STMicroelectronics N.V. (STM)

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STMicroelectronics NV (STM)

Q2 2014 Earnings Conference Call

July 23, 2014 3:30 AM ET

Executives

Tait Sorensen – Director-Investor Relations

Carlo Bozotti – President & Chief Executive Officer

Carlo Ferro – Chief Financial Officer

Jean-Marc Chery – Chief Operating Officer

Analysts

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

Andrew Gardiner – Barclays Capital

Marie Mawad – Bloomberg

Gareth Jenkins – UBS Investment Bank, Research Division

Francois Meunier – Morgan Stanley

Stephane Houri – Natixis

Johannes Schaller – Deutsche Bank AG

Jerome Ramel – Exane BNP Paribas

Adithya Metuku – BofA Merrill Lynch, Research Division

Bernd Laux – Kepler Cheuvreux, Research Division

Lee Simpson – Jefferies & Company

Amit B. Harchandani – Citigroup Inc, Research Division

Gianmarco Bonacina – Equita SIM Spa, Research Division

Guenther Hollfelder – Baader Bank AG

Francesco Previtera – Banka Akros

Presentation

Operator

Ladies and gentlemen, good morning. Welcome to the STMicroelectronics Second Quarter 2014 Earnings Results Conference Call and live webcast. I'm Joya, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. After the presentation there will be a Q&A session. (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 for joining our Second Quarter 2014 Financial Results conference call. We hope that this new time-table for earnings release and conference call is helpful. We have also decided with this change to combine both the investment community and press participants on one call to share our commentary and answers to your questions altogether.

Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining Carlo on the call today are Jean-Marc Chery, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Georges Penalver, Chief Strategy Officer; Carmelo Papa, Executive Vice President, General Manager of the Industrial & Power Discrete Group; and familiar voice to the media, Claudia Levo, Corporate Vice President External Communication.

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 may 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 this press release that was issued, and also in ST's most recent regulatory filings for a full description of these risk factors.

Also to ensure all participants have an opportunity to ask questions during the Q&A session please limit yourself to one question and a brief follow-up.

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

Carlo Bozotti

Thank you, Tait. And welcome to our Second Quarter Earnings Conference Call. For the benefit of all, the agenda today includes a review of our financial highlights and of our two product segments, further details on our product groups within the segment, and then our outlook for the third quarter.

So let us begin. Our quarterly results were well-aligned with our guidance. Revenue came in at the midpoint of our outlook of 2% sequential growth. Gross margin was 34% above the 33.6% mid-point of our range improving both quarter-to-quarter and year-over-year.

Operating expenses were again, we're on track with our financial model and we return to a net profit at the bottom line. We also further strengthened our capital structure and significantly enhanced our financial flexibility to boost growth with the $1 billion convertible debt offering completed in July, which will be visible in our third quarter balance sheet.

ST simultaneously launched a buyback program for 20 million shares in order to meet the company's obligations in relation to its employee stock award plans. Moreover, we returned capital to our shareholders with the payment of a quarter dividend of $0.10 per share or $90 million in the aggregate.

Turning to the second quarter results in more of that, revenues came in at $1.86 billion, up 2.1% sequentially. Excluding legacy ST-Ericsson products and one-time licensing revenue in the first quarter, this represents a sequential progression of 4.7%. In our Sense & Power and Automotive Product segment, the key drivers of our top line growth were the Industrial & Power Discrete and Automotive product groups, IPD and APG increased 7.4% and 4.2% sequentially respectively. And in our Embedded Processing Solutions segment, EPS, our Microcontroller, Memory & Secure microcontrollers grew 14.5% sequentially, so all three of our largest groups perform very well.

Our customer diversification across market channels continued. Distribution represented 31% of total sales in the second quarter, up from 26% at this time last year and slightly increasing from the first quarter. Gross margin improved sequentially up 120 basis points, thanks to manufacturing efficiencies, a favorable product mix, and product pruning. So we continue to move towards our target range of 36% to 38%.

Turning to operating expenses, we are well aligned with our objective, combined R&D and SG&A totaled $626 million in the second quarter with the sequential increase mainly due to higher number of days in the quarter. Year-over-year, our operating costs are significantly lower due to the exit of ST-Ericsson and our cost reduction programs.

Also in the second quarter, the European Union approved the funding of €400 million for the Nano2017 R&D program. This funding granted by the France authorities to ST for the development of new technologies in the Nanoelectronics sector is for the period 2013 to 2017. Apart from the catch-up of the Nano2017 program recorded in the second quarter going forward and in combination with other smaller programs, R&D grants are expected to total about $30 million for quarter. This is helping us to keep our net operating expenses at the lower end of our target range.

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