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News Release

Q1 2003 Earnings Conference Call Remarks

2003 First Quarter Report
Message from the President

STMicroelectronics NV
Conference Call Remarks

Pasquale Pistorio
President and Chief Executive Officer

Pistorio - Biography Good Morning and Good afternoon Ladies and Gentlemen, and thank you for your participation today.

I will spend a few minutes providing additional insight into our first quarter 2003 results, review our outlook for Q2, and then we will open the call to your questions.

To summarize, Q1 2003, as you know, came in below our initial expectations, putting us about one quarter behind where we had hoped to be at this time. On the positive side, however, we are seeing signs of improved fundamentals, which validate our expectation of increasingly higher levels of profitability levels for ST in 2003.

Seasonality was the major factor driving ST's Q1 2003's top-line performance. Net revenues for the period of $1.62 billion were up 19.4% over last year's first quarter, but declined 9.4% on a sequential basis. What put revenues at the low end of our guidance range were order push-outs over several end markets that occurred in the early days of the Iraqi conflict.

First quarter 2003 gross profit of $566.3 million equated to a gross margin of 35% for the period, which was below the low end of our initial guidance of 36%. This variance was caused by the combination of a more intense pricing environment than we had projected and the effect of a further weakened US dollar. These factors masked the benefits of certain manufacturing efficiencies that were achieved in the quarter.

I believe we did a very good job in containing our major operating expenses, namely R&D and SG&A. These items totaled $ 457.1 million in Q1, basically flat on a sequential basis, after absorbing the not significant impact of a strengthened Euro.

Operating income and net income of $123.6 million and $79 million, respectively, were up significantly over last year's comparable period, but below the $209 million and $160.6 million, respectively, reported in the 2002 fourth quarter. This year's first quarter net income included a one-time charge of $8.4 million related to our buy-back of about $ 429 million, or 19.8%, of our Zero Coupon Convertible Bonds due in 2010.

Thus, ST earned $0.09 per share in Q1 vs. $0.04 in last year's first quarter and a $0.18 in the prior quarter.

Our earnings release contains much more financial detail, so I will only comment here on certain points which I consider particularly noteworthy.

First, of course, is the breakdown of revenues and operating income by product group. On the plus side, TPA maintained a solid operating margin, and DSG continued to hold its own despite significant pricing pressure.

CMG was a positive sequential revenue performer, although its operating margin continued to be penalized by the intense competition in this space -- where, in fact, many of our competitors are losing money.

MPG's performance reflected a very tough market environment for non-volatile memory products, particularly Flash, which accounted for about ---% that Group's first quarter sales.

The outlook is considerably brighter for the remainder of 2003. Thanks to the ramp-up of 0.13 micron and related technologies, we expect MPG to significantly narrow its operating loss in Q2 and post operating profits in Q3, Q4 and for the year as a whole.

As you can see from our release, we made a certain modification to the breakdown of quarterly revenues by market segment. Convergence has arrived, and we are therefore unable to precisely track all of our product revenues to a distinct end market.

One obvious example is the CMOS imaging product for digital cameras which has been developed in CMG, but which we have been shipping in large quantities for use in wireless applications, namely the camera phone. And, conversely, certain of our networking and storage products end up in digital consumer applications.

Thus, we believe it is more prudent to breakdown revenues by the estimated relative weighting of each market segment.

We further strengthened our balance sheet in Q1, generating cash flow from operations of $423.5. Net operating cash flow before debt repurchase was $154.5 million and was calculated by deducing capital expenditures and interest from cash flow from operations. A cash flow analysis statement has been added to our release, beginning this quarter. Capital expenditures for the period were $255.7 million, of which approximately --% was allocated to leading-edge technologies and strategic R&D programs.

Inventories were in line, with about 30% of the sequential $ 47 million increase attributable to currency translations. Cash and marketable securities stood at $2.36 billion, and long-term debt was $2.6 billion at the end of the quarter.

Thus, while we had originally expected a more robust Q1, we consider this credible performance in light of the pricing and currency issues we faced, not to mention the geopolitical uncertainties and most recently, the health issues that have taken their toll on businesses throughout the world.

Our short term outlook is for difficult pricing conditions to continue in Q2. The good news is that our current backlog data indicate a sequential pick-up in demand in specific applications, including: wireless, printers, DVDs and automotive, and a rebound in Flash revenues. This leads us to anticipate Q2 revenues of between $1.68 and $1.72 billion which equates to a sequential increase of between 3.8% and 6.3% and a year-over-year improvement in the range of 9.7% to 12.3%. Gross margin should approximate 36% in Q2 as we expect a combination of higher revenues and manufacturing efficiencies to more than offset pricing pressures.

Our served market is forecasted to experience solid growth in the second half of 2003, and we believe that ST's product portfolio and strategic alliances will give us an important competitive edge. This should translate into increased sales and gross margin, the latter moving back into the 38% to 40% range by the 2003 fourth quarter.

At this point, my colleagues and I would be pleased to take your questions.

PISTORIO SIGNATURE
Pasquale Pistorio
President and Chief Executive Officer