STMicroelectronics : Q4/18 Earnings Conference Call Remarks

STMicroelectronics

Jean-Marc Chery - President & CEO Q4& FY 2018 Financial Results January 24, 2019

Good morning, and thank you for joining ST on our year-end earnings call today.

Before going through a detailed review, let me start with some opening remarks:

First, on 2018:

We had solid financial results in the fourth quarter, for both revenues and profitability.

For the full year, in line with our objectives, we delivered significant revenue growth across our product groups, a strong expansion of operating profitability, net income and free cash flow, while investing to drive growth opportunities and operating efficiency over the mid-term.

Second, on 2019:

Our first quarter outlook reflects the combined impact of increased unfavorable dynamics -on top of first quarterseasonality- in some of the end markets we serve: smartphone applications; computer hard-disk drives; distribution in China - and also in Europe.

On the other hand, we see Automotive and Power Discrete holding well, with significant growth year-over-year.

And, for 2019, we plan to return to sequential growth in the second quarter, with an acceleration in the second half of the year.

Our key objectives for this year are to continue outperforming our served market and to balance our end market and application focus, delivering sustainable profitability and returning value to shareholders.

To support all of that and to execute on our strategic technology, R&D and manufacturing programs, we expect to invest in CAPEX. Part of this CAPEX is devoted to support three strategic initiatives that I will detail later.

Let's now start with the detailed review.

Our financial results in the fourth quarter, for both revenues and profitability, were solid.

• • Net revenues increased 7.4% year-over-year, on double-digit growth across our Automotive and Discrete Group, in Imaging and in Digital ICs. On a sequential basis, our revenues increased 5.0%, very close to our mid-point target of 5.7%. Sequential growth was driven by Imaging, Automotive and Power Discrete.

• • Our gross profit totaled $1.06 billion, representing a year-over-year increase of 5.6%.

• • Our gross margin was 40.0%, 20 basis points higher than the mid-point of our guidance. In comparison to the fourth quarter of 2017, our gross margin was 70 basis points lower.

• • Our net operating expenses were $614 million.

• • Operating income increased 7.9% year-over-year to $443 million. Our operating margin was 16.8%, 10 basis points higher than the year-ago quarter.

• • Fourth quarter net income of $418 million and diluted earnings per share of $0.46 both increased about 35% year-over-year.

Now, let's look at our fourth quarter results by product group on a year-over-year basis.

ADG revenue increased 17.8% to $967 million, on double-digit revenue growth for both Automotive and Power Discrete.

ADG operating margin expanded 220 basis points to 14.6% from 12.4%. For both the third and fourth quarters, ADG's operating margin were solidly in-line or ahead of our low teens second half 2018 target.

Moving to our Analog, MEMS and Sensors group, AMS revenues totaled $988 million, an increase of 9.5% with double-digit growth in Imaging, and single-digit growth in Analog and MEMS.

AMS operating margin was 20.5%, stable with the year-ago level of 20.8%. For AMS, we had initially anticipated second half 2018 operating margins to move into the mid-teens, and we exceeded that level in both the third and fourth quarters.

Finishing our product discussion with the Microcontrollers and Digital ICs group, "MDG", the inventory correction in Microcontrollers continued, as anticipated, during the fourth quarter, due to the mass market softening in China. In total, MDG revenues decreased 6.9% year-over-year to $689 million, with growth in Digital ICs offset by Microcontrollers and Memories.

MDG operating margin was 17.7%, below the 19.7% in the year-ago quarter. For MDG, we had initially anticipated second half 2018 operating margins to be about 20%, and we came in belowthat level in both the third and fourth quarters. This was mainly due to a lower than expected level of revenues, and less favorable mix between Microcontrollers and other products.

Turning now to our full year results, as I said earlier, 2018 was an important year of achievement.

2018 net revenues were up by 15.8% compared to 2017, reaching $9.66 billion. So, in 2018, we achieved our objective to outpace the growth of the market we serve.

Gross margin was 40% compared to 39.2% in the prior year.

Operating margin expanded 250 basis points to reach 14.5% in 2018, on sales growth and operating efficiency leverage.

Net Income and free cash flow were up 60% and 73%, respectively, compared to 2017, while capex was slightly lower at $1.26 billion from $1.3 billion in 2017.

Also in 2018, revenues were balanced across product groups, customer types and regions of customer origin.

ST has over 100,000 customers.