Looking back at ST's 2005 performance

	The year 2005 was devoted to strengthening and reshaping our company to make it stronger and more competitive.
	Today, customers in the Asia-Pacific region account for nearly half our total sales.
	We redeployed over 1,000 R&D engineers to improve market share and profitability by getting our products on the market faster.
	We are now the number one camera module manufacturer in mobiles worldwide, expanding our product range to three and five megapixels.
	We have reinforced our presence in the automotive market, winning designs in new generation braking systems.

Working towards sustainable excellence

As a company, ST is committed to growing its business for the benefit of customers, staff, shareholders and all other stakeholders worldwide. This commitment to growth and prosperity is matched by a dedication to total quality and corporate responsibility. Our business continues to perform well, and we are investing in new products and technologies, while also continually ensuring that we meet these wider responsibilities.

The company, of course, does not live in a vacuum and its success is heavily influenced by world events and the global economy. In 2005, the global semiconductor market experienced a moderate increase in total sales after the strong growth recorded in 2004. Semiconductor industry revenues on our market increased year-over-year by approximately 7%. This increase was driven by unit demand while average selling prices remained basically flat, largely due to overcapacity in the industry. So, while there was significant demand for our products throughout 2005, this price pressure meant our success was not necessarily fully reflected in our revenue earnings. Our revenues increased by approximately 1% to US$8,882m compared with US$8,760m in 2004. This sales growth was driven mainly by successes in the computer peripherals, telecom and automotive markets. Declining sales price and the unfavorable US$ exchange rate also had a negative impact on our gross margin, which dropped from 36.8% in 2004 to 34.2% in 2005, while our net income dropped from US$601m in 2004 to US$266m in 2005.

Implementing programs for higher performance

The year 2005 was devoted to strengthening and reshaping our company to make it stronger and more competitive. This has a number of benefits for everyone involved in the company and for its customers and those affected by its activities. Investment and restructuring offers us opportunities to improve the way we operate, and the changes we have made have always taken into account our commitments to social responsibility.

Increasing market share

We have reorganized in Japan, and we are expanding sales, design and support resources to take positive steps to gain market share. Our creation in October of a new 'Greater China' sales region covering China, Hong Kong, and Taiwan reflects the growing importance of this region. Today, customers in the Asia-Pacific region account for nearly half our total sales, and shipments within China are responsible for over half of our Asia-Pacific volume.

We have also increased our efforts to develop new online tools to help us grow in the wider mass market, where we aim to make the most of our technical know-how. We also launched a quality awareness program, extending the product quality progress made with our automotive products to other areas. Finally, we have begun strong campaigns to increase our market share with potential key customers, six of these in Asia, four in the US and two in Europe.

Improving R&D effectiveness

We have cancelled a number of lower-priority projects and focused our efforts on higher-priority developments, to improve market share and profitability by getting our products on the market faster. To do this we redeployed over 1,000 R&D engineers, which represents around 10% of our total R&D workforce.

Reducing costs

In addition to launching several initiatives in 2005, we have continued the transfer of 6-inch wafer manufacturing to Asia (Singapore), to reduce cost as well as allowing our company to redeploy the Europe- and US-based workforce on state-of-the-art manufacturing activities (8-inch and 12-inch technologies). We have also centralized some key corporate functions such as purchasing, logistics and IT, in order to be more effective; in the purchasing area only, this has allowed us to save over US$100m a quarter (Q4 2005 compared with Q4 2004). Last but not least, we have launched a significant restructuring program, aimed at reducing our workforce by about 3,000 (approximately equivalent to US$90m a year), mainly in our European and Mediterranean sites; at the end of 2005, this program was almost halfway to completion.

Pushing back the boundaries

ST's commitment to pushing back the boundaries of technological progress is demonstrated through innovative product development.

We have been winning business in the wireless market, offering high-value products for 3G applications as well as processors for smart phones and feature phones in Europe and Asia; we have also started to supply several customers with Bluetooth and wireless LAN devices, and we are now the number one camera module manufacturer worldwide, expanding our product range to three and five megapixels with integrated autofocus. We provide Flash memories to the top five cell phone manufacturers, and we have introduced a common standard for these products together with Intel.

We are expanding our product offerings in the digital consumer segment, with a strong position in high-definition TV, set-top boxes and DVD players. There is a growing demand for our products in China, Korea and Japan, on top of our traditional European and US market.

We have reinforced our presence in the automotive market, winning designs in new generation braking systems, as well as in safety and power-steering applications, including in China. ST is number one for digital satellite radios, in a market of over nine million subscribers.

We have developed a revolutionary Lab-on-Chip device called 'In-Check™', which allows molecular diagnostics on silicon, dramatically reducing the time and complexity of the instrumentation needed, as well as the risks of cross-contamination inherent in conventional analysis methods.

We maintain our leadership in the computer peripherals and industrial markets, focusing on hard disk drives, printer heads, power conversion for wireless and personal computers, and advanced analog devices.

Investing for the future

In 2005, we continued to invest in upgrading and expanding our manufacturing capacity. Total capital expenditures in 2005 were US$1,441m, which were financed by net cash generated from our operating activities. We also continued to invest resources into R&D in front-end and back-end. R&D costs for 2005 were US$1,630m, or 18.3% of net revenues, compared with 17.5% in 2004.

Business outlook

We expect moderate industry growth to continue through 2006; in this context, we expect that our quantifiable initiatives across manufacturing, cost efficiencies and capital management, will lead to significant improvements in our earnings and return on capital.

As we reshape ST into a more competitive industry leader, we are better positioned to re-establish our long-term financial and growth objectives.