2007 First Quarter Report
Message from the President

STMicroelectronics NV
Carlo Bozotti, President and Chief Executive Officer
Conference Call Remarks, April 24, 2007

Thank you for joining us on our conference call today.

Opening Comments:

As we have observed, the trough of the multi-quarter industry correction has been somewhat deeper than estimated by us and other industry participants. As a result, our first quarter sales and operating results were negatively impacted by declines in the telecom and consumer segments, a tougher overall price environment, and an unfavorable product mix within wireless.

While I don't want to underestimate its impact on results these last two quarters, I believe ST has done a fair job of navigating operations through this period, while staying focused on advancing our key strategic initiatives – in sales and marketing, in carving out and pursuing financial deconsolidation of our FLASH business, in moving towards a lighter asset model and in generating increased cash flow.

Looking ahead, we see a resumption of sales growth in the second quarter and believe this current semiconductor industry correction is coming to an end.

First Quarter 2007:
Turning to the first quarter, I would like to begin with the application specific group (ASG), which was most affected by the industry correction. ASG sales declined 9.1% sequentially, with operating income essentially at breakeven compared to $111 million or an 8% operating margin in the fourth quarter.

We saw double-digit sequential revenue decreases in both telecom and consumer products. Importantly, telecom results reflected weak wireless demand, limited mix shift to higher end products as well as – similar to other industry players - weakness in the networking market.

The sequential decrease in ASG operating income was due to telecom and, to a lesser extent, consumer while automotive and computer peripheral maintained profitability. Lower volume, down approximately 5% sequentially, was the largest ingredient. A tougher pricing environment, down about 3% sequentially, included the impact of January 1 new pricing contracts. In addition, ASG inventory decreased in the first quarter.

As we look to the second quarter for ASG, we expect to see sequential revenue growth and this will positively impact volume, resulting in improved operating income. We also expect that the mix will improve in the second quarter and this will continue through the year, with important new products increasing in volume for all our converging applications.

Our industrial and multi-segment sector, IMS, had a solid performance in the quarter. Sequentially sales were down 5.1%, in line with normal seasonality, and year over year, sales were higher by 16%. IMS had an operating margin of 14.8%, demonstrating some benefit from the shift of our portfolio to higher value-added products, such as our power conversion and advanced analog. We expect IMS to continue this strong performance as we move through 2007.

Since the January 1st reorganization, our NOR and NAND Flash businesses have been combined into a stand-alone segment. During the first quarter FMG sales decreased 13.4% sequentially and it posted an operating loss of $17 million, due to a gross margin of about 19%. The internal carve-out activities are essentially completed and we are progressing towards deconsolidation.

Moving to inventory, we actively managed fab loading to control inventory levels during the first quarter, taking into account the swing in currency, as well as the more severe market conditions. Since the end of December inventory is up $37 million on the balance sheet. However, approximately $17 million is currency related. Therefore, net of currency, inventory is up about $20 million-due exclusively to flash memories. We would expect to see improvement in our inventory turns, Q1 to Q2, and this improvement will continue to advance as we progress through the year.

Second Quarter 2007 Outlook:
Turning now to our outlook, for ST we believe we have reached the trough in the current industry correction and that the overall semiconductor industry situation should begin improving sometime during the second quarter.

As we look to our second quarter we see a resumption of growth for ST. More specifically, our revenue target is for sequential growth between 4 and 10%, giving a mid-point of about 7%. .

Based upon information released by other companies and industry analysts, we expect to show somewhat better sequential improvement in sales compared to the industry overall. We expect to see a strong recovery in consumer and telecom with high single digit to double digit sequential growth. IMS will also certainly be a key factor and automotive which had a good first quarter, both sequentially and year-over-year, is also anticipated to have sequential growth in the second quarter as well.

Our gross margin is expected to be approximately 35%, plus or minus 1 percentage point, at an average effective exchange rate of $1.34 to 1 Euro. The continued weakening of the US dollar – in fact, our expected effective average exchange rate is 9% lower than the year ago period – will limit the second quarter margin expansion opportunity. In addition, discontinued logic product loading in Singapore coming from the Flash carve-out will negatively impact the gross margin by about 40 basis points. This situation is caused by our removal of logic products from Singapore's manufacturing portfolio, as we focus this fab entirely on Flash memory products.

We are also continuing to manage our inventory levels, so while we would expect to see somewhat better fab loadings for ST, excluding Singapore 8 inch, in the second quarter, market conditions have now resulted in three quarters in a row where the gross margin will not reflect optimal loading of the fabs.

While the second quarter outlook shows a resumption of growth, we will not be back to fourth quarter 2006 profitability levels given the depth of the correction as well as currency exchange factors and their impact on ST. Nonetheless, the second quarter performance will be a good step forward, and we expect to make progress through the second half of 2007 and to improve our financial metrics quarter after quarter.

Summary:
Before taking your questions, I would like to share a few final, key points with you.

First, we continue to focus on cash flow and a lighter asset model for ST. In spite of a significant sequential decrease in net income due to the severity of the correction, our net operating cash flow increased $20 million to $172 million during the 2007 first quarter, one of the best ever quarterly results of net operating cash flow to sales.

Our first quarter capital expenditures of $285 million represent a decrease of 26% from the prior quarter and for the full year, we are driving towards our capex to sales ratio target of 12%. Based upon our first quarter investments, we are solidly on track. In addition to aiding cash flow, this strict capital control will reduce the vulnerability of our internal manufacturing assets to market fluctuations.

Due to our focus on better managing our capital expenditures and moving to a more flexible manufacturing structure, we are generating more cash and are positioned to return some of that cash to shareholders. At our annual meeting scheduled for tomorrow, shareholders are expected to approve a 150% increase in the annual cash dividend to 30 cents.

Second, we continue to advance our sales and marketing initiatives. We have spent our time fruitfully building new relationships and extending existing ones, so that our relative market position will be stronger as market conditions improve. For example, excluding telecom accounts, strategic customer sales were up 1% sequentially.

We continue to extend our sales presence in certain regional markets. For example, our sales to Japan are up 35% year over year.

Third, our product portfolio is strengthening. This is evident in the market share gains we achieved during 2006. As you see from our results we have a strong foundation in Industrial, Multisegment and automotive. During 2007 the work we have been doing in ASG should become more evident. In particular, new ASG products introduced in the first quarter, most importantly the 3G digital base band, saw limited sales impact so far, but are expected to ramp nicely through the year. Coupled with planned introductions during the remainder of 2007, including new connectivity products, data storage SoC's, digital TV offerings and progressive growth in multimedia processors, we believe our product roadmap and strategy are gaining traction.

With that, my colleagues and I would be happy to take your questions.


Carlo Bozotti
President and Chief Executive Officer