- Second quarter net revenues increased 9.7% sequentially and 14.6% year-over-year to $2.39 billion - Gross margin was 36.8% - Diluted EPS of $0.18 before restructuring and impairment charges
ST, in conjunction with Intel and Francisco Partners, completed their previously announced agreement to create Numonyx, an independent semiconductor company, with ST contributing its Flash Memories Group (FMG). The transaction was completed on March 30, 2008. In this press release the income statement for the Q2 2008 period reflects the deconsolidation of the FMG segment. Accordingly, all comparisons of Q2 2008 results, both sequential and year-over-year, exclude FMG, except as noted.
Second Quarter Net Revenues and Gross Profit Review
ST's net revenues for the second quarter increased 9.7% sequentially to $2.39 billion driven by double-digit sales growth in the Telecom (wireless), Industrial and Consumer market segments. On a year-over-year basis, ST's net revenues grew 14.6%, led by nearly 20% gains in both the Industrial and Telecom (wireless) segments.
Application Specific Product Group's (ASG's) net revenues grew 8.4% sequentially and 15.9% year-over-year to $1.51 billion and were driven in both comparisons by strong wireless performance led by 3G digital baseband and device unit growth in connectivity and imaging. On a sequential basis, Consumer market segment posted double-digit sales growth, primarily driven by portable navigation device shipments. Industrial and Multisegment Sector (IMS) net revenues of $865 million grew 11.9% sequentially and 12.8% year-over-year led by MEMS, Advanced Analog and Smartcards/Microcontrollers for both comparisons. Q2 2008 IMS sales were composed of $531 million of ICs and $334 million of discrete products, which grew 20% and 4% respectively year-over-year.
Gross profit was $880 million for the 2008 second quarter compared to $820 million in the prior quarter, and posted a 12% improvement in comparison to the $788 million in the year-ago quarter. Gross margin was 36.8%. The Company estimates that currency negatively impacted gross margin by over 300 basis points year-over-year.
Combined Q2 2008 SG&A and R&D expenses were $751 million equal to 31.4% of net revenues compared to 33.3% of net revenues (excluding the one-time $21 million in-process R&D charge) in the prior quarter, despite the negative effects of currency.
R&D and SG&A expenses were $470 million and $281 million, respectively, in the second quarter of 2008. On a year-over-year basis, R&D costs increased about 8.6% net of currency impacts reflecting increased costs associated with the Genesis and wireless IC design-team acquisitions, while SG&A increased 3% excluding currency impacts.
In the second quarter of 2008, the effective average exchange rate for the Company was approximately $1.55 to euro 1, compared to $1.47 to euro 1 in the first quarter of 2008 and $1.33 to euro 1 in the year-ago quarter. The Company's effective exchange rate reflects actual exchange rate levels combined with the impact of hedging programs.
President and CEO Carlo Bozotti commented, "ST's top-line performance in the second quarter clearly demonstrates the significant improvement in our product portfolio, which is leading to market-share gains for ST. Moreover, we believe ST will continue these market-share gains as we move through the remainder of 2008.
"Our more competitive product line-up and marketing initiatives drove an increase in net revenues of approximately 10% on a sequential basis. And, for the first half of 2008, sales increased by 13.2% in comparison to the 2007 first half.
"On top of strong revenue results, our gross margin and operating expenses were essentially in-line with our initial expectations. In combination this led to a sequential improvement in our comparable operating margin to 6.7%, from the 4.6% in the prior quarter, and resulted in diluted earnings per share of $0.18, before charges."
Constant Currency Analysis
Management believes that the currency impact on operating performance is an important element in comparing operating results. The following table illustrates estimated year-over-year currency impacts.
In Million US$ and % Q2 2008 Q2 2007 Estimated impact on selected Q2 As Excluding 2008 results at reported FMG Q2 2007 exchange rates* Effective Euro/USD $1.55 $1.33 Estimated Estimated Q2 2008 Adverse results Impact at constant currency Net Revenues 2,391 2,087 Gross Profit 880 788 75 955 Gross margin 310 basis 36.8% 37.8% points 39.9% R&D (470) (397) 39 (431) SG&A (281) (243) 29 (252) **Pro-forma Operating income: excluding Impairment & Restructuring charges 159 159 134 293 * These columns reflect non-GAAP best estimates of exchange-rate impact on selected financial metrics for ST, and are based upon a US dollar-to-Euro effective exchange rate of $1.33 per Euro and $1.55 per Euro for Second Quarter 2007 and Second Quarter 2008, respectively. Net revenues impact is based on the assumption that industry prices adjust to equivalent US$ prices with a delay of one quarter which is incorporated into estimated amounts. ** Pro-forma Operating income excluding Impairment and Restructuring charges is a metric management believes represents a meaningful comparison of operating performance. The Q2 2007 amount is derived by adding $906 million in impairment and restructuring charges to the reported operating loss (excluding FMG) of $747 million; while the Q2 2008 amount comes from the addition of $185 million in impairment and restructuring to the reported operating loss of $26 million.