STMicroelectronics : Q316 Earnings Conference Call Remarks

Thank you for joining us this morning on our third-quarter earnings conference call.

We had a solid quarter in terms of revenues, gross margin, operating expenses and free cash flow.

These results are fully in line with the objectives we outlined during our Capital Markets Day in May: first, restart revenue growth on a year- over-year basis leveraging our strategic focus on Smart Driving and Internet of Things; and, second, improve our operating profitability through the combination of revenue growth, gross margin expansion and operating expense control. Three words: growth, discipline and leverage, summarize our focus and will drive ST forward.

Now let's review our key figures.

Net revenues increased 5.5% sequentially to $1.80 billion, exactly in line with the mid-point of our guidance. More ST content in smartphones, wearables and IoT applications -from 6-axis gyroscopes to Time-of-Flight imaging sensors to STM32 microcontrollers- drove the sequential increase. Also, amid an improving semiconductor market, we continued to see positive momentum in industrial, the mass market and in particular, the distribution channel with point-of-sales up 12% year-over-year. We also made progress towards our goal to return to growth in 2016, as revenues in Q3 increased 1.9% year-over-year, or 3.4% excluding the businesses undergoing a phase-out.

Third quarter gross margin significantly improved to 35.8%, up 190 basis points sequentially and 100 basis points year-over-year. This gross margin result was better than the mid-point of our guidance and was mainly driven by manufacturing efficiencies. As anticipated, unused capacity charges in the quarter negatively impacted gross margin by about 60 basis points.

Combined R&D and SG&A expenses were $542 million in the third quarter, in line with our expectations. We continue to exercise discipline controlling our costs and again, I can confirm that we are on track to capture about $100 million of annualized cost savings from our set-top box restructuring program exiting 2016.

We also delivered a substantial improvement in operating profitability. Third quarter operating income before impairment and restructuring increased to $119 million, or 6.6% of revenues, from $40 million and

$102 million in the prior and year-ago quarter, respectively, on higher revenues and gross profit and lower operating expenses.

Free cash flow in the third quarter significantly improved. Before the business acquisition of NFC and RFID reader assets in Q3, free cash flow increased sharply to $178 million compared to $47 million and $85 million in the prior and year-ago quarter, respectively.

Now let's move to a more detailed business review.

In ADG -our Automotive and Discrete group-, revenues decreased 2.3% sequentially to $704 million, reflecting seasonality in automotive and substantially flat revenues in power discrete. On a year-over-year basis automotive revenues grew, while power discrete products were negatively impacted by the weak PC and computer peripheral markets.

ADG operating income was $58 million in the third quarter with an operating margin of 8.2%.

Year-to-date sales growth and operating margin improvement in ADG came from automotive and from our focus on smart driving.

Therefore, let me turn now to some of the wins that ADG achieved during the quarter in this focus area.

Regarding greener driving, we continued to generate wins for a variety of car electrification products. We had design wins with silicon carbide diodes with a major Chinese manufacturer and wins with low-voltage trench-technology for leading Asia-Pacific and European manufacturers. In addition, we launched a strategic cooperation with a European Tier1 for a new generation of car-body applications using our 40nm 32-bit microcontrollers; we also captured a win for our 40nm powertrain