President and Chief Executive Officer
It is my pleasure to report to you on our performance for the first quarter of 1998. Results for the first quarter confirmed our outlook for the semiconductor market and for the Company, as we described in our 1997 fourth quarter report. Net revenues for the 1998 first quarter were slightly in excess of $1 billion, and increased 6.4% in comparison to the first quarter of 1997. This is the third consecutive quarter in which we have been able to show year-over-year growth in net revenues.
Our gross profit in the quarter was $385.0 million or 38.3% of net revenues, which was basically in line with the gross profit margin of 38.2% in the year-ago period. This reflects the Company's ability to maintain the gross margin within the target range despite a very tough competitive environment and pricing pressure. For the 1998 first quarter, operating profit was $114.9 million, or 11.4% of net revenues, modestly above the $113.5 million in operating profit reported in the 1997 comparable quarter.
Net income for the 1998 first quarter totaled $90.2 million, or $0.65 per diluted share, on higher net operating expenses of 9.1%. This compares to first quarter 1997 net income of $90.5 million, or $0.65 per diluted share.
We have significantly increased our research and development expenses. We spent $166.4 million on R&D this quarter, an increase of 17% over last year's first quarter. This increase in R&D expenditures is focused on key strategic applications. We want to be prepared with new products and technologies as we move forward. In fact, we believe these types of investments help advance one during an industry downturn.
SG&A expenses in the 1998 first quarter increased 16.4% to $119.9 million, or 11.9% of net revenues, compared to $103.0 million, or 10.9% of net revenues in the first quarter of 1997. In addition, we are increasing marketing resources in the battle to gain sockets. And finally, we have been making significant investments in MIS to upgrade our reporting and planning systems and to prepare for the Year 2000 conversion.
During the first quarter of 1998, we only had $3.8 million of start-up costs because our M-5 fab in Catania is in volume production and our new fab in Rousset has not yet entered the phase of heavy start-up costs. In comparison, in the same quarter of last year, start-up costs were $18.0 million, and, therefore, this important difference resulted in a very positive swing in this quarter's comparison.
At April 4, 1998, cash, cash equivalents and marketable securities totaled $494.5 million and shareholders' equity was $3,386.2 million. Total debt was $640.2 million, including $346.3 million of long-term debt, while net financial debt amounted to $145.7 million.
The Dedicated Products Group (DPG), Discrete and Standard Products Group (DSG), and Programmable Products Group (PPG) all showed solid improvement over the year-ago quarter. DPG's sales were up 10.3% to $423 million, the increase for DSG was 17.5% to $215.2 million, and PPG's sales were up 8.7%.
In addition, this quarter differentiated products showed a favorable comparison to the year-ago quarter, increasing 8.9% to $607.9 million. Differentiated products represented 60.5% of net revenues in the recent quarter and included a significant contribution from graphics products. Some areas of particular strength in differentiated products this quarter included products for wireless communications and the automotive market, as well as an improving situation in the set-top box market.
The performance of our Memory Products Group (MPG) reflected the current difficult market environment for memories. MPG's sales declined 15% compared to the year-ago quarter, due to pricing. However, MPG represented less than 15% of net revenues in the quarter and has historically represented approximately 18% of our net revenues.
Turning to market segments, on a year-over-year comparison, automotive was very strong, gaining nearly 22%; telecom increased 15%; consumer was up almost 6%; computer increased only 1%, while industrial was down nearly 4%.
From a geographic standpoint, we now have five regions -- Europe, America, Asia/Pac, Japan and what we call Region 5. The last category includes the following countries/or regions: India, Latin America, Africa, Middle East and Eastern Europe. All regions showed positive comparisons to last year's first quarter. Europe was solid, up 5.4% and reflects our strong position in the automotive and telecom markets. Sales to Europe represented 44% of net revenues. America increased just under 1%. Asia/Pac increased 9% and Japan was up 16%. On a sequential basis, Japan and Asia/Pac declined the most, as expected.
Products and Technology
The first quarter of 1998 saw the introduction of a number of new devices, especially for the PC-related market. During the quarter, we announced the availability of our MPACT2 media processor and a new version of the RIVA 128 graphics accelerator. In addition, we announced a new 32-bit dedicated microcontroller for highly integrated global positioning by satellite (GPS) systems, and a new family of 8-bit standard microcontrollers.
There were two notable announcements of next-generation technologies during the quarter. In February, we announced a joint development with Mitsubishi to develop a new generation of Flash memory products, starting with multi-level 64Mbit, which will include the advantages of both DINOR and NOR architectures as well as associated advanced processes from 0.20 through 0.18 micron. In March, the Company announced the completion of the first phase of development of HCMOS-8, the next generation 0.15 micron CMOS process, at Crolles.
We started shipping new MPEG decoder ICs, which combine graphics features, for set-top boxes and received numerous orders for power supply, memory and other ICs for this application. The HDTV MPEG2 decoder, developed in conjunction with Thomson Multimedia, was demonstrated in a number of customer prototypes at industry events such as the Consumer Electronics Show and the Windows Hardware Engineering Conference.
ST's success in digital telephony products continued in the first quarter with design wins for new chipsets for GSM telephones and a next-generation feature phone based on the Company's DSP core. During the quarter we also received significant orders for power supply management ICs and non-volatile memory products for mobile telephone applications.
In the area of wideband network, we have started volume deliveries to Alcatel of an ADSL chip set and have started sampling to key customers. Produced under the Alcatel license, the chipset is the only solution available today believed to be fully compliant with the ANSI Issue 2 standards.
In the automotive market, we have achieved a design win with a major Japanese supplier for a chipset to be used in a new system for vehicle dynamic control with breaking assistance. The chipset will be incorporated in vehicles in the model year 2000.
For the smartcard market, we have produced the first prototypes of a new smartcard MCU with 64Kbyte onboard EEPROM, today's record density in the smartcard market. STMicroelectronics also started volume production of the first contactless smartcard MCU, to be used in an electronic ticketing application in the Paris region.
In summary, the 1998 first quarter market environment reflected a very tough competitive situation as we had described to you previously. Within this environment, we achieved results very much in line with our expectations.
Looking forward, our visibility based upon firm orders and frame orders remains modest, even if we are seeing some signs of improvements. We are seeing some strengthening in differentiated products, particularly in set-top boxes, automotive, and telecom. In addition, discrete and standard products, which tend to lead a recovery, are exhibiting good unit growth.
We continue to expect that the industry overcapacity should show signs of decline, sometime in the second half of this year. Based on the visibility we have today, we continue to believe that despite difficult market conditions and economic weakness in certain parts of Asia, 1998 should be a year of progressive financial and operating improvements for STMicroelectronics, led by sales of new products, improved product mix, manufacturing efficiencies and price improvement once demand and capacity reach a better equilibrium.
President and Chief Executive Officer
Some of the statements contained in this quarterly report are forward-looking statements that involve a number of risks and uncertainties. Factors that might cause actual results to differ from those indicated in the forward-looking statements include, but are not limited to: the cyclical nature of the semiconductor and electronic systems industries; capital requirements and the availability of funding; competition; new product development and technological change. Unfavorable changes in the above or other factors listed under "Risk Factors" from time to time in the Company's SEC reports, including the Prospectus relating to an offering of Common Shares dated May 15, 1998 (pages 10 through 20) could materially affect the Company.
President and Chief Executive Officer