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STMicroelectronics CEO Discusses Q3 2010 Results – Earnings Call Transcript

STMicroelectronics CEO Discusses Q3 2010 Results â¿¿ Earnings Call Transcript

STMicroelectronics N.V. (

STM

)

Q3 2010 Earnings Conference Call

October 27, 2010 9:00 AM ET

Executives

Tait Sorensen – Director, IR

Carlo Bozotti – President, CEO and Chairman

Carlo Ferro – EVP and CFO

Carmelo Papa – EVP, General Manager - Industrial and Multisegment Sector

Alain Dutheil – COO and Vice Chairman

Philippe Lambinet – EVP, Home Entertainment and Displays

Analysts

Amit Desai – Nomura

TheStreet Recommends

Guenther Hollfelder – Unicredit Research

David Mulholland – UBS

Francois Meunier – Morgan Stanley

Sandeep Deshpande – JPMorgan

Simon Schafer – Goldman Sachs

Jerome Ramel – Exane BNP Paribas

Jonathan Crossfield – Bank of America Merrill Lynch

Glen Yeung – Citigroup

Odon de Laporte – Cheuvreux

Lee Simpson – Jefferies

Stephane Houri – Natixis

Tristan Gerra – Robert W. Baird

Kai Korschelt – Deutsche Bank

Presentation

Operator

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Previous Statements by STM
» STMicroelectronics N.V. Q1 2010 Earnings Call Transcript
» STMicroelectronics N.V. Q4 2009 Earnings Call Transcript
» STMicroelectronics N.V. Q3 2009 Earnings Call Transcript
» STMicroelectronics N.V. Q2 2009 Earnings Call Transcript

Good afternoon/Good morning. This is the Chorus Call conference operator. Welcome and thank you for joining the STMicroelectronics third quarter and first nine months 2010 earnings results conference call. At this time, I would like to turn the conference over to Mr. Tait Sorensen, Director, Investor Relations. Please go ahead, Mr. Sorensen.

Tait Sorensen

Thank you everybody for joining our third quarter 2010 conference call. Hosting the call today is Carlo Bozotti, ST’s President and Chief Executive Officer. Joining him on the call today are Alain Dutheil, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Carmelo Papa, Executive Vice President of the Industrial and Multisegment Sector; and Philippe Lambinet, 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 results last night and also in ST’s most recent regulatory filings for a full description of these risk factors.

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

Carlo Bozotti

Thank you Tait and thank you all for joining today’s call. We appreciate your interest in ST. The third quarter was a good quarter for financial results, progressing towards our target model and seeing the benefits from our portfolio investments.

First, our financial results were well in line with the outlook we shared with you in July. Net revenues were $2.66 billion, representing year-over-year growth of 17%. On a sequential basis, net revenues increased 5%, above the mid-point of our range of 2% to 7% growth. Gross margin came in at 39.2%, also above the mid-point of guidance. Operating profit showed a significant sequential improvement, more than doubling. And finally, at the bottom-line, adjusted earnings per share of $0.23 increased 28% sequentially, and here again has shown progressive and substantial improvement during 2010.

Second, during the third quarter, we had record sales in two product segments and, in reaching the record, achieved a key milestone. ACCI, our largest segment, accomplished record sales and our IMS segment reached both a record sales level and surpassed the $1 billion in quarterly revenues milestone for the first time.

Third, the September quarter was also a period where we moved, one quarter ahead of expectations, into the key financial targets for 2010 that we outlined at our field trip in London this past June. Specifically, we were targeting an ACCI operating margin in the high-single digits at the year end, and in the third quarter we exceeded that goal with ACCI posting a double digit operating margin.

We were targeting an IMS operating margin in the high-teens at year end and in the third quarter we were already at the very high end of that range. Also, as anticipated, ST-Ericsson continued to make solid progress on transitioning its product portfolio and in the third quarter improved its cost structure and reduced its operating losses.

Looking at the company in total, thanks to the improved operating results and higher net asset turns, the RONA attributable to ST reached 19% in the quarter. We moved into our target range of 16% to 22%, well in advance of our expectations even during this exceptional period of investment in wireless R&D. These improvements are coming from multiple directions and demonstrate that our targeted investments across our business are paying dividends.

First, the reshaping of our product and the investments in innovation over the last several years has positioned the company to offer more robust and higher value products. Second, the very significant realignment for our manufacturing has lowered our wafer costs. And third, through our investments in marketing and sales, we extended our customer reach and our presence in key geographic regions.

The progress at both ACCI and IMS, representing about 80% of our revenues, demonstrates that our efforts to develop waves of innovative products is taking hold and producing results. The investments we have made in product R&D are now bringing tangible benefits to ST from a financial perspective. Key products contributing to the revenue growth of the quarter included our gyroscope families, our general-purpose 32-bit microcontroller families and our power and smart-power products, which serve many different markets. But while we are pleased at our progress, we are not stopping here.

Looking ahead, we are excited as our product development pipeline is full of innovative and higher value products. Some of our most promising products include our latest generation digital TV system-on-chip and Display Port interface ICs, MEMS microphones, motion sensors, and high performance analog products for a variety of applications, such as advanced sensors for medical and power line communication ICs for smart grids. In regards to the remaining 20% of our revenues, the product transition is well underway at ST-Ericsson. The effort is currently shared with our partner Ericsson but we look forward to sharing with Ericsson the future opportunities. So now, let’s turn to the quarter’s results in detail.

We saw continued positive progression with our gross margin. It reached 39.2% in the third quarter, representing a 90 basis point increase over the second quarter. Since the start of the year, gross margin has improved 220 basis points. The sequential increase in the gross margin principally reflected improved manufacturing and the contribution of new products, partially offset by a slight decline in pricing trends. Currency did not have much impact this quarter. Inventory turns during the third quarter were 4.5, in line with our target range of 4.5 to 5 times. They were lower than the second quarter’s 4.8 times, reflecting a buildup of inventory for Q4. However, of the $130 million increase in inventory at the end of September compared to the end of June, about a quarter of increase simply reflects currency translation. At the completion of the year, we expect an improvement in turns from where we finished this past quarter.

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