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Pasquale Pistorio
President and Chief Executive Officer
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 We are very pleased with our Q3 performance. In addition to having set many new records, Q3 was an excellent illustration of ST's earnings power and our continuing ability to generate substantial operating leverage.
For the first time in our history, quarterly revenues surpassed the $2 billion mark. To put this in perspective, in 1993 ST's full year revenues were just about even with the $ 2.04 billion we reported for Q3 2000, which equates to an approximate 4-fold increase in 7 years. On a year-over-year basis, Q3 revenues were up over 60% and sequential organic growth reached 7.4%.
Gross profit increased about 50% faster than revenues-rising 90.2% from last year's third quarter. Gross margin reached a record 47.3%, reflecting tremendous efficiency throughout our worldwide manufacturing machine as well as a better pricing environment and increased capacity. Our two new 8" modules in Agrate and Rousset reached volume production in Q3, which means that the related ramp up costs were moved from the "other expense" category into "cost of goods sold." This makes our Q3 gross margin performance even more impressive.
In Q3, ST continued to achieve substantial operating leverage, as operating income and net income were up 23.1% and 23.4%, respectively, over Q2 levels while sequential revenue growth was 8.8%. I believe it is noteworthy that for the first time in our history, we were able to report an operating margin of over 25%, which in my opinion is an outstanding level considering our size, product portfolio and significant investments in research and development.
To sum up Q3 financial performance, net income reached a record $415.3 million, and diluted earnings per share were $0.45, up 21.6% sequentially.
As we noted in our news release, differentiated products increased 7.4% sequentially and represented 62.9% of Q3 revenues. If we add the portion of our Q3 FLASH memory sales that can be categorized as differentiated products because they are customized, that number would be over 65% of revenues. We are in the process of reclassifying those customer-specific FLASH memory product sales and will have a more precise number available by the first quarter of next year.
In terms of applications, the biggest sequential revenue gains were in telecom, which was up 15.3% and industrial, which was up 20.3%. The latter includes smart cards, in which ST is a closer contender for the number one market position.
Consumer, computer and automotive were up sequentially 4.3 %, 2.7% and 0.5 %, respectively.
Q3 revenues per end market remained well balanced with:
· Telecom accounting for 30.3 %
· Consumer equaling 26.2 %
· Computer at 20.8 %
· Automotive accounting for 8.7 % and
· Industrial + others representing 14%
Our press release included a comment on broadband and Internet access-related applications. Clearly, both areas are important growth drivers as they utilize differentiated products and the system-on-chip solutions that ST has pioneered, and these applications cut across many of our traditional end markets.
Also, with respect to end markets, I believe it is important to provide perspective to some of the recent news relating to slower growth rates for certain of our key applications. First, I should say that ST continues to experience strong order rates from all geographies and, as we noted in our Q3 earnings release, Q4 should be another record period for us, in terms of revenues, as well as gross margin and operating margin.
We remain capacity-constrained, and in Q3, 13% to 15% of our wafer supply came from external foundry services. At the same time, ST's internal investment plans have been based on relatively conservative projections. Therefore, we are not overly concerned about the re-adjustments in short term growth projections for specific products, whether they be mobile phones or PC's, or for that matter any other application.
As a direct consequence of our strategic focus on differentiated products, ST has always taken a broad overview of our end markets, measuring growth potential and deploying resources accordingly. Our strategic customer alliances, which accounted for 42 % of Q3 revenues, put us in a strong competitive position to make these determinations. All indications give us confidence in the current industry analyst forecasts which call for continued significant growth - in the magnitude of 25% to 30% in 2001, following growth of more than 35% this year. This, in our judgment, puts us squarely in the middle of the market upturn. Therefore, we are moving ahead with our investment program within the framework of our proven modular formula. And, as noted in our news release, we will be monitoring market conditions with a view toward raising from $ 1 billion to $ 1.5 billion support future growth.
In summary, we are very comfortable with our position in the current robust market environment and our commitment to continue to grow at a faster rate than the markets we serve.
Pasquale Pistorio
President and Chief Executive Officer
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