Net revenues for the third quarter were $2,231 million, up 2.7 per cent sequentially from the $2,172 million reported in the prior quarter, and 23.7 per cent above the $1,803 million of last year’s third quarter.

Revenues from Application Specific Products were $1,163 million, or 52.1 per cent of 2004 third quarter net revenues. Differentiated product revenues were $1,451 million, or 65.0 per cent of net revenues for the period.

Gross profit was $845 million, up 4.0 per cent sequentially from the prior quarter’s $812 million, and 33.6 per cent above last year’s third quarter gross profit of $632 million. Gross margin was 37.9 per cent, higher than the prior quarter’s 37.4 per cent and the 35.1 per cent reported for last year’s third quarter.

Pasquale Pistorio, president and chief executive officer said: “ST continued to improve profitability levels in the third quarter. Despite a progressive decline in market demand that was characterised by shortened lead times and backlog adjustments, our revenues came in within the guidance parameters we provided at the time of our 2004 second quarter earnings announcement. We are especially pleased that gross

margin reached 37.9 per cent for the period, the high end of our guidance range, benefiting from sequential improvements in product mix and manufacturing efficiencies.”

In the 2003 third quarter, research and development expenses increased modestly to $302.8 million from the $297.9 million of the second quarter of 2003, but declined as a percentage of revenues to 16.8 per cent from 17.5 per cent in the 2003 second quarter. In the 2002 third quarter, R&D expenses were $258.0 million and represented 15.7 per cent of net revenues.

Operating income increased 19.1 per cent to $213 million, or 9.6 per cent of net revenues, in the 2004 third quarter, up from the $179 million, or 8.3 per cent of net revenues, reported in the prior quarter. In the 2003 third quarter, impairment, restructuring charges and other related closure costs resulted in an operating loss of $64 million. Before impairment, restructuring charges and other related closure costs, the company posted 2003 third quarter operating income of $129 million, which equated to 7.1 per cent of net revenues.

Net income equalled $189 million in the 2004 third quarter, a 28.4 per cent increase over the $148 million reported in the 2004 second quarter. In the 2003 third quarter, the company’s net loss was $50 million. Before impairment, restructuring charges and other related closure costs, and a non-operating pre-tax charge of $22 million related to bond repurchases, last year’s third quarter net income was $102 million.

Earnings per diluted share were $0.20 for the 2004 third quarter, up 25 per cent from the $0.16 earned in the 2004 second quarter. In the 2003 third quarter, the company incurred a per share loss of $0.06. Before impairment, restructuring charges and other related closure costs, the company had earnings per diluted share of $0.09 in the year-ago quarter.

Mr Pistorio noted, “In the 2004 third quarter, we kept the dollar amount of R&D spending at the same level as the prior quarter, and we succeeded in reducing SG&A costs by 2.6 per cent on a sequential basis. In the aggregate, R&D and SG&A expenses accounted for 27.6 per cent of third quarter net revenues, a sequential reduction of 110 basis points. This was accomplished while maintaining the accelerated pace of our product design and development activities.”

In the 2004 third quarter, research and development expenses were $384 million, flat with the $384 million expensed in the prior quarter, and 26.7 per cent above the $302 million reported in the comparable year-ago period. R&D costs represented 17.2 per cent of net revenues in the 2004 third quarter compared to 17.7 per cent of net revenues in the prior quarter, and 16.8 per cent of net revenues in the year-ago quarter.

Selling, general, and administrative expenses were $233 million for the 2004 third quarter, 2.6 per cent below the prior quarter’s $239 million, and 21.5 per cent above the $191 million incurred in the comparable year-ago period. As a percentage of net revenues, SG&A expenses decreased to 10.4 per cent, from 11.0 per cent in the prior quarter, and 10.6 per cent in last year’s third quarter.

For ST, the average exchange rate of the euro versus the US dollar in the 2004 third quarter was approximately $1.21 to €1, compared to $1.20 to €1 in the second quarter of 2004 and $1.12 to €1 in last year’s third quarter.

Summarising, Mr Pistorio said, “Year-over-year revenue increases were achieved by all of our product groups and targeted market segments. As anticipated, third quarter sequential revenue growth was driven primarily by a broad range of digital consumer applications and Application Specific ICs serving wireless, data storage and certain automotive/audio applications. Revenues from Flash memory products were basically flat at $306 million, increasing by $2 million from the $304 million reported in the prior quarter.”

“Importantly, all four of our major product groups produced operating profits in the 2004 third quarter, and three out of four posted sequential increases in operating income, enabling ST to significantly improve its profitability for the period and contributing to the Company’s sequential increases of 19.1 per cent in operating income, 28.4 per cent in net income and 25.0 per cent in earnings per diluted share,” Mr Pistorio said.