2006 Second Quarter Report
Message from the President

STMicroelectronics NV
Carlo Bozotti, President and Chief Executive Officer
STMicroelectronics 2006 Second Quarter Conference Call

I would like to welcome all of you to this conference call. Today, I will cover three areas in my remarks and then we will open the call to questions. Let’s begin with an overview of the second quarter, then move to the first half report and conclude with the third quarter outlook.

Second Quarter Overview
ST made good progress in the second quarter. We delivered revenue growth above the midpoint of our guidance, gained market share, generated solid earnings improvement and cash flow and expanded our return on net assets.

Revenue was up 15.4% year over year. And on a sequential basis, revenues increased 5.6% on broad-based strength. Earnings per share of 18 cents represented a substantial improvement from last year and, excluding restructuring costs was 21 cents and on this basis, increased sequentially 40%. Our gross margin remained unchanged with the first quarter, despite the tougher and more volatile currency environment of the second quarter.

We delivered strong year over year and sequential improvements in both our operating income and operating margin. Importantly, all product group segments’ operating margin improved sequentially. We are generating more cashflow, with $241 million for the quarter, compared to $23 million one year ago and $187 million in the first quarter.

Our efforts are leading to an improving return on net assets. Specifically, our RONA for the second quarter was 9.6% with our sequential increase in operating income before restructuring, and some expansion in asset turns thanks to disciplined capital spending driving the improvement. On this point, we continue to exercise tight control in utilizing our capital. For the first half, our capital expenditures were $696 million.

Finally, our cash position improved and is quite strong. In preparation for a likely August bond redemption, we completed two financings earlier in this year. Assuming the early redemption in August of our 2013 bonds, we have set aside approximately $1.4 billion for payout, which gives us a very healthy pro forma cash balance of over $2.5 billion, assuming full redemption of the bonds.

With this as an overview, I would like to now turn to a report on our first half business and financial progress.

First half report on ST’s business and financial progress:
Our first objective for the year has been to strengthen top-line performance and we have. In fact, we are meeting with very good success on a number of fronts.

We are gaining market share as shown by our favorable growth rate compared to the industry. Revenue in the first half of 2006 increased 14.4% year over year versus a preliminary semiconductor industry growth rate of about 9%. We had double-digit growth in Telecom- specifically wireless, Computer and the industrial market segments.

We are building positive momentum in expanding in key regions. In China our sales have increased 28% year over year and are up 10% sequentially. And in Japan, revenues have risen 30% year over year and increased 15% sequentially. I would say that management emphasis is paying off.

We are also expanding our relationships with new major key customers. As you know, we have been targeting 12 OEMs: 6 in Asia, 4 in the US, one being Cisco, and 2 in Europe. These new major key accounts grew 12% sequentially and increased 85% year over year. This program is a very important ingredient in our performance year to date. Moreover, I am pleased to announce our first success in adding a new major key account, Cisco where we are now a preferred supplier and strategic partner. So, again we have a significant, positive sign in addition to excellent momentum from this initiative.

Turning to our recent and upcoming new products, let me spend a moment summarizing some highlights: Let’s start with the
Application Processor
We shipped Nomadik 8810 in the second quarter to Samsung and it is available in handsets now.
And 8810 & 8815 design wins offer significant revenue take off in 2007 with 2 additional wireless customers.
Digital Base Band
We have design win in 3 and 3.5G ASIC solutions
Connectivity
WLAN is shipping in volume to a top-tier OEM, while
Bluetooth is tracking to our 10% market share objective in Q4, due to EDR thanks to our low power performance and voice quality. We also have a recent design win in combined Bluetooth and FM radio receivers, where we are the first in the market with a combination solution.
Imaging
In Q4-06, we will be shipping 3Megapixel camera modules, and sampling 5Megapixel modules.
Set Top Box
For our 7100 family, the world’s first single-chip 90 nanometer for multiple CODEC’s, volumes continue to ramp. And for the next generation, the 7200 platform in 65nm, we will sample this quarter with volumes ramping in the first half of 2007.
Digital TV
Integrated TV solutions based on STD2000 and 1000 begin volume production the current quarter and we have major design wins in Korea, Japan and China.
Data Storage
We are current producing 130nm SoC’s for the high end desktop and server markets, while we are now sampling the first 90nm SoC, and developing our 65nm IP’s.

Additionally, in the automotive, memory and industrial markets we continue to add new products to the catalog every single day. And, as you can see many of the benefits of our intense effort on products are not yet realized on the top line!

Now, let’s examine our progress by product group.

The Application Specific Product Group’s operating income has improved substantially, increasing 50% over the second quarter of 2005, and 14% sequentially. Its operating margin was 7.9% for the second quarter. From a revenue perspective, its sequential growth was 3.8%, while wireless grew at a rate in line with the Company average.

MPA’s operating income was up over 30% both year over year and sequentially. Its second quarter operating margin of 15.6% was the highest in the company. We are absolutely delivering on plan for growth and for margin expansion, thanks to improved mix and efforts in advanced analog.

Our major initiatives with respect to MPG have been moving along two fronts – first, to improve the performance of our memory business. And here we have made significant progress to bring the business to an operating profit as we had this quarter. Both mix improvement and technology advances have been important drivers to improve the economics of this segment. In 2005 we were focused on moving our wireless NOR products to 2 Bit per cell. This year we are driving them to 90 nanometers, which represented over 15% of our wireless flash mix in the second quarter and it will continue to increase through the rest of the year.

At the same time, I would like to reemphasize that our ultimate objective is to drive economies of scale and to lower the exposure of our portfolio to the capital requirements of this business through a strategic initiative with a partner.

Alongside our product initiatives in each group, we have been intensely focused on cost reductions across ST. This has been visible in our operating expenses, where we have reached an expense to sales ratio of 27% this past quarter, representing a very significant improvement from the year-ago quarter figure of 31.4%.

On top of the introduction of new products let me touch on our cost reduction initiatives. Our 6 inch restructuring is now essentially completed, with benefits to come in Q3 and Q4 as planned. Through careful capital management our depreciation has been reduced. And our headcount restructuring program is also substantially completed, with remaining benefits to both cost of goods sold and operating expenses coming in the next two quarters.

Now, let’s move to our outlook for the third quarter.

Third Quarter Outlook
We continue to expect that industry growth for 2006 will be in the high single digits on a percentage basis, with continuing expansion in 2007.

Looking at ST’s revenues for the third quarter, we expect sequential sales growth in the range between -1% and +5%. This is consistent with our traditional low, single-digit seasonal progression in the third quarter. We expect the sales drivers to be wireless, digital consumer and industrial products.

With the tougher currency environment, we expect the gross margin to be about 36%, plus or minus 100 basis points. This expectation includes about half a point of margin reduction effect due to a very recent power blackout in one of our Italian sites. We are currently conducting a final assessment of this impact.

Our revenue and gross margin outlook assumes an average effective rate of 1 euro to 1.255 US dollar for the third quarter.

I want to add a few more comments on gross margin, since I know there are many questions here. If I am correct, most of you expected a gross margin for ST of approximately 37% for the third quarter of 2006, based on the second quarter guidance we provided. If we consider the effects of currency, and the power blackout—each of which represent a gross margin impact of about half a point in the third quarter --our guidance of 36% is consistent with this model. Said another way—our cost reductions are delivering the benefits we have been communicating with you.

Finally, from an earnings perspective, we expect to see sequential improvement driven by gross margin expansion and continued operating cost control.

So, in summary, ST is solidly tracking to plan for strengthening the performance of the Company, with higher net revenues, improving gross and operating margins, better expense control, careful capital and cashflow management and significantly improved bottom-line performance with better return on net assets.

Let me stop here now so that we have sufficient time to answer your questions.

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Carlo Bozotti
President and Chief Executive Officer