2008 Second Quarter Report
Message from the President

STMicroelectronics NV
Carlo Bozotti President and Chief Executive Officer
Second Quarter Conference Call Remarks Wednesday, July 23, 2008

I would like to welcome all of you to the conference call.

ST continued to make important progress in the second quarter across a number of fronts. Looking at the quarter let me review some key highlights:

First, it was a solid quarter from an execution perspective, with revenue, operating margin and earnings exceeding or tracking to plan and showing good improvement sequentially. And on a constant currency basis we likewise had very significant improvement in our financial gearing year-over-year.

We had continued positive momentum on our strategic initiatives and our financial results demonstrate this progress. Our sales increased nearly 15% in comparison to the year-ago quarter, exceeding the estimated growth rate of the semiconductor market. On a sequential basis, our net revenue growth of 9.7% significantly exceeded that of the market, and for the first half of 2008 we also outperformed the market as well, with ST’s net revenue growth of 13.2%.

ASG posted a strong sequential revenue growth and an improved operating margin. And IMS delivered double-digit sales and operating profit growth both sequentially and year-over-year.

ST’s operating margin showed improvement from the first quarter, taking advantage of our higher sales level, but also demonstrating leverage from careful control of our ongoing costs. On a sequential basis the operating margin increased to 6.7% from 4.6% - certainly moving in the right direction, although not at our targeted level.

We accelerated our restructuring efforts by entering into advanced negotiations to sell our Phoenix fab, with the potential for substantial operational and financial benefits upon completion.

We increased the cash dividend to shareholders, began quarterly payments of the dividend, and started a share buyback program, spending $83 million on share repurchases during the quarter.

From a credit rating perspective, both Standard and Poors and Fitch reaffirmed our credit rating at A- after evaluating our $1.55 billion ST- NXP Wireless investment. In light of their recent review regarding the strategic merits, and the associated financial returns, of the deal we were very pleased with this outcome.

So, all in all, ST made important progress across a number of metrics.

Unfortunately, the significant strength of the Euro continues to mask our gross and operating margin improvements. Because of this I believe it is important to also examine our performance from a constant currency perspective.

In particular, on a year-over-year constant currency basis, we estimate that our gross margin would have been 39.9%, 310 basis points higher than it was and would have represented a 200 basis points improvement over Q2 2007, excluding FMG.

Secondly, at the operating level, operating income before charges would have been $293 million and based upon our second quarter net revenues of $2.39 billion, would have equaled an operating margin of 12.3%.

This analysis helps gauge the true value of the significant changes we have brought to ST in improving our manufacturing, strengthening our product portfolio, expanding our marketing efforts and focusing on execution.

Now, let’s look at the quarter in more detail.

Net revenues increased 14.6% year over year to $2.39 billion. We had been expecting growth of between 10% and 16%, so we were well above the midpoint of our outlook.

Looking at revenue growth by market segment, both Telecom and Industrial delivered almost 20% growth compared to the 2007 second quarter. A growth rate I suspect very few of our competitors will match. We also saw good growth in both Computer and Consumer, up 12% and 11%, respectively. And Automotive was up 7%.

By product segment, ASG’s net revenues increased 15.9% year over year on strong wireless results with our 3G digital baseband and unit growth in connectivity and imaging leading the way. ASG grew 8.4% quarter on quarter on wireless strength as well as consumer market segment that grew double-digits on strong sales of portable navigation devices.

IMS net revenues increased almost 13% year over year and 11.9% sequentially, led by MEMS, advanced analog and Smartcards/microcontrollers. As I had indicated previously, we expect a steep ramp up of our MEMS products in 2008, and based upon our progress in the first half of this year, I can confirm that is certainly the case.

Looking more closely at IMS, our focus on advanced analog is clearly paying off. I think we had an impressive result given the size of the business with IC sales growing 20% year-over–year, reaching $531 million. Discrete products increased 4%.

Our product initiatives and R&D focus are clearly visible in our sales performance.

Revenue results also reflect the very strong progress we are making in sales and marketing on our new key strategic customer accounts. These accounts were important drivers of our 14.6% year-over-year growth.

More specifically, sales from new key accounts, 16 in fact that we identified two years ago, increased over 70%, year-over-year. Sequentially, new key accounts sales grew 36%. These strategic accounts are also important as they represent repeatable revenues, with new design wins continuing to grow and helping offset potential weakness in other portions of the market.

In addition, we saw further improvement in all key sales initiatives, including our regional initiatives in Japan and China and in targeting the mass market.

Turning to gross profit, it was up 12% year over year. Our gross margin, at 36.8%, came in close to the mid-point of our targeted range of 37% plus or minus one percentage point. As mentioned, negative currency impacts weighed heavily on the gross margin absorbing 310 basis points on a constant currency basis year over year.

On the cost side, we are continuing to be conservative with respect to our expenditures.

SG&A increased 3% year over year excluding currency impacts-or about 3 cents for every dollar of incremental sales.

R&D, net of currency, increased 8.6% year over year. Looking more closely at this amount, a full 6 points of the 8.6 point increase comes from acquisitions—both Genesis and the wireless IC design team addition. So, net of currency and acquisition-related incremental costs, operating expenses grew less than 3% year-over-year.

Before leaving the topic of these two acquisitions I can confirm for you that we are tracking to plan on our integration and design activity efforts related to the wireless design team we acquired from Nokia at the end of 2007. The 45 nanometer SOC’s they are involved in developing are coming along nicely, as is the multimedia integration. We are also on track with our integration of Genesis. Synergies are developing as planned and we expect Genesis to be accretive to ST’s results in 2009.

In total, combined SG&A and R&D represented 31.4% of net revenues, improving from 33.3% in the first quarter. We continue to pursue our target level of 28% by the fourth quarter which is achievable despite the current high level of the Euro to US dollar exchange rate, assuming no disruption in demand.

Let me remind you of some key initiatives to improve our operating expense evolution from Q1 to Q4 of this year: On a quarterly basis we are: targeting Genesis savings of about $10 million; an SGA estimated savings of $10 million; and a post-FMG realignment of about $10 million; and I can confirm that all of these efforts are tracking to plan.

Net operating cash flow was $128 million in the quarter, primarily reflecting the higher expenditures related to Crolles2 weighted towards the first half of 2008. For the first half, net operating cash flow was $347 million, excluding the $170 million used for the purchase of Genesis Microchip.

Operating cash flow growth continues to be a key priority for us. Our capex to sales ratio for the year will be well aligned with our target of being at or below 10%, a further improvement from our capex ratio of 11.4% for 2007. Again, significant progress towards our asset lighter strategy which we have been pursuing on a steady and consistent basis.

We are intensely focused on our inventory levels. Importantly, we saw improvement in our inventory turns during the second quarter, improving to 3.8 times from 3.5 times in the first quarter. During the third quarter the absolute inventory level will rise slightly, reflecting seasonal factors as we prepare for the fourth quarter. But from a turns perspective we expect to see some further sequential improvement.

Our return on net assets or RONA was 8.6% in the second quarter, with asset turns reaching 1.3. On a constant currency basis year-over-year, RONA would have been 16%, well within our targeted range of 12% to 20%.

Looking ahead to the 2008 third quarter, we expect to have three reporting segments during the quarter – ASG, IMS and ST-NXP Wireless. Additionally, we will also be reporting Numonyx financial results on a deconsolidated basis.

First, as you may recall, we will be reporting Numonyx results on our equity line item with a one quarter lag, commencing with the third quarter. This first reporting period will have some initial period costs that will impact the results, primarily from purchase accounting dynamics.

Secondly, turning to our joint venture with NXP, we have received all the required anti-trust clearances and the JV is on track for closing during the third quarter. The management team is in place, led by Alain Dutheil as CEO of ST-NXP Wireless. The teams are now working together on product alignment and customer service matters and we are tracking to our plans for integration and synergies. In short—we are executing on our initial plan in line with the information we have shared with you in the recent past.

At closing we will contribute most of our Mobile, Multimedia and Communication group to ST-NXP Wireless and make a $1.55 billion payment, fully funded from existing cash, to NXP in exchange for 80% of the common equity. And NXP will contribute its wireless business in exchange for 20% of the common equity.

Our goal is to improve the returns in our wireless business while being in a much better position to serve the needs of our customers. From a financial perspective, we plan to move quickly to make this opportunity accretive to ST. With respect to 2008, we continue to expect that it will substantially contribute to sales, have some positive impact on average gross margin and have a minimal impact on our non-GAAP cash earnings per share. And it is expected to be accretive in 2009 and beyond.

Turning now to our outlook for the third quarter, we expect to see very good year-over-year revenue growth comparisons. Our revenue and backlog give us confidence in our prospects. At the same time we think it is appropriate to be vigilant and careful considering the overall macroeconomic environment. Accordingly, to take into account the somewhat increased uncertainty in the marketplace, we have expanded our revenue outlook range to 7 percentage points. Our visibility is quite similar in both ASG and IMS, with sequential growth expected to be driven by industrial, wireless and consumer segments.

Looking specifically at our guidance range, we expect sales to range between -1% and +6% sequentially, compared to our second quarter net revenues of $2.39 billion. This represents year-over-year growth of between 7% and 14%.

For the gross margin we are expecting to be equal to the second quarter, 2008 level of 36.8%, plus or minus 1 percentage point.

Our outlook is based on an assumed average effective exchange rate of $1.57 to 1 euro compared to the $1.55 to 1 Euro actual rate for the 2008 second quarter and representing a 15% decrease in the value of the US dollar compared to the 2007 third quarter when it was $1.36 to 1 euro.

In summary, ST had a solid second quarter performance, with revenues up strongly, market share growing and strategic initiatives moving forward and tracking to plans.

Now let me stop to take your questions.

Carlo Bozotti
President and Chief Executive Officer