STMicroelectronics N.V. (STM) Earnings Call Transcript & Summary

Good morning, everyone. Welcome to Barcelona. Welcome to the 25th Morgan Stanley TMT Conference here in Barcelona. Welcome to, of course, Jean-Marc Chery, CEO of STMicro to the stage.

Jean-Marc, maybe just to level set the audience, if you could maybe help us or remind us rather, how did Q3 go? What was the main points? And how does that leave us going into Q4?

Okay. Q3, our revenue has been mainly driven by the usual seasonality of personal electronics, where we have benefited of both our increasing content with our main customer and the usual seasonality of the start of the new device. So personal electronics grew 40% sequentially in Q3. And -- except automotive, I will come back on it. All the other segments grew sequentially and good news year-on-year. On automotive, we are still on a year-over-year decrease, but the main gap is related to one customer specific, an electrical car maker, well-known. And also you know that for ST, the progressive decrease of the fees related to capacity revolution. But clean on this effect that is not product related, that is more, let's say, the heritage of the shortage period, we can say that automotive is starting to grow year-over-year, very close. So this was the main point of Q3. And the book-to-bill was basically above 1, okay, which was okay, also good for Q4. Yes.

And maybe just keeping on Q4. Obviously, you guided sales, I think, 3.28 billion for Q4, slightly above the minus 10% that you would see for seasonality. So maybe help us understand, does that help us appreciate what the run rate will be into '26? And again, as reference to automotive, how should we think about that as we go into '26?

No, it's a very interesting question. '26, well, clearly, again, the usual seasonality for ST is to have a first quarter of minus 10% or slightly above minus 10%, mainly driven by the personal electronics and [indiscernible] because of the Chinese New Year impact for mass market and distribution. Today, the dynamic of our backlog coverage for Q1 linked to the order entry we have, is clearly securing ourselves that we will be capable to deliver minus 10%, minus 11% in terms of revenue in Q1, which is positive news confirming that we are basically almost free of material inventory correction that was the case in Q1 last year. And by the way, if we deliver minus 10%, minus 11% Q1 versus Q4 year-over-year will be a nice 20% growth Q1 '26 versus Q1 '25. So this is, okay, what we can see. But after qualitatively or directionally for next year, what will be the main contributor of the growth of ST above the cycle. First one will be a massive introduction of new product and microcontroller. So more clearly, next year, because now we are inventory free in terms of adjustment on distribution, industrial, we will have a legacy growth. But more important, we will introduce basically almost 45 new products on micro next year at 40-nanometer or even 18-nanometer. So micro, which will be fitting with the demand, okay, to have more computing power, more memory storage, hardware accelerator for AI at the edge and so on. So clearly, it will be 1 positive growth driver. Second positive growth driver will be analog. Why? Because analog and spread between personal electronics, automotive, and industrial. Why? Because here is mainly for personal electronics new product, and for industrial and for automotive, it is, let's say, moderate growth, okay, we are seeing in the market and clean of inventory correction. More than as usual for ST, [indiscernible] by satellite with our new customer ADAS system. But personal electronics will be with our main customer, more moderated. But this is okay, what we see as a growth driver. So detractor will be the capacity reservation fee that will be basically close to 0. So at the end, we are not yet in position to confirm exactly the percentage of growth we have, but we can say Q1 has a seasonality. We enter the year with Q1 20% growth year-over-year, so we can expect a growth next year.

Very clear. Very clear. Maybe take a little bit of a detour here and just ask about AI servers. Obviously, a peer is reporting this morning a doubling of sales into next year. And I know you've got ambitions to get into power supply units, particularly using, I imagine, silicon carbide, silicon carbide modules, but you have the tie-up with Innoscience as well. So maybe help us understand how that opportunity plays out for ST. When would that come in? And could that be a contributor in '26?

Well, of course, I have seen like results and guidance and communication of our competitor. Well, what is the difference between this competitor and ST. What we have, what he has not; and what he has, what we have not. Okay. What we have and what he has not, we have today, now the silicon photonics that will start to contribute with the switch from copper cable communication connectivity to optical, let's say receiver and transceiver. This, for ST, will be a growth that should bring us revenue contribution in 3 years about USD 300 million -- at least $500 million at the end of the decade. What we have is our general purpose microcontroller that are spread everywhere in the [indiscernible]. What we have as well, but not yet present because we focus on the market like the automotive, is a switch on silicon carbide. And what we are introducing is switch on GaN. What we have not yet is a low voltage capability on MOSFET or on a smart power switch. We are working now to do it with the next generation of 800-volt architecture. So to make a long story simple, ST revenue in server in the short term, so means starting in '26 '28, will be mainly driven by silicon photonics and microcontroller. And more marginally, I have to say, by power and analog, that we started to be boosted beyond '27, '28 by the new architecture. This is a path of ST on AI server. Well why we are not present, okay? It was strategic choice, okay, mainly power automotive oriented and less industrial infrastructure. But this is a situation we have to deal with.

Got you. I appreciate that on short notice to answer that question. Maybe if we jump back to silicon carbide. I mean we did see revenues of $1.1 billion in '24. And I think you said this is a transition year '25, but '26, maybe '27, we get back to that sort of levels eventually. But maybe help us understand the profile and the demand perhaps by region, Europe and China in particular.

Well, clearly, you know ST has been really successful in silicon carbide, mainly driven by one customer. And we started, let's say, not late, but we started in the past 2 years, okay, the diversification with European first and targeting the China market after. Well, it's clear that in '25, when you accumulate our main customer decrease and correcting inventory massively plus the European player struggling more in their capability to grow, and with a Chinese success, but with a strong price pressure, but at the end okay, 25 is a significant share of decrease. How we have reacted in front of this situation? First of all, we reacted the case since many quarters to diversify and accelerate ourselves both in Europe and in China. So next year, we will grow significantly, so well above USD 100 million compared this year. 60% will be driven by this time, the start of the European program, and 40% by the Chinese one. Moving forward, we expect to go back to the peak of our revenue in '24, in '27 and directionally go to the $2 billion between '28 '29.

Got you. Very clear. Maybe another area that investors are interested in is the power discrete area, Power and Discrete. Operating margin was weak, I think minus 15% last quarter. We're seeing that inventory normalization coming through the second half of '26, and you've got the manufacturing reshaping program as well. So how does that all drive profitability or the regain of profitability in that space?

In consistent way, we communicate that our reshaping plan, so cost base resizing and manufacturing reshaping. Yes, the cost base, the operating expense contribute now, okay? It's $120 million less per year starting '25, '26, '27. Unfortunately on manufacturing, the contribution will be '27. Why? Because in '25, it was the year to prepare the technology transfer, product qualification, and we are not completely controlling the agenda because it's customer, we control the agenda. Entering in '26, we have to ramp down the fab we want to close, and we have to ramp up the fab we want to open, specially on silicon carbide and [indiscernible]. We will be at a period of time where the 6-inch will start to degrade their performance and the 8-inch will not be at their optimum performance. So for sure, in '26, I don't expect power to go back to breakeven. It will happen most likely H2 '27 and come back to stabilize, okay, where power contribute to the operating margin of SP in '28 and beyond. So for sure, that '26 will be still a difficult year for power discrete overall, but for good reason. The good reason is this reshaping of the manufacturing and will be okay, limited basically fourth quarter.

Got you. And so it's really that start-up costs into 200-millimeter or 8-inch that's a headwind.

Clearly, when you are making this reshaping, when it is related to digital or mixed signal analog fab [indiscernible]. You close Crolles 200, you go to Crolles 300, you have the immediate payback because the fab is at the scale at 12,000 wafers per week. So you have the immediate payback. When you close a 6-inch power silicon carbide or 6-inch silicon and you go in a new fab, for sure, the new fab is not yet, okay, at the optimum scale. It will be the case on Sanan and Catania. So you pay the bill on the cost of goods sold, but you have to make a lot of expenses in terms of startup. So to qualify equipment, to qualify the process, the chemicals and so on. So for us next year, it will be $100 million of start-up costs that will disappear moving forward, but that will be present in 2026. And that's the reason why we communicated during our earnings that despite the cost decrease of ST linked to our plan, we will have this offset of start-up costs, but in '27 will be gone.

One other thing we noticed on the call, I think you called out the NXP MEMS sensor acquisition that you're doing, I think, $950 million, expecting that to close in first half. So how that -- once you get into sort of a full year of contribution, how does that roll through? How does that help the profitability growth in the business?

Historically, up to this acquisition, the MEMS business of ST was mainly driven by consumer and mobile phone, I have to say. And not by automotive, even if we started automotive, and less by the industrial. The objective of the acquisition of NXP was to better balance our MEMS product group to be copy paste of ST, so to have different paths. So in automotive, industrial, mainly with robotics, okay, and to continue on consumer, point number one. Point number 2, okay, if possible to have also benefits in terms of technology. And we started discussion within NXP 4, 5 years ago. And we decided to start the cooperation with ST making the foundry for NXP, okay, a few years ago. And then, okay, during last year, we have a common agreement that, okay, for the MEMS of NXP, it's better to be joined with ST to have a scale business unit, addressing widely all the verticals. And I am pleased to say that our mission, and the mission of ST is to double our revenue on MEMS. And with this acquisition in the next 3 years plan or 4 years, we have a strong confidence, double our revenue on MEMS.

So it's the scaling of the operation sort of squeezing out under utilization in that business area effectively.

It is not the primary objective. The primary objective of the acquisition is to balance our exposure from consumer to better balance between automotive, then robotics and consumer to have technology block acquisition. And of course, for manufacturing is basically transparent because we were already the foundry for the mechanical part of the MEMS for NXP. Then, the companionship is done in the foundry. We will not rapidly add these companionships. It's a waste of money. Okay, we don't make an acquisition and this I would like to clarify, ST will not make acquisition to load the fab. ST will make acquisition to boost the revenue and to boost the product portfolio or the technology portfolio, but not to load the fab because it's engineering bond with consumption, it's cost of transfer, it's customer qualification. So it's a huge work by [indiscernible] program, our reshaping program. We have 2,000 device, and we have basically 150,000 product change notice to manage because of this restructuring program. So it's a huge work. So don't add the acquisition that will ask us to transfer in our fab. This is not the objective, okay, our objective is driven by revenue, profitability and technology.

Perfect. All right. That's very clear, actually. Maybe jump to microcontrollers. I mean we've got a class-leading family, STM32s. But if we look at general purpose microcontrollers more generally, it is starting to show recovery. It's starting to see that you're maybe on a path back to that historical market share of low 20s, 23%. So what do you think specifically maybe by launches or by regional take-up? What is going to drive that maybe through '26 and '27?

Clearly, the good news for ST is our inventory is good. So it means, okay, over market share and revenue trajectory will be no more polluted by this inventory digestion that has been built up between '21, '22 and first half '23 because okay, customer ask a warranty of supply. So we have put in place non-consumable order and so on and so forth. Well, this is clean, point number one. Point number 2, the microcontroller now, they have to follow or to anticipate the request for more computing power, sometimes to be capable to have a hardware accelerator to enable machine learning or including, okay, some AI at the edge, connectivity and security features. So that's the reason why ST in '26, will introduce 45 new products, now at 40-nanometer technology and 18-nanometer technology. So I am really pleased to say that in '26, we will produce and sell the first 18-nanometer microcontroller which will be a nice machine. And moving forward, we have about 60, 70 new products in the next 3 years that will be overall introduced. And this will be driven by the industrial market for sure, definitively. But okay, now, okay, some start in consumer because inventory is good. But one of expectations we have as a booster of growth will be the robotics. Clearly, industrial robots or humanoid robots. But we don't know exactly yet what will be the success. You have many [indiscernible] saying 1 billion of robots. It will be maybe like [indiscernible] the story. But whatever, okay, you have microcontroller, MEMS switch and driver everywhere in the humanoid robotics. And by the way, we are working with the best player, American player or including Chinese player. So microcontroller, okay, after this terrible clear story of other inventory buildup and then correction now are coming back on the healthy pace, so driven by innovation, cost, of course, shrink of the technology and new application driven like the robotics for industrial or the humanoid for both consumer and industrial. So we plan to go back to between 21%, 23% market share next year, '26 and to go back at our historical market share in '27.

Got you. Very clear. Maybe you touched on humanoids, and we've got obviously robots out in the lobby there. Help us understand the addressable market here because if we think about AI vision, the brain and the compute that's going in there, but the huge amount of sensor array and in particular, the degrees of freedom in the hand, all of that seems to be relevant to ST. So I mean, if we go through each of those, how does that play out? Is it a microcontroller plus sensor story? Or is there something else, maybe GaN?

No, it is -- you have, for sure, the sensing -- sensing part, so the MEMS. But we have as well the optical sensing solution. So you have the 3D sensing with time of like kind of technology. Most likely, you will have some face or object recognition clearly microcontroller everywhere, and you have motor control everywhere. And where you have a motor control, you have a driver, you have a switch. So for ST, we can expect that the consumer like robots, we will have a content between $300 and $400. And for the most sophisticated humanoid industrial level, it will be more in the range of $600 to $700.

Interested. And would this include like power semis because I assume you're going to need a power inverter, onboard charging, that sort of thing. Does that -- in that 600 to 800, I think you said, does that include power semis as well?

You will have a battery. So if you have a battery -- you have a battery management system. So you will have a charger. So you will have all this feature. You need to make some move to take some weight to make some act. So you need to have power, power activator; sensor, sensor activator and microcontroller and imaging sensor. I cannot disclose the name, but we are working with the 2 best American player on robots and with the most well-known Chinese one and including some European.

Fair enough. Very good. Quite widespread already. I'll maybe pause it there just to see if there's any questions in the audience. Anybody would like to ask anything? Not at this point. Maybe we'll come back to that in a second. You've got a manufacturing reshaping program, obviously, you're talking about triple-digit millions of saving. I think as we exit '27, we're looking at that. And I think you saw 360 million -- sorry, $300 million and $360 million savings in OpEx. Can you maybe walk us through that? How does that linearly progress? And now that we're end of '25, what does it mean for '26 and then out to '27 and how it splits between COGS and OpEx? If you could just remind us how that works?

We -- on OpEx, it's pretty smooth, okay? It's basically $120 million per year, and basically, this what we deliver in '25. And it is mainly related to labor census reduction that we are managing mainly on a voluntary basis. So creating some complexity, but for the time being, okay, is working according to our expectations. Of course, okay, there is a streamlined of some product development, okay? So we have already decided to stop some project programs because you cannot reduce sensors and especially in R&D, if you are not streamlining your R&D. And it will have also to be compensated progressively, but accelerating moving forward, but the business processes that will be automatized okay, with the AI development project we have. So here, I am pretty confident moving forward that we will deliver $120 million, '25, '26, the same and '27. Well, on the manufacturing is another story. On the manufacturing, first of all, '25 was the year to prepare the job. So it means, I repeat, 2,000 device, 150,000 product change notice, okay, with many customers and prepare the technology transfer and the product transfer. So it was more the preparation work. Then to discuss, okay, with a representative of the personnel about the plan to have the agreement in the various region where we are operating. So it was more preparation work. Then '26 will be the transitory period where we will have to ramp down and ramp up. And according to the customer acceptance in timing to have the ramp down because, okay, you are not protected against customer wake up and say no, I forget that I need to have this excess of inventory or blah, blah, blah. So this will be a transitory period. And that's the reason why the full benefits of the reshaping plant where you will have the 6-inch fab in Catania, Singapore, 6-inch activity into close. Agrate 200 closed, Crolles 200 closed. The full benefits will happen in '27 when the fab will be closed and the receiving fab at the scale. Crolles 300 will be at the scale. Agrate 300 will go at the scale. The most difficult one are the ramp-up of silicon carbide, Catania and Chongqing, that will be at scale end of '27. So that's the reason why, okay, on power discrete, okay, we will still struggle in 2026 in terms of economical performance.

Got you. And with all the shifting movements on the manufacturing base and your China for China strategy as well, surely has implication for CapEx. And I think you're moving closer to that sort of $2 billion level as an annual run rate. Do we see that as a sensible level for the next couple of years? Or could we see upside based on growth trajectories, for instance?

Clearly, our CapEx are mainly driven today by this reshaping program. So means 300-millimeter capacity increase in Agrate for the short term, not in full, because we are on use capacity. So we will load the capacity first. Moving forward, we will have to increase the capacity to support the growth of the silicon photonics, as an example. So the CapEx will be dedicated on it and will be dedicated on the silicon carbide 200-millimeter. This will be valid for the next 3 years. So for sure, in terms of CapEx, we expect to contain the CapEx to sales ratio, okay, well below 15%, okay, for the next 3 years. And driven by the reshaping program, our capacity will be driven by mix, okay, but just what we need, no more.

Okay. Maybe again, if we take a step back and sort of think about things at a strategic level, you have things like humanoids coming. We have the AI server story coming into play as well. And we're being very clear about how we're moving the manufacturing footprint around as well. I guess if you think about things through an M&A lens, however, you've been active in the market. You've acquired MEMS capability from NXP. Is there anything else out there? I mean, obviously, you can't give too much plans away. But what would you say here is would you -- there's a desire for end market or a JV capability that you could see that really sort of flip the switch in some of these big new opportunities coming?

I think during the past 2 years, you have seen the panel of what we can do out of the pure stand-alone organic growth and operating model because we have done this acquisition of MEMS NXP. We have done this joint venture with Sanan, with a material incentive from China. And we have done this strategic agreement with Innoscience of GaN, okay. What it brings to ST? So MEMS, in '24, this business was USD 300 million. We can expect moving forward that could represent $400 million, okay, I have to say. So additional revenue, better balance in terms of verticals and additional technology. Then the joint venture with Sanan, what it brings to us. What it brings to us is, first of all, the access of grants of capital that mitigate a lot our effort and our risk, access to local asset at a lower price. And I have expectations that, okay, it will bring to ST some recognition about to be considered as a local player, okay? Then the deal with Innoscience, okay, at a certain moment, it enabled us to streamline our R&D effort on GaN to take benefits of the high level of know-how of Innoscience, to [indiscernible] this technology in our fab to deliver the Western world and to have the China for China strategy for free. And then we could develop -- so you see this is a panel of what we can do. But I would expect that we continue in this direction in order to do what, to continue to address, okay, all the vertical we address with a pretty wide portfolio because to sustain power analog, analog for power, analog for digital microcontroller, some [indiscernible] digital, silicon photonics and sensing. Believe me, it's a huge effort in terms of technology R&D and in terms of product development. Without the right scale and the right market share and the right partnership, basically, it's really difficult to sustain. So now this is where we want to go. But then we have to let's say, we have still our ambition, okay, to reach $18 billion, then $20 billion, but maybe with a way which will be complementary to the pure organic growth way.

Very full answer. Maybe just staying on the point. So I think you mentioned silicon photonics in there, clearly, a growing footprint in the AI server or the data center space. How would you rank your positioning there? And how does that -- because it doesn't feel like it's full size yet. We haven't really seen all of the applications that you can address. So maybe help us understand where does this go to beyond sort of just a change to the plug-ins on the interconnect.

No, we claim that on power and analog, okay, we want to reach 10% market share, that -- of this addressable market, that -- the overall content on the AI server are addressable by ST is $2,000 of components, out of which you have $500 on silicon photonics and the rest is power analog and microcontroller. So on this power analog and microcontroller, we want to achieve 10% of market share, okay. On silicon photonics, who are our competitor? Is TowerJazz and GlobalFoundries, okay, of course, I have a huge respect for this company, but TowerJazz is an 8-inch in silicon photonics. We are on 12-inch, okay. I don't know how TowerJazz will move to 12-inch without an agreement. So for sure, okay, on silicon photonics, I expect our market share to be well above 10%, and that will benefit to the growth of ST.

Very clear. And I think maybe just on GaN as well because I do think it's a very interesting tie-up within a science, given your pricing power, given you sort of regional prowess as well. But also, there's a systematic change in the data center. I think your interim bus conversion moving to GaN or your second stage. And that feels as though it's a market that's ready for you guys to address. Is that part of the long-term plan sort of '27 and beyond when we get [khyber] racks?

It is clearly part of our plan. It is -- I repeat, okay, compared to the big competitor in Infineon and MPS, okay, our focus using a wide-band gap technology like SiC or GaN were more exclusively driven by automotive up to 2 years ago, okay? 2 years ago, I decided to break it, okay? And that's the reason why I changed organization. I say I want to have product organization, not driven by automotive, but more broad range, okay? So this 2 block analog power sensor and micro and digital. And to support the 4 segments in order to diversify ourselves, not because I was anticipating a disaster on automotive, but I was feeling that it is the protection of the company to be well balanced. Unfortunately, we know what happened in automotive. That will come back. But for the time being, it's a little bit struggling. So yes, okay, we will participate this market. The point is today, we are not participating because you have already 2 or 3 players in good position. So we have to prepare the next step because if not we will come with income bond position that we will have to pay the margin for sure. So it's better to play the next step will be the 800-volt architecture and when our product will be ready, so either our SiC our GaN, but the low voltage. So the low-voltage MOSFET and the smart switch -- smart power switch that we have not yet developed because automotive focused. Unknown Speaker.

Got you. Okay. That's pretty clear. Maybe one last one for me. Just on the gross margin guidance for Q4. I think you guided 35%, including the 290 bps headwind on unused capacity charges. I think there's an additional 30 bps. I'm reading this from a sheet of paper, so 30 bps with process migration. I could almost pass this to you. Really, just how should we think of the evolution on unused capacity charges we go through next year?

Next year will not completely disappear. For sure, we will be at least -- we expect compared to Q4 this year, at least divided by 2 in terms of negative contribution to the gross margin moving forward, mainly Crolles 300 will be normal with used cost, I guess, I got as well. Silicon carbide, we will close the 6-inch. So we'll set up just what we need in terms of capacity on 8-inch. But we will have still maybe some legacy capacity available on 8-inch that will generate unused capacity cost still Q4 '26, but I hope at least divided by 2 compare, okay, to Q4. So this is how we see moving forward, and of course will be related to the revenue we will have in H2 next year and in H1 in '27.

Perfect. Jean-Marc, I see the clock ticking down. Thank you very much for coming. Enjoy Barcelona.

Thank you. Thank you very much. Thank you.