STMicroelectronics N.V. (STM)

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STMicroelectronics NV (STM)

Q4 2013 Earnings Call

January 28, 2014 9:00 am ET

Executives

Tait Sorensen - Group Vice President of Investor Relations

Carlo Bozotti - Chairman of Management Board, Chief Executive Officer and President

Carlo Ferro - Chief Financial Officer

Jean-Marc Chery - Chief Manufacturing & Technology Officer, Executive Vice President, General Manager of The Embedded Processing Solutions Segment and Vice Chairman of Corporate Strategic Committee

Analysts

Sandeep S. Deshpande - JP Morgan Chase & Co, Research Division

Francois Meunier - Morgan Stanley, Research Division

Tristan Gerra - Robert W. Baird & Co. Incorporated, Research Division

Didier Scemama - BofA Merrill Lynch, Research Division

Simon F. Schafer - Goldman Sachs Group Inc., Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Lee J. Simpson - Jefferies LLC, Research Division

Janardan Menon - Liberum Capital Limited, Research Division

Gareth Jenkins - UBS Investment Bank, Research Division

Peter Knox - Societe Generale Cross Asset Research

Presentation

Operator

Ladies and gentlemen, good morning or good afternoon. Welcome to the STMicroelectronics Fourth Quarter and Year-End 2013 Earnings Results Conference Call and Live Webcast. I'm Alice, the Chorus Call operator. [Operator Instructions] The conference must now be recorded for publication or broadcast.

At this time, it's my pleasure to hand over to Mr. Tait Sorensen, Group's Vice President, Investor Relations. Please go ahead, sir.

Tait Sorensen

Thank you, and thank you for joining our fourth quarter and full year 2013 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining Carlo on the call today are several Executive Vice Presidents: Carlo Ferro, Chief Financial Officer and Executive Vice President of Finance, Legal, Infrastructure and Services; Georges Penalver, Chief Strategy Officer, also overseeing Communication, Human Resources and Quality; Jean-Marc Chery, our General Manager of Embedded Processing Solutions; and Carmelo Papa, General Manager of Industrial & Power Discreet Group.

This call is being broadcast live over the web and can be accessed through ST's website. A replay will be available shortly after the conclusion of this call.

This call will include forward-looking information that involves risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the release last night and also in ST's most recent regulatory filings for a full description of these risk factors. Also, as a reminder, we hosted a presentation in Paris this morning. The presentation is available on our website, as will be the webcast for the full event.

[Operator Instructions] And I'd now like to turn the call over to Carlo Bozotti, President and Chief Executive Officer.

Carlo Bozotti

Thank you, Tait. First of all, I would like to thank everyone for joining today's call, and for those of you who also joined us earlier today at our year-end earnings presentation here in Paris.

Turning first to our fourth quarter results. Revenue and the gross margin were in line with the outlook we shared with you entering the quarter. In fact, all the key metrics were well in line with our expectations, including the positive operating income before impairment and restructuring charges of $18 million and the substantial positive free cash flow of about $90 million in the fourth quarter.

Moving to the full year 2013. It was a year of execution. We made solid progress in executing the strategy that we announced in December 2012 and, of course, we still have much to accomplish, but let me share a few highlights of the year.

First, with respect to ST-Ericsson, we accomplished our major goals. We exited ST-Ericsson as planned. From a timing perspective, we took [ph] the split-up of the joint venture completed in August. From a cost perspective, we managed the ST-Ericsson exit at lower cost than our original and revised down estimate. Currently, we estimate our remaining wind-down cost to be about $30 million to $40 million. This is the remaining wind-down cost. As a result of the split-up, we added some of their competencies and strengthened our product development teams across every core group. The transfer of resources is starting to deliver a wave of new products that we'll discuss more in detail shortly.

Second, looking at the year in total, excluding ST-Ericsson, grew 3.2%, while the market that we serve actually declined by about 1.7%. This is good news. Although, we must also say that the overall market decline and -- call it worse than we were expecting based on industry analyst. This did slow the progress at our top line and gross margin that we had been planning.

Third, our operating expenses have come down substantially along the year. Exiting 2013, we have successfully lowered the breakeven point of the company by over $400 million compared to the fourth quarter of 2012, where breakeven point is the range of $2 billion of revenues per quarter now. This is thanks to the significantly lower operating expenses, mainly due, obviously, to the exit from ST-Ericsson. The improvement was progressive as we generated non-GAAP profit of $18 million in the fourth quarter of 2013 compared to $66 million and $100 million in the, of course, negative losses in the fourth quarter of 2012 and in the first quarter of 2013, respectively. This represents a significant improvement when considering the material reduction of about $640 million in revenue contribution from the former ST-Ericsson products in 2013.

In addition, we entered our target quarterly net operating expense model range of $600 million to $650 million in the fourth quarter of 2013, so 1 quarter ahead of our plan. I can share that we are now targeting the lower end of this range to adjust to lower-than-expected revenues following the softening of our markets.

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