|
Conference Call of Tuesday, April 23, 2002
Pasquale Pistorio's Prepared Remarks
 |
 Good morning and good afternoon Ladies and Gentlemen. Thank you for joining us to review Q1 2002 results and discuss our outlook for Q2.
First, I believe you will agree that Q1 2002 was a respectable quarter for ST. Net revenues of $1.36 billion, while down 6.4% sequentially, were in line with the range of expectations we shared with you at the time of our Q4 2001 earnings. And, we had a solid upside surprise in gross profit which posted only a modest sequential decline, giving us a gross margin of 33.4% or 170 basis points higher than Q4 2001 levels.
About one third of the significant sequential increase in gross margin resulted from higher utilization rates at both our leading edge and more mature fabs. The remaining two thirds or so was attributable to increased yield and other efficiencies throughout our manufacturing infrastructure.
I believe it is important to keep in mind that this positive operating leverage was achieved during a period when ASPs averaged a 4% sequential decline from Q4 2001 levels.
The efficiency of our global manufacturing machine, combined with our continued emphasis on controlling discretionary spending enabled ST to report earnings for the 2002 first quarter of $33 million or 4 cents per diluted share.
This was not an insignificant accomplishment considering the seasonal and price-driven $100 million sequential decline in revenues, and the fact that we absorbed a close to $10 million restructuring charge, fab start-up expenses of about $30 million and $15 million in net interest expense.
This quarter we include tables containing revenue breakdown information in our release.
Therefore, I will only highlight certain key points that I believe are noteworthy.
Differentiated products, which include customized flash devices, accounted for a record 70.3% of net revenues in Q1.
We expect that percentage to return to more normalized levels in the second part of the year, as commodity pricing firms.
As noted in today's earnings release, telecom application revenues posted an exaggerated sequential decline.
This was primarily attributable to the effect of an inventory realignment of certain ST dedicated and customized products serving this market.
By contrast, current order flow suggests that telecom revenues could post sequential growth in excess of that of the Company as a whole in the 2002 second quarter.
All product groups experienced significant increases in new order intake, in the second part of the quarter, reflecting what we believe to be a signal that the upturn has begun and is driven by both inventory replenishment and fundamental end market demand.
Revenues from strategic customers in the 2002 first quarter were $643 million, or 47.5% of net revenues. This includes a contribution from SIEMENS VDO with whom we recently signed a strategic customer alliance agreement. Previously included as a key customer, Siemens VDO is a leading manufacturer of electronic equipment for automotive applications.
ST's financial position at March 30, 2002 was very similar to that of year end 2001. Although no longer a priority we ended the quarter with a $30 million decrease in inventories, which represented an annualized turns rate of just over 5 times, in line with the Company's objectives.
Before reviewing our outlook for the current quarter, I would like to spend a few moments commenting on the transactions that we summarized in today's earnings release.
As you know, ST is selective in its approach to acquisitions, whether it be of IP or of whole companies. Fortunately we have the financial resources to complete transactions quickly and the patience to wait for situations that provide us with strategic advantages.
In essence, the Alcatel-Microelectronics acquisition and the Tioga Technologies transaction combine to boost ST to number 1 in the DSL market, with what we believe to be over 30% market share. We will very shortly have a complete offering for the broadband access market, giving ST the opportunity to benefit from the growing internet access business and the eventual recovery of wireline in general.
Additionally, the cooperation agreement we signed with ALCATEL in mid-February complements our strong differentiated product business in wireless by giving ST the ability to offer a wider choice of products.
Also, I believe that the just announced agreement between ST, PHILIPS and MOTOROLA for the joint development of deep submicron technologies down to the 32 nanometer node in our 300mm wafer facility in Crolles is a major statement on how the industry is pooling its resources and on ST's leadership position in developing breakthrough technology.
To the extent possible, my colleagues and I will address these and other recently-announced transactions during the Q&A session.
At this point, I would like to move on to what we currently see in our markets.
First, we are convinced that revenues bottomed out in the 2002 first quarter.
A combination of backlog data, order flow rates and customer input leads us to believe that ST will be able to post double-digit sequential revenue growth of about 10% in Q2.
Importantly, it looks to us that this significant sequential revenue increase will be across all major applications and will reflect a fundamental pick-up in demand, beyond that relating to inventory replenishment.
For ST, such a scenario means a substantial degree of operating leverage, bringing fab utilization rates to levels that could add 200 to 300 basis points to the 33.4% gross margin reported for Q1.
The positive effect on second quarter 2002 net income could be even greater thanks to our relatively low operating expense structure.
The latter should benefit in the 2002 second quarter from lower start-up costs than first quarter levels, while restructuring charges and net interest expense should remain approximately the same.
At this point, ladies and gentlemen, I believe it is time to open the call to your questions.
Pasquale Pistorio
President and Chief Executive Officer
|
|
|
