2006 First Quarter Report
Message from the President

STMicroelectronics NV
Conference Call Remarks, April 26, 2006
Carlo Bozotti, President and Chief Executive Officer

I would like to welcome all of you to this conference call.

The first quarter was a period of solid progress for ST. From a financial perspective, revenues came in at the top end of our guidance, gross margin came in above the middle of our targeted range, and earnings per share were substantially above that of the year ago quarter and, I believe higher than most of your expectations. Importantly, our return on net assets, or RONA, was the highest first quarter performance since 2001. So, clearly we are making steady, continuous progress in improving the financial performance of the Company.

Let me take you through the details and then we will open the call to your questions.

In the first quarter, net revenues decreased just 1.1% sequentially, compared to our guidance of a decrease of 1 to 7%. First, we benefited from sequential growth in automotive and digital consumer applications. Secondly, wireless product sales were stronger than initially expected. I would emphasize that this wireless strength in the first quarter reflected good volumes as well as an expanding customer base.

On a year-over-year basis, net revenues performance is showing good progress, with growth of 13.5%. Wireless sales increased over 40% compared to the year-ago quarter and automotive increased double-digits. I believe our figures are a good indicator that 2006 will be a year of market share gains for ST.

By product group, Application Specific Product Groups accounted for 56% of the net revenues in the first quarter. On a sequential basis, sales increased about 1%, while year over year, they were higher by almost 11%. The operating margin was 7% in the quarter, compared to 10% in the fourth quarter. Seasonal factors, including new contract pricing and lower R&D funding, explain most of the decline in operating profit.

As of January 1st, we renamed our MLD group, Micro, Power and Analog or MPA, to better reflect product emphasis and capabilities and the significant effort we have underway to improve our offerings and competitive positioning. MPA sales decreased 0.5% sequentially, and increased 7.4% compared to the year-ago period. The operating margin was 13%. MPA accounted for 21% of net revenues in the quarter.

MPG reported a sales decline of 5.9% sequentially, 28% year over year growth, and maintained an operating profit slightly above break-even. Results in the quarter reflected lower volume and lower prices, offset in part by a more favorable mix. Flash memory sales in the first quarter were $407 million.

The gross margin result of 35.4% was solidly in line with our outlook of 35% plus or minus 100 basis points. This result was lower sequentially, largely reflecting seasonal factors. In comparison to the year-ago quarter the gross margin has increased by 250 basis points, demonstrating our solid progress over the last five quarters.

As you noted in the press release we are in the final stage of phasing out three 6 inch fab lines. The phase-out gives rise to inefficiencies, which are actually increasing in the first and second quarters of 2006. By the way, that is one of the reasons for the sequential decrease in application specific products group’s operating margin, as much of the impact falls on automotive products.

On the expense front, first quarter figures were in line with our expectations, with operating expenses representing 28.1% of net revenues, compared to 32.1% in the year-ago quarter. Our cost initiatives in 2005 are the most important contributors to this improvement. Looking ahead, we believe ST is positioned to have operating expenses below 28% of net revenues for the rest of the year.

As stated, key metrics to our financial progress are improvement in Return on assets and cash flow. Our net operating cash flow in the first quarter was $187 million compared to a negative net operating cash flow of $216 million in the first quarter of 2005--and this is after a $70 million equity injection into the memory joint-venture in Wuxi, China. Our net cash position on April 1st was $400 million, an improvement of over $600 million compared to the prior year level.

Just a few comments on our recent financing activity, we proceeded with two offerings in order to essentially pre-fund in advance the likely redemption of our 2013 convertible bond in August of this year. In the aggregate we raised $1.6 billion with a combination comprised of $974 million zero coupon convertible bonds and 500 million Euro senior unsecured bonds. We achieved three key objectives that are important to us and to ST’s shareholders. First, there is no incremental dilution to equity holders as the underlying share count on the new convertible bond remains the same as the 2013 Bond. Second, we extended the minimum average life of the financing to nearly 6 years. Finally, I believe we optimized the cost of funding and the impact on our weighted average cost of capital.

Moving to capital expenditures, in the first quarter we invested $297 million, and we continue to maintain our $1.8 billion capital expenditure budget for 2006, reflecting our plans to expand 300 mm leading-edge capacity as well as our advanced proprietary 8 inch technologies.

Inventory turns were 4.1 times in the first quarter, reflecting increased stock levels needed to meet order flow requirements in the second quarter. We expect to make steady progress, increasing our turns throughout the year, and still expect to exit 2006 within our targeted range of 4.5 to 5 turns.

Moving to our outlook for the second quarter:

From a revenue perspective, our current backlog supports an increase in second quarter revenues between 2% and 8% sequentially. This will represent year-over-year growth of between 11% and 18%.

From a gross margin perspective, we believe it is appropriate to set an objective of about 35.8%, plus or minus 100 basis points. We expect to see sequential improvement in the gross margin, but our view is tempered by second quarter revenue mix and, as anticipated, higher sequential inefficiencies related to the phase out of three 6-inch fab lines.

With respect to revenue mix, we expect MPA to post comparatively stronger sequential growth. In addition to its positive impact on revenues, growth of MPA sales benefits our earnings per share and RONA performance, but not necessarily gross margin.

From an earnings per share perspective, we expect to see further sequential improvement, and significant year-over-year growth in the second quarter results.

Our revenue and gross margin outlook is based upon a 1 euro to 1.21 US dollar average effective rate assumption for the second quarter, compared to approximately 1.20 US dollar average effective rate in the first quarter. Our effective exchange rates include the impact of existing hedging contracts.

Before closing and taking your questions, let me share some key points from a business perspective:

First, on the product front, we are introducing a wave of new products throughout the year. 2005 was a year of reshaping for ST. Our goal in 2006 is to make it a year of new product successes, which in turn, will help us grow our market share. I am certain that our product portfolio will be much stronger at the end of 2006. Additionally, these new products will be important drivers of earnings expansion for the Company beginning in 2006 and continuing into 2007.

Just to mention a few highlights of the impressive list of product announcements we introduced in the first quarter:

• In wireless, we introduced the third generation of our Nomadik multimedia processor, the 8815, which as you may have seen was endorsed by Nokia;
• In connectivity, we are now in volume production of our latest low power Wireless LAN device and began sampling the next generation of our Bluetooth which integrates FM radio functionality.
• In imaging, we have announced 2 new devices which offer low power consumption and a very small form factor.
• In Digital consumer, as a complement to our high definition products, we introduced a new leading edge, low-cost set-top box decoder for high volume free to air markets, as well as our DTV 100 solution.
• In automotive: We have also generated a Nomadik design win for video application in the car, as well as body, power train and safety kit awards for OEM’s in Japan, China, Europe and the US.
• For computer applications we have a new design win in 90 nanometers for our System on a Chip solution in data storage, as well as 2 new printer products and our Lab-on-Chip offering. I would also point to our announcement yesterday of a new motor controller for the disk drive market.
• In the area of multiple segment products we have a new 4 Gigabit multi level cell NAND flash device, a solution for the Zigbee networking market, a new 32 bit microcontroller for industrial applications and a number of new advanced analog products.

I mention this list to emphasize the scale of our efforts and the important results to date.

At the same time, we are also growing our customer base. As you know, we have put in place a target list of twelve major OEMs around the world that we have identified as potential key customers. In the fourth quarter, we had sales to this group of nearly $300 million, and in the first quarter, sales to this target group of customers increased by 12% on a sequential basis and 66% year over year.

In summary, I would like to leave you with a few key thoughts on ST for 2006: First, we want to strengthen our market share. With our customer initiatives, new product roll-outs in place and our R&D resources focused on key areas, I believe we will make headway on this objective, both in 2006 and even more so in 2007. Secondly, we want to drive revenue and margin expansion to the bottom-line. As our results indicate we are positioned to see significant growth in earnings per share in 2006. Finally, for RONA, I am optimistic here as well that we will make significant improvement as we move through 2006.

At this point, my colleagues and I would be happy to answer your questions.

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Carlo Bozotti
President and Chief Executive Officer