Satisfy shareholders expectations through financial and non-financial performance

ST key figures 2006 | EC1 |		%
ST1	Net revenues	$US 9,854m
ST3	Net earnings	$US 782m
ST2	Gross profit	$US 3,523m
ST4	Earnings per share	$US 0.83
ST5	Gross profit as a percentage of sales	35,8%
ST6	Market share (sales divided by Total Available Market)	4%

Dividend paid | EC1 |			US$m
	2004	2005	2006
Dividends	107	107	107

 

Operating income & cash flow | EC1 |			US$m
	2004	2005	2006
Operating income	683	244	677
Net operating cash flow	208	270	666

 

Share price 2006, NYSE | STE8 |	US$

 

ST sales by market segment | EC1 | 2.7 | STE9 |			%
	2004	2005	2006
Automotive	15	16	15
Computer	16	17	17
Consumer	21	18	16
Industrial	16	14	14
Telecom	32	35	38

In 2006, our net revenues increased 11%, driven by strong growth in Communication (wireless) and Industrial segments:

• our sales grew by almost one billion dollars
• our net income tripled
• our gross profit increased 16%

Our financial results for 2006 compared to the results of 2005 were favorably impacted by:

• higher sales volumes and a more favorable mix in our revenues
• continuous strong improvement of our manufacturing performance, including the completion of our 6” restructuring and the redeployment of Electrical Wafer Sort (EWS) resources to Asia
• a more favorable effective exchange rate for the US dollar
• net interest income
• lower impairment, restructuring charges and other related closure costs
• income tax benefit

But they were also negatively affected by:

• negative pricing trends (-8%) due to persisting overcapacity in the industry
• stock-based compensation charges related to 2005 and 2006 grants
• increase of other expenses

We seek to use our available cash in order to develop and enhance our position in the very capital-intensive semiconductor market while at the same time managing our cash resources to reward our shareholders for their investment and trust in us.

Based on our annual results, projected capital requirements as well as business conditions and prospects, the Managing Board proposes each year to the Supervisory Board the allocation of our earnings involving, whenever deemed possible and desirable in line with our objectives and financial situation, the distribution of a cash dividend. Read our 20-F report (pages 4, 5, 56).

The semiconductor industry is highly cyclical and has been subject to significant downturns at various times. This means performance can vary significantly from one year to the next.

Last year, our Serviceable Available Market increased by 8% while STMicroelectronics grew by 11%, gaining market share in 2006 compared to 2005. Over the last 10 years, our compounded annual growth rate was approximately 9% in a market which grew only 6%. We are a solid member of the top five semiconductor companies.

• Since January 1st, 2005, the region ‘Europe’ includes the former East European countries that joined the EU in 2004. These countries were part of the Emerging Markets region in the previous periods. Net revenues for Europe and Emerging Markets for prior periods were restated to include such countries in the Europe region.
• As of July 2nd, 2006, the region ‘North America’ includes Mexico which was part of the Emerging Markets in prior periods. Net revenues have been reclassified to reflect this change.
• As of January 1st, 2006, we created a new region ‘Greater China’ to focus exclusively on our operations in China, Hong Kong and Taiwan. Net revenues for Asia Pacific in prior periods were restated according to the new perimeter.
• ‘Emerging Markets’ includes markets such as India, Latin America (excluding Mexico), the Middle East and Africa, Europe (non-EU and non-EFTA) and Russia.

 

The evolution of revenues in the various regions illustrates the fact that sales initiated in countries such as Europe and North America (where applications are developed) will frequently generate shipments in other regions such as Asia Pacific and Greater China (where manufacturing operations are located).

Our customers’ profile is relatively stable compared to previous years; we serve five main market segments: automotive, computer peripherals, consumer, industrial and telecom.

Our sales by market segment

Telecom remains our primary market, with Nokia as our largest customer. We have formed alliances with customers including Alcatel- Lucent, Bosch, Hewlett-Packard, Marelli, Nokia, Nortel, Pioneer, Seagate, Siemens VDO, Thomson and Western Digital. Our strategic alliances have been historically a major growth driver for us.

In 2004, 2005 and 2006, revenues from strategic customers accounted for approximately 39%, 44% and 41% respectively of our net revenues.

We are targeting new major key accounts, where we can leverage our position as a supplier of application-specific products with a broad range product portfolio to better address the requirements of large users of semiconductor products with whom our penetration has been historically quite low.

In 2006, our sales growth to these new key accounts was an impressive 48%.

Also, we have targeted the mass market, or those customers outside of our traditional top 50 customers, who require system-level solutions for multiple market segments. Results in 2006 were remarkable, since our sales to the mass market grew 17%.

Finally, we have focused on two regions as key ingredients in future sales growth, Greater China and Japan, where we have reorganized regional management. We are now number 3 in China, where our sales grew 16% last year. In Japan, we grew over 30% in 2006 while the Japanese market grew only 5%.

For more details on the results by segment, also read our 20-F report (pages 59, 62).