2007 Fourth Quarter Report
Message from the President

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

Hello and thank you for joining us on this call today.

The fourth quarter of 2007 tracked closely to our plan, with both revenue and gross margin exceeding the mid-point of our outlook. Earning per share before restructuring and other one-time charges was 27 cents.

On a sequential basis, net revenues were up 6.9% and, excluding our FLASH memory group, net revenues were up 7.7%. Sequential sales growth was driven by the strong performance of our industrial product offerings and our improving market positioning in wireless. Year-over-year, fourth quarter net revenues increased 10.4% and excluding FMG, increased 13.0%. Year-over-year quarterly revenue growth reflected real traction in ST's efforts to improve product positioning in both converging multimedia and power applications.

Looking at sequential revenue growth by market segment, telecom was up 11%, industrial was up approximately 9%, followed by automotive and computer both posting sequential revenue growth of about 6%. As we had anticipated, automotive returned to growth in the fourth quarter. The only area where results came in lighter than we anticipated was consumer. While digital consumer increased sequentially, overall consumer declined slightly due to analog consumer and displays.

Looking at our product segments ASG's Q4 revenues increased 9.1% sequentially, and 13.3% year over year. Imaging products, data storage and application-specific wireless products were the drivers of both year-over-year and sequential sales performance. Operating profit for ASG decreased sequentially due to the impact of currency and on increased R&D expenses that reflected the acquisition of the Nokia design team.

IMS' revenues increased 5.3% sequentially and 11.3% year over year on strength in MEMS and advanced analog products. IMS operating profit improved year-over-year and sequentially showed resilience in the tough currency environment.

And finally, FMG sales increased 1.6% sequentially but were lower by 4% in comparison to the year-ago fourth quarter. Operating profit improved sequentially due to the benefit of suspended depreciation in assets held for sale.

Sequentially, gross margin results largely tracked our expectations. In total, gross margin improved sequentially, as anticipated. Excluding FMG we anticipated a sequential decrease in gross margin due to negative effect of currency and product mix due to a higher weighting of imaging products.

Moving to the full year 2007, let me first discuss market position, where we made significant progress. We are strengthening ASG. Our revenue growth of 25% in comparison to the start of the year, demonstrates this progress. While ASG grew less than the market for the full year, with revenues up about 1%, our positioning going into 2008 is dramatically improved. In addition, our IMS group, boosted amongst others by MEMS and advanced analog, grew sales over 10% in 2007, well above the market growth. Overall, we believe ST was able to maintain our market position in 2007, growing in line with the market we serve on a strong improvement during the second half of this year.

Secondly, our net operating cash flow increased significantly, up 26% to $840 million for the full year. Looking to the fourth quarter we generated $188 million in net operating cash flow even after spending an aggregate of about $250 million for a portion of the Crolles2 equipment purchase and the Nokia agreement which closed in early November. Inventory turns, excluding FMG, increased to 4.4 times from 3.9 in the third quarter. While this is the second quarter in a row of improvement, we also benefited from some one-time shifts by our customers. We would expect inventory turns to decrease seasonally in the first quarter, while we continue to target a 4.5 to 5.0 times range by the end of 2008.

Third, our work in repositioning the Company has enabled us to report significant improvement in our return on net assets or RONA as we progressed through 2007. For the full year it reached 8.2%. Importantly in our final two quarters of the year our RONA, excluding FMG, moved within our target range of 12 to 20%.

And finally, our balance sheet is very solid, with cash of almost $3.5 billion and a net financial position of $1.27 billion at year end.

Turning to the first quarter of 2008, let me share our views and then our outlook as a result of what we are seeing. While there is a general concern about the current economic situation, and we remain vigilant in this regard, we are not seeing evidence of weakening demand at this point. In fact, our visibility is higher than that of last year's first quarter at the same point in time.

Our outlook is based on an assumed average effective exchange rate of $1.46 to 1 Euro and on expected FMG results for the full quarter and Genesis results for the next two months in the first quarter. With our current backlog and visibility, we expect that on a sequential basis, net revenues will decrease between 5% and 11%. This is generally in line with our normal first quarter seasonality. For the gross margin we are targeting 36.3%, plus or minus 1 percentage point.

Let me spend some time on currency. We speak about this each quarter, as unfortunately, the US dollar continues to weaken. We have made many significant actions to improve our cost structure, but much of our progress has been absorbed by this exchange rate dynamic. For 2007, we estimate that operating profit on a constant currency basis would have been $310 million higher, and would have exceeded the 2006 operating profit by $240 million.

In response, we will work on four primary axes: portfolio management, restructuring, asset lighter strategy, and top-line efforts.

• To begin, we are also working diligently on product portfolio positioning and the next milestone here is the completion of the divestiture of our FMG business segment. This will enable us to be 100% focused on our ongoing businesses, ASG and IMS. In addition we will become less tolerant of those underperforming product families and consider them for pruning. However, we will also look for selective acquisition candidates in our core businesses, converging multimedia and power affiliated, that improve returns.
• Secondly, in restructuring, we will accelerate the current effort underway connected to the separation of flash and in the US and Morocco.
• Third, we will continue to reduce our capital spending. In 2007 we spent 11.4% of sales for capex. For 2008, we are reconfirming that our capital budget is targeting a capex to sales ratio at or below 10%. Based upon the completion of tool purchases related to Crolles2, we would anticipate a higher capex run rate in the first half of the year compared to the second half. It is worth noting that with our asset lighter strategy we have much more flexibility to manage through potential changes in the demand environment.
• Fourth, we expect to solidly grow the top line in 2008, outperform the market and gain share. We are entering 2008 with a stronger product portfolio and customer base. Let me mention a few areas:

• We saw good progress in third quarter revenue growth and that continued in the fourth quarter.
• In addition, we have further ramped 3G digital baseband business at Ericsson Mobile Platform licensees during the 2007 fourth quarter. The product volume reached in 2007 was basically in line with the plan we articulated at our analyst day in May. Reconfirming what we said last quarter, volume estimates for 2008 are looking very robust.
• Connectivity continued to have very strong growth, driven by our Bluetooth and wireless LAN positioning. Our new products here are focused on integration of functionality, and we expect continued sales growth in 2008.
• Importantly, we acquired the Nokia IC design team and intellectual property in November. As you know we are also working on the 3G digital baseband product at 45 nanometers for delivery in 2010.
  

In computer peripherals, we began volume shipments of our proprietary 90 nanometer system on a chip for the data storage market in the fourth quarter and expect this to become an important revenue driver for this segment in 2008. Last quarter we were awarded a design win for our proprietary 65 nanometer SoC, again demonstrating our technical advances in this segment.

In consumer, we continue to lead in the set-top box portion of the market. Whether it is satellite, cable, terrestrial or IP we are enjoying leading positions and continue to innovate with our 65 nanometer products such as the 7111 and the 7200 devices. In digital television, we will benefit from the intellectual property coming from Genesis and look to expand our presence in the image quality sensitive portion of the digital TV market.

In automotive, following normal seasonal weakness in the third quarter, automotive was up in the fourth quarter and for the full year. Our automotive products will be an important driver of growth in 2008 as semiconductor content continues to increase. Further, we have important new wins, including a Nomadik based multimedia processor for navigation devices. Our traditional engine and car body designs progress continues as well.

Turning to IMS, MEMS reached about $100 million in sales in 2007 and we expect the ramp to continue on a steep curve in 2008. In addition, we saw continued progress with our efforts in advanced analog products and microcontrollers. Advanced analog targets converters, power management and photovoltaic electronics while in Micros we are emphasizing our ARM based 32 bit products.

So, let me conclude by saying that 2007 was a year of significant progress on our strategic roadmap. First, in memory though the creation of Numonyx, then in process R&D by joining the IBM consortium, and in our cost structure efforts and restructuring, we have made important decisions to further strengthen ST. We also made clear and measurable progress in reducing the capital intensity of the Company and have likewise driven significant cash flow improvement in 2007. As you can tell, we are looking forward to continuing our progress in 2008.

Now let me stop to take your questions.

Carlo Bozotti
President and Chief Executive Officer