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STMicroelectronics N.V. (NYSE:STM)

Q1 2011 Earnings Call

April 27, 2011 9:00 PM ET

Executives

Tait Sorensen – Director, IR

Carlo Bozotti – President and CEO

Carlo Ferro – CFO

Didier Lamouche – COO

Carmelo Papa – SVP, Industrial and Multisegment Sector

Philippe Lambinet – Chief Strategic Officer and SVP, Home Entertainment and Displays

Analysts

Sandeep Deshpande – JPMorgan

Jerome Ramel – Exane BNP Paribas

Stéphane Houri – Natixis

Niels de Zwart – ING

Guenther Hollfelder – UniCredit

Manish Goyal – TIAA-CREF

Gunnar Plagge – Nomura

Gareth Jenkins – UBS

Kai Korschelt – Deutsche Bank

Didier Scemama – RBS

Janardan Menon – Liberum Capital

Operator

Good morning or good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the STMicroelectronics First Quarter 2011 Earnings Results Conference Call. As a reminder, all participants are in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. (Operator Instructions).

At this time, I would like to turn the conference over to Mr. Tait Sorensen, Director, Investor Relations. Please go ahead, sir.

Tait Sorensen

Thank you, Dino, and thank you for joining our first quarter 2011 conference call. Today Carlo Bozotti will be hosting, ST’s President and Chief Executive Officer. Joining him on the call are Didier Lamouche, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Carmelo Papa, Senior Executive Vice President of the Industrial and Multisegment Sector; and Philippe Lambinet, Chief Strategic Officer and Senior Executive Vice President of Home Entertainment and Displays.

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, ST-Ericsson will host a conference call shortly after the conclusion of our call. Also please limit yourself to one question and a brief follow-up call. Now I’d like to turn the call over to Carlo Bozotti. Carlo?

Carlo Bozotti

Thank you, Tait. And thank you for joining us today to discuss STMicroelectronics financial results for the 2011 first quarter. Overall, it was a solid quarter of financial performance. On a year-over-year basis total revenues was higher by 9% to $2.53 billion, gross margin was higher by 140 basis points to 39.1%, net income was up significantly from $57 million to $170 million, and operating margin before restructuring attributable to ST more than doubled to 9.9%. As anticipated, our net financial position remained strong at $1.14 billion.

Both total revenues and gross margin were within our guidance range. Revenue results were below the midpoint of our sequential guidance due to wireless legacy sales falling off at a faster rate than anticipated as at ST-Ericsson and the weak demand at the single customer. All other areas of our product portfolio performed as expected, even slightly better. Our gross margin was just above the midpoint of our guidance and our operating profitability progressed over last year.

Looking beyond the headline figures, we had strong year-over-year growth across many areas of our product portfolio, demonstrating the momentum we are seeing with our new products and the success with the expansion of our customer base as we address critical blocks helping to drive our customers’ success.

So it is clear our R&D investments have been the right ones as we demonstrate more and more innovation in our product portfolio. Our marketing and sales initiatives have been equally well focused as we engage with more industry leaders as customers across our product portfolio. Also, our temporary pickup of capital investment is designed to support areas of growth in 2011 and well beyond.

We’re progressing with our strategic manufacturing and product initiatives. With respect to reshaping our business portfolio, we completed the sales of our Micron shares received in connection with our former Flash business. In the first quarter, we realized net proceeds of $195 million from selling all the remaining shares of Micron. And in total we received net proceeds of $514 million, including the payment to the equity partner.

With respect to our manufacturing restructuring in the first quarter, we completed the closure of our Phoenix fab. So with this action, we have substantially completed the restructuring of our manufacturing operation. We are now well positioned with eight fabs, down from 17 fabs in 2005.

In line with our product initiatives, we continue to make selective capacity additions in 2011 to support growth in three key blocks. First, smart power products, particularly for the automotive industry. Second, MEMS and the third is to prepare for the launch of the ST-Ericsson’s new products targeting the smartphone and the tablet market that are ramping in the second half of this year. And I would like to reinforce here that we continue to outsource a significant portion of our advanced CMOS technology requirement, and for other technologies such as advanced analog technologies, we are providing the capacity internally.

As a result of the capacity additions and the ramp of new products, we are in a temporary period of heavy investment. This is visible in our cash flow figures that have declined with respect to the prior quarter and will decline again in the second quarter. While we are facing this reduction in cash flow by strategic design, we remain committed to our asset-lighter strategy. Our overall cash flow generation trajectory has enabled us to have a strong net cash position. In turn this has given us the ability to focus on several key priorities, enhancing our future opportunities through critical investment to support new products and enhancing our returns to shareholders.

With regard to the latter, last quarter we mentioned that based upon our cash position and investment requirement, we believed we could support an increase in our cash dividend in dollar terms. And indeed at the upcoming Annual Meeting, ST is recommending an increase of about 43% in the cash dividend to $0.40 per share.

Turning now to a more detailed discussion of our results, commencing with the 2011 first quarter, we have made some changes to our product segment. ACCI, comprised of Automotive, Consumer, Computer, and Communication Infrastructure products, and Wireless both retained essentially the same scope as they had – they have had.

With respect to IMS, we now are presenting two sub segments that for us have different growth dynamics and operating margin characteristics. The first is AMM comprised of Analog, MEMS, and Microcontrollers. AMM is where we are investing in product and system design and manufacturing capacity, and the growth perspectives and margin dynamics of these markets are excellent. The second is PDP and includes our Power Discrete Products. Here, the return on invested capital and cash generation are excellent.

So turning first to Analog, MEMS, and Microcontrollers, we saw very strong year-over-year growth with sales up 38%, thanks to a steep ramp of our new products. As we had indicated previously, we see a tremendous opportunity for growth in MEMS coming from three directions. First, we are positioned to grow by selling to more customers. Second, our plan encompass five families of products, and at present we have two families in volume production, specifically accelerometers and gyroscopes. The three additional product areas are the compass, active microphones, and pressure sensors.

And the third block of opportunities is centered on driving MEMS into a broader set of applications. Today our MEMS products are mainly used in gaming and portable devices, but looking ahead, we see the opportunity to penetrate healthcare, wellness, and industrial applications. As the numbers demonstrate, AMM has the highest operating margin of our businesses at 22% in the first quarter and 24.4% in the prior quarter.

Turning now to Power Discrete Products, they also posted double-digit sales growth with revenues up 18% year-over-year, and in the first quarter we saw good traction in power MOSFET and IGBTs. PDP’s operating margin was 15.1% in the 2011 first quarter and 17.2% in the prior quarter.

ACCI first quarter net revenues also increased 18% year-over-year. Revenues were over $1 billion again, so we are on the right trajectory here. And from a profitability perspective, ACCI’s operating margin was again at a double-digit level three quarters in a row. Here, the key dynamic is automotive where we see a good deal of opportunity in 2011. During the first quarter automotive was up sharply year-over-year and thus supported a sequential increase against normal seasonal pattern. The growth in automotive is broad-based. We are excited in particular about our smart power technologies, and in the second half of this year we will ship for the first time ever our family of 32-bit microcontrollers based on the PowerPC architecture.

All the three product segments, ACCI, AMM, and PDP, have substantially doubled their operating income year-over-year in a seasonally low quarter. This important achievement of improving results demonstrates further progress towards our solid and sustainable profitability model.

Turning now to ST-Ericsson where clearly the transitional period from legacy products to new products has been difficult and painful. ST’s wireless sales declined to $384 million in the first quarter, a substantial decrease when compared to the prior and year ago quarters reflecting a steeper decline in legacy products than had been anticipated.

As you saw from their press release, for the 2011 second quarter, they are anticipating a sequential decline in revenues. Just one point of clarification on the wireless revenues. If you look at the revenue number we reported versus the ST-Ericsson reported, the difference relates to R&D work they do for third parties that is consolidated with a design JV where Ericsson is the majority shareholder compared to the operating JV where ST is the majority shareholder for consolidation purposes.

ST-Ericsson’s main focus today is delivering these new products to customers. From a new product perspective, ST-Ericsson has expanded their customer base and is now actively engaged with seven of the nine largest OEMs in the wireless handset market. ST-Ericsson’s new products and platforms supporting high growth applications will drive the success of the joint venture. They have the customers, they are focused on ramping up and delivering, in our words, execution is the key.

Now let me turn to our second quarter outlook. We think it is appropriate to have some caution with respect to the short-term environment as there are some new headwinds that we face. Certainly the situation in Japan will be first, and we want to express our heartfelt concern for those affected. As a company we do not have manufacturing facilities in Japan, and about 4% of our revenues are shipped to Japan. The impact from the earthquake so far has been manageable from ST perspective, but we could see in the near-term unexpected shifts in demand or changes to the semiconductor supply chain, so this is something we are managing and watching carefully with an intense focus on supporting our customers.

Currency has recently been quite volatile with the euro moving significantly higher against the U.S. dollar in a short period of time. However, thanks to our hedging programs, our effective exchange rate for the second quarter is much lower than today’s rate. And third, in wireless ST-Ericsson’s transition from its legacy products to its new product portfolio will continue in the second quarter as they are anticipating a sequential decline in revenues, but we expect improvement in the third quarter. We do expect several of our businesses to grow on a sequential basis in the second quarter led by Automotive, Imaging, Analog, and Power Discrete.

So taking these different factors into account, we have set a second quarter net revenues range that is somewhat wider. This leads to a sequential revenue outlook of about minus 2% to a growth of plus 5% and a gross margin outlook of about 38.7%, plus or minus one percentage point.

In closing, we are pleased with the progress we made during the first quarter and the outlook for our product portfolio. For sure there are new challenges to manage in the second quarter, some for the semiconductor industry as a whole and some unique to ST. As we move into the second half of the year, we expect growth compared to the second quarter in our overall business to be driven by MEMS, Digital Consumer, and Microcontrollers. In addition, with the ramp of the new products currently anticipated, we expect to see particularly strong growth in comparison to the first half at ST-Ericsson.

I am confident in the direction ST has taken, and I am optimistic with respect to the opportunities in front of us during 2011 and beyond. There is a great deal we can accomplish, including the creation of value from our wireless business by remaining focused, responsive to our customers, and flexible to adjust to short-term market dynamics. Overall, we are all positioned to address our current market and the four key growth application areas we are targeting, energy management and savings, smart consumer devices, trust and data security, and healthcare and wellness.

Finally, ST will host its Annual Investors and Analyst Day in New York on May the 19th and a similar event in Hong Kong on June the 2nd. So we look forward to seeing many of you in person. Now my colleagues and I would be happy to take your questions. Thank you.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. (Operator Instructions). First question is from Mr. Sandeep Deshpande of JPMorgan. Please go ahead, sir.

Sandeep Deshpande – JPMorgan

Yeah, hi, thanks for taking my question. With regards to – a couple of questions actually, with regards to your gross margin, I mean you’ve given guidance in this quarter based on a currency of 1.37 to the – dollars to the euro. How – I mean, given that where the currency currently is at around 1.45, 1.46, do you see an impact to the current quarter from the negative impact from the currency, or this is something which could happen in the future? I mean, related to that is, of course, has your currency exposure changed since the last time the euro was this strong?

And then secondly, with regards to product, clearly your core businesses, I mean, IMS businesses are doing extremely well at this point. Do you see, I mean, the growth trajectory in this business continuing in 2011 as it has through the last few quarters?

Carlo Bozotti

Well, I will take the second one, and then Carlo will elaborate on the currency impact on gross margin. Well, indeed, on the core business we see important opportunity for growth in the second half of this year. As I said, we see significant opportunities in the area of digital consumer with our, let’s say, set-top box products, the digital TV products, but also the new areas like, important new areas like the display port, for instance.

We see a continued growth in MEMS. In fact, second half is particularly strong in MEMS. And this is thanks to existing products at existing customers and new customers, but also thanks to new products, products that I have just mentioned like the compass, the microphones, the active microphones, and the sensor – and the pressure sensors. We see important opportunities to grow in the second half also microcontrollers. And this is both on secure microcontrollers and on general purpose microcontrollers.

So this is a core business. We are excited about the opportunities in the second half from these products, and we expect this going on for some time. Now overall in the year, of course, automotive is very strong, but automotive is very, very strong now. I mean, the first year automotive position is really booming and is really contributed to the growth of this year.

Now of course, starting from Q3 and then very importantly for us in Q4, we see a very strong contribution from new products in ST-Ericsson. This is now basically no contribution. I mean today what we have is a business that is a legacy – its legacy products is declining, and the new products will really start in Q3. And we expect then an important contribution from ST-Ericsson new products in Q4 this year. So this is the present visibility, and I would ask Carlo Ferro to comment on the gross margin dynamics, vis-à-vis the exchange rate fluctuations.

Carlo Ferro

Yes, Carlo. Good morning, good afternoon, everybody. Yes, Sandeep, your point indeed on the currency impact on the gross margin, and we estimate about 40 basis point, the effect on from Q1 into Q2 due to the exchange rate. And as reported in our press release, this is based on an effective rate of 1.37. For us the effective rate is a combination of actual rate, expected rate to go, and the hedged rates, and the hedging is in this respect helping this quarter. To give you some color around that, our 1.37 assumes the exchange rate to go from now through the end of the quarter in a range of 1.25. So at the current levels, we are in line with what is underlying our guidance.

Going forward, we will continue somehow to be protected by the hedging and to be more detailed for your modeling in Q3, hedging currently covers about 40% of the total euro cost exposure, and we have a hedge at an average rate of 1.35. And for Q4 the hedged portion is 30% of the euro cost exposure, again at an average rate of about 1.35. So you are right, maybe in the next quarter there will be a little bit less benefit from the hedging, but still some substantial, some significant support from the hedging activity.

And of course, we are meanwhile taking measure on initiative for continued improvement in the efficiency of our fab. The closure of Phoenix occurred end of March in this respect will help and will be more visible in Q3 after having depleted this inventory. We have several manufacturing programs, just to mention one, the conversion from gold to copper for building material in assembly, which is a very significant program, especially at the current level of the gold pricing.

In any event, we are really sailing these days against the currency headwinds, and the breakthrough on our gross margin dynamic going forward is more driven by the new product introduction, particularly with ST-Ericsson, but also with mix improvement in the weight of the ST businesses. For instance, increasing revenues in MEMS, Analog, and Digital Consumer in the second half of the year will be another positive factor to our gross margins.

Tait Sorensen

Thank you, Sandeep. We’ll take the next question.

Operator

The next question is from Mr. Jerome Ramel, Exane BNP Paribas. Please go ahead.

Jerome Ramel – Exane BNP Paribas

Yep. Good afternoon. Two very quick questions, the first one is, Carlo Ferro, maybe can you comment how we should model the OpEx going forward? And the second question may be more for Carlo Bozotti. What is your take on someone bidding on National Semiconductor, and going forward, how do you think your analog business will be positioned? Thank you.

Carlo Ferro

Yeah, Jerome, I believe that the ending of Q1 we did what we have anticipated when talking three months ago, reducing in absolute dollar amount, but increasing in term of as a percentage of sales due to declining sales. And this 34.5% OpEx to sales ratio of Q1 obviously is disappointing, is not where we want to be.

Also in this respect, the specific situation of the wireless business that Carlo has just described obviously somehow affect the metrics, and to offer all of you a clear understanding where we stand in this respect, a part of the wireless business, excluding wireless, our OpEx to sales ratio last quarter was about 25%, which is frankly not far from a good model for us. Also there are still opportunity when growing in revenues.

Going forward, to come to your question, for the current quarter we see some increasing factor for OpEx in absolute dollar. To remember you, we do in ST adopt yearly salary increase starting in the month of April. ST-Ericsson benefit the last quarter of a high level of sales of R&D services on LTE technology to third parties. This quarter expect still a substantial level of sales of this service, but lower than the prior quarter. We are taking action to mitigate and to take also these two ingredients in our OpEx dynamics.

So overall, as a percentage of sales, we may expect in Q2 OpEx to sales ratio similar or slightly higher than first quarter 2011, also depending, obviously, where we fall into the revenues guidance.

Carlo Bozotti

Okay. So as far as the move, of course, we typically do not comment on competition, but it’s clearly a bold move and is an important sign of commitment from one of our major competitors on the analog. And I think this is, let’s say, of course, we believe this is a very good opportunity for ST. This is a very good opportunity for ST because, of course, we have this year about $1.25 billion in what we call general purpose analog, advanced analog, and this includes, of course, the power management but all the advanced analog products.

It is a very material block, and we have noticed that there are important areas of overlaps between the two product portfolios, and this is an opportunity that I believe we have both at the OEM customers, but also at the distributors. And we have defined, as you know, a set of priorities, both for advanced analog and power management. In fact, it is very focused, is very, very important for us to move on here, is one major competitor less. There is more space for us to win businesses, as I said, OEM customers, distribution, and overall. This is, of course, without looking at our MEMS business. It also includes advanced analog products in many of the MEMS products that we have. But without MEMS, this is already at the level of the general purpose audio. It is already a business of about $1.25 billion, and we want to move on aggressively from here.

Tait Sorensen

Thank you, Jerome. We’ll move on to the next question, please.

Operator

The next question is from Stéphane Houri of Natixis. Please go ahead, sir.

Stéphane Houri – Natixis

Yes, hello, good afternoon. Just wanted to talk a bit about ST-Ericsson, about your scenario for this year. Is it fair, given the visibility that you have with your customer, to say that Q2 might be the bottom of the sales and the losses of the joint venture? And do you think that the joint venture can still go breakeven in Q2 2012? And if there is not a success here, is there a plan B? Do you intend to do more restructuring or even thinking about disposing the division? Thank you.

Carlo Ferro

I’ll say, Stéphane, that at the end, two-third of your questions are for ST-Ericsson management, and by the way, Gilles and his team will be with you in about one hour and a half. To go to the point, as our shareholder expectation, we count on ST-Ericsson delivering on this plan. There are all the ingredients to deliver and to succeed. Recently, ST-Ericsson management shared with you the objective to reach breakeven in the second quarter 2012, and this is a must for us as a shareholder to see.

Stéphane Houri – Natixis

Right.

Carlo Ferro

There are good ingredients on this respect. We again, what you know we measure is not so much the revenue’s evolution on the legacy product, which is what it is, but is the fundamentals for the future, which is the introduction of the new product with customers, and engagement of seven out of the nine largest OEM is very encouraging news in this respect.

Stéphane Houri – Natixis

Okay. So, maybe if I may have a direct question for you, not for Gilles. About the CapEx budget, do you – at this time of the year, do you think you will be more in the low end or in the high end of the guidance that you gave last quarter for the CapEx budget for 2011?

Carlo Ferro

Well, you know, then we have provided entering the year a quite large guidance with at the end frankly no expectation to have to exactly tune each individual quarter. Be reassured that we are executing with the appropriate care about preparing for the future of the new product on one side and optimizing the cash impact on the other side. This is a period which is intense for capital spending of the company. We’re executing this plan within the guidance we have shared with you three months ago, which is a range between $1.1 million and $1.5 million for this year in a moderate way aimed at preparing sales and sales of new product for the fourth quarter of this year and for 2012 as well.

Stéphane Houri – Natixis

Okay. Thank you very much.

Carlo Ferro

Thank you, Stéphane.

Tait Sorensen

Thank you, Stéphane. Next question, Dino.

Operator

The next question is from Mr. Niels de Zwart of ING. Please go ahead, sir.

Niels de Zwart – ING

Good afternoon. My question would, again, be on automotive, which was very strong during the quarter, and you also mentioned to have a good outlook for that. If you look at the entire year also take into account possible impact from Japan earthquake, would you expect normal seasonal patterns to evolve throughout the year?

Carlo Bozotti

Yeah, Didier will take this.

Didier Lamouche

Yes, good afternoon, everybody. Yeah, I will take that because I especially focusing on the – as Carlo mentioned before, on a task force aimed at anticipating and managing the effect of the Japan crisis. First, the basis of our automotive business, as Carlo mentioned before, is very strong independently of the Japan effect. As you probably noticed, we even saw, and as Carlo mentioned, we even saw a sequential increase in our business quarter-to-quarter, a pretty significant increase mostly driven, not uniquely, but mostly driven by the Chinese markets and mostly driven by high-end models.

On top of that, your question is related to what is the effect of the Japanese crisis. So let me step back a bit and describe a bit how we see the effect of the Japan crisis on our business and then after that refocus on the automotive aspects. There is two kind of business of impact, one which is direct impact to us. The direct impact there is three flavors. The business impact, and for that our business is only – the business we do over there is only 5% of our total revenue, which is much less than the total Japanese market, so we are less exposed than most of the competition. And second in term – and third in term of supply, we have no factories over there, so we have no direct impact from a manufacturing standpoint.

The only impact we could see at the moment, and we are monitoring that carefully, is the supply of material, but again on that aspect, when you look to the way we have structured our supply chain, we are roughly half exposed than the rest of the industry. To give you one straightforward example, on silicon wafers, 60% of the wafers sold in the world are coming from – the raw wafers, I mean, are coming from Japan. As we are procuring only 30% of our supply from Japan, so roughly we are half exposed.

Where we see an impact is more indirectly, a customer who could push out products that they require from us because they cannot procure products from other suppliers, come and manufacture in Japan. And that’s why, as Carlo mentioned before, we have opened up our guidance for Q2 to take into account that effect of uncertainty.

And now to come back on your question, later in the year we see more positive impact on our business coming from customer coming to us. And specifically on your question, this is a case, specifically the case on the automotive sector, customers coming to us and requesting for help in order to supply a backup solution with our products to replace products from the competition.

Competition you can easily imagine who they are – is competition in the micros space, competition in the analog space, who can supply the parts that they had committed prior to the crisis to their suppliers. So all-in-all to make a long story short, Q2 will probably be a quarter of readjustment of the overall supply chain. That’s why we must be careful in the short-term, but mid-term H2 and specifically for the automotive business we see a significant opportunity for us. I hope I answered your question.

Niels de Zwart – ING

Okay. Yes, that was a great answer. A final one on – still on the gross margin, going forward in the second half, taking into account the currency impact and as well as some cost of mix effect from things you mentioned, would you expect your gross margin in the second half of 2011 to be higher than in the second half of last year as it is the case on your guidance for the first half of this year?

Carlo Ferro

Do you know really on this – I’m sorry being unable to answer the question as we do normally do not provide the guidance on gross margin beyond the next quarter. Hopefully, what I said earlier is qualitatively giving you some expected impact. We are sailing against the currency, and we have opportunities from manufacturing efficiencies and the new product introduction. The impact of the new product introduction of course depends on the timing on this product, but frankly I’m really sorry but to give you guidance on gross margin for Q3 and Q4 would be I’ll say a little bit more than what would we do usually and there is no starting a new practice today.

Niels de Zwart – ING

Okay. Thanks very much.

Carlo Ferro

Sorry for that.

Tait Sorensen

Thank you, Niels. Next question, Dino.

Operator

The next question is from Mr. Guenther Hollfelder of UniCredit. Please go ahead, sir.

Guenther Hollfelder – UniCredit

Yeah. The first question, a follow-up to the automotive situation, so right now given this uncertainty, do I understand that you modeled in I guess less trend or even a slight decline for automotive sales going into the second quarter compared to the first quarter?

The second question concerning your PowerPC MCU technology, do you see a competitive advantage here? As is it easier for customers, for example, to program new software on the same architecture here like from Freescale and from you guys going forward and that this could be an advantage in design wins?

And the last question is concerning the capacity utilization, if you could provide an update what you’re expecting here, also, maybe or given the current inventory situation? Thanks.

Carlo Bozotti

Well, it is articulated question. So the first point was concerning automotive. No, in the automotive area, we see a sequential increase. There are other areas like ST-Ericsson where we see a sequential decrease. There are other families where the impact from Japan is more material, and this is just due to the complexity of the supply chain because certain of our customers cannot get all the components they need to build their products. And therefore, we have seen some pushed out, and of course it’s temporary pushed out because of the complexity of the supply chain, but not in the automotive.

The second point was on the PowerPC, we are very pleased about the progress that we have on this new family. In fact this year is the first year for us with certain revenues for this new microcontroller that is in ST fully devoted to the automotive applications. I think that the model that we have designed together with Freescale is a successful model. It’s giving the flexibility to our customers to work with two alternative sources. We are committed to this model.

We are also committed to develop those technologies that specifically are embedded Flash technologies. Today is on the 90-nanometer embedded Flash that is a very competitive technologies for automotive microcontrollers, but the next step is also a competitive move with the introduction of the 55-nanometer embedded Flash, and this time 12 each, and so this is an important program for us.

It is one of the areas where we have invested significant resources in the research and development, and this year is the first year of revenues, not very important, but we expect then, of course, important growth for the next – for the next years. Then there was a third one that was on the...

Carlo Ferro

Capacity utilization.

Carlo Bozotti

On the capacity utilization, I’m thinking that Carlo will take it.

Carlo Ferro

Yeah, Guenther, the capacity utilization in first quarter has been overall 85%, let me remember – remind that how we measure on a standard line and an 85% to 90% is the normal range whereas of capacity utilization on this metric last quarter was 84%. So we are running the fabs in Q1 similarly to what we did in the prior quarter.

For the second quarter, we expect a slight increase in the capacity utilization. You are right on pointing on the need of depleting some inventory on one side. On the other side, we need also to consider that our strategy of foundry is starting to take some evidence in our manufacturing strategy, and we have I’ll say higher buffer to maneuver on outside manufacturing in respect to the loading of our internal fab. This is also why the overall revenues guidance some plan of accelerating inventory turns translate into the possibility for us to increase, slight increase in loading of our fabs from Q1 entering into Q2.

Tait Sorensen

Thank you, Guenther. We’ll take the next question, Dino.

Guenther Hollfelder – UniCredit

Okay.

Operator

Next question is from Mr. Manish Goyal of TIAA-CREF. Please go ahead, sir.

Manish Goyal – TIAA-CREF

Yeah, hi. Apologies in advance if this question was asked earlier. I just wanted to understand how you think about ST-Ericsson targeting for a breakeven substantially higher than their current revenue run rate? Why should that number not be close to €500 million or even less than that?

Carlo Bozotti

If I understood well the question, I think I would try to position, first of all, the ambition that we have for ST-Ericsson, this ambition is, of course, is the ambition of ST and is also the ambition of our partner, Ericsson, is to share to have participation 50-50 in a company that is a global leader in wireless targeting smartphones and targeting tablets.

Manish Goyal – TIAA-CREF

Okay.

Carlo Bozotti

And therefore we want to focus on one side high-speed modem and on the other side on complex multimedia application processors and, of course, covering all the connectivity features that are required for these high-end phone applications.

Therefore, the scope of the R&D is defined, and the focus today is to introduce a number of new products, for instance, standalone high-speed modems or integrated solution embedding both the modem and the application processor to replace all the products that were basically custom solutions for a few customers. The new business model is also calling for a much wider customer base coverage. So we want to work basically with the most important – all the most important customers in this domain.

Many of these platforms, many of these products have, let’s say, an average selling price structure that is being a platform that is significantly higher than what we had experienced in the past with our more customized solutions, and, of course, on these platforms and new products, we are targeting significant volumes. And this is, to be clear, at the level of tens of millions of units per year, and we expect an important turnaround on the top line thanks to the quality of the roadmap with coverage of the customer base that is much wider than what we had before. And also thanks to a price structure of these platforms and solutions that is structurally higher than what we had in the past.

So this is today commissioned, this is today the scope of the ST-Ericsson activity, and we have an important turnaround already in the second half with the products. It will become very much easier for this year, and management is targeting breakeven in the second quarter of 2012. This is an important target, very, very important target for management. It’s a very, very important step for the shareholders, and of course, the company is also working on several additional actions to improve internal efficiencies and to make it simpler to achieve this target by the second quarter of next year.

Manish Goyal – TIAA-CREF

So just as a quick follow-up. Let’s say that if the deadline to get to breakeven slips by six months or 12 months. What are some of the actions you may be prepared to take at that point?

Carlo Bozotti

Well, I think there is no doubt that for us it’s very, very crucial to meet the deadline of breakeven into next year. And there are actions that will be taken to achieve this target if the top line will not materialize as we expect.

Manish Goyal – TIAA-CREF

Thank you.

Tait Sorensen

Thank you, Manish. Next question, Dino.

Operator

Next question from Mr. Gunnar Plagge of Nomura. Please go ahead, sir.

Gunnar Plagge – Nomura

Yes, hello, I have a question for Carmelo. Could you maybe talk a little bit about the supply demand dynamics in Power Discrete that look quite healthy? And then maybe for Philippe, are we fully on track in the TV semi market to reach triple-digit revenue numbers over the course of this year?

Carmelo Papa

Okay. I’ll start first, Carmelo speaking. As far as Power Discrete, we see a good demand coming from all over the world in many application that – mostly industrial application, of course, but not only. You consider, please, that also these devices goes to automotive. So listen, we are also enjoying the booming situation that was automotive. As far as the industrial applications, these are coming from LED lighting, from a smart grid and all its variations starting from the photovoltaic power discrete associated with these applications. They are coming from major OEMs in industrial field, but also from distribution in mass markets.

So it’s an overall flourishing situation, and I’m convinced of this – it will continue also in the second quarter. I’m convinced because of most – some of this demand is coming for 40%, 50% from distribution. Distribution stock rates are under control. There is no reason why this should not continue in the second half of the year. So that’s my vision, which is, let’s say, corroborated by the facts up ‘til now.

Philippe Lambinet

Okay, now this is Philippe Lambinet. I can take care of the question on the TV, TV and monitors. Yeah, we do confirm that this year we will be selling revenues that can be written with triple digit in millions of dollars, thanks to the launch of new digital TV and monitors products on the market. We do confirm this plan.

Gunnar Plagge – Nomura

Thanks.

Tait Sorensen

Thank you, Gunnar. Dino, next question?

Operator

The next question is from Mr. Gareth Jenkins, UBS. Please go ahead, sir.

Gareth Jenkins – UBS

Hi, couple of very quick ones if I could. Just wondered if you’re still budgeting for 25% capacity increase in autos this year? Secondly, I just wondered if you could comment on inventory, on those fairly big increases in inventory days both in the core business and in ST-Ericsson. Wonder whether that’s anything Japan related, whether you’re sitting on work-in-progress? And then finally, just on the consumer and computing businesses, I wondered if you could talk about the linearity through the quarter? So I’ve heard a couple of companies talk about a strong pickup in March in computing, in particular. I wondered if you’ve seen the same. Thanks.

Carlo Bozotti

Well, I will take the first one, yes. We just pointed that we confirmed the 25% increase in the automotive business year-over-year. Carlo?

Carlo Ferro

I take the question on inventory, and, indeed, yes, the Q1 performance has been somehow disappointing, and the key reason is that revenues at ST-Ericsson have been a surprise and mostly at the end of the quarter. To give you some reference number, we have increased the inventory in our balance sheet by $173 million. There are $38 million, which is the currency translation adjustment and it is out of our control. There are $135 million, which is still a big number on operating increase. More than half of that is for wireless.

When reading our press release, ST-Ericsson press release, please keep in mind that inventory for a while in ST’s are higher than the ST-Ericsson inventory due to the work-in-progress for wireless in our manufacturing effects. Additionally, we have completed the operation and the closure of the operation in Phoenix for the automotive business. This also translating some inventory built for end of life products that have not being suitable for new qualification at another fabs and this is another ingredient of temporary increase.

Overall, we remain committed to our target of running inventory turns in the range between 4.5 to 5 turns. There is some journey to do that will take a few quarters to accomplish, so we reaffirm this objective for the fourth quarter of 2011.

Carlo Bozotti

Okay. I can take the question on computer consumer. Yeah, we do confirm a pretty significant growth in the second half versus the first half. This is due to two phenomenons. First, I already mentioned it is the introduction of new products in digital consumer, which in the second half will drive some growth.

Then there is a recovery mostly in the consumer market in the second half. In the first half the digital consumer market is fairly soft with some inventory correction after Q4 last year. So the first half is fairly soft and the second half shows a very good recovery. So overall, we see in the computer consumer area some good growth in the second half, again mostly driven by consumer.

Tait Sorensen

Thank you, Gareth. We’ll take the next question, Dino.

Operator

Next question from Mr. Kai Korschelt of Deutsche Bank. Please go ahead, sir.

Kai Korschelt – Deutsche Bank

Yes, can you hear me?

Carlo Bozotti

Yes, yes, Kai.

Kai Korschelt – Deutsche Bank

Great. Okay, thank you. My first question is just on your revenue guidance, could you give a bit more color what the guidance would be, excluding ST-Ericsson in terms of Q2 revenues? And my second question was do you expect any impact from consolidation in the – in hard disk drives, given that’s still one of your end markets? And my third question was on the tax rate it is running at pretty high levels by your standards, and I understand that it’s because of the high losses that ST-Ericsson got. Could you just maybe give a bit of color, please, on the run rates or expected run rates here in the second half? Thank you.

Carlo Ferro

Okay. Maybe I start from the last question about the effective tax rate. Yes, indeed, 27% incurred in the first quarter, and so as a projection for the year is higher than our normal tax rate. We already had the chance to discuss about these dynamics where the earnings incurs in ST at a tax rate which is very similar to the one that we are used to see for ST.

And in Q1 the effective tax rate on the ST portion has been 16%, very much in line with our usual model. While there are the losses of ST-Ericsson that benefit from a lower tax rate for a number of reasons and the combination of the two resulted into a 27%. It’s quite evident that in the first half of this year the losses of ST-Ericsson are important in respect to the total result of ST, and this is mechanically lifting the effective tax rate you read on our consolidated index.

Carlo Bozotti

On the hard disk drive question, I will answer. There is two factors. The question is about the consolidation that we saw, right, between WD and SGS? So two – yeah, two flavors on that. WD, the acquirer is our customer; the one acquired is not. So it’s going to go in the right direction for us clearly. Second point is – there is a second impact you might also consider which is the Japan effect. As you know, this business is extremely consolidated in term of final manufacturer, but also in term of chip manufacturer. Among all the chip manufacturers that are remaining in this business, we are probably the only one not affected in term of manufacturing capacity by the Japan tragedy. So, you can easily draw the conclusion. It’s going to be clearly more than an opportunity for us, an upside for us in that business, and we are seeing that already.

Carlo Ferro

Yeah, well, the last one was, I will – I think, of course, we rarely give guidance on blocks of business, but I think what we have in our – in our – what we have plugged in our system for the second quarter is that decline in ST-Ericsson is slightly above 10%.

Kai Korschelt – Deutsche Bank

Okay. Thank you.

Carlo Ferro

Thank you.

Tait Sorensen

Thank you, Kai. Next question, please.

Operator

Next question, Mr. Didier Scemama of RBS. Please go ahead, sir.

Didier Scemama – RBS

Good afternoon, gentleman, and thanks for taking my question. So, Carlo, did you just say ST, ex ST-Ericsson, would be up more than 10%?

Carlo Ferro

No.

Carlo Bozotti

No, no.

Carlo Ferro

No, I said – I’m sorry, your questions, sometimes the telephone line do not help, but, no, I said that what we have plugged in our system to prepare for the second quarter guidance is a decline in ST-Ericsson that this is likely above 10%.

Didier Scemama – RBS

Okay, okay, sorry. Okay, great.

Carlo Ferro

And then, of course, you can make the math on the rest, I think.

Didier Scemama – RBS

Yeah, yeah, no, perfect.

Carlo Ferro

This is what we have plugged into the system for the second quarter.

Didier Scemama – RBS

Okay, gotcha. Great. Since many very, very clever questions have been asked already, I’m going to look a bit more into the details of the new reporting structure, so I guess that’s for Carmelo, if you can help me there that would be great. First of all, in your Power Discrete business, you make reasonably strong margins, but if I look at Infineon, I mean, the business that is similar to Power Discrete, sees margins above 20%. So I’m just wondering if your product mix is capable of achieving margins above 20% in the medium term, or is there anything structural there that would sort of preempt you from going above 20%?

And on the Analog, MEMS, and Microcontroller business, there again, you’ve got really good margins currently in the 20% plus, but I mean, if I look at your peers in the U.S., the fact that you also have the MEMS business, which is pretty proprietary, is there any reason why your operating margin in that business could also go up maybe to the 30%, which is more the sort of norm in this type of business, please?

Carlo Bozotti

Well, I – yeah, Carmelo will comment, but I, considering that I – we have this debate many, many times in ST. I want also to give you my feeling here. I think definitely we can do better in discrete. Definitely, I think we can, we should. I think is a matter of volume. We are not at the same level of volume as Infineon, but we have the opportunity to grow. And it is also a matter of mix, and of course, Carmelo will comment on many new products and new technologies that we are developing. So what I expect also in this business is growth and better margins. Carmelo, do you want to...?

Carmelo Papa

Yeah, the comment I can make after my boss is that we are currently working on this to improve also the efficiency of manufacturing of it by moving products outside Europe, and this is both internally to ST manufacturing facilities in Singapore and also to external foundries in Asia.

And I can tell you that from an innovation point of view, we are second to no one because we have a wave of new products coming from mostly to RF to transistors to IGBTs. This will lead the market starting this quarter, and they will come flowing into the next quarter. So finally, we are second to no one, and we will recover in those areas we are behind the others. It’s a matter of innovation of drive, but we have clear ideas and the structure is helping us. There is no point why we should not perform at the highest level here.

Didier Scemama – RBS

Sure. And actually on that point, talking about IGBTs, can you give us a sense of how much of the Power Discrete business is IGBT and higher voltage MOSFET and thyristors, please?

Carmelo Papa

Well, this – I don’t think we go into these details. I can tell you as a principle that the MOSFETs are most of it. IGBTs are the fastest in terms of growth. Where we are now putting our – grabbing our hands is in the module, so which is a new area of promising, and this is something that we didn’t do before. So in terms of growth rate and size, the MOSFET low voltage, high voltage, everything is out of the highest. Second largest growing part is the one of IGBT, percentage-wise the highest, and the thyristors are legacy products. It’s still a good market, but less in terms of innovation.

Carlo Bozotti

Yeah, allow me – maybe I – Carlo has a comment here, Carlo Ferro, and I also have a comment on your last question.

Carlo Ferro

My comment is first of all to complement on those words, highlighting that also in the Analog, MEMS, and Microcontroller areas we have opportunities for margin expansion towards number more similar to the one of other competitors. And there – the key driver there is really the product mix as we move from standard analog towards high-performance analog, system solution, and MEMS overall. And by the way, I want also to thank you, Didier, for the question since really I am glad that the new segment reporting raised the attention on this, which is big opportunities and deal with the 43% of our revenue, so a very large part of the ST business.

Carlo Bozotti

Well, the comment from my side is this is a great opportunity for ST because I believe in this area, the new area that we define as AMM, we have, of course, margin improvement opportunity. But we also have very significant top line expansion opportunities.

And I want to make this point because while it’s true that we are lagging on the margin with respect of some of our American competitors, I think this is an area where we have enjoyed very, very strong top line expansion, and our ambition, of course, is to achieve the two objectives, margin on one side, but also to continue to grow at an accelerated pace. I think the second half of this year, not in Q2, but in the second half of this year, we see an important expansion on the AMM.

Didier Scemama – RBS

Great. And then final question, if I may, for Carlo or Carlo, whichever you want. Great that you’ve increased your dividends, but I mean, with the balance sheet you’ve got and with the sort of ongoing free cash flow you should expect to generate on your core business, I’m just curious why you’re not buying back your shares. They trade at sales that is anywhere between 50% and 70% below your peer group, and if you’re very confident into the recovery of ST-Ericsson in the second half of this year and next year, it’s probably a great time to buy your shares. I’m just wondering why you’re not considering a very aggressive buyback here?

Carlo Ferro

Yeah, Didier, Carlo wants Carlo to answer the question. He has indicated me for taking your question at the end. I believe we have made an important step increasing the dividend vis-à-vis – towards our strategy of expanding distribution to shareholder to one side keeping a solid capital structure that also may support opportunistic or strategical move if any value opportunity will arise.

Several times we have addressed with many of you about the trade-off between dividend and the shares buyback. We believe at the end of the day, a dividend, especially under our methodology of quarterly distribution is offering to serve the remuneration to midterm shareholders that at the end – at the end of each quarter can get their own coupon, vis-à-vis a first basis and a solid basis or rate of return on the investment in the ST shares while the shares buyback eventually could be more on the benefit of those that are on the shareholder register at the time when you execute it. So we have this kind of preference on the methodology.

In term of the overall amount of distribution, we have made one significant step ahead. We are now above the level of dividend where the company was before the 2009 recession. Our cash offers the possibility to address the next installment of redemption of the euro bond and the 2016 convertible bond with no plan, no further dilution to shareholder. We have a solid shareholder opportunity raised for M&A. We believe that at this stage, our strategy of use of cash is complete, and we are not planning for a share buyback.

Didier Scemama – RBS

Thank you.

Tait Sorensen

Thank you, Didier. We’ll take the next question, please.

Operator

Next question is from Mr. Janardan Menon from Liberum Capital. Please go ahead.

Janardan Menon – Liberum Capital

Hi, I just have a very quick follow-up. Carlo, you had said that about 40% and 30% of your Q3 and, sorry, Q2 and Q3 euro costs were hedged. Can you give me the equivalent number for Q1, how much you have hedged for the current quarter?

Carlo Ferro

Yes, give me – give me one second. In Q1, indeed, we were hedge in a range of 60% of the overall cost of exposure.

Janardan Menon – Liberum Capital

And can you just give me roughly what the formula is at this point in time in terms of any change in the euro to your gross margin and the operating margin? Is it still what you had a couple of years ago in terms of for every percentage change, you’ll take 4 million to 5 million?

Carlo Ferro

Yeah, well, say that the rule of thumb that remains, it remains very similar so some initiative has been taken in order to reduce the euro exposure of our manufacturing cost and of our expansions, and then eventually, so we may have the opportunity or so on our Analyst Day to elaborate on this strategy. So overall, the rule of thumb remains that one percentage point of euro dollar will alleviate the one or the other direction effect the operating margin in a range between $8 million to $10 million. And this refers to the effective rate, including this daily rate, plus the hedging impact.

Janardan Menon – Liberum Capital

Okay. I have no further questions. Thanks.

Tait Sorensen

Thank you, Jan. Okay, I think at this point we’ll go ahead and close the conference. And as a reminder, ST-Ericsson will have their conference call in about 45 minutes. So thank you very much.

Carlo Bozotti

Well, of course, we invite you all to attend our Analyst Day in New York in May this year. Thank you again.

Operator

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

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