All product groups increased revenues and improved their operating margins on a sequential basis. Application Specific Product Groups' revenue increased 2.3% sequentially, and operating profit increased nearly 13% to $81 million. MLD sales were up 2.7% and operating income was up nearly 5%. MPG sales grew 10.5% sequentially and the group had an operating loss of $17 million, a significant improvement from the $66 million loss recorded in the prior quarter. Flash memory sales increased 17% sequentially to $345 million.
Q3 2005 Net Revenues Breakdown by Market Segment
The following table estimates, within a variance of 5% to 10% in the absolute dollar amount, the relative weighting of each of the Company's target market segments in the third quarter of 2005.
% of Net Revenues Automotive 15% Consumer 17% Computer 18% Telecom 36% Industrial & Others 14%
Three of the five market segments experienced sequential sales increases, with both Telecom and Computer growing faster than the Company average of 3.9%. Specifically, Telecom, the Company's largest segment, grew approximately 9% followed by Computer which grew approximately 8%. Consumer reported a slight sequential increase of approximately 1%. Automotive declined approximately 4% while Industrial & Others was essentially flat.
First Nine Months 2005 Results
Net revenues for the first nine months of 2005 were $6,493 million, an increase of 0.9% over the 2004 first nine months revenues of $6,432 million. Gross profit was $2,165 million, or 33.3% of net revenues, compared to $2,376 million or 36.9% of net revenues for the 2004 first nine months. Operating income was $47 million compared to $473 million in last year's first nine months. Net income was $83 million, or $0.09 per share, compared to net income of $414 million, or $0.45 per diluted share in last year's first nine months. Net income included $137 million of aggregate charges for pre-tax impairment, restructuring charges, other related closure costs, and one-time compensation charges for the 2005 first nine months compared to $57 million of charges for pre-tax impairment, restructuring charges and other related closure costs for the 2004 first nine months.
Research and development expenses were $1,228 million, compared to $1,131 million in the 2004 first nine months. Selling, general, and administrative expenses were $766 million compared to $702 million in the same period in 2004.
Capital expenditures for the first three quarters of 2005 were $1,211 million, consistent with the 2005 full year capital budget of $1.5 billion.
In the 2005 first nine months, the effective average exchange rate for the Company was approximately $1.30 to euro 1, compared to $1.23 to euro 1 in last year's first nine months.
First Nine Months 2005 Net Revenues and Operating Income (Loss) by Group: In Million US$ First Nine Months 2005 Operating Net % of Net income Group Revenues Revenues (loss) Application Specific Product Groups* 3,686 56.8% 218 MLD (Microcontroller, Linear & Discrete Group) 1,388 21.4% 204 MPG (Memory Products Group) 1,375 21.2% (145) Others (1)(2) 44 0.6% (230) TOTAL 6,493 100% 47 * (1) and (2) defined in a previous table Outlook
Mr. Bozotti observed, "We believe that moderate industry growth will continue into the final quarter of 2005 and through 2006. Within these dynamics, we expect that ST will continue to make solid progress in improving the performance of the Company thanks to our ongoing marketing, R&D, and cost actions.
Accordingly, we expect that ST's sequential revenue growth in the fourth quarter will be in the range between 3% and 9%. Gross margin for the fourth quarter is expected to be about 36%, plus or minus one percentage point."
This guidance is based on an effective currency exchange rate for the Company of approximately $1.22 = euro 1, which reflects current exchange rate levels combined with the impact of existing hedging contracts.
Products, Technology and Design Wins -- In the digital consumer field, the company gained multiple design wins for both the STB7100 and STi7109 single-chip H.264 high-definition TV (HDTV) decoders with various OEMs addressing the worldwide operator market. Volume production of the STB7100 HD decoder is also ramping up in 90nm technology for use in IP set-top boxes (STBs) from major European operators. And, in the European cable market, multiple operators have adopted the STB5100 as the CPU/decoder solution for interactive DOCSIS-based set-top boxes. -- ST announced its first range of STB decoders to embed Secure Video Processor (SVP) capability, the next-generation open specification for the protection of digital-video content. The two new devices -- the STB5525, which is also ST's first single-chip solution to support dual TV and dual DVR (Digital Video Recorder) requirements in standard- definition STBs, and the STB5524, which targets the growing DVR market -- are ideal for satellite, cable, and terrestrial TV services. -- The Company announced the STx5300 family of MPEG-2 decoder chips for low-cost STBs and DVD recording that anticipate the increasing demands of interactive TV applications by increasing the available computing power by over five times compared to earlier devices. The chip uses the company's most advanced processor core, the ST200 VLIW (Very Long Instruction Word) family, whose high performance has been certified at 300MHz by the Embedded Microprocessor Benchmark Consortium and is intended for use in high-performance multimedia System-on-Chip (SoC) devices. -- ST gained further success in Bluetooth as the company's single-chip STLC2500 recorded several design wins with major mobile phone manufacturers. And in audio applications, Taiwanese company TwinMos selected ST's audio Bluetooth chipset for its high-quality audio wireless applications, and has started production of Bluetooth wireless speakers and audio dongles. -- In imaging, ST's 2-megapixel SMIA-based camera modules and image processors are now in volume production for use in mobile phones. -- In the wireline infrastructure area, ST won a major ASIC design, which will be implemented in ST's leading-edge 65nm process technology. This design, won with a large telecomms customer, confirms the leading role played by ST in state-of-the-art ASICs. -- For healthcare applications, ST introduced a lab-on-chip application for DNA-based detection of sepsis-causing bacteria, using a diagnostic panel from ST's bio-tech partner, Mobidiag, and running on ST's In- Check platform. Providing faster and more reliable results at a fraction of the cost and complexity of conventional laboratory systems, the miniaturized solution enables early detection of disease, resulting in better patient treatment choices and lower costs for healthcare systems. -- In automotive, ST's strategic partnership with Bosch has been reinforced with the signature of an agreement for ST's next-generation BCD6S smart power process. Also in smart power, ST gained a significant design win in battery charging from an important European OEM. -- In the power train area, ST won designs for several new kits with two major American OEMs for the European and American markets. In the car body area, ST signed with a major North American OEM for an advanced smart body-control module. -- In car safety, ST has extended its reach into the Japanese market by winning a design from an important new OEM. Also in car safety, ST won a design for a new ABS chipset with a major American OEM for the worldwide market. -- In car radio and multimedia, ST won a design for an advanced digital-input audio power amplifier with a leading North American customer for the 2007 model year. And finally in automotive, ST announced that it had shipped a cumulative total of approximately 10.5 million XM Satellite Radio Baseband Decoders to radio manufacturers, since starting production in 2001. The 10.5 million XM Radio decoders have been delivered to equipment manufacturers including Delphi and Pioneer, for vehicle, portable and home radio receivers. -- In peripherals, ST started shipments of an advanced SATA (Serial ATA) SoC to a major hard-disk drive manufacturer. Additionally, ST, in conjunction with Synopsys, conducted and successfully completed interoperability testing of its 90nm SATA MIPHY (Multi-Interface PHY) Physical Layer interface macro-cell, aimed at designers integrating SATA functions into SoC designs for hard-disk drive applications. -- In smart cards, ST announced that its established ST22L128 32-bit secure microcontroller has received "Common Criteria" security certification at Evaluation Assurance Level EAL5+ (Augmented), the first 0.18-micron 32-bit secure MCU to be certified at this level. -- ST announced volume production of the ST19WP18 Trusted Platform Module, and confirmed that more than one million of the TCG 1.2 (Trusted Computing Group) solutions, complete with software stack, had been delivered to a number of major PC motherboard makers. -- In RFID, ST introduced an ultra-high frequency contactless memory chip, compliant with the latest Electronic Product Code(TM) (EPC) specifications. ST's XRAG2 RFID chip delivers interoperability, enhanced security, and optimized performance for next-generation supply-chain and logistics applications. -- In NOR Flash, multiple leading mobile phone manufacturers started platform development based on ST's 90nm 2-bit per cell 512-Mbit NOR Flash. In NAND Flash, ST started high-volume shipments of 1.8V 2-Gbit NAND Flash in 90nm technology to a market-leading multimedia-phone manufacturer. Also, production of ST's 128-Mbit NAND Flash device was transferred to 90nm process technology. The shrink to 90nm reduces both the cost and the power consumption of the memory chip, which is widely used in consumer equipment such as digital still cameras, audio recorders, PDAs, STBs, printers, and bundled Flash cards. -- In microcontrollers, ST won a design for its ST7232A 8-bit microcontroller at one of the top five Chinese air-conditioner manufacturers. ST also expanded its family of USB MCUs with new products in its ST7263B series, which has become the reference solution for a range of USB-based peripheral products. ST also announced 8-bit ST7Lite Flash microcontrollers for control applications, adding new embedded peripherals to the established ST7Lite feature set. -- In power, ST introduced a reference-design platform for the emerging electronic power-meter market. The versatility and low-cost provided by electronic meters allows manufacturers to implement features that were impractical with older mechanical designs, such as protecting against meter tampering and theft of service; and automatic meter reading. -- ST won an important design with a major North American server manufacturer for its low-voltage power MOSFET, the STSJ100NHS3LL, which is implemented in ST's proprietary STripFET(TM) III technology. ST also announced production of the first devices built using the second generation of its MDmesh(TM) high-voltage power MOSFET technology. -- In high-end analog ICs, ST gained a design-win with a major Asian manufacturer for its new Gamma-Correction circuit for LCD panel applications.