STMicroelectronics N.V. (STM)

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STMicroelectronics NV (STM)

Q1 2014 Earnings Call

April 29, 2014 9:00 am ET


Tait Sorensen - Group Vice President of Investor Relations

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

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

Carlo Ferro - Chief Financial Officer and Executive Vice President of Finance, Legal, Infrastructure & Services

Georges Penalver - Chief Strategy Officer, Executive Vice President of Strategy, Communication, Human Resources & Quality and Member of Corporate Strategic Committee


Stephane Houri - Natixis S.A., Research Division

David Mulholland - UBS Investment Bank, Research Division

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

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

Adithya Metuku - BofA Merrill Lynch, Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Bernd Laux - CA Cheuvreux, Research Division

Gianmarco Bonacina - Equita SIM Spa, Research Division

Amit B. Harchandani - Citigroup Inc, Research Division



Ladies and gentlemen, good morning or good afternoon, depending where you're calling from. Welcome to the STMicroelectronics First Quarter 2014 Earnings Results Conference Call and Live Webcast. I'm Joya, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Tait Sorensen, Group Vice President, Investor Relations. Please go ahead, sir.

Tait Sorensen

Thank you, Joya, and thank you to all for joining our first quarter 2014 conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining Carlo on the call today are Jean-Marc Chery, newly appointed Chief Operating Officer; Carlo Ferro, Chief Financial Officer and Executive Vice President of Finance, Legal, Infrastructure and Services; Georges Penalver, Chief Strategy Officer, Executive Vice President, Strategy, Communication, Human Resources and Quality; and Carmelo Papa, Executive Vice President, General Manager of the Industrial & Power 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 statements that involve 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. As a reminder, please limit yourself to 1 question and a brief follow-up.

And now I'd like to turn the call over to Carlo Bozotti, ST's President and CEO. Carlo?

Carlo Bozotti

Thank you, Tate. First of all, I would like to thank everyone for joining today's first quarter financial results call. Overall, the macroeconomic environment and business dynamics in the quarter positively evolved as expected. Looking briefly at our financial results and key metrics, revenue and gross margin were well within our guidance. Operating expenses were well in line with our financial model. Operating income before impairment and restructuring charges was a positive of $8 million, representing the year-over-year improvement of $188 million. Our CapEx investments represented about 6% of total revenues in the quarter. Our financial position remains solid. And dividends paid in the quarter represented a yield of about 4%. Despite this progress, we still have much more work ahead of us to achieve our target financial model of about 10% operating margin, and our main area of focus is in the Embedded Processing Solutions segment, which I will discuss in detail shortly.

Looking at our financial results, first quarter revenues were $1.83 billion, down 9.4% sequentially. As anticipated, legacy ST-Ericsson products revenues decreased sequentially by about 50% to $63 million. Including this, ST's first quarter revenues grew 0.7% year-over-year, and decreased 6.4% sequentially.

From a product group perspective, MMS and APG led the groups with year-over-year revenue growth of 15.6% and 15.5%, respectively. And from a channel perspective, Distribution represented 30% of total sales in the first quarter, up from 25% 1 year ago. In addition, point of sales, meaning the sales of our products by our distributors, grew double-digit year-over-year.

Also in the first quarter, ST recorded a onetime licensing revenues of $15 million related to the settlement of proceedings with InvenSense.

Gross margin in the first quarter was 32.8%, up 150 basis points year-over-year. On top of the onetime licensing revenues, the improvement has been driven by a better situation in manufacturing, both in terms of loading and manufacturing efficiencies, despite price pressures. In manufacturing, as we outlined last quarter, structural changes and other initiatives are underway to help to progressively move our gross margin into target range between 36% and 38%, and the key levers here include the reshaping of our manufacturing footprint in major technologies, with the upgrade of our front-end fab in Singapore to 8-inch, and the consolidation of our back-end activities in China.

An overall better situation of manufacturing capacity, particularly in our fabs serving Embedded Processing Solutions, product migration into new technologies, and the lithography notes, replacing low-margin legacies from products with higher sales of the steaming products, and the pruning of low-margin mature products in particular, within IPD and AMS.

Turning to operating expenses. Combined R&D and SG&A totaled $606 million representing a decrease year-over-year of about 25%. Over the past 12 months, we have successfully completed a number of cost-reduction programs, yet we remain vigilant in controlling our cost going forward. In comparison to operating expenses in the fourth quarter, a portion of the difference relates to a lower number of days in the first quarter. Importantly, we have not yet benefited from the Nano2017 R&D grants, which are now expected in the second quarter, pending European Union approval.

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