a number of shared connected bike models in China.

Moving to security.

We announced the integration of our contactless near-field communication technology with MediaTek's mobile platforms to help mobile OEMs overcome key technical challenges, such as antenna design and integration and bill-of-material optimization.

We started ramping the production of an automotive near-field communication reader for a key electric vehicle manufacturer and designed in a NFC reader for the first major roll out of a smart furniture with a key household name.

In our custom silicon business, we were awarded a digital ASIC design in 16-nanometer FinFET technology from a leading networking infrastructure solution provider and an optical IC design win for use in 100G and 200G web-scale datacenters.

We also began volume ramp of the RF-SOI technology into a new high-end smartphone from a Chinese manufacturer.

Let's move now to our Imaging Product Division, which we report in others.

Imaging registered very strong sequential revenue growth, reflecting the initial ramp in wireless applications of ST's new program, including the company's Time-of-Flight and new specialized imaging technologies.

Other revenues more than doubled in the third quarter.

From an operating performance perspective, others still recorded a loss of about $9 million, excluding impairment and restructuring mainly due to the start-up costs of our new program.

However, in Q3 we saw an important first step of improvement with a 60% reduction of losses on a sequential basis.

For the first 9 months, others revenues increased by 60% compared to the year-ago period accompanied by a substantial decrease in its operating loss.

Now let's move to our fourth quarter outlook.

We expect to finish 2017 with strong revenue growth and further improvement in our overall operating profitability and net income.

Demand continues to be healthy across our product groups and geographies and we expect the acceleration of growth for our new program serving wireless applications.

Therefore we anticipate fourth quarter revenues to increase about 10% at the midpoint on a sequential basis.

Based upon our revenue growth outlook, we expect our gross margin to be about 39.9% at the midpoint.

Looking at the year in total, based upon our first 9 months results and fourth quarter midpoint revenue guidance, we expect that 2017 net revenues should grow about 18% compared to 2016 accompanied by a substantial improvement in operating profitability and net income.

Importantly, this performance is well supported by multiple sustainable growth drivers across all our product groups.

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

Thank you.

(Operator Instructions).

The first question is from Anthony Stoss from Craig-Hallum.

Carl, if you won't mind, maybe highlighting each of the segments heading into Q4, do you expect all 4 of the business groups to be up sequentially or maybe if you could parse that a little bit?

And then secondly, I'm curious what you think in terms of customer inventory levels, especially on the microcontroller side, if you have any thoughts on potential double ordering.

Well, maybe I will start on the second one and then I'll leave to Carlo Ferro to comment by product group.

Well, I think as I said before our point of sales and distribution was pretty strong in Q3 and I think this is across the board.

This is in Asia where, of course, we have our biggest distribution business, but also in Europe and in United States.

And the inventories of our distributors are at an historical low level.

We never had such low level of inventory in distributions.

I mean, my view is that it's too low and -- because as you know, our portfolio is pretty broad.

So it's important to cover all our products.

So it's very low.

We are also working with our sales and marketing team to try to understand what is ultimately the demand of the customers of our distributors.

But so far we do not have any sign of accumulation.

On the opposite, as I just said, very low level of distributors, little bit of -- very low level of inventory at our distributors, I would say everywhere particularly in Asia.

Good morning, Anthony.

Good morning, everyone.

I'll take the question on the Q3 to Q4 revenues progression and indeed the 10% sequential, which would be equal at mid-point at 26.4% year-over-year growth is really very -- very substantial.

Carlo in the introduction has indicated the status of the new program in the imaging division.

That has started revenues in the third quarter and we see a very substantial step-up in the fourth quarter and this is certainly a very important contributor of this growth.

However, it's not the only one, it's the most important, it's not the only one.

As you specifically ask Anthony, we can confirm that based on current visibility all the 3 product groups on top of the imaging division anticipate sequential revenue growth from the third into the fourth quarter and anticipate a double-digit year-over-year growth in the fourth quarter with respect to the fourth quarter of the prior year.

So we have the revenues across the board.

To give an overall summary about that, if I exclude the contribution of the imaging division the current visibility on fourth quarter for the rest of the revenues of the company is better than the normal seasonality.

The next question is from Jerome Ramel from Exane BNP.

Question is on your CapEx, Carlo.

With a run rate of now, let's say, [2.3, 2.4] (inaudible) how do you see the situation for your capacity utilization rate going forward in 2018?

Because I guess in Q4 it could be mostly fully saturated.

So I'd like to understand what is the flexibility you have from an outsourcing standpoint.

And with the existing manufacturing what is the revenues you can generate?

Well, of course we will come back with, let's say, I would say a comprehensive description of 2018 when we met -- when we will meet in January next year.

I think, first of all as I said, we reconfirm our plan for CapEx.

The new plan has been announced in fact 1 quarter ago.

It is in the range between $1.25 billion and $1.3 billion this year.

And I have to say that we are also accelerating on the front of our subcontractors with a number of important new initiatives covering quite broad spectrum of technologies.

So it's a combination of CapEx, internally there are many important programs.

Of course what we are doing in 12-inch, it is a significant increase of the capacity in Crolles with a very, very important reduction of the manufacturing cost, but it's not the only one.

Our silicon carbide initiative is another important one.

This is a new technology, a new product.

But in general, the demand is strong also on our BCD technologies.

And we are trying to support our internal programs with a very, very, let's say, aggressive initiative in terms of outsourcing and we will continue.

Now, yes, you're right, our run rate now, it is based on the Q4 guidance is 9.4%.

But I think it is premature to discuss about the next year and we are working on our next year budget, of course, that would be formalized pretty soon and we will then describe the visibility in January next year when we meet for the fourth quarter results.

And maybe just as a follow-up, are you experiencing or your clients probably experiencing some shortages and do you say that in some products you have some allocations?

Yes.

Yes, we see shortages.

I think we see that first of all with some of our suppliers.

And then of course, it is sometime somehow a challenge to completely serve the demand of our customers.

We tend to, how can we say, really to strive to do the best effort to serve all our customers from the small customers in distribution to the major customers overall.

We -- at this very moment I would not like to mention any specific family that is in allocation, but certainly the situation is stretched.

Next question please.

The next question is from Adithya Metuku from Bank of America.

I have 3 questions.

Firstly on silicon carbide.

Can you talk a bit about how you see your positioning here as the modules ramp?

You've historically not been that strong in the modules space.

However, you have had some initial design wins with silicon carbide.

So any color around how you see your positioning in the modules spaces as that market ramps and your thinking behind that would be very helpful.

And secondly, one for Carlo Ferro.

You are currently guiding using an FX rate of $1.15.

Can you give us some color on how you see the operating expenses trending into Q4 and into 2018 using the current FX rate?

Thank you.

Yes, well on the silicon carbide, we work both on standalone products and not necessarily power module.

I have to say that some of these new packages are, from what I can say, very innovative solutions.

But we are also working on a power module initiative for instance, I can say.

We have a line for low power applications in the area of power modules with a possibility to integrate also microcontroller and include microcontrollers in this lower end power module.

And this we define as intelligent power module.

And we have an important manufacturing line in Shenzhen in China where we are also investing to expand the line, because we see a lot of demand there.

But we are also working with partners, external partners, on the more traditionally high power modules.

And of course, SiC is one -- SiC PowerMOS is one of those products that is very much part of the strategy.

But please do not consider that SiC is only for power modules.

SiC is for both.

We have important silicon carbide initiatives with innovative standalone power packages and we also have an initiative with our power module offer.

So it is global and of course it depends on the application and depends also on the choice of our customers.

The second question is about currency and operating expenses, right.

On currency, moving forward on the next quarter based on the current hedging and assuming [that if really] market rate stays at the current level or stay in the bulk of $1.175 or $1.18 for the fourth quarter, effective rate is anticipated to be $1.15.

In Q1 and Q2, we see some increase around $1.17 and then the full effect there will be from Q3 on and the normal rollover of the hedging contract.

In this respect what is the impact on OpEx and particularly, your question on OpEx for the fourth quarter of this year?

So the currency itself on OpEx sequentially could generate an about 10% increase.

However, from the $553 million of net operating expenses of the third quarter, currency as you know, is not the only ingredient, particularly in the fourth quarter in particular.

So in the current situation of result of the company, there are 2 other important ingredients to consider.

One is the seasonality.

If you see normally has a large number of vacation in Europe and in this respect labor cost increase in the fourth quarter.

And the other ingredient is that based on current prospect of result for the full year of the company, you may also anticipate that the variable portion of the labor cost this year is, I would say, higher than in prior year.

So overall for modeling the fourth quarter, I would indicate a range -- a number of net operating expenses, R&D plus SG&A minus other income and expenses in a bulk of $580 million, $585 million.

Okay.

Just a quick clarification on the silicon carbide.

So, is the idea that you will apply the MOSFETs and somebody else will do the packaging when you say you're working with partners and what do you exactly mean?

On modules, on power modules.

Of course, we have a very important internal packaging activity.

Some of these packages are new and very innovative.

And this is very good for silicon carbide.

On power modules, we have 2 axes.

One is internal, that is the intelligent power module.

And in this intelligent power module, the line is in Shenzhen, our facility is in Shenzhen, for this one there is also the opportunity to include in the intelligent power module, for instance, a microcontroller.

But the other -- and the other line is the higher power kind of power modules where we work with external partners.

Okay, understood, very clear.

Next question.

The next question is from Achal Sultania from Credit Suisse.

Just one clarification on the previous question.

I think Carlo you mentioned that we should expect better than normal seasonality for all businesses, excluding special imaging.

Like -- can you just help us understand because seasonality has been all over the place in the last few years, like, what is normal seasonal for STMicro?

Just want to get a sense of that.

And then secondly on gross margin level, when I look at gross margins today, it's already like you're guiding for 40% plus gross margins in Q4.

I guess, obviously, higher fab loading and product mix have helped a lot.

I'm just trying to understand, like how much are we there in those 2 processes, like how much product expansion can we actually see, what are the drivers there?

Any color on that would be helpful.

Okay.

Thank you for the first question [and really it's] helping to clarify indeed at the end.

If you -- if you look at our historical performance in the last years, particularly after we have exited the platform for smartphones, normally fourth quarter is not a quarter of growth in respect to the third quarter, normal seasonality is about flattish.

Then I have mentioned that all of the product groups expect a sequential growth quarter-over-quarter.

So at the end this translates in a positive sequential growth and this translates into a double digit year-over-year growth for the 3 product groups combined and before the effect of the imaging division contribution, which is very substantial as you could expect.

The other question was the gross margin, on the gross margin progression.

Gross margin continues to, at the end, take advantage from efficiencies in manufacturing [and also] they are becoming a little bit less contributing than in prior quarter as you could expect after having really the company reach the optimal utilization of the fabs at the full steam on one side.

On the other side, the product innovation, the new products contribute on improving the product mix in a way that more than offset the usual industry price erosion.

And when moving from [35.5] to the midpoint of guidance at [39.9] you may consider [bulk of] this ingredient fab efficiency and the positive balance between the product mix minus industry price erosion, the 2 major contributors.

So clearly offsetting a couple of times of basis point negative impact from currency.

Next question, please.

The next question is from Francois Meunier from Morgan Stanley.

I was looking at the microcontroller revenue line, which is like -- has had lot of growth.

So maybe it's kind of the same question as we had before.

But like where do you see those products growing more specifically?

Are we sure -- of course you've got potentially shortages, but are we sure that those products are really being used and sold to a consumer or corporates?

So basically like I understand there are shortages, but is there any chance that there are pockets of inventories building somewhere down the supply chain that maybe you don't see at the distribution level and maybe it's further down.

Now the other -- the question of course is on the other line.

Can you confirm this is where you put like the new quite exciting CMOS sensor that is chipping into a very famous product design in California?

And how hard is it to fight for the sockets of next year and the year after given this is a CMOS sensor and that I guess everyone is smelling the smell of coffee for this big socket?

Well, I like tea, Francois.

Anyhow, let's start from microcontrollers.

First of all, microcontroller of course is a product, but it is also an ecosystem.

So our STM32 at this point, it is an important ecosystem, is very well known, I would say at a global level.

And the applications are a very large but variety of applications, really could be anything.

We have 700 part numbers.

I think this year we will sell 1 billion pieces of STM32.

So it is very broad, it is very large, it is together with application board, of course the development board et cetera.

We track, first of all, directly the inventories of all of our OEM customers.

This we know, okay.

And certainly it's still an important part, even if it is not the biggest part for our STM32.

The biggest part is in distribution.

But, first of all we track the inventory and this is a significant part of course of the business.

The inventory of our direct OEM customers sometimes are mid-size customers, sometimes are major customers.

So we certainly have a good visibility of this part of the inventory.

Then we track the point of sales and the inventories of all our distributors worldwide, okay.

And finally, we are really trying to understand the bookings of our distributors and do have this data, of course, and we try to understand also what is the final inventory of the customers of our distributors.

Now, are we perfect?

Of course we are not, okay.

Is there any sign of inventory accumulation in the world today, no.

We do not have any sign.

On the contrary it is very stretched.

There are many, many new applications.

Some is also new products, new technologies.

So this is what we see.

And then we also believe that this is a business that is quite sticky in the sense that it is really an ecosystem.

So Claude Dardanne, I believe, has done a really great job with this family which started 10 years ago and we want to keep going.

So there are areas like connectivity, there is area like embedding security even in these more general purpose microcontrollers that are very important new areas for us and we are investing on all of these things.

For the other question, we cannot comment on customers, Francois, I am sorry.

Of course, I can confirm that the imaging is using the others.

But I cannot -- I cannot comment on any specific customer.

And again the only thing I can say here, these are things that are very complex, okay.

And it is a large know-how that we have, covering as many aspects of the technology, are very complex things on a growth base.

And I would -- of course, our motivation is to keep going and to do everything that we can to make this business sustainable for many years to come.

Next question please.

The next question is from Sandeep Deshpande from JPMorgan.

My question -- my first question is regarding -- Carlo -- to Carlo Bozotti -- I mean, clearly, Carlo, you have been targeting this kind of margin that you have achieved in the third quarter and guided to in the fourth quarter for many years now.

So clearly ST has reached a destination as such.

Does that trigger, I mean, other issues at ST such as -- I mean that you are looking that the company will look at more M&A now that you are probably going to be a 15% margin company in the fourth quarter, so in that respect looking at other places where what you have not involved yourself in over the last 5 years as you restructure the company?

And secondly, my question is regarding back again to this -- to the imaging business.

I mean do you need to add capacity significantly again next year because, I mean, very likely your customers will continue using your part in their lower-end handsets, et cetera?

So would you need to add capacity next year and if that's there how do you look at the CapEx scenario in the next year?

Sandeep, on the second one, again, this is a phase where there is strong growth for the company.

Our run rate now, looking at Q4, is in the range of $9.4 billion.

And I think it is important for us to formalize our budget for next year and then we will certainly discuss about opportunities for further growth when we meet in January.

And we will also disclose what are the capital investment plans and the initiatives that we have in terms of -- in terms of outsourcing.

For M&A, it's not on the table.

I think our priority, it is certainly organic growth.

We want to keep growing.

For us, it's fundamental and remain disciplined.

Of course, the company has the capital structure that is compatible with M&A moves.

But this is not something that is new for us and -- but I would like to underline one more that our priority is to make sure that we continue with growth and we continue with a good level of discipline to extract more value from what we do.

Having said that of course we can never say no.

This is a world where there are always opportunities.

But our priority is organic growth.

And I have a follow-up, Carlo.

I mean, the supply chain seems to continue to indicate that you have some big major win next year.

It could be to do with wireless charging or something to do with some new chip as such really.

I mean can you -- I mean maybe your wireless charging or to do with any other major chip.

Do you have any major wins ramping up into production next year?

Sandeep, I cannot comment of course on specific applications and specific customers.

What I can say is that ST, as you know, wanted to be in the digital core of wireless, not alone, but with the Ericson Group and for a number of reason, we could -- we could not make it.

ST has, however, I believe an interesting package of technologies that are around the digital core of a smartphone and this is good for many customers, okay.

And ultimately there have 3. One is sensors, sensors technology to be used in smartphone applications.

The second block that we have is power management.

And the third block of technologies that we have that could be used around the digital core of the smartphone is security, okay.

So these are the things where we believe we have a lead and where we believe we have good technologies.

We know that to be in this socket, you need to have pretty technologies.

Otherwise major customers in the world from China to America to Korea et cetera, they would not select us.

In general, we believe that in these 3 important areas that are around the digital core of the smartphone, we have some good innovation, some good technology portfolio and of course we are working on these 3 blocks, really important project for the future.

And we also want to make sure that it's not only 1 of the 3. We want to make sure that it's balanced, both in terms of technology, but to balance also in terms of what we can manufacture inside and what we can manufacture outside.

Next questions please.

Next question is from David Holland from UBS.

Just coming back on Francois question on the kind of 3D sensing business you are building today.

You made the comment that you want to make that a sustainable growth business.

I wonder if you can just update us on the strategy that you're planning to take to kind of build sustainability into that.

Are you carrying on with more of a, let's say, discrete approach and being as such the best at what you're doing today?

Or are you planning to broaden that out more into building more of a portfolio solution?

And if so, how would you do that over a platforms solution?

And then the second, just as a quick follow-up, in the Q4 guidance, if we look back to the Capital Markets Day, I think for full year '17, you implied that the others business would be roughly $700 million and (inaudible).

Does that still hold today or have things changed slightly within the mix?

It seems like it's coming in a little bit blow that given the comments you made on the other divisions for Q4?

Okay, so I leave the calculation to Carlo on the mix between the segment others and on the rest.

Our approach -- of course, to be a leader in this new imaging applications, you need to master many technologies, okay, and it is very broad based.

We believe that we are in an excellent position with all of these technology [mix] to keep growing here for many years at a very high level of revenues and this is what we want to do.

I think -- I want to make sure that it must be clear for us sustainability is in all aspects the most important priority that we have.

And we are working very hard to make sure that in all the bricks that we need in terms of technology for this application we are the best.

And sustainability is the key, key priority and we are all working very -- with a very strong focus on this aspect.

But if I can just follow up on that.

Some of the competitors in this space -- I mean, you've seen a couple getting together to build platform solutions, competitors like AMS have been acquiring to build more of a platform solution.

Are you planning to follow them in that route or stay more focused in (inaudible) you have today?

They are following us, we are leading here.

We have all the key ingredients that we need and we've grown for many years.

Okay.

Just on the Q4 guidance question.

Yes, on your second question, I frankly don't remember, again, (inaudible) Capital Markets Day, we've offered really a very detailed guidance on growth for each of the groups of the company.

We have indicated the overall sales of the company to be expected to grow by 14% plus or minus 1.5% and we said that would have been the plus 1.5%.

Now we say this is an 18% year-over-year growth and this is for the full company.

Then on the (inaudible) that we have presented anyone may have made that may use our computation, but we never -- we never -- we are not aware frankly that we gave a guidance on imaging revenues this year at $700 million.

Having said that, the growth in imaging this year is very, very important.

Absolutely on the full year it's going to be very important and an important contributor to the overall growth of the company.

Next question.

The next question is from Andrew Gardiner from Barclays.

Perhaps if I could ask the last question a slightly different way.

I did hear you say a triple-digit growth in imaging again in fourth quarter, so triple digits in the third quarter, and you sort of said that would accelerate further in the fourth quarter.

Is that still correct?

Are you seeing growth accelerate from an already high level?

Andrew, so we said triple digit growth in the third quarter obviously on a low base and then Carlo's comment was that there would be a continued acceleration of the growth, not necessarily at that level.

So the growth rate not accelerating but still very strong?

It's a matter of (inaudible).

I mean, as you guys said it is a key business -- it's a key part of the business, it's the key part of the guidance.

So I just want to make sure that I'm hearing it correctly.

I would like to facilitate on addressing this point as clearly would we have intended.

And we will be in a position in respect to the overall ingredients of this communication to share us much as possible with you to keep as much as possible confidential in respect to our customers would be very easy for us to give you the growth for each of the 3 groups and 1 for the region or even the number underlying the 10%.

If we can't do at the beginning of this call it's very unlikely that through question we will do by the end of this call.

So my suggestion is please be patient on taking the message as a formulated, which is we do expect sequentially a growth in the company by 10%.

Imaging division will be the largest contributor both in dollar and in percentage to this growth.

All the other 3 product groups are expected to sequentially grow year-over-year.

All the other product groups are anticipated at midpoint of the guidance to grow double digit.

Okay.

All right.

We got most of that.

Sorry for that.

Perhaps just another one sort of in this area.

I mean relating to sort of imaging products there has been an awful lot of noise in the supply chain about what's happening, order cuts, bottlenecks, et cetera.

The way you guys have just described things suggests that you're certainly not seeing any problem in terms of ramping your products -- ramping your production lines and delivering the product.

Is there any concerns that you see further down the supply chain related to this?

I am not speaking -- so, no we are perfectly on [path] with this program.

We don't see really problems.

We are on track.

Next question.

The next question is from Janardan Menon from Liberum.

I was just going back to your gross margin, where you said that it's a -- the increase in gross margin was a combination of the fab loading efficiencies as well as new products coming into the mix.

I was just thinking if you look at 2018 you've had quite a lot of new products coming into the mix this year.

Do you expect a similar level of new product introductions, which will continue to either support gross margin at this level or even increase it further as we go into next year?

And in particular can you give us some flavor as to which are the kind of products, which typically will enhance your gross margin from a mix point of view and which is it that could be below company average, if you could give any kind of color that will be great?

And I have a follow-up after that.

You see Janardan that we are in the process of defining our 2018 budget and finalizing all the related plan.

So it's quite early to discuss gross margin for next year.

Clearly the level we are reaching in the second half of '17 is a very significant progression in respect to the prior years.

And my belief it's about a 4 points of improvement in respect to 2016.

And in this respect our focus is first of all to ensure this level to be sustainable going forward and second to identify and act on further, other particularly, in the area of the quality and profitability of our product portfolio through innovation.

And you said -- you talked about price pressure, but given that we are in an area of tightness of capacity allocation, very low inventories in the channel, et cetera, would it be fair to assume that price pressure will be lower than sort of normal industry run rates as we get into 2018?

Yes, from case to case, you know this industry at the end is also based on long lasting relationship with large OEM as a portion of business more through distribution.

Based on the portfolio, based on the customer there are areas that are totally [inelastic] and areas, to the supply-demand relationship, and the area where some leverage overall exist.

In general at the end, we are currently experiencing a milder than normal price pressure and we may expect that entering 2018 this will remain, the level of price, the level for product price evolution and I cannot clearly comment on individual actions on pricing with customers.

Next questions please.

The next question is from Gianmarco Bonacina from Equita.

Couple of quick questions.

The first one is about the ramp-up of the imaging sales.

So is it fair to say that your ramp-up is in line with expectation, so there is no extra, let's say inventory that you're building for the client, which means that the normal seasonal decline we should expect for Q1 could be, let's say, average, so should not be, let's say, higher than normal because in Q4 there is extra inventory?

The other question is about the other line, so the (inaudible).

I saw there was a drop as expected, so single digit.

Shall we now pencil for the new -- for the next year roughly this $5 million per quarter or we should put [zero] or what is your best suggestion?

(inaudible) So I confirmed under the programs we are perfectly on track according to the volume demand.

So no excess inventory.

So this is the first point.

And about the second point, okay we confirm when we say that we will see next year a substantial decrease of the growth.

And we have [no news] about that.

The $5 million could be a reasonable assumption, certainly there is a decrease but we will be more precise at the beginning of next year.

Next question.

The next question is from Robert Sanders from Deutsche Bank.

Just on 3D sensing question for Jean-Marc maybe.

Your competitor AMS is saying that their content opportunity is $10 to $12 in smartphones.

So I would imagine then given that you have a similar portfolio according to you that that's your content opportunity as well.

We do not want to comment...

(inaudible) customization in our product that we cannot comment.

Okay.

And then...

And again for us in the smartphone it's not only in the sensors.

There are 3 blocks of technologies where we have, I believe, a unique technology leadership and one is power management, the second one is sensors in not only imaging, but also other things and the third one is security.

And we try to exploit this technology leadership to tell these 3 blocks of product technologies to important customers and many times because the customers are very, very important, there is a good level of customization, right.

But we want to be balanced, we want to be broad and making sure that manufacturing when it's really key for us to make it inside, we run it inside, but it is also good to run some of the manufacturing outside.

So this is what we are trying to do.

And just a quick follow-up will just be, there's been some reports about you guys starting to discuss with the [EC] about potentially getting funding for new 12-inch fab.

Is there anything you can say about that?

I know it's quite far off, but clearly any demand of subsidy you might get or not would be relevant for our model.

(inaudible) Maybe we commented.

Let's be very clear here.

We do not have any plans to make new 12-inch fabs.

We have certainly, I believe, the need to support our business both in terms of manufacturing capacity and in terms of R&D.

And I think in Crolles we have the opportunity, if there is the demand, of course, to further increase the capacity in the present infrastructure.

This of course is important for our customers and this also important for us, not only for the growth, but also because it would be a further reduction of the manufacturing cost and we know also that on smart power technologies with time it is important to go to 12-inch, but for R&D.

And having said that, we are of course trying to work to make sure that if we could exploit, of course, European Union rather made the initiatives in terms of grants that we will work on this, but this is certainly to support the strategic initiative in ST that are the initiative that I just described.

Thank you, Rob.

Next question please.

The next question is from Taze Veysel from Oddo.

Just a quick question on the distribution business, particularly microcontroller.

There was in September, this rumors, okay, you are capacity constrained and could not serve all the customers, and I sense today that your comments direct into a similar way, now that you are really capacity constrained.

I was wondering from the 34%, 35% distribution business, how much is that microcontroller-related and how much -- how fast can you bring that to external partners?

You mean to silicon foundry?

Yes.

Yes, well, microcontrollers, we have a very important volume with silicon foundry already, very, very important.

It is in fact the family where, well in the past we had the traditional logic at silicon foundry, but that in more recent years, microcontrollers have always been STMicroelectronics have always been using also silicon foundry manufacturing on a number of technology -- we -- on a number of technologies.

We have now the opportunity to expand the range of technologies at the silicon foundry, we are working on that.

But we are also working to expand the internal capacity of microcontrollers.

I think in particular, I would like to mention that it may seem strange, but technology that we started with the silicon foundry, that is 180-nanometer, is still growing in terms of revenues.

And we started many, many years ago, right.

But more recently, we are working with the silicon foundry also on 90-nanometer, this is a very important -- this is a very important program that we have with silicon foundry partner.

And internally, we are now in production with 40- nanometer.

So there is a range of technologies, there is initiative outside, there are initiative inside.

What is good here that, on the first technology that we started on the STM32 that is [180-nanometer] technology, sales are still growing, after so many years.

And now, 90-nanometer is extremely important and we started the 40-nanometer on a couple of flavors of technologies.

So this is very broad internally and externally.

And then follow-up on your Time-of-Flight sensor, okay, the communication business is ramped up, but moving that into the industrial space, like some of the companies, [Molex] et cetera are very vocal about that in the industrial space, but also cash recognition driver monitoring in the auto space as kind of applications there.

How is your technology moving into other verticals, particularly in the auto part, I sense that -- it's -- the requirements are much higher, so it would be not that easy to bring Time-of- Flight into this area, any thoughts around that?

This is clear that, we target the Lidar device, which are really a key enabling components on the overall smart pricing application.

And our technology is really a key competitive factor for us to target this kind of Lidar activity definitely.

So it is important for us with the model and imaging, very important.

But we have already like in the industrial space, robotics et cetera, any revenues already with the first, yes, I think 2 generation of the Time- of- Flight?

No.

We don't, no .

Not yet.

And just really a very quick one, if I may, on the previous question.

The ramp-up or the scenario ramping new 300- millimeter fab.

I think one of your board members said in the interview, even 2 fabs could be possible by 2021, if you get the funding.

I mean is that really so far away?

Or if I consider like your largest competitor Infineon in the power space going to 300- millimeter getting scale and scope.

Would that be really not a view for your company as well?

No, I clearly confirm.

Okay, (inaudible) is to further extend our 300-millimeter capacity in whole in the [current in first quarter] according to the demand.

And the second point is to set up 300-millimeter pilot line to develop advance BCD smart power technology, which are key enabling technology to address our automotive and industrial segment and power management segment.

This is our plan today.

Thank you, Veysel.

Next question please.

The next question is from Lee Simpson from Stifel Financial.

Maybe just 2 questions for me, from really just on silicon carbide MOSFET and electric vehicles.

it's -- just wonder if there is any cause for revision of the sales assumptions in the second half of '17, any reason for that changing, I know, recently you talked about few tens of millions in the back half, and if there is any change, how that might impact progress next year?

And certainly, as it sort of works off of, suppose it bottlenecks in supply chain as well for silicon carbide.

Well, for us, it's a very, very important program as you know.

And now I do not want to comment on, of course, any specific customer here.

We are ramping now, is in production.

This is, for us, is very, very crucial because it is a new wave and I believe with this new wave, we can be very strong in general in the electrification.

I have to say that we have been working with suppliers a lot and at this point, we have a pretty decent support from our suppliers, we would like to get more.

But I think, we have a pretty decent support, and I am personally, of course, involved with these key suppliers in silicon carbide.

Our yield are improving continuously, of course, it's difficult we know, but is working.

So we are in production and we are ramping up and we want to keep going.

And then of course, the volume depends on our capability, depends on customers, but it is a very, very important program for ST and we are very encouraged by the progress on one side internally, both the packaging and the yielding production, but also with our suppliers that are now starting to deliver high volume production.

Great.

Maybe just a related follow-up.

Just as we, if we take a step back and look at silicon carbide as it goes into the car, what do you get a sense when speaking to customers is the main driver for the use of silicon carbide, is it improved range of the car or is it for weight savings or even power deficiencies in the drivetrain?

In fact, it's the 3 together, I think it is of course one of the important technology innovation that could contribute materially to mileage autonomy to the range.

And I think, what you said is absolutely correct.

I think, is a combination of electrical -- electric efficiency power, lower power consumption, even working at higher temperature, right.

A smaller heat sink and also certainly related to these let's say, less weight.

So if you put all together smaller, lighter, higher rating efficiency, of course, this has an impact of the mileage range and this one of the technology driver we believe for the electrification.

The next question is from Amit Harchandani from Citigroup.

Please go ahead.

A few if I may, firstly, could I maybe get a comment from you on lead times, how are they trending across your various product groups right now and if you have seen any further extensions with the course of Q3 or are they coming back?

Secondly, with respect to the gross margin, could you comment on any potential impact from increase in silicon wafer prices or is that being offset by the milder pricing pressure that you referred to earlier, and thirdly, very quickly if you could comment upon silicon carbide traction for you outside automotive and whether that is also trending in-line with expectations or ahead of expectations.

Thank you?

Well, I think maybe I will take the first and the third and Carlo will comment on second question.

So lead time are stretched.

We do not certainly see any improvement in the third quarter, the demand is strong, and of course we are working very, very hard to support our customers, the very best of our capability but we didn't see in Q3 any real improvement in terms of lead times and this is very much on a broad base of technologies, and I think the book-to-bill was very, very strong in Q3 and despite our effort in terms of capital investment there is certainly a stretching of the lead time.

I would say that for the other question was on the....

On the silicon substrate pricing.

This I can take up.

Indeed the pricing for silicon substrate in the industry is increasing particularly in rest to the 200-millimeter diameter.

And this for us perhaps is a little bit less relevant that is negative as with some of our supplier we deal with yearly contract as opposed to semi-annual contract.

Overall, at the end, this is negative is part of the overall evolution of the manufacturing cost and the manufacturing we have a number of other positive contribution including also pricing for other categories of supply.

Overall at the end, as we structurally are exposed to the price erosion with our customer we target every year a level of savings in the procurement with our supplier, this is something that this year is occurring similarly to our plan [in a rate] over prior years for 2018 we may anticipate based on current visibility that this price reduction advantage in supplying would reduce substantially but will remain positive in our overall cost evolution.

All the factors and all the different materials and services overall included.

When looking at our [9%] midpoint guidance for the fourth quarter clearly the silicon substrate prices well included and already reflect and anticipate some of the effect that we could expect also entering 2018.

Yes the last one was on the silicon carbide for industrial application.

Yes, it is important, I think we of course in the automobile there are less -- there is a less fragmentation objectivity.

It is typically with bigger customers.

My address at the very beginning, I mentioned that we are on a road in Europe with an important car marker with our silicon carbide solutions.

That industrial is very important.

And we are working with all our distributors, we are working in the mass market to expand with our products for a large variety of industrial applications and we see a lot of traction, of course this is much more fragmented but is very, very important for the company.

And based on time, we will take one more question please.

The next question is from Guenther Hollfelder from Baader.

Yes, thank you.

Just 1 follow-up question left from my side, on silicon carbide, do you have any design wins for bare die business, silicon carbides today.

I think, you also mentioned a supplier with a SiC MOSFET design win in your press release.

So I was wondering off whether you have anything here based on bare die business.

Sorry, I don't know.

You mean, die without a package?

Yes.

I don't' know, I need to ask.

I'm sorry.

From time-to-time on silicon, we have this kind of business, of course, we also sell from time-to-time dies, but I do not know specifically in the case of the silicon carbide.

So at this point, we'll close the call.

Thank you all for listening in and please let us know if you have any questions.

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