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Conference Call Remarks
Pasquale Pistorio
President and Chief Executive Officer
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 Good Morning and Good
Afternoon Ladies and Gentlemen. Thank you for joining us to review ST's Q2 2002
financial and operating performance.
ST's Q2 results met
and even exceeded the guidance we provided when we released Q1 2002 earnings.
We had anticipated an approximate 10% sequential revenue increase, and, in
fact, net revenues were up 13% over Q1 2002, reaching $ 1.53
billion.
Sequential revenue
gains were broadbased, achieved across all product groups, market segments and
product categories, reflecting a combination of supply chain inventory
replenishment and end-market demand.
Summarizing Q2 2002
results:
The 13% sequential revenue increase
was driven by an upturn in unit demand, as ASPs declined about 3.5% from Q1
2002 levels.
The 425 basis point increase in
gross margin resulted from a combination of higher revenues and a significantly
better average fab utilization rate of approximately 80% versus an average of
65% in Q1 2002. Our utilization rate has been progressively increasing in 2002,
having reached close to 75% in March of this year. You may recall that we
consider the optimal saturation rate of our fabs to be approximately
85%.
The benefits of this operating
leverage flowed straight to the bottom line, enabling us to report net income
of $ 104.7 million compared to $ 32.9 million in the previous quarter and
earnings per diluted share of $.12 versus the $.04 earned in Q1.
Effective control over
discretionary spending also contributed to our Q2 2002 performance, as SG&A
remained at 10.4% of net revenues, which I believe is amongst the best ratios
in our industry. R&D expenditures increased by almost $ 35 million
sequentially, representing 16.9% of the period's net revenues. This includes a
$7.6 million one-time charge for in-process R&D related to the Alcatel
Microectronics acquisition.
And, excluding that acquisition,
which we completed at the end of Q2, ST reported positive operating cash flow
of $ 93.6 million for the period.
This quarter we began
reporting operating profit by product group, as we believe this additional
disclosure provides investors with important insight into trends in the product
categories and market segments in which we are active.
Each of our product
groups was profitable in both the first and second quarter of this year. This
is no small achievement given the difficult industry environment of this year's
first half. Even our Memory Products Group, which has experienced significant
price pressure, managed to stay marginally in the black in Q2.
From a business
perspective, ST's emphasis on differentiated products and strategic customer
alliances continues to provide a solid foundation for revenue
performance.
Differentiated
products increased 11.1% sequentially and accounted for 69.2% of net revenues
in Q2, while revenues from strategic customer alliances were up over 11.5% from
Q1 levels and represented 46.8% of Q2's net revenues.
To comment on a few
specific applications:
Digital consumer was a strong
performer in Q2. We saw a relatively steady contribution from set-top box, in
which ST has the number 1 market share position. And, DVD revenues more than
doubled in Q2 from Q1 levels, illustrating our continued penetration of this
application. We also saw good sequential revenue growth in imaging due to
recent design-wins.
Overall telecom revenues were up
12.6% on a sequential basis, of which wireless represented over 80% and
wireline the remainder. Wireless posted a 10.2% sequential revenue increase,
but revenues from differentiated products serving wireless applications were up
12% sequentially--- the difference primarily reflecting the steep decline in
FLASH memory pricing that has persisted through Q2.
Audio and automotive applications
increased 18.7% sequentially, and printers were up almost 33% from Q1 2002
levels.
Our second quarter
2002 earnings release contains detailed information by product group, but I
would like to add some comments:
Our Discrete and
Standard Products Group was a strong performer in Q2, both from a sales and
operating profit standpoint. Industrial and automotive end-market demand and
supply chain inventory replenishment were major contributors to top line
growth, while our ability as a low cost producer created important operating
leverage.
Of course, as has been
well-documented, FLASH memory pricing continued its negative trend in Q2,
declining by almost 10% from the prior quarter. Thus, while our sequential unit
growth in this product was about 14%, price erosion cut the sequential revenue
increase in FLASH to a little over 3%. ST is extremely well positioned in
FLASH. Accelerated R&D spending has given us a technological edge over most
suppliers, and ST enjoys a very competitive cost structure on the manufacturing
side. Thus, we are able to weather the current pricing environment and emerge
in a very strong position.
In Q2 ST moved ahead
with several strategic initiatives that we believe will yield important
positive long term results.
The power of the
technology partnership agreement we developed with Motorola and Philips is
tremendous for two key reasons.
First of all, this is
not just a sharing of know-how. State-of-the-art new technologies are currently
being developed together by teams of the three companies under the same roof
and on the same equipment in our Crolles facility.
Secondly, the three
companies together represent sales volume in excess of $15 billion, and our
firepower in terms of R&D, as a given percentage of sales, is second only
to that of Intel and could be twice as much as any other major
player.
With the continuous
reductions of geometries, photomasks are becoming increasingly critical, and
strategic components in the manufacture of integrated circuits.
Thus, the alliance we
announced with Dai Nippon to build and operate a photomask production facility
just next door to our site in Agrate, near Milan, Italy, is a significant long
term plus. The alliance includes a long term supply agreement that makes DNP
ST's primary leading edge and high-end photomasks supplier as well as a
technology agreement under which the two partners will closely cooperate to
ensure that DNP develops new photomasks that will be seamlessly supplied to ST.
This will strongly enhance ST's ability to offer its customers state-of-the-art
products with leading edge technology.
At the end of Q2 we
completed the acquisition of Alcatel Microelectronics and the simultaneous sale
of that Company's mixed-signal business and fabrication business to AMI
Semiconductor. Our purchase gives us a global leadership position in DSL and
preferred supplier status with Alcatel. This is a transaction that will be a
short-term contributor, but it has even more important long-term implications
for the breadth of our product offering, and our ability to capture incremental
market share as the Internet access market recovers.
ST ended Q2 with a
strong balance sheet, which we believe is essential to success in today's
business environment. Cash and marketable securities exceeded $ 2.1 billion,
and our financial debt-to-equity ratio was a very healthy 0.12.
To further maximize
our returns on investment under current market conditions, we have decided to
reduce 2002 capital expenditures by approximately 17% paring back from $1.2
billion to $1.0 billion. At the same time, we are accelerating the product
qualification process at our foundries so that we can be ready to accommodate a
significant upturn in market demand without commensurate increase in
investments in fixed assets. Recently announced agreements with TSMC and UMC
support this approach of being increasingly flexible in our capital
allocation.
Entering Q3, ST
continues to move ahead in our targeted market segments. Based upon current
backlog data, we believe that ST's Q3 2002 revenues will show a modest
sequential increase over Q2 levels, despite seasonal factors.
We do not expect a
major sequential upturn, rather a broadbased increase in several applications
such as wireless: wireline, automotive, printers, and DVD's.
Again, we are not
counting on a meaningful change in the pricing landscape, although we expect
some improvement of the rate of decline in FLASH product pricing.
In spite of that, our
guidance is for a Q3 gross margin similar to that of Q2 resulting from an
increase in capacity utilization and improved manufacturing efficiencies.
In conclusion, we
believe that in today's challenging times, strong fundamentals will accelerate
the differentiation process, both from an industry standpoint as well as with
respect to financial performance. ST is solidly positioned: from technology to
product portfolio, from customer base to manufacturing capability; from
financial strength to human talent. Therefore, we are confident that we will
continue to outperform the markets we serve. Thank you for your
attention.
Pasquale Pistorio
President and Chief Executive Officer
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