STMicroelectronics N.V. (STM) Q2 2015 Earnings Report, Transcript and Summary

Ladies and gentlemen, good morning. Welcome to the STMicroelectronics Second Quarter 2015 Earnings Results Conference Call and Live Webcast. I’m Moira, 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.

Thank you, everyone, for joining our second quarter 2015 financial results 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, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; Georges Penalver, Chief Strategic Officer; Carmelo Papa, Executive Vice President and General Manager of Industrial & Power Discrete Product Group. This live webcast 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 results this morning 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. And now, I’d like to turn the call over to Carlo Bozotti, ST’s President and CEO. Carlo?

Thank you, Tait, and thank you for joining us today on our second quarter earnings conference call. As usual, we will start with a financial improvement review of the second quarter and then of our two product segments in detail. We will then turn to our third quarter outlook, so let’s begin. Looking at gross differential metrics, revenues, gross margin, progression, operating margin and free cash flow generation, all of these were substantially in line with our expectations. Revenues totaled $1.76 billion increasing 3.2% from Q1 with most of our product groups contributing to the growth and with APG [ph] flat. On a year-over-year basis, net revenues decreased 5.6%. When excluding a negative currency effect and the mobile legacy products, net revenues decreased instead 1.1% year-over-year with AMS and MMS registering growth and with APG substantially flat. As about 15% of our total revenues are Euro-denominated, currency effects negatively impacted net revenues in the second quarter by $14 million on a sequential basis and $66 million on a year-over-year basis. For the first half of 2015, currency effects negatively impacted total net revenues by $108 million. We continued to diversify our customer base and expand in the mass market with distribution channel stays at 23% of total revenues in the quarter driven by the Americas, which achieved double-digit growth in point of sales on a year-over-year basis. Our gross margin was on-target at 23.8% improving sequentially by 60 basis points with several positive contributors included as anticipated currency, lower unused capacity charges and product mix. Moving to expenses, we are performing well here, as anticipated combined R&D and SG&A increased sequentially $8 million to $599 million with currency benefits essentially offsetting the longer number of days in the quarter. Also we registered some additional savings from our EPS cost reduction plan which will be completed this month. Net of R&D grants expenses were at $564 million so again at the lower end of our net operating expense range of $550 million to $600 million. Restructuring cost in the quarter were $21 million compared to $29 million in the first quarter largely related to our EPS cost savings program. Our operating income before impairment and restructuring cost increased to $33 million from $10 million in the first quarter and it improved by $31 million compared to the year-ago quarter excluding the effect of the Nano 2017 EHR [ph]. As you may recall, the European Union approved the funding for the Nano 2017 R&D program for the period 2013 to 2017 in June 2014. As a consequence, we recorded in the second quarter of last year $116 million for grants related to prior periods. More importantly we see further progress both from product and operational improvement as well as currency benefits. Excluding existing hedging contracts, operating margin would have been about three points higher than the reported $1.9%. In the second quarter, income tax including a one-time income of $32 million associated with the re-measurement of a local tax provision. Reflecting this benefit, on a sequential basis, our net income grew over to $35 million for the second quarter. Finally, we have seen another progressing improvement in our free cash flow which rose to $53 million from $41 million in the first quarter. And on a year-to-date basis, it is a positive swing of $244 million to positive $94 million in the 2015 first half. Let’s now turn to SP&A and EPS before tax during the quarter. Beginning with SP&A, net revenues increased to $1.16 billion or 3.6% on a sequential basis, with all product groups contributing to this increase. More specifically, AMS, MEMS and Microfluidics, Industrial & Power Discrete and Power Transition products for mobile and industrial market, and APG in microcontrollers, infotainment and advance strategy product sales. Currency effect on SP&A net revenues had a negative impact of $11 million sequentially and $52 million on a year-over-year basis, mostly affecting APG as over 20% of the group’s revenues Euro denominated. SP&A operating margin was 6.6% improving from the 6.4% in the first quarter. Due to hedging, SP&A is not yet benefiting in the quarter from favorable currency effects of about 290 basis points. Within SP&A, our Industrial & Power Discrete Group recorded net revenues of $448 million, an increase of 4.2% on a sequential basis despite softness in components for PC Applications and market conditions in China. During the quarter, we had a number of achievements across the four growing application areas where we are focused. In power conversion, we won multiple designs for 16-channel LED driver for panel displays with an important American OEM. We gained several design wins for low-voltage power MOSFET in DC-DC telecom converter applications with a number of global manufacturers. We also continued to broaden our high-voltage portfolio adding 1,200 volts IGBTs that are the industry’s best low-frequency performers. And we launch easy-to-configure controllers to simplify digital power conversion. In automation, we introduced our power step driver that delivers compact motor control design for applications at high-power. And we continued to gain traction and expand our customer base with the silicon-carbide rectifier diodes. In portable applications, we continue the fast expansion of the RF balloons within internet of things applications, using either subjugate or Bluetooth low energy connectivity solutions. And we ramped up production of Amoled drivers for the latest smartphones of a major Chinese customer. And in our fourth focus area, energy management we’ve been awarded sockets for the new gapDRIVE galvanic isolation family on a platform for the hybrid electrical vehicles, our market-leading U.S. automaker. In our Analog MEMS and Spencer [ph] groups, revenues in the second quarter totaled $273 million, a sequential increase of 7% driven by our diversification activities combined with products in our traditional areas of strength. In motion MEMS we ramped production of our ultra-low-power 6-axis sensor in some of our latest Samsung Galaxy smartphones, as well as in the smart-watches from leading global manufacturers. The product diversification initiatives with key customers allowed us to increase shipments over MEMS microphones, fingertip touch-screen controllers and pressure sensors. In terms of new products, now we’re generating revenue streams. During the quarter we ramped up shipments of our Bluetooth smart network processor in devices for fitness applications for leading brands. We also continued to ramp shipments of our micro-mirrors and associated controller devices, which as we announced last quarter were chosen by Intel. We also saw our automotive sensor business continued to grow, even if the business is still small today, the contribution of our MEMS technologies and other important step in ST’s leadership in smart-driving. Continuing with our position in smart-driving and turning to our MOSFET product group, net revenues in the quarter were $438 million up slightly from the first quarter. We continued to leverage the strength of our broad-based portfolio to in-business in areas of strategic focus. In active-safety through our partnership with Mobileye, we remain positioned as the leading supplier for vision based active-safety systems. During the quarter we headed three carmakers and nine car platforms to the design wins obtained with the EyeQ3 System for production start during this year. In 32-bit microcontrollers, we continue to see solid growth driven by our existing design win pipeline. In addition, we capture a new design win at the global leader for a body-control module for European car manufacturer and earn an award from U.S. manufacturers for navigation module. In car-infotainment, we gained a socket for our Core 2, a fully integrated audio subsystem for a telematics box with large Chinese customer and one business for the global automotive parts supply company for a connected radio. We have also been awarded multiple design wins for our multi-satellite GNSS products in China in emerging markets and also in the mass market. And finally, in the Smart Power, we earned an award for body-control modules from a large European tier-1 with our vertical intelligent power technology. Turning now to EPS, second quarter at net revenues increased 2.4% on a sequential basis driven by general purpose microcontrollers in MMS and ASIC products in DPG. By group, MMS increased 3.8% and DPG’s revenues were stable on a quarter-to-quarter basis. EPS negative operating margin was reduced to a negative 7% in the 2015 second quarter from negative 11.1% in the prior quarter driven by product mix, lower unused capacity charges and a favorable currency effects net of hedging. In addition, the EPS cost savings program which we are completing this month, we’ll continue to contribute with the full benefit to come in the fourth quarter. In the Digital Product Group, revenues in the second quarter were $207 million representing 12% of total ST revenues. As I mentioned, revenues were stable sequentially, thanks to growth in ASICs offset by the decline of commodity camera module products due to their phase-out. Operating results were still negative also reduced bought on a sequential and year-over-year basis. We continued to explore options for our Digital Product Group and we expect to give you an interim update on our progress at our Q3 2015 earnings call in October. During the quarter, we unveiled in France’s Canal Plus market deployment of technical plus innovative hybrid over-the-top ultra-definition broadcast set-top box based on our Cannes SOC family. In our energy business, we captured multiple design wins for our Time-of-Flight photonic sensors at several leading Asian smartphone manufacturers with more than 10 phone models with this technology now available on the market. We were also awarded 28-nanometer FD-SOI ASIC design with a networking customer. And we recorded several wins in mixed process ASICs for optical transmission projects. Moreover, our 100-gigabit per second silicon-photonics technology gained traction in Optical Solution project for large datacenters. Moving now to our microcontrollers, memories and secure MCU group, net revenues were $388 million, a sequential increase of 3.8%. This was driven by general purpose microcontrollers where we reached another record during the second quarter shipping our 1 billion STM32 device. In the STM32 family, we began delivery of our new STM32 F7, this is the first microcontroller coming to market featuring the ARM Cortex M7 core, and the set advanced peripherals which ensure developers can get maximum performance for their applications. We introduced a new variant of our popular STM32F4 family, which enables the smartphone like graphics for wearable devices, smart appliances and other internet-of-things application. We also captured several design wins for the STM32 power families in mobile phone fitness, healthcare and industrial markets. We also had a number of wins with our ST Ericsson portfolio. We began ramping ST Ericsson products for a major smartphone OEM and we landed wins for two mega ST Ericsson in wafer level cheap-scale packages for server modules for a global leader. Finally, we also earned a win for a secure microcontroller in a major electronic identification project in Asia. Now, let me conclude with our third quarter outlook. Based upon our visibility and current assessment of mixed market conditions, specifically in components for PC applications and the overall economic environment in China, we expect revenues to increase sequentially by about 2.5% at a midpoint. We expect the gross margin to increase to about 35% at the midpoint mainly thanks to manufacturing efficiency in currency, partially offset by usual price pressure and an amount of unused charges similar to Q2. All-in-all, we look to continue to make further sequential improvement in revenues, gross margin, operating margin, free cash flow and to further advance our focused product and technology initiatives. My colleagues and I would now be happy to take your questions. Thank you.

[Operator Instructions]. The first question is from Kai Korschelt from Merrill Lynch. Please go ahead.

Yes, good morning gents. Thanks for the question. I had one on the automotive side. So, it looks like in China, what we’re seeing is a mixed change, German car OEM losing share to the local brands. I guess that’s probably bad for the mix. I was just wondering are you seeing that or would you have any other regional color for the automotive business, please? And my second question was on the gross margin improvement in the third quarter. I think you’re guiding at the mid-point for almost 150 bps with very modest revenue growth. So, I’m just wondering if you could walk us through the driver, is it effects of the restructuring mix, all three of these, a bit more color would be appreciated? Thank you.

Yes, well, I think I’ll take the first question APG and then Carlo will go through the mechanism of the gross margin. I would say that overall, what we see in terms of demand on the premium cars is strong. Now, of course it’s very difficult for us to understand how much of this is related to the significant improvement in view of car registrations and how much is exported to China. But we see a good demand in the automotive on premium cars with for us, important opportunities in advance ATT and microcontrollers that the most recent products that we have introduced. In Asia overall, the situation is weaker, particularly I would say in Japan. But in China, we had a material growth in our automotive business moving from Q1 to Q2. And we expect another more modest growth in the automotive business in China moving from Q2 to Q3. I think overall, we expect automotive to despite seasonality to contribute to the growth moving from Q2 to Q3. I will leave the second question to Carlo, Carlo Ferro.

Thank you, Carlo. Good morning everyone. So, on the gross margin evolution from the second to the third quarter, indeed at midpoint we forecasted 120 basis points progression. Here of course, currency contributes as progressively we have reabsorbed being the hedging affect. And this is about half a point of the progress. Another important point at the end is, in the second quarter, some of the progress, have been offset by an efficiency in the fab, in the first quarter you remember, first quarter has been quite weak for us in loading and manufacturing that have negatively affected. The efficiency has improved significantly in the second quarter in the event of the cycle grows to benefit the gross margin progression for the third quarter. And this is the second largest positive contributor to the gross margin progression towards the midpoint. And finally, I believe is the quarter where we have natural price pressure, however, also some progression on the product mix and the combination of the two, this quarter is still negative but better balanced. So, overall, let me also remind that both the second and the third quarter gross margin includes about 40-basis point negative impact of charges for unused capacity.

Thank you.

You’re welcome.

Thank you, Kai. Next question.

The next question is from David Mulholland from UBS. Please go ahead.

Hi, thanks for taking the questions. Just firstly, I guess, in comparison to what I was saying last month and then you’re already through the quarter. I wonder if you could give comment somewhat what you’re seeing I guess, as you said, it was quite weak in April and then improved through Q2. I wonder if you could give us some update there. And then just secondly, on DPG, I know you said you’ll come back in Q3 with a more concrete update. But I wonder if at this point you could let us know if there is anything that you’ve already ruled out in terms of strategic options as you progress through the planning stage?

Yes, David, your first question was just about the progression in the quarter?

Yes.

Of bookings, in general?

Yes, demand in general.

Demand in general, now I think we have not noticed I mean, bookings improved, there was an improvement quarter-over-quarter. I mean, if we compare Q2 over Q1, the overall booking improved, I’m talking about the control of the CFO is, it was 7%. Now this was the sequential improvement of the bookings moving from Q2 to Q3, less than what we expected but still a material improvement. And I do not remind any specific pattern month by month that these to be underlined. I think the situation in July is similar. I think of course we also have frame orders from our customers that are normal way that we have when we deal particularly with key customers in certain areas that we need to be transformed into real order. So, we have not seen a specific monthly pattern that is important to underline. Clearly, we had expected the stronger booking evolution. I think geographically there is a difference. America remains very, very strong. Our I think I mentioned this before during my initial address, I mean, in America the business what we saw in terms of POS from our distributors who was very, very healthy with double-digit increase. In Europe, in the currency Euro, if U.S. was not the leader, I will say high single digit, the POS evolution, why overall the U.S. was weaker in Asia. This is more from a geographical point of view to give a sense of the evolution of the market.

That’s great, thanks.

The second question is on DPG, no, I prefer again, I prefer not to comment. I said that we come in October, we’re exploring a number of options but I think it will be not appropriate and different counterproductive to talk about any of these options at this time.

Thanks very much.

Thank you.

Thank you, David. Next question please?

The next question is from Sandeep Deshpande from JPMorgan. Please go ahead.

Thank you for letting me on. My question would be regarding the earlier question Carlo I hope you’re seeing better trends on the order book than your competitors. Do you see the better trends on orders that you’re seeing is because you’re gaining share in some segments in particular. So is this the new products that somewhere you’ve gained share because if you’ve seen the comments from your peer group in the U.S., they’ll all been much more cautious than your indications particularly for instance we’ve seen in the mobile market, we’ve seen very weak indications. Secondly, I have a question for Carlo Ferro on OpEx, I mean, can you give us an indication on how you see OpEx development into the third quarter?

Well, Sandeep, did you refer to specifically to mobile or more in general, I mean, as part of your question?

No, I think I just mentioned mobile, but it’s best for us in general actually?

Well, I think there is a clear I would say, there is a clear let’s say diversified pattern in terms of geography, this is for sure. I think America is stronger, even very strong Europe. If we neglect the fact that of course we have a massive, it’s difficult in terms of over Euro denominated sales so I mean, I read before that Q2 over Q2 in one year for this part, I mean, for the dealing of course then for the end, there is an event, but for the billing there is $66 million penalization on the top-line due to the effect of the Euro-denominated. I think Europe is not bad either, and in general, Asia is weaker. Of course we do not see the results from Europe because a very material part of it, I mean, is about 50% of what we do in Euro is Euro-denominated. So, if we go market segments, well, maybe let’s start from mobile, clearly, what we see is that and we have one major OEM that is going, I would say pretty well. And then there is, the rest of the market that is more under pressure. This is what we see. If we move to automotive, I just want to repeat what I just said we see a strong demand on the premium cars particularly thanks to Digital Products. And these indeed are new products. I mean, like the advanced safety, the microcontrollers, and we see a weaker demand from Asia particularly from Japan. If we now go into Power Applications, for instance, certainly there are areas that are very important and new for us like the products for datacenters and servers. But we have important weakness to use in the area of personal computer that as you know for us is related to better charges, power supplies and also hard disk-drives where we have important presence with our modules in broad solution. I would say that the overall situation, the best way to define is mixed. So, it’s mixed and we’ll see the evolution during the next weeks.

Thank you.

Your second question Sandeep is on the operating expense is, we’re I believe we are really well under control. The second quarter operating expense is net of grants have been $564 million so at towards the low end of $550 million, $600 million range. Third quarter is normally good quarter in terms of seasonality given the vacation period in Europe. And then we have an additional step to come from the savings from the restructuring plan that EPS is announced in last October, which is completed in this week as we talk. And so, overall, we could expect for the third quarter operating expense is net of grants well below the $550 million low-end. It’s obvious that this is very transitional because of third quarter on the fourth quarter is that, in this case, their counting calendar plays on the other as shown as Q4 as this year is even particularly longer than other quarter. Some of the factor for instance is inflationary dynamic we have discovered increased mid of the year that are not visible yet in third quarter because of the vacation became evident in the fourth quarter. So, overall at this stage, add to the current level of exchange rate and also considering the advantage of progressing and taking advantage of the exchange rate, I would expect for the fourth quarter, expense is net of grants level with the second quarter actually.

Thank you.

Thank you, Sandeep. We’ll move to the next question.

The next question is from Achal Sultania from Crédit Suisse. Please go ahead.

Hi, thanks for taking my questions. Two questions, first on, just to follow-up on that OpEx question. Given that you’re going to see some benefits from cost savings in Digital and also the FX benefits. Could you actually see a situation where next year your OpEx on an average quarterly run-rate basis could actually be below your guidance of $550 million to $560 million?

Well, I think of course it’s not Euros. I mean, it is U.S. dollar.

Yes, sorry.

So, I think we confirm what we say that then of course there is evolution quarter-by-quarter for instance this year will be materially lower than $550 million but the range is between $550 million and $600 million. And our ambition is to stay on the average as much as possible, close to $550 million.

Okay. And just a follow-up, so obviously I think last quarter you said that there is going to be about 440 basis points of impact to your operating margins because of the currency. And now you’re saying that there was 300 basis points impact to your group margins this quarter. So, is it fair to say that you’ve already seen 150 basis points of FX benefit in your numbers in this quarter and there is another 300 basis points yet to come as we go forward?

For this, I leave to Carlo.

Yes, plus ‘09 overseas is correct then considering also that the reference exchange rate is not always the same. So I have in front of me competition now down at 1 to 10, which leads me to the exchange rate as we talk. And there what we could expect is between 2 to 2.5 points of improvement to the operating to come from the second quarter towards the full effect and full impact.

Okay.

Maybe to give a number I think isn’t fair, I mean, if we take the second quarter, our hedging loss was $56 million.

Okay, okay, thanks a lot. That was helpful.

Thank you, Achal. Next question.

The next question is from Francois Meunier from Morgan Stanley. Please go ahead.

Hi, hello, Carlo and Carlo.

Hello.

The first question is on inventories which went up $50 million during the quarter. Is that cautious enough given all the negative news we’re hearing at the moment, that’s the first question? The second question is about your microcontroller and positive division, I think you call MMS now, it’s moved to negative growth in Q2 versus Q1. Could you explain what happened here, is it microcontrollers, is it the memory path, is it pointing, what happened? Thank you.

I think the second one, and Carlo I think just went more in detail on the inventory. I think if you look at MMS, frankly it’s not an excuse, excluding the exchange rate effect of course of the very material part of microcontrollers that we sell in Euro, the growth year-over-year was let’s say 1.4%, okay. And I think we see good prospects, we have good prospects on this family for the rest of the year. And so, and these good prospects are covering basically the three product divisions that we have in MMS, I repeat the most important of course is general purpose microcontrollers, the second is secure microcontrollers and the third one is these tiny memories that is the ST Ericsson family. So, Q2 was net of the currency effect year-over-year was 1.4% increase sequentially, I think the increase was 2.8% by well. And we expect good trends in the future on the not only as a thought of MMS but also in line to line, line by line on the three divisions composing MMS.

The second question, good morning Francois, the second question is about inventory you will pick the increase from the first to the second quarter. Indeed we have increased than we had decreased in Q1. So, overall if we look at from beginning of the year, it’s not a big change, its $27 million reduction on the inventory value continuing to run at similar terms on revenues. There are also increases very specific, for instance new product coming in certain areas for instance for microcontrollers and of course normally it’s quite seasonal in second quarter to prepare something for the third quarter as some activity in Europe in the third quarter is also a bit impacted from the vacation period. So, I see nothing special there. Then thank you for the question, as obviously inventory turns at 3.8% is not where we targeted to be, and then progressively the objective is to accelerate inventory turns. Of course, the first priority at this day is to serve revenues growth for the new product and to keep an eye on the saturation of the fab as well.

All right, thank you.

Thank you, Francois. Next question.

The next question is from Janardan Menon from Liberum. Please go ahead.

Hi, good morning. Thanks for taking the question. Just to clarify on the currency benefit point, you said that there is still about 2 to 2.5 percentage points of benefit to come from the currency hedges ruling off and about 50 basis points you’re getting in Q3. So, the remaining roughly 200 basis points, will most of that come in Q4, if the currency stays at 1.1% or is it going to roll, is it majority by Q1 next year as I think you had said at your Capital Markets Day as well, can you just give the set linearity on how many quarters it’s to going to take to get that full benefit? And also, many of your peers have talked about industrial weakness, and that’s where we’ve seen commentary from linearity and all that. Can you say, are you seeing much weakness on the industrial markets and if you are, what is compensating in your case, is there specific product ramps that you’re seeing which is helping you gain market share and if so what are those products which are helping you do well versus the others?

I’ll take the first one, so thank you for the question, which has to clarify as well to the prior question about the progression in margin due to currency referred to the fourth quarter. So, the 2 to 2.5 points improvement to come is from Q2 towards the Q4. Q4 will be a quarter with still some effect of outstanding hedging as we hedge on a 12-month horizon so carrying on under the current exchange rate still some negative impact of the hedging, so to complete the full effect to take advantage of the exchange rate at about 1.10 you can add an additional 1 point or less than 1 point benefit, say 0.5 to 1 point additional benefit.

But in a previous answer you said that you’re getting 50 basis points in Q3 out of the 120 basis points of gross margin increase 50 is from currency. So should I assume therefore that you will get about 150 plus basis points Q3 to Q4?

And then, of course there is the impact in COGS, so there is impact on OpEx, so I believe is a fair assumption that the 2 to 2.5 points to come from Q2 towards Q4 may basically evenly materialize in Q3 and Q4 progression.

Okay.

On the other one, a small point. Sometimes when we have product like battery-chargers, power supply, we in our industry we consider this industrial product, even if at the end of final market these personal computers. So this maybe, so clearly on this area we see a weakness, there is now a discussion is but is more PC related even if it is power supply, those kinds of power management products that are considered as industrial. Now, coming from the industrial…

Just one comment, also here and there, there are different situations. Overall for instance, we hear from our customers the lighting marketing has a brilliant future, in particular driven by the lighting conversion. Still in this precise specific moment, some customers are complaining about the high level of stock but this doesn’t change the perspective in the lighting in this very moment for instance. Motor control is going very well for instance.

Again, I mean, we have products for power supply, we ramped new products for datacenters, for servers, these are I believe important opportunities.

Also for the new technologies silicon-carbide.

Because we have new technologies bought for the IC but also for the discreet. So, I think what we’re seeing here is newer technologies for applications like datacenters and servers but also for the so called industry for the zero, robotics, and all of this is increasing. And we see some of the more traditional lighting part of the business, the traditional battery chargers for personal computers etcetera. So first of all, we have to make sure that we become stronger on the higher end thanks to the combination of smart power and also new discreet technologies. One area that we normally do not touch but I believe is becoming material is the RF balloons. And the RF balloons, is of course the integration of multiple passive components. And that is very much used in internet-of-things and also many applications. And we see an excellent area of opportunity starting this year.

Understood. Thank you very much.

Thank you.

Thank you, Janardan. Next question.

The next question is from Andrew Gardiner from Barclays. Please go ahead.

Hi, good morning. Thanks very much. I just had a question on the Digital Products Group, I mean you mentioned it was flat quarter-on-quarter with ASICs growing and camera modules down. I was just wondering if you could help us a bit more in terms of the magnitude of these moves and also any comment around the trends of set-top box products in the quarter.

I think now, Carlo, do we have this exact some of the camera modules. I think this is a business that we have decided to phase-out. So, we are moving from $20 million to $25 million per quarter in - $20 million per quarter for in Q4 last year. Well, this is the order of, we try to give you the precise number but this is a business that for last year was about $20 million and is going to be zero because of the phase-out that we have decided by Q4 this year. So, very close to zero, so, this is the impact of the phase-out of this part. I have to say that in this unit, we also have the forma ST had some products that are also being phased out. So, now for us to after the discussion we had one quarter ago certain new opportunities that did not materialize. Of course for us remaining flat means to replace this business that is phasing out with new products. And I think there are two areas that I would like to mention in terms of new product opportunities. One is the ASIC and the other one is our Cannes and Cannes Wi-Fi and the combination of high-definition new products but also the ultra-high-definition. So these parts in these quarters, in these two quarters, is of course the one that is compensating for the decline of the ST Ericsson and the decline of the camera module, commodity camera module. In other area, that is contributing to this growth is what we call Baby-Bear or the Time-of-Flight silicon photonics, this is now becoming more pervasive in Asia, particularly in the area so far but we have new opportunities of auto-focusing. So and is we have now a number of phone-makers in Asia that are using this new technology for a better out-of-focus. I have, I think I have got the number here for the overall camera module business, I suppose this was in Q4 last year, right?

No, this is $20 million Carlo, is the reduction in revenues from Q2 ‘14 to Q2 ‘15.

Yes.

And then, this is $28 million while the overall image business that decline revenues by $9 million in the same period.

So, in one year on this, in the last 12 months let’s say this camera module business, we lost about $30 million. And I think we have another $10 million or so to go but it will be zero in Q4 this year.

Understood, thank you. Also you mentioned the ultra-high-definition products, I mean, is that earlier in the year that you were concerned that that wasn’t going to ramp quite as quickly as you anticipated. I mean, would you say that you’re on track with those perhaps sort of lower expectations?

Well, I think the deployment is much slower than what we expected, I confirm. Of course I think our aspiration as you know we’re massive area. Now, what is happening in these two or three quarters is that we’re replacing this business that is legacy products like the commodity camera module and also the legacy of the ST Ericsson. We are replacing this part of business with new products that are related to the Cannes Wi-Fi and the initial start of the 4K Solutions and also as I mentioned with some new ASICs and the Time-of-Flight.

Understood. Thank you very much.

Thank you, Andrew. Next question.

The next question is from Amit Harchandani from Citigroup. Please go ahead.

Good morning, gentlemen, Amit Harchandani from Citigroup. Thanks for taking my questions. Two, if I may. Firstly, if I could just go back to the bookings answer earlier, and I was wondering if you could just give at least a comment on how you’ve seen the overall book-to-bill shape-up, where does it stand and if any further color across the different segments? And secondly, in terms of the seasonality as we think about moving from Q3 to Q4 usually tends to be at least the way we see it over the past three years, around flattish to slightly down or up. How do you, what’s your best case assumption for seasonality at this stage based on the visibility you have from Q3 to Q4, if you could share any initial thoughts on that? Thank you.

Yes. Overall, I mean, again when we talk about book-to-bill it is always better to understand what is inside and what is not inside. So, what we have inside is of course all the bookings of the firm, or the bookings that is various bookings from customers plus we have all the materialization of the pulls from customers. And for this piece of business, the book-to-bill is mathematically always one because that we book at the moment we bill. Now, so, overall, I think we have a book-to-bill in the quarter that is below the parity, it is in fact is about 1.1, which is a positive book-to-bill I’d say. Now, I think if we look at the mixed market conditions, frankly I think it would be not prudent to tell you what our expectations are, of course we have very, very, we are very keen to make sure that all the opportunities that we have will materialize. But I think it’s premature to give you an assessment of the way that we see the market moving into from Q3 into Q4.

Thank you. And if I may just quickly slip-in a follow-up, any update on FD SOI fraction during the quarter? Thank you.

Yes.

Jean-Marc speaking, so I kind of say that during speech, we have been well awarded an additional 28 FD SOI ASIC for Digital Networking, so, which is confirming the good momentum of this technology. And then another important recent event is announcement of global family moving to and also we know the 22-nanometer FD SOI technology. Just for the sake of let’s say accuracy, 22-nanometer FD SOI technology in fact is implementation of our second generation transistor device in FD SOI. So, what we call for us is 14-nanometer. But in 22-nanometer unlike geometry for inter-connection, there is a main advantage that this technology will be processed in 28-nanometer sub-class, so, selling generally good, very good cost. So, ST is seeing this move very positively because it will let’s say some time the momentum again ends up consistent.

Thank you, gentlemen.

Thank you, Amit. Next question.

The next question is from Jerome Ramel from Exane BNP Paribas. Please go ahead.

Yes, good morning.

Good morning.

One question for Carlo and could you rank into - for the gain on for Q3 in terms of revenues on average 2.5%, could you give us ranking between the subdivision which one is going to grow faster or which one is going to be the lowest one? And maybe one question for Jean-Marc, on the 22-nanometer note from Global Foundry, are they using double-patterning or not? Thank you.

While Carlo Ferro was working…

No, I can take. You see this is at the end I will give you the ranking starting from the fast growing sequentially. And the ranking is microcontrollers, APG, DPG, IPD, AMS.

So, we were very accurate.

And any of them going down?

No, this we do not comment today. So, the second one is on what, on the FD SOI. I think certainly this is question mark.

Okay, Jerome, I think you might much better you check with double-pattern but again the key dynamic of double-following is really to a fair technology with let’s say the second generation after the 28 including really the performance is, both the capacity to enable process at higher speed. But mainly okay with very good dynamic power consumption and possibly with very low leakage for kind of internet-of-things application. But then, they really would like to maximize the inter-connect cost, really minimizing the usage of multiple patterning. As far as I know, I guess there is one level, only one level using double-patterning, no more than that. But overall, okay, believe me, that solution is well optimized in terms of manufacturing cost and it will yield learning curve and really minimizing the usage of complex lithography like double-patterning and hedging.

Thank you very much.

Thank you, Jerome. Next question please.

The next question is from Gianmarco Bonacina from Equita. Please go ahead.

Yes, good morning, few questions. First one, on the CapEx, I saw Q2, you have basically doubled the amount in the Q1. Can you give an idea for the full year? Then, on the OpEx, you mentioned in the report that in the Q2 you had some one-off R&D expenses, if you can quantify this amount? And then the last is just on the, if you can remind on the sensitivity for the currency because you mentioned before that you’re expecting about half a point of benefit from the currency in Q3 but I read in the report that you expect Euro-dollar of 1.16 in Q3, and it was 1.17 in Q2. So, it’s just $0.01 of improvement. Nonetheless you’re saying that you will improve the gross margin by about $10 million from FX, which I think is about double your normal sensitivity, maybe it’s around I don’t know but if you can clarify again this sensitivity? Thank you.

Okay. So, maybe I start with one-off in R&D and this is about $8 million which at the end has been on the second quarter 2015 R&D expenses. The second question is on the CapEx, I’ll not consider the evolution of Q1, Q2 particularly different from what we have planned for the year, we have been executing as planned. It’s obvious that we are carefully monitoring the evolution of demand and the specific need to support revenues growth. The plan we started the year was for CapEx in the range of $600 million for the full year, we are now considering the modularity of the execution. And for sure, we would not exceed this amount and eventually depending on demand, it could be possibly below this amount at the end of the year. And finally on currency, at the end you guys may decide which prospect you may want to have. There are many angles. One is the rule of thumb of the impact. The other one is the impact of the hedging. The third one is I directly tell you what is the overall impact actual in the one to come. I repeat the one expected to come is between 2 to 2.5 points at operating margin level from the second quarter to the fourth quarter. This is not fully absorbing the effect of the hedging still partially affecting the Q4, so there is another half to 1 point to come. After Q4, assuming the exchange rate stays at 1.10. And out of the evolution from Q2 to Q4, if we have to consider about half in the third quarter, half in the fourth quarter. This is in comparison, the impact on the revenues, the impact on the gross margin, the impact on the COGS and the impact on the operating expenses.

Thank you.

Thank you, Gianmarco. Next question please.

The next question is from Robert Sanders from Deutsche Bank. Please go ahead.

Yes, hi, good morning everyone. Thanks for squeezing me in. I was just following-on from Francois’ question about MMS you talked about positive trends in Q3. I mean, there is a lot of press around the big two smartphone make this exploring embedded SIM in 2016. I was just wondering how you could see that like in your microcontroller business, I mean, do you think it could be a net beneficiary of embedded SIM in 2016?

Well, of course it’s very difficult for us to predict this evolution. Of course there is lot of evolution etcetera. I think overall, we have been traditionally very strong in the area of secure microcontrollers. And we also have traditional business in what the past was final marker business. So, we were present in the past, we are present today, we are good technology in terms of silicon technology with good embedded flash but also I think we have good security on our STM32. And so, I think we are well positioned but of course this is a very general comment. And our market will evolve is very difficult for us to assess at this moment. Certainly ST is a company that has been always working in a leading position in this market, and since there is the secure microcontrollers, so I think we have been also in a leading position there. So, we are ready to take the opportunity.

Great. And just a quick follow-up, Carlo Ferro, if you could just give the update on the utilization base in fab and across the group into Q3 and to Q4 if you can? Thanks.

Certainly, certainly. So, on the fab utilization of second quarter at the end materialized as expected. Indeed the overall utilization of underlying capacity has been 84%. And this as mentioned as resulted in $9 million of unused capacity charges to the COGS of the quarter. For the third quarter, we expect to improve and to increase the utilization rate in 8-inch but to have a bit lower utilization in the 12-inch. In the 12-inch, we now expect a saturation level in the range of the 70% of the overall capacity. So, on this respect the unused capacity charge is in second quarter and third quarter will be substantially similar. Then, looking forward frankly, Q4, very much depends on the evolution of demand. We may have a lower activity in 12-inch and in this case, it could result in higher unused capacity charges in Q4. So, obvious that in the 300-millimeter fab is important, the overall loading. For us also it’s very important to progress on evolving the technology mix in the fab. And in this respect a good sign is that we expect to end the year with 300 loaded with embedded non-volatile memories for over 50% of…

Even 60%.

Yes, about between 50% to 60% of the overall capacity.

That’s great, thank you.

Thank you, Rob. Next question.

The next question is from Guenther Hollfelder from Baader. Please go ahead.

Yes. Thank you. I had first question on your distribution business, which grew in the second quarter. Do you expect here a decline or stable trend in the third quarter, and could you also disclose what’s the approximate share of Asia here of your distribution business?

Well, I think, we do not want to give a detailed split by region. I think it’s, they’re also grow by customers here in distribution as you know very well, two or three global leaders. But I would say that overall the point to take of our distribution business including the negative effect of the Euro denominated part that is material because of course we are in Europe, we are European company. I think the overall growth of the point of sales Q2-over-Q2 one year including the Euro-dollar effect on the top-line is 3%. And this 3% and of course they cannot report the U.S. evolution by region, it would be too many things also for our competitor. Is much stronger in the United States within double-digit. I think a good block in Europe taking into consideration that the biggest part of the distribution business in Europe of course we sell in the currency Euro and a weaker performance if we look at the performance in terms of POS evolution in Asia. So, this is what I can say about the overall distribution business. Of course our motivation is to keep going with the POS growth and what we’re trying to do here is to exploit as much as possible our very strong presence with the microcontrollers and trying to sell chipset products around our microcontrollers. And for this purpose we have introduced in November last year a new system to promote our product that is based on microcontrollers development board plus a number of expansion board with all the other technologies listed in it, it’s basically three other things. One is of course, Analog sensors, the other one is everything that is needed in terms of frequency in connectivity and the third one is about power, motor control for instance with power management. So we have introduced this prospect to our distributors and particularly of course more importantly for the customers of our distributors. Everything is centered around our STM32 but with the number of expansion boards that make much simpler the like of our customers to design and run their R&D not only using our microcontrollers but using the chipset of products around our microcontrollers.

Okay. Thank you. I had a question also on the automotive business. Here on your 77-gig radar sensor and also the camera sensors for automotive, what’s the timeline for these products right now. Do you, are you assembling a 77-gig product today or do you already have design wins of what’s - and the same maybe also you said that camera sensors probably your sales as here in the first quarter. Are you still trying here to leverage like a special camera sensors into the automotive market?

Yes, I know that I mean, this initiative on, and rather very, very important initiative. I have to say that I prefer not to give any comment here because my comment may not be completely accurate. So we come back to you after we get a complete information, a better information on the design win status and the sampling. I know that is very important, is very important initiative for us. And we come back to you with information on this one. If we, the other question was on…

The image sensors for automobiles.

Well, I think this is the kind of diversification that we want to push you. I think yesterday I was at major carmakers and say that our sensors is introduction and this is differentiated, of course it’s not a commodity camera module, it’s a differentiated imaging device and that is integral part of our system around advanced safety. And as you know, you need sensors on the car to monitor. So it’s certainly is an important area. We also have image signal processing solutions for automotive applications. So it is a massive effort, this one around advanced safety. It’s close to our corporation with Mobileye but it’s also this special image-sensor for automotive is our ISP for automotive applications is very much centered on our FD SOI technology. And I think is certainly one area of priority for ST. But to be specific on the camera, we had introduction already.

Okay, many thanks.

Thank you.

Thank you, Guenther. Next question please.

Next question is from Maxim [indiscernible] from Natixis. Please go ahead.

Good morning, gentlemen. Just a quick question, it was a follow-up actually. You mentioned that MMS at 1.4% excluding the ForEx impact with U.S. well the figure for the other segment excluding the ForEx impact year-on-year?

So, I think we can give yes, not as detail as MMS but I think overall SP&A was up about 1 point if we exclude the exchange rate. And I think so, SP&A was up about 1 point, MMS as I said is 1.4 points, and DPG overall is below.

Not currency impact?

In DPG there is zero currency impact, in revenues of course, we’re talking about revenues.

Yes, yes.

So, SP&A is plus 1, net of currency, MMS is better 1.4 and DPG is also due to the Ericsson forma products and the camera, the commodity camera module discontinuation is minus 20.

Okay, thanks.

Thank you.

Thank you, Maxim. Next question.

The next question is from Mitchell Sabitah from Merrill Lynch. Please go ahead.

Hi, it’s Adi from Merrill Lynch, a quick question, quick couple of questions. Firstly, on the set-top box business, could you comment on whether this grew in the quarter? Secondly, in the banking card market, can you describe how demand is trending especially in the U.S. and how big supply do you think this will be in 3Q within MMS? And then could you give some commentary on any divisions, see the revenues decline in the third quarter, and if so, by how much? Thank you.

Okay, so set-top box.

Set top box, was the first question, then banking cards and.

About the set-top box?

Adi, you were just basically asking about how the market is moving?

I note, did you have revenues in the set-top box business did they grow in the quarter?

So, revenue of the set-top box, the revenues for the set-top box let’s say slightly improving quarter-after-quarter. And it’s certainly not at the pace we wanted. But they are slightly improving but what I think is even more important to underline is the change of mix. And because we have about - we are about to finally exploit these new technologies and products that is the Cannes, the Cannes Wi-Fi, the 4K etcetera so the mix change is also material to question. The other one was about banking cards. Clearly it’s an important opportunity. I think you mentioned U.S., for us it’s also U.S. is certainly also material opportunity for MMS in second half of this year. I have to say that it took a while but I think we also have some opportunities to grow in China in the area of the banking business. So, certainly this is an area that is important for us. It’s one of the three divisions that we have in what we call secure microcontrollers. One division is about banking, one division is about identification and one division is about of course mobile. And so these are the three areas.

As usual at the end, we don’t want to specifically guide on revenues growth product group by product group. We’ve already addressed the question one way, the other way eventually. And complimentary information now we want to give you is we see microcontrollers motive with a solid growth perhaps above the overall blended average of the 2.5% at midpoint. For the other groups, we see lower than average evolution eventually not growth. And then of course these reflected market condition, reflected equity market, reflect the mobile market. In Asia, weaker than expected and reflect a number of weaker situations that also are under-evolution and monitoring in the course of the quarter as usual when deploying the quarter.

Okay.

Okay. I think at this point since we’ve run a little long, we’ll go ahead and close our second quarter conference call. Thank you all for participating. Thank you. We look forward to speaking with you soon.

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