STMicroelectronics NV Management Discusses Q1 2014 Results - Earnings Call Transcript

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 |  About: STMicroelectronics NV (STM)
by: SA Transcripts

Operator

Ladies and gentlemen, good morning or good afternoon, depending where you're calling from. Welcome to the STMicroelectronics First Quarter 2014 Earnings Results Conference Call and Live Webcast. I'm Joya, 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.

Tait Sorensen

Thank you, Joya, and thank you to all for joining our first quarter 2014 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining Carlo on the call today are Jean-Marc Chery, newly appointed Chief Operating Officer; Carlo Ferro, Chief Financial Officer and Executive Vice President of Finance, Legal, Infrastructure and Services; Georges Penalver, Chief Strategy Officer, Executive Vice President, Strategy, Communication, Human Resources and Quality; and Carmelo Papa, Executive Vice President, General Manager of the Industrial & Power Group.

This call is being broadcast live over the web and can be accessed through ST's website. A replay will be available shortly after the conclusion of this call.

This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the release last night, and also in ST's most recent regulatory filings for a full description of these risk factors. As a reminder, please limit yourself to 1 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?

Carlo Bozotti

Thank you, Tate. First of all, I would like to thank everyone for joining today's first quarter financial results call. Overall, the macroeconomic environment and business dynamics in the quarter positively evolved as expected. Looking briefly at our financial results and key metrics, revenue and gross margin were well within our guidance.

Operating expenses were well in line with our financial model. Operating income before impairment and restructuring charges was a positive of $8 million, representing the year-over-year improvement of $188 million. Our CapEx investments represented about 6% of total revenues in the quarter.

Our financial position remains solid. And dividends paid in the quarter represented a yield of about 4%. Despite this progress, we still have much more work ahead of us to achieve our target financial model of about 10% operating margin, and our main area of focus is in the Embedded Processing Solutions segment, which I will discuss in detail shortly.

Looking at our financial results, first quarter revenues were $1.83 billion, down 9.4% sequentially. As anticipated, legacy ST-Ericsson products revenues decreased sequentially by about 50% to $63 million. Including this, ST's first quarter revenues grew 0.7% year-over-year, and decreased 6.4% sequentially.

From a product group perspective, MMS and APG led the groups with year-over-year revenue growth of 15.6% and 15.5%, respectively. And from a channel perspective, Distribution represented 30% of total sales in the first quarter, up from 25% 1 year ago. In addition, point of sales, meaning the sales of our products by our distributors, grew double-digit year-over-year.

Also in the first quarter, ST recorded a onetime licensing revenues of $15 million related to the settlement of proceedings with InvenSense.

Gross margin in the first quarter was 32.8%, up 150 basis points year-over-year. On top of the onetime licensing revenues, the improvement has been driven by a better situation in manufacturing, both in terms of loading and manufacturing efficiencies, despite price pressures. In manufacturing, as we outlined last quarter, structural changes and other initiatives are underway to help to progressively move our gross margin into target range between 36% and 38%, and the key levers here include the reshaping of our manufacturing footprint in major technologies, with the upgrade of our front-end fab in Singapore to 8-inch, and the consolidation of our back-end activities in China.

An overall better situation of manufacturing capacity, particularly in our fabs serving Embedded Processing Solutions, product migration into new technologies, and the lithography notes, replacing low-margin legacies from products with higher sales of the steaming products, and the pruning of low-margin mature products in particular, within IPD and AMS.

Turning to operating expenses. Combined R&D and SG&A totaled $606 million representing a decrease year-over-year of about 25%. Over the past 12 months, we have successfully completed a number of cost-reduction programs, yet we remain vigilant in controlling our cost going forward. In comparison to operating expenses in the fourth quarter, a portion of the difference relates to a lower number of days in the first quarter. Importantly, we have not yet benefited from the Nano2017 R&D grants, which are now expected in the second quarter, pending European Union approval.

Now let's move to our product segment results, starting with Embedded Processing Solutions. The first quarter of 2014 was important as it represented the bottom revenues for EPS, mainly due to the phasing out of legacy ST-Ericsson products and lower sales of set-top box products, revenue decreased 27.6% year-over-year, driving improved, but still negative operating results.

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

Importantly, our set-top box business is expected to grow in the second quarter, as it transitions to ARM-based solutions. On top of this, we expect growth in Microcontrollers in Q2. As a result, we expect the Embedded Processing Solutions segment to grow sequentially. While these dynamics currently translate into sub-optimal loading for our fabs serving the EPS segment, we are encouraged by the restart of the growth overall, in EPS in the second quarter.

Going now into more detail into the EPS dynamics for the quarter. First, we had strong year-over-year growth in Microcontrollers, where our general-purpose Microcontrollers business enjoyed the fourth consecutive quarter of record revenues. Looking at the combined general-purpose and Secure MCU markets, according to IHS, we climbed from the fourth position in 2012, to the second in 2013, building on our comprehensive range of industry-leading ARM-based products, the rapidly developing echo system we are assembling and our broad reach through distribution partners.

Second, we just signed a strategic agreement with a top-tier foundry for 28-nanometer FD-SOI technology. This agreement expands the ecosystem and ensures the industry of high-volume production of ST's FD-SOI-based IC solutions. ST's unique FD-SOI technology is well on its way to become a significant revenue generator for 2015 and beyond, and strengthens the business and financial prospects of our Embedded Processing Solutions segment.

And third, I can confirm that our Digital Convergence group is now reaching an inflection point, with the revenue ramp starting to show traction with the first wave of new products, the high-volume requirement of our 40-nanometer chips for broadcast set-top box and further market penetration of our ASICs for networking. Our road map to double DCG revenues by Q4 2015 in comparison to Q4 2013 is confirmed.

Moving to our Sense & Power and Automotive segment. On a year-over-year basis, it delivered revenue growth of 5.7%, driven by our automotive and Industrial and Power Discrete product groups. Automotive revenues increased 15.5% year-over-year, driven by strong market conditions, the expansion of our customer base, product innovation, as well as market share gains in 32-bit automotive-grade Microcontrollers.

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

The major area of focus for AMS is the ramp of new products, such as high-performance microphones and high-accuracy pressure sensors, and the diversification of our MEMS and sensors towards a broader set of applications. In the area of AMS, it's also still very important for us to start in production of our new fingertip solution for portable equipment.

Sense & Power and Automotive operating margin improved to 8.7% in Q1 2014, compared to 7.7% in the prior quarter, even with seasonally lower sales. It also improved year-on-year from the 5.1% operating margin recorded in Q1 2013, reflecting leverage on revenue growth, product innovation, and manufacturing performance improvement.

Moving forward, we expect margins to improve further, thanks to revenues coming from new products. With expenses well aligned, gross margin improvement initiatives underway and a solid roadmap to growth for EPS evolving, let me share some perspective of what we see ahead with respect to our product portfolio to enable ST to deliver quarter-over-quarter revenue for the remainder of 2014.

Let us start with our Microcontrollers business. In general-purpose microcontrollers, we ramped the production of the STM32, for 3 new Samsung smartwatches that were unveiled at the 2014 Mobile World Congress. We also expanded into the mass market with an impressive number of wins in many devices, such as detectors and sensors, lighting applications and gaming accessories. Building a strong ecosystem is a key element of our winning strategy.

And during the quarter, we took a major step forward in making our STM32 development platform more widely available, affordable and easier to use. With the launch of the STM32 Nucleo boards and the STM32Cube software suite. In just 1 month from the launch, we shipped over 17,000 boards to developers around the globe. An amazing result, I believe.

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

Our Automotive business achieved important wins in infotainment, active safety and positioning. We had 2 key wins in audio amplifiers. We signed an exclusive agreement with a market-leading manufacturer of audio sound systems and a direct-through deal for the Japanese market. We continue our relationship with Mobileye to supply an FD-SOI-based vision processor for their fourth generation advanced driver assist system. And finally, we recently were confirmed as the #1 player, overall, in automotive in China.

Our Digital Convergence business is progressing in building a solid-design win pipeline. In our set-top box and home gateway business, we continued to build the global momentum, collecting several design wins, including HEVC high-definition, HEVC ultra-high definition and DOCSIS 3.0 socket with our CAN and Alicante product families, and other wins with our Flash [ph] family.

In our ASIC business, we added 2 design wins for 28-nanometer FD-SOI for consumer applications to our growing pipeline of business.

Moving now to Analog, MEMS and Sensors, we maintained momentum with our motion MEMS, with wins at 4 leading smartphone manufacturers in Greater China, and the launch of a new 9-axis movement and position sensor. In addition, we made good progress in a number of areas that we highlighted in January as our revenue boosters for 2014. For example, our touchscreen controllers ramped production for a new Samsung smartphone launched in the quarter, and we gained momentum with additional big wins in tablets in Asia.

Another booster, our environmental sensors took a step forward with a 100% share in all pressure sensors with a leading consumer brand in Asia and the launch of a new pressure sensor ideal for wearable applications. Our diversification into other areas continued with wins in accelerometers for our automotive infotainment market from top players across the globe.

To sharpen our focus on the wearable market, we also announced a broad portfolio of analog devices for creating innovative wearable applications. This complements our complete offering of sensors, Microcontrollers, and low-power connectivity solutions across this market.

In Imaging, our time-of-flight photonic sensor, another of our revenue boosters for this year, was selected by a leading smartphone manufacturer for innovative camera system. Also within IPD, our momentum in silicon photonics is continuing with a new project and transceiver chipset with a key customer for FibreChannel, used for high speed data storage applications.

In closing now, with power and smart power management products, also during this quarter, we continue to focus on the 3 main growth areas: power management for portable; industrial automation; and smart grid.

In portable, we landed a number of design wins in portable devices for filtering and protection, which will contribute to the ramp of the business this year. And in industrial, we secured qualifications from several power-supply manufacturers for low-voltage MOSFET and earned a first win from a large Chinese manufacturer for high-voltage IGBT for a telecom applications.

Finally, we launched a complete, configurable plug-and-play street-lighting solution to address the growing digital power management market. Looking forward, we are encouraged by first, the signs of improvement in the general macroeconomic environment; second, by the forecast for the semiconductor industry that continue to show positive momentum; and third, by the specific proper dynamics, we see evolving over the next several quarters.

As a result, we are anticipating a sequential revenue increase of about 2% plus or minus 3.5%. This includes the anticipated reduction in legacy ST-Ericsson product revenues of more than half of the $63 million posted in the first quarter. Excluding legacy ST-Ericsson product revenues and the first quarter onetime licensing revenues, our second quarter revenue guidance at the midpoint equates to sequential growth of about 5%.

Key revenue drivers in the second quarter include Microcontrollers, Automotive, Industrial and Power applications. Moreover, we will begin to see initial recover in revenues of the Embedded Processing Solutions segment. Gross margin driven by manufacturing the efficiencies is expected to be about 33.6% plus or minus 2% in the second quarter.

To conclude, we are working towards our 2015 financial model goal of 10% operating margin, and as we mentioned earlier, we still have much to accomplish. We are continuing to build a solid pipeline of design wins across our portfolio, and this should enable us to deliver quarter-on-a-quarter revenue growth for the remainder of 2014. Based upon our financial position, performance and market outlook, our Supervisory Board is recommending to shareholders to approve -- the approval of a $0.10 per share cash dividend for each of the second and the third quarters of this year, in line with our intention to continue to return value to shareholders.

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

Question-and-Answer Session

Operator

[Operator Instructions] The first question comes from Stephane Houri from Natixis.

Stephane Houri - Natixis S.A., Research Division

Actually, I've got one question. If you could come back on the FD-SOI strategic agreement and help us understand how important it is for you, and maybe give us some color on the capacity now at your disposal and how you're going to split the quantities between you and your partner, and how much design wins you have et cetera, et cetera? So if you could give us some color would be very helpful. That's the first question.

Carlo Bozotti

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

Jean-Marc Chery

I think, I can repeat only the 3 points of what we have said, okay? Well, first of all, FD-SOI strategic agreement with the Tier 1 foundry, a 28-nanometer FD-SOI. It will expand the ecosystem, of course, it will strengthen our business and financial prospect and the host partner are engaged to communicate regularly within a few weeks. And I don’t want to say more at this instant.

Stephane Houri - Natixis S.A., Research Division

So you may [indiscernible] there, right?

Jean-Marc Chery

[indiscernible]

Tait Sorensen

Can you repeat the question, Stephane?

Stephane Houri - Natixis S.A., Research Division

No, I was just saying, you may -- so it would be [indiscernible] any day in New York, I guess.

Carlo Bozotti

Absolutely. But actually, to comment on the second part of your question, yes, it's important also. Of course, it's the credibility. It's important for us to have a second source. Clearly, it's important we have several customers now. It's also important because we can work with the right balance between internal manufacturing and external manufacturing with the proper flexibility in terms of loading and also in terms of capital investment.

Stephane Houri - Natixis S.A., Research Division

Right. Okay. And I have a second question about the gross margin evolution, because you are showing a bit of improvement in the second quarter, but still you're targeting 36% to 37% to be able to do the 10% EBIT margin. And your assumption is to get to $225 billion and this is part of the assumption. Given the outlook for the second quarter, it looks a bit far. So the question is, are you able, in your view, to improve the gross margin higher than the 36%, 38% that you target? And if yes, how would you do that? And -- or would you play more on the OpEx line to go below the $600 million? What's your favorite view on that?

Carlo Bozotti

No, we commented on the -- from the sales point of view because well, you also mentioned top line evolution. And then, I think, Carlo Ferro will go in detail to talk about the gross margin evolution in the second quarter and further on. Clearly, on the top line, I would say that there are 2 blocks. One block is, how we can say, the business as usual. For instance, in the second quarter on the product on the core business of ST at midpoint is centered around 5% sequential growth. But really, the 2 blocks is, on one side, all our activities in the area of Microcontrollers, power, analog, demands et cetera, so this is 1 block, where of course, we want to grow quarter after quarter. But on the other side, we expect, of course, since we are working on a strong acceleration of our DCG business. And this shall make a very significant addition in terms of revenues as we have detailed. There are 2 block of products, 1 block is clearly the set-top box and the Home Gateway, but very much with any products, the products that we have launched in September last year at the IDC in Amsterdam. Our Alicante, the CAN the Monaco, and this is for cable, this is for satellite. It's very much for the market in Europe and for -- also, and for us is really key for the market in the United States. So this is one part of the products and the other part is the -- is back to the FD-SOI products where, in addition to the traditional ASICs for communication infrastructure, we have one very important project, high-volume complex products for consumer applications. And so this is important, this continuity. So really, it is a part of the company where we believe we can grow. Of course, our ambition is to outperform the market with our Microcontrollers, the power, the analog, demands and the automotive, but we expect a very strong accelerations, thanks to all the ARM-based products for DCG, the cable markets that we can now address, and of course, all the FD-SOI ASICs, a major turnaround in this part of the company. Now, I just passing out the word on Carlo, but clearly, today on the digital part, while we are not in heavy unsaturation conditions, we are not running at an optimal level of loading in the digital stage. And this is one of the element of the gross margin improvement, but I'll leave Carlo to comment on the progress of the gross margin in Q2 and further on.

Carlo Ferro

Certainly, Carlo. Good morning, Good afternoon, everyone. Yes. Indeed, at the end of the gross margin evolution, both of the actual for the first quarter and the guidance for the second quarter is absolutely in line in what we did expect and what we said 3 months ago, when we met in Paris. At the end of the first quarter, took a benefit from the product mix, which is important, including an initial step of the reduced exposure on the former [indiscernible] product not yet completed, as you see. And took the charge of manufacturing inefficiencies that we have anticipated already from the fourth quarter due to the lower loading at the end of last year of [indiscernible]. You see progress in the guidance for the second quarter at a midpoint of 33.6, and here, again, we expect some good contribution of probably the product mix, maybe not totally compensating the usual price pressure, but significantly affecting it and a significant improvement from the manufacturing cost also based on improved loading especially in the area of the Sense & Power and Automotive, and improved manufacturing in Performance in general, and in general, manufacturing cost during the period. As you said, at the end of the road map to improve the gross margin towards the 36% to 38% model remains unchanged. All the key 4 factors, we are progressively executing are moving on and all the potential essentially, remains to be achieved as an opportunity.

I would eventually remind what they are at the exit from ST-Ericsson and we are -- we have now maybe less than 1 point still to come in terms of improvement to the gross margin. The manufacturing initiative, notably the evolution of manufacturing in Singapore from 6- to 8-inch and the closure of the plant of Longgang for [indiscernible] and testing, and this is expected about 1 point to come. So far the effect is very negligible and to be evident at the end of the -- when the initiative will be completed.

The one from the [indiscernible] yes, we have made some progress. I would say, about 1/3 of the expected progress are done, but it remains about 1 point still to come as an improvement to the gross margin and the scale of all these initiatives of technology evolution, loading of the fab and efficiency in 8-inch, in 12-inch, particularly, in the fab that's servicing the Embedded Processing segment. And in assembly, still had to generate all their potential. This is over 2 points of opportunity on the gross margin. So this is the long answer. The short answer to your question, Stephane, is that at the end where you said the 36% to 38% is confirmed, where instead that we have opportunity in respect to the model as originally anticipated is on the expenses line where we continue to target expenses net of grants at the low end of the $600 million to $650 million range.

Stephane Houri - Natixis S.A., Research Division

Okay, and just to be clear, you expect FD-SOI product revenues at the end of the year? Or will we have to wait at the beginning of 2015?

Carlo Bozotti

No. I think, I this year, I think we did confirm what we said. In fact, I think that the major volume will start in production in the second quarter of next year. So this will be very material, as we said, because this is high-volume products for consumer and this is complex products, so is ASP products. So this will be really for 2015, starting from introduction in Q2.

Operator

The Next question comes from David Mulholland from UBS.

David Mulholland - UBS Investment Bank, Research Division

Just 2 if I may. Firstly, I wonder if you could talk about OpEx and what you're thinking into Q2 on gross OpEx and into the rest of the year. Obviously, there's still question marks over the R&D grants, which is what we should be expecting on underlying basis for the rest of the year would be very helpful. And then secondly, I wonder if you could just give us some color on what you seeing in terms of booking levels and book-to-bill through Q1.

Carlo Bozotti

Okay, so maybe I start on the booking and then Carlo will go in details on the expense and the expense model. I think, in Q1, it was a relatively short quarter for us. It was also a quarter impacted somehow by the Chinese New Year, that is an element that is also taking some impact. And overall, our book-to-bill was ramped, this is the overall ratio. I think we have seen some form of acceleration of bookings in the recent groups. There are areas, and I would like to mention, really, 2 major market domain. One is, everything that is around distribution, industrial, small and midsize customers. But of course, it's our IPD products, but very, very importantly for us, also, Microcontroller and some analog products. This market, traditionally, we serve through distribution. We see a good momentum, including the resale of our distributors. This is a good momentum. And then, we see a very strong demand that is accelerating in the recent weeks in the area of Automotive. On other products, there's more -- for instance, in DCG of course, there's mostly new products. It's mostly new design win. But overall, I would say that the book-to-bill in Q1 was at the level of parity, and we have seen an acceleration of the bookings in the month of April, driven by -- the models driven by industrial and the mass markets -- and the mass market area. In terms of expenses, well, Q1 was a short quarter. We want to tell you that 1 point here. We have not yet accounted for any of the grants related to the Nano2017 that we now expect to start in Q2.

Carlo Ferro

Or maybe I can, I'll try to help you how to model the expenses growth, how to model the grants going forward on the next quarter. And obviously, starting from where we were in the first quarter. In the first quarter, R&D and SG&A expenses totaled, as you see, $606 million. And this is a number, which really, in terms of growth of expenses, took benefit of some of onetime. The calendar for the quarter has been as usual, based on our 5, 4, 4 weeks calendar has been shorter than a normal quarter. Additionally, there's been a number of other onetime ingredients. So frankly, should they have to normalize the level of expenses where we are today, this is more in the range of $630 million. And then, if you model, so -- and this is well in line with our objective is widely reflecting all the actions, that has been, I guess very diligently executed within the cost structure of the company and then the end, the reflect where we will go, going forward.

You may consider maybe some salary increase, and so I'll recommend to refer to a range between $630 million to $640 million gross expenses per quarter for the next couple of quarters. And similarly, for Q4, plus some addition because the fourth quarter is expect the higher in term of number of days. Then, the grant. The grants, as Carlo said, do not include yet the benefit from Nano2017. None they [indiscernible] made the recurring part. We do expect this program to be finally approved in the course of the current quarter. So to start to benefit of this grant on the recurrent basis in the course of the second quarter, on top of the onetime benefit of the catch up. If we take what we have to date, which in the -- for the first quarter, which also include the recurring part and the non-recurring part, I would say that after the approval of Nano2017 program, the recurrent amount of grant in the -- overwrote including all the programs that could be in the range of $30 million to $35 million overall. So at the end, if you compare the gross expenses and the grants opportunity, you'll see that really, we are now running at the lower end of the $600 million to $650 million range. And even in a quarter with a bit higher gross expenses due to the longer calendar, we are well comfortable that we'll remain well within the $600 million and $650 million range in that.

Operator

The next question comes from Sandeep Deshpande from JPMorgan.

Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division

I have a couple of questions. Firstly, Carlo Bozotti, if you mentioned in your initial remarks that if you adjust for something, that the overall growth in the second quarter was at the average of 5%. I can understand you're adjusting for ST-Ericsson. But are you saying that x ST-Ericsson, your growth was 5% -- is 5%? But I can't come to this calculation, so if you could help us on that. Secondly, is the conclusion, Carlo Ferro, from the earlier comments that you've made that despite whatever changes through the year, your OpEx will remain at the current levels, virtually through the year so that as your top line grows, you will see leverage on your earnings? Because your top line grows as your gross margin grows, et cetera. And then, finally, regarding DCG. I mean, your DCG performance in the first quarter was worse than the fourth quarter. I mean, we've been -- I mean, clearly, things are -- you're talking about the improvements in DCG, with it being a really important driver now for your target operating income plan for 2015. What level of confidence do you actually have that this revenue will double, given that there have been promises on DCG for a very long time, but this business has disappointed repeatedly over the last few years?

Carlo Bozotti

Yes, so maybe, this time we ask Carlo to go in details on the 5%, but -- and let me comment on the expenses. I think, it's very simple. I think what we want to do is, of course, to hit longer calendar days moving in Q3 and Q2. And then in Q3 normally, we'll have -- we have some benefits from the location in Europe and then in Q4 there will be a longer calendar day. I think, if you take Q2 as reference, that is a good reference. I think we should have something that is in the range of between $630 million and $640 million gross. And then, we see on this line, where we have the grant that is the line other income and expenses. Apart Q2 where there will be a big number, we expect, because there is like a chop, we shall run on that line in the second part of this year at about $30 million to $35 million positive. So indeed, what we want to do is to keep, as much as possible, at this level and to stay very, very close to $600 million net that is on the lower end of our range and enjoy the leverage in terms of sales growth and enjoy the leverage in terms of, of course, gross margin improvement with the strict control of the expenses. But we shall not forget that we have redeployed important product-design resources that are instrumental to boost the effort of -- on the core business on ST-Ericsson and this hopefully, quickly -- and quickly will pay off in terms of growth. But this is an important element for the driver. So I think one comment on DCG, what is very important here for us is the migration to ARM. I think we started early in the process. We are now paying the fact that the legacy products are going down, but we have important traction with the customers. We have materials and wins and now, this of course, will pay off step-by-step with our set-top box ARM products. These products have -- our 28-nanometer products are good products. We have important design wins with major operators in Europe, in the U.S. So we have a number of products. So here, there is a very important traction, and the traction is demonstrated really by the formal awards that we receive from these customers. And the second elemental again is our ASIC activity. Traditionally, our ASIC activity was for communication infrastructure. This activity is, we can say, is based normally on high-complexity products with low volume. Now, with this very low power performance of the FD-SOI, we have managed to win very high volume products for complex products, for complex applications. So this is products with significantly higher ASP than the normal -- than normal -- than other products. And of course, this will pay off when the production volume will start, as I said before, in Q2 2015, with a number of important customers. So this is the model, this is what we have described. Of course, we understand this is very critical, but we are committed to execute this roadmap in terms of new product introduction continuing with the traction and expanding the customers' base and win more business with the FD-SOI. Now we can move to the second quarter guidance, I think Carlo will make -- will describe.

Carlo Ferro

Yes, Sandeep, I believe the math is quite easy. The other ingredient on the reconciliation -- the ingredients in the reconciliation are 2. One is, as you mentioned, the revenues generated from the former ST-Ericsson product, which were $52 million in the first quarter. And an anticipated that to be -- below half of that to say, below $30 million in the second quarter. And the other one is the $15 million of proceeds from the settlement of the IP litigation with InvenSense, which are included in the first quarter revenues. So if you take $18 million to $25 million from Q1, and take out these elements of the starting point, this $17 million $48 million, and if you move from the midpoint of the guidance, minus the [indiscernible] less than $30 million in wireless, you see that the difference is in about 5%. So hopefully the math's around.

Carlo Bozotti

Yes. The other consideration is that with this further drop in wireless today, the visibility is the that we will -- we shall be below the $30 million, then there will be a number of quarters where we will see kind of, let's say, continuity at this level of revenue. So starting from Q3, then we shall not experience further significant drops in what we define as legacy wireless business, for a number of reasons.

Operator

Next question comes from Tristan Gerra from Robert W. Baird.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

A couple of questions on the -- on your MEMS business. First, could you talk about the growth outlook that you see for this year, year-over-year, on the basis of some of the wins that you've mentioned? And where do you think your market share is? Right now, [indiscernible] the pressure sensor given the wins that you've announced and what do you think the adoption rate will be this year?

Carlo Bozotti

Well, I think overall, as you know, we have -- we are expanding in terms of products. Now if you take the gyro per se which is one device, we have clearly, the deduction of the market share right. I think, on the other hand, we have important addition in terms of market share on the pressure sensor. We have won very, very important programs from the -- on the pressure sensor and also on the analog microphones. So the -- overall, we see good opportunities to complement what we do in motion MEMS using the same technique, the same technology for environmental MEMS and also acoustic MEMS. We have important opportunities, particularly, for the second half for a number of new products, for very high-volume applications. I mean, this is not yet completely in our pockets, but it's an opportunity, of course, that we'll try very, very hard, and is -- as I said, it's not just one product that stands, but there's more products. From motion to acoustic to pressure, et cetera. On top of this, there are other 2 elements, that I think is important to mention for AMS. The first is the starting production on the fingertip. This is a new business for us, I think of it as a product, it's group-performance product, it's life-performance products, and this will contribute and we believe we can expand starting from the recent wins. One of them is also prestigious win, and we want to expand this product line. I think we have some good, let's say, performance advantage with this new product, with this new family. And finally, I will also like to mention the pruning, because in [indiscernible] we also have some legacy products that we manufacture today in the [indiscernible] in Singapore, but will become effective. In fact, dedicated to one specific business for one customer in the area of micro fluidics and for the rest, we are disengaging. And as a consequence, there is, and there will be some more pruning that is specifically for AMS and for IPD, as I said before. So overall, I think it's a larger base of products. Of course, gyro remains very, very important for us. We have new technology that is very, very competitive. But, it is still important for us that we have the new products. We are doing now with our environmental, with our acoustical products with the touch -- with the FingerTip family. And equally important is the differentiation of the customer base. I think, we are making good progress in China, overall. And we are making also strong effort in Automotive with our accelerometer. So far, we have a major customer, in fact he's a major automotive player, and we can expand from there. So as you see plenty of opportunities, so it is a moment, as you can see from the figures, that we are not enjoying the growth that we had in the past, but it's also a moment where we are really producing a lot of new products that is not only the traditional motion MEMS, but other MEMS that have functionalities. And we expect this will turn in good growth and good growth opportunities for us in the second half of this year and for sure in 2015.

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Okay, and then as a quick follow-up. Anyway, to quantify the magnitude of the wins or share gains that you expect in the set-top box business in the U.S. with HEVC and what is the outlook for next year? Do you also have opportunities in cable? Or is it mostly satellite at this point?

Carlo Bozotti

No, we have a major win in cable. We cannot name the customer, but it is a major win. It is the result of the effort that we have done, first of all, to get the certification from the cable lab in the United States on our DOCSIS 3.0. Also we have other specific piece of [indiscernible] that was intended for this market, United States, like the MoCA. And so this is now a very, very important priority for us. Why that? Because this is a very important business. I mean, this is a very important market. This is a market in United States that is in the range between $1 billion and $1.5 billion. Of course, this includes satellite in U.S., but the cable is the major contributor there. So, it's not only satellite, It's box satellite and cable is on -- is really, it's not only for Europe. It's Europe and I think, at this point, we have at least for -- yes. I mean, we are working on with a number of operators that I would say 3 to 4 operators in the United States to quantify this, and we have tried, of course, 3 months ago in Paris, I think. This, we believe, is material starting from the very low level that we have today, our vision that we can exploiting this new products, new wins, new customers, new markets in the set-top box, but also exploiting the FD-SOI ASICs. Our ambition is to double the DCG business moving from Q4 2013 to Q4 2015.

Operator

The next question comes from Adithya Metuku from Bank of America Merrill Lynch.

Adithya Metuku - BofA Merrill Lynch, Research Division

My question is again on the DCG group. I was just -- the increasing competition in the set-top box space, especially in the over-the-top [indiscernible] space, with Amazon choosing its streaming device recently. I was just wondering, how do you see demand for traditional set-top boxes in the U.S. trending over the next few years. Do you still think there will be demand by the time you introduce your products?

Tait Sorensen

Adi, can you repeat the question? That was a little unclear here. You're talking about Amazon?

Adithya Metuku - BofA Merrill Lynch, Research Division

Yes. No, we're talking about the DCG group demand trends, basically, and I was just talking about the introduction of a -- of the over-the-top streaming design by Amazon. Considering that lots of people have clearing content using over-the-top devices, I was just wondering how do you see demand for traditional set-top box like cable and satellite trending over the next few years? Do you still think there will be the same level of demand that there is now for the Tier 1 set-box design wins that you're talking about?

Carlo Bozotti

Yes. Of course, we understand the trend here, the trend that you mentioning. But from what we see, working with our customers but also, really spending a lot of time with all the major operators, the major operators in the world, we see, this as a good market opportunity. And I think, I would leave Georges, the opportunity to comment here because indeed, this is a significant market today, and we believe it will remain a significant market opportunity. And in terms of semiconductor competitors, it's true there are important competitors, but also I believe it is true that most of the operators we are dealing with, they're all the most prestigious names. They really welcome the presence of an important player as ST. With now that we've new products and innovative new solutions. But Georges, please..

Georges Penalver

Yes, Georges speaking. You're right. I mean, there are a lot of new ways to distribute content and over-the-top -- many, many different over-the-top ways to do it. And this doesn't imply, obviously, set-top box. But on the other end, the market for protected content, for IM content, for premium content is still very strong, and is still controlled by the operators, the cable operators, satellite operators, IPTV operators. And we still see a strong market. I can remind that the market this year was 265 million set-top box in the world and it is expected it to be, in 2014, at the 285 million, while the average selling price remains at the same level. Meaning, just like Carlo said, the set-top box encompassed more and more features, more and more memory, and more and more processing power to improve the user interface to incorporate gaming. So in other words, I mean, as a conclusion, we are very confident in this set-top box and Home Gateway market.

Adithya Metuku - BofA Merrill Lynch, Research Division

Okay, that's clear. Just as a follow-up, where do you see the demand in these units coming from? Is it -- where is it coming in terms of geographies?

Carlo Bozotti

Yes, it's coming from the existing markets. American market, U.S. I mean, American both. North American and also South American, which is more dynamic, I agree, European market, and Chinese market is still, in quantity is huge, but not very, still, dynamic in premium boxes.

Operator

The next question comes from Kai Korschelt from Deutsche Bank.

Kai Korschelt - Deutsche Bank AG, Research Division

I'll try and make up by asking 2. The first one was on DCG. So it looks like you've moved about $15 million in quarterly revenues from IDP into that -- into DCG, and I think you're moving another $25 million or so in wireless revenues into that division. I'm just wondering, obviously, the guidance that you gave us to get to about $300 million in revenues by the second half of next year, should we assume that this is a moving target and should, in reality, be higher now, given that you have just increased the products that count as DCG? That was my first question. The second one was on the 10% margin target. So I didn't see a formal reiteration in the -- I just want to confirm that, that target is still there for middle of next year. And then also, as a follow-on to a previous question, to be the most specific here. It seems you'll need about 20% growth in revenues from your guided Q2 level. Which just seems quite ambitious to achieve in the next 12 months. So I'm just wondering, if your view on the probability of achieving your targets has at all changed?

Carlo Bozotti

Okay. So Carlo, if you can start commenting on the transfer. I think it's about the spending on dollars.

Carlo Ferro

Yes, the transfer is a transfer of a very marginal line has been done more for a reason of better allocation and utilization of resources as opposed to another notification. Of course, you are out of whack [ph], you [indiscernible]. So and it's very marginal. At the end of the day, revenues of this division are $10 million and that will cover the -- could be more likely less than, more than $10 million. So it's not at all contributing to the achievement of the revenues growth for DCG?

Carlo Bozotti

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

Carlo Ferro

On the model, I believe we have. If we have not, we wanted to do so. Certainly, at the end of the day, we talked about revenue, we talked about the gross margin, we talked about the expenses during this call, and we reiterate the objective of reaching about 10% operating margin the end of 2015. And I believe, by the way, reading again the introduction of Carlo at today call, that has been already said. But good just to repeat it.

Carlo Bozotti

And again, I've been just asked. Yes, indeed. But as I said, there's really 2 blocks. One is more a normal piece of business. That of course is bulk of what we do today with Microcontrollers, automotive and analog, MEMS and power. This is a block, I think, we intend to grow this year, quarter after quarter with this block. But then we expect an accelerated growth first with the set-top box and new products, and starting then from mid-next year also with the FD-SOI and here is not a continuity. This is an important discontinuity, a positive discontinuity. So this -- and there is no news compared to what we have described in January on this, and I think, is really these 2 major blocks. Of course, it's from a certain point of view, there's really 3 markets. There is the automotive market, this is a market that is going well, we're growing and we have important opportunities now for Microcontrollers, then there is all the block that industrial power, Microcontrollers, where the mass market and the distributors and the small customers is really playing an important role. And of course, one element of aggregation here is our Microcontrollers and all the products that we have around the microcontroller in many, many different applications. And the total area is the specific case of this is why we expect an accelerated recovery.

Operator

The next question comes from the Bernd Laux from Kepler Cheuvreux.

Bernd Laux - Kepler Cheuvreux, Research Division

I'd like to get back to the matter of FD-SOI. You announced that you collected 2 new design wins for the first quarter. Is it correct to assume that at least 1 of them is related to smartphones? And what area is the other in, if I'm right?

Carlo Bozotti

Well, we said that there are 2 in DCG if I remember well. I think, I mentioned another one that is in automotive. So if I -- indeed it is 3, and nobody -- none of the 3 is for smartphones. Okay. One -- yes. That's why, again, and then if we get into the details, we'd need to talk about customers. But the Automotive we could describe. This is our running operation with mobileye, and this is the next generation of products. It's very advanced solution. It's -- I believe it's very successful, and the new generation will be based on our FD-SOI technology. But the other 2 are not for smartphones.

Operator

The next question comes from Gianmarco Bonacina from Equita SIM.

Gianmarco Bonacina - Equita SIM Spa, Research Division

Considering the good booking development during the Q4 and the let's say, a little bit higher than expected seasonal decline in the Q1, is the -- was the second quarter growth of 2% in line with what you expected? Or basically, there is some delay in the orders for the -- for quarter? And then recent question, I didn't understand if you mentioned, let's say, for DCG and IDP, already stabilization, and let's say return to growth from the second quarter or that will be later on during the year?

Carlo Ferro

This is Carlo Ferro speaking. I think this as part of your question, the markets [indiscernible] at the end, what we currently see. And I would say, a recurring business, 10-point is a 5% sequential growth from the first quarter to the second quarter. 2% midpoint for the reported revenues number, 5% when readjusted excluding onetime revenues in Q1, and beside of the core ST-Ericsson. This 5%, does it fully reflect the demand and the level of the booking? Almost yet not totally, as we are in a situation under certain technologies to see delinquency on requested data by the customer higher than normal level, as I believe, in general, the industry is experiencing, in particular, in area of automotive and industrial power.

Tait Sorensen

The second was DCG. Yes.

Jean-Marc Chery

About DCG, I confirm that start in Q2 thanks to the fact that we are moving to the 14-nanometer ARM-based solution where we start to grow profitable facilities.

Operator

The next question comes Prunap Surmas [ph] from AM Capital [ph].

Unknown Analyst

I have 2 questions on productibility. First one is on your 9-axis movement sensor. Could you elaborate a bit on designing process with that particular product? Could we expect anything major anything up with that product by second half of this year on the volume terms? And second one is on that design in the smart grid platform. I think you have mentioned something about that. What is exactly there? And do you expect this one to go outside Europe in sometime this year?

Carlo Bozotti

No, I -- so the first question on the 9-axis sensor and the second one on the smart grid. On the smart grid, I think maybe Carlo can comment here. But we have a new project that we have been awarded recently. I do not -- in Eastern Europe, I do not believe we can mention...

Carlo Ferro

Disclose.

Carlo Bozotti

Disclose, but I think it potentially is a good program. I believe overall, we have a good technology on the smart grid. We are present in several countries. Of course the deployment has been massive in our -- in Europe in the recent...

Georges Penalver

So we have a full range of a solution from Micro to ASICS. Covering wireless, with power line more than -- we'll be reading inside. So this is a strong point.

Carlo Bozotti

So I completely checked, and there is this new design win in Eastern Europe, that -- is in addition to what we have. And hopefully, will be a successful program. And then, as far as the 9-axis, well, this is a product that is more for a wide range of customers rather than for one specific customer in general. I think we expect stronger growth in this area with our acoustical MEMS, with our environmental MEMS, and also with the fingertip. This product is more for a variety of customers, midsize customers, and not necessarily one specific high-volume opportunity.

Operator

The last question from today comes from Amit Harchandani from Citigroup.

Amit B. Harchandani - Citigroup Inc, Research Division

I'm Amit Harchandani from Citigroup. My question's related to the earnings, but they have more or less been answered. But I had a question related to a development earlier this month. I came across some news reports about researchers that were originally being laid off by Micron approaching STMicroelectronics for job I think related to the Pneumonic [ph] joint venture. I was not quite sure what to make of those reports, but some suggested that ST would be taking those employees back. Could you maybe clarify what the situation was all about? And if indeed, you're hiring back people, which division would they be going into?

Carlo Ferro

Yes. It's me Carlo Ferro taking your question. Seems at the end I have to clarify a subject that were a lot of rumors on the spread and the articles that had been written. At the end, in short, ST had not at all any kind of obligations or commitment under its legacy with the former flash memory business and the former mnemonics. Always, at the end, the situation raised of a number of expert researchers, people that came available on the market and considering our recurrent turnover in these kinds of profiles, we experienced, normally, in the site of grati and [indiscernible]. In Italy, considering the profile of these people, we entered into an agreement with Micron and we took commitment to hire about 140 people, possibly 170, depending on the available profiles that are technical profiles only, to fully meet the requirement of our groups in Italy to replace, to lower and under certain terms, agreed with Micron I'll say, regain it with the I'll say some relief of the cost in the initial period, making at the end what I believe is a win-to-win solution. A win solution, as far, of course, that people continuing to have a job opportunity in the technology environment and as far as -- and our group leveraging on expert resources, possibly then act as a cost that take in account the starting up and the learning curve.

Amit B. Harchandani - Citigroup Inc, Research Division

Okay. And would these resources be spread across the group? Or any particular segment where you see their expertise being fully utilized?

Carlo Ferro

This is mostly for Automotive, Industrial and Power, [indiscernible] And this is over a 2-years period, by the way. We will start to hire these people in the course of the first quarter of 2015.

Carlo Bozotti

Absolutely compatible with our league of resources and with our financial model with improving profitability for development company.

Tait Sorensen

Joya, at this point we'll go ahead and close down the conference call. I would like to remind everyone that we will host our Investors and Analyst Day in New York, on May 15. So that's coming up in a couple of weeks. If you need any additional information, please contact Investor Relations and we hope to see you in New York. Thank you very much.

Operator

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in conference. You may now disconnect your lines.

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