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

I think we're ready to start. Hi, everyone. I'm Simon Coles, Head of European Technology Hardware and Semiconductor Research here at Barclays. Delighted to have Lorenzo, CFO of STMicro with me here today. Thanks so much for joining us.

Thank you.

Maybe we'll start off with sort of setting the scene a little bit. So 2025 was an interesting year. The industry was hoping for some recovery in the analog space, and it never really materialized as hope. So maybe you could give us a sort of a review of how STM for the year. And then you could give us an update on sort of how you're feeling about the auto and industrial markets at this point?

Yes, sure. Good morning, everybody. Well, let's start to say that looking at the current quarter, I can confirm that what we said entering the quarter is what is going on. Let's say, we see the situation evolving consistently with our expectations. And maybe for some elements, even a little bit better than our expectation. But you know that this year for us in 2025, looking at 2025, clearly, the first part of the year -- the first half of the year was impacted in automotive and also in industrial by a significant inventory correction. Looking at automotive, clearly, we have a few customers, important customer for us that were significantly correcting this inventory in the first part of the year. And now I have to say that this is behind us. Indeed, when we look starting from Q2, we started to grow on a year-over-year -- to grow, let's say, on a sequential basis in automotive, definitely. And still, we think that we see that also in this current quarter, we will continue to grow on a sequential basis on a mid-single digit. And the evolution is consistent and in line with our expectations. Industrial was similar in Industrial, the year has been characterized by an important inventory correction in 2025. And now if I look at the situation of the inventory and especially the inventory that we have in distribution, we see now a normalization. And in some regions, even a little bit better than what is the normal level of inventory that we should have. So I think also here, we see, let's say, a positive dynamic you see that our revenue in Industrial were growing on a sequential basis. In Q3 we were also on a year-over-year basis, improving. But we will continue to see some growth also in the current quarter, more low single digit. Why? Because we wanted to exit the year as clean as possible in terms of inventory. But looking, for instance, some dynamic like the book-to-bill, we see that the company has a book-to-bill that is both parity and this is positive, let's say, especially when we look our booking in the industrial. So I would say that we are relatively optimistic on the trend at this point.

Okay. Great. You touched on some of the inventory levels there. Is it fair to say that you're cautiously optimistic that the destocking risk that -- or the destocking activity we've seen in '25 is pretty much done. And by the time you've got through Q4, you don't really expect to see anything else on that front. And then you mentioned book-to-bill is above 1. Are bookings sort of trending maybe a little bit better since sort of earlier in the year. And do you think you have sort of better visibility into 2026 than you did have going into 2025 at the same stage last year?

Now clearly, when we look at the visibility entering in 2026 compared to the visibility that we had entering 2025, yes, the visibility is definitely improving. As I was saying before, at this stage, we do not detect any inventory correction. Last year, we were impacted significantly. But today, clearly, what we said at our earnings release, Q3, we said about our expectation now there is no reason why to not to think that Q1 will be in the normal seasonality. Last year, we're well below the normal seasonality. Today, frankly speaking, with all the indication that we have, we think that the next quarter should be in that range. So at the end, now I would say that overall, definitely, our visibility has improved. We enter with a level of backlog that is in the year that is better than what it was 1 year ago. Maybe we are not yet a situation in which we cover in terms of backlog the same level that was covered pre-COVID. But definitely, we see the situation improving, definitely improving.

Okay. Great. Maybe we touched on gross margins before talking about some of the revenue opportunities. I mean they're not where you'd like them to be. There are a number of moving parts that you've been very helpful sort of laying out in the last few quarters. Could you maybe help us how to frame how to think about those into 2026. I mean you're reshaping the manufacturing footprint so there's some costs shifting around there. Underutilization should come down as revenues are improving, FX, like lots of things going on. So could you help us sort of frame how to think about those?

No. Yes. Definitely, 2025 in terms of gross margin has been quite difficult definitely, let's say, at the end, at the midpoint of our Q4 guidance, our average gross margin in the year would be in the range of 33.8% or something like that. So clearly, this year, our gross margin has been definitely significantly impacted by what about, first of all, impacted by a significant level of unloading charges. This year, the unloading charges account for more than $400 million. That is a little bit more 300 basis points. So this was clearly a strong headwind. But when we look next year, clearly, at this stage, it's a little bit difficult to define exactly where we will position in terms of gross margin. But definitely, we can talk together with you about what it will be the dynamics of our gross margin. For sure, one of the expectation is to have a significantly reduction in terms of unloading charges in respect to this year. Why we expect this significantly reduction? There are 2 elements to consider. On one side, we expect to an increase in terms of revenue. So this will better load our manufacturing infrastructure. And on the other side, we do expect to start to implement our reshaping plan for the manufacturing infrastructure. It means to reduce some of our capacity especially next year, we expect to reduce the one in silicon carbide, reducing capacity at 150 millimeter, and for some extent, also some reduction in the 200-millimeter of silicon. This mechanically will reduce the level of unloading because we will transfer products in silicon carbide 200-millimeter, in silicon to the 300-millimeter but the increase of capacity, it will be tuned based on the demand. We will try to tune based on the demand. So this will be a positive impact. There is another positive impact always related to the manufacturing that is better loading, lower unused capacity, but also better manufacturing efficiency. This will come, let's say, of course, we do not yet exploit all the positive impact of our reshaping plan. But we will start to see something already in 2026. Then I was talking before now, clearly, let's say, next year, we will not have any longer the impact of the inventory correction, especially in the industrial market. Industrial market for us is the most accretive in terms of gross margin. So it means that we expect a positive impact of the product mix. More revenues in our microcontroller, STM32, more revenues in analog. These are bringing a positive impact on our gross margin. Unfortunately, not everything is positive. There is also some headwinds. One headwind that we talk many times together was -- is the one-off capacity reservation fees. Capacity reservation fees this year are still meaningful means that impacting in a positive way our gross margin for around 100 basis points next year, this will decline significantly. Still some. But let's say, if we have a 20, 30 basis point impact positive is the maximum level that we can think about. And then on the other side, we have not to forget that the dynamic of the exchange rate is not going in the right direction for us. Exchange rate this year in average for the company the effective one means considering the impact of the hedging has been 1.11. Next year, this level of spot rate most likely will be something between 1.15, 1.16. This clearly is a negative impact. All in all, anyway, we expect improvement in the gross margin and more significant in the second part of the year in respect to the first part of the year, most likely, also due to our seasonal dynamic in terms of revenues. But yes, at this stage, I'm quite confident to see some recovery in terms of gross margin next year.

That's great. That's very clear. Maybe just quickly on OpEx. It seems like after the Q3 commentary is set to go up next year. You have your cost-cutting plan. Anything we can do to sort of accelerate that to sort of try and manage this increase? Or how to think about that into '26?

In terms of OpEx clearly, we continue with our plan of resizing of our OpEx. Anyway, also here, we have a different dynamic. First of all, let me remind you that when we talk about OpEx, of course, excluding the restructuring cost at this stage, but is including SG&A, R&D and the line that we have in our P&L, other income and expenses. In this line, other income and expenses, we account mainly for the grants. And this year, this line is positive for us in the range of $200 million plus. What are the dynamics of next year? Of course, next year, we will continue to resize our expenses. As you remember, we were saying that in respect to the cost structure of 2024. We wanted to achieve a savings of around between $300 million and $360 million. Let's say that my goal as a CFO is to be more on the high side than on the low side, but fine. This year has been more than $100 million in the range of $110 million something like that. Well, next year, we do expect it to be similar, maybe slightly a little bit slightly higher. So the savings will be there. On the other side, there are some negative impact. And the main one is related to a reduction of the positive impact of other income and expenses. Why we think that other income expenses will go down, not because there is less grants, more or less the level of R&D grants that we will have in 2026 is not so far from the number that we have in 2025. But it's mainly due to the fact that we will account in this line the start-up cost, especially for our facilities in silicon carbide 200-millimeter. This is an impact that is onetime, but it will be accounted in that line. But then there is the FX also in the expenses, we will have the negative impact of the FX. You know that we are in our expenses quite exposed to the euro. We have a significant amount of expenses that are denominated in euro. So all in all, what is our expectation. All in all, it is an expectation of a slight increase when you take SG&A, R&D and other income expenses together.

Got it. Okay. Maybe moving on to some of the revenue opportunities that you have ahead. There's a lot of excitement around interconnect in DCs. And I think about a year ago, you announced a sort of silicon photonics foundry business. How is the progress on this opportunity? How meaningful do you think this can be for STM? Is it a significant revenue driver in '26 already?

Silicon photonics for sure, is a very significant opportunity for us. There is a strong traction here. You have to consider that we start now. And we are now qualifying our products and really, let's say, here, the opportunity, yes, I have to say that it's already in next year. We see some opportunity already next year, let's say, some meaningful revenues in silicon photonic. More we go more, we see traction on that. Clearly, let's say, 2027, it will be even higher and important than 2026. Anyway, we start to see already some revenues over there. We think that silicon photonics could be a significant driver in terms of our revenues but there is no reason why to not think that in 3 or 4 years from now, we may be, let's say, something in the range of $0.5 billion of this business. And this business by the way so far is also bringing more than decent profitability, I would say, for the company.

Okay. Great. Maybe you sort of linked to this then is the AI power opportunity. Some of your peers have obviously been announcing some big numbers recently, but you have all the same products as well, silicon carbide, gallium nitride. You talked about some of these opportunities at your CMD last year. I mean, are you expecting to generate revenue in this area soon.

As ST, I think we have a portfolio that is well fitting this kind of opportunity. As you know, we have also announced a cooperation with NVIDIA, let's say, with in this field in order to provide and especially to target architecture 800-volt for the artificial intelligence in terms of server for power. So here, I think this is an opportunity for us. We have the portfolio that is covering with the silicon carbide, gallium nitride, but not only we have a microcontroller, analog all these, let's say, products, high-voltage MOSFET and low power, low voltage power MOSFET. So we have a portfolio that can cover this kind of portfolio. We address -- we think that we are well positioned, let's say, to address the new architecture 800-volt. So it means that this probably a revenue that will come not immediately, not in 2026, but we will start to have revenues that are coming in the coming year '27, '28 and '29. Also, here, we think that this is a market that is visible to everybody, growing significantly. No reason why we should not position ourselves with a similar level of revenues as for silicon photonics, this could be a significant driver for us, bringing revenues in the range of $0.5 billion and more by the end of the decade.

Okay. Great. So $0.5 billion potentially from AI in the next couple -- next few years. The satellite business, I feel goes under the radar a little bit and is performing very strongly for you. I mean how do we think about that business growing from here? Is there much competition in this space? How does STM differentiate? Can you give us a bit more color on the satellite opportunity?

You know that we are here in this area since a long time, I think something in the range of 10 years. Our, let's say, cooperation and work together with Starlink has been pioneering this area. We have, let's say, IPs, technology ability in design chips that are fitting very well this kind of application. But this is a significant growing area. We see, let's say, that is an area in which we have experienced in the last year's growth. We expect to experience growth also in the coming year, in 2026 and 2027. And on top to our, let's say, let's call it, historical customer. And now we are enlarging the customer base. There are new actors that are coming in some of them are quite important in which we are present. We start already shipping this quarter in 2026 will be a growth driver. And this is for us, let's say, enlarging the customer base. And then we have also, let's say, design win in other constellation. You know that both in Europe than in China, there are, let's say, traction on these kind of things. So I think this is an area in which we are well positioned. We are well advanced. We have, let's say, the right technology, both in front end and in back end in order to address and to enjoy growth and profitable growth here.

Great. Okay. Maybe we touched on silicon carbide that was seen as a huge growth opportunity. The last year or so has been quite difficult given what's happening in China. But it feels like the pricing pressure in places like China may be sort of bottoming out. How are you feeling about the silicon carbide outlook from here. You suggested growth next year already, I believe. So what are the drivers of that as well?

In silicon carbide, clearly, 2025 has been let's call it, a transition year for us. In 2025 seeing a significant decline in our revenues in silicon carbide this not secret. But clearly, we were impacted by fewer factors. Clearly, let's say, our main customers had inventory correction, also reduction in respect, let's say, the penetration in the market. This was somehow impacting our revenues. And we were not in the position in 2025 to compensate with new sockets that were there, but not at the level to compensate this impact. What moving forward, let's see. Moving forward, clearly, our expectation for 2026 is to have some growth in terms of silicon carbide. Why I'm saying so not only mainly due to our main customer, but because we have new sockets, both in Europe and in China that in the course of 2026 will ramping up. Of course, we do not expect in 2026 to be back at the level of revenues that we were in 2024. There will be some increase, but still not at the level of 2024. Looking at what we have in our hands and looking what are the sockets, the platform where we stand today, we believe that in silicon carbide that we may be back close to where we were 2024 in 2027. Anyway, we believe that silicon carbide is still, let's say, technology product set that has an important development. Maybe has been a little bit later and slower than what was expected maybe 2 years ago. But still, there is a significant opportunities, not only in the mobility but also in the industrial market and to not be forget in the server for AI. So it means that at the end, I think here, let's say, our target in terms of revenue in silicon carbide is still there.

Got it. Very clear. Humanoid robots starting to get some more attention. STM has an extensive MCU portfolio. You also do lots in sensors as well. How are you feeling about this opportunity? Are there any numbers you could share about sort of content? Is this something that's exciting for STM in the next couple of years?

No, yes. This is an opportunity, definitely a significant opportunity in this market. Clearly here, our portfolio is fitting quite well this kind of application because, as you said, here is microcontroller analog and motion control, let's say, sensors, all these kind of things, sensors, both MEMS and image sensor positioning. There are a lot of products that are really fitting this kind of application. And we see also because already today, we are selling in this kind of market. But clearly, the point of this market that today is still quite small. Even if the content can be quite high because you may have as a minimum $200 to $300 of content in 1 humanoid and that could grow also in the range of $500 million, $600 million. So it means that at the end, this is a good opportunity. But the question mark is the evolution of this market. The good point is that we are present. We are in more than one, let's say, customers for this kind of application. Then we will see how this application will move, how pervasive will be in terms of pervasiveness in the market. Yes, there are possible different opportunity. One is the industrial market. Why not defense because this could be another area for this. Maybe consumer a little bit down on the road. But definitely, this is a market that we look very carefully, and we think for us could be a good opportunity. And I repeat that we start already now to sell to some of these early, let's say, company in this field.

Okay. Great. You've got an acquisition in progress, NXP's MEMS business. Could you give us a bit more color on sort of how you think that's going to fit into the group? And then it's going to cost you not far off $1 billion. Are you happy with sort of the cash position post-acquisition?

To be honest, I think that this acquisition has been very, very positive for us. I'm quite excited about this acquisition. Clearly, let's say, it's fitting perfectly our portfolio. As you know, let's say, in MEMS, we are quite strong in -- when we look at the personal electronic consumer with the acquisition of NXP, we will rebalance our presence in the market with automotive and industrial. So means that at the end, for us, it is the perfect fit. The cooperation with the MEMS of NXP has been since a long time because we were working together. So it means that for us, this is a very good acquisition. By the way, -- but I think looking at the last years, let's say, M&A activity, if you consider the multiple on which we buy this business is more than reasonable. At the end, we have enough cash on hand in our balance sheet to sustain this kind of acquisition that has been -- the consideration has been fully in cash, will be full in cash because so far, it's not yet closed, but I'm quite confident soon it will be. So I feel very, very excited about that because I think it positions ourselves in a very strong positioning in respect to the MEMS. So we will be, let's say, among the 2 top players in this field. And frankly speaking, this field is growing significantly. There are many applications, industrial, automotive. We were talking now about humanoid, all these kind of things. Think about -- there are many, many areas in which this MEMS are going. And to be honest, it's one of our most profitable product lines. So for me, it has been a great achievement.

Okay. Brilliant. And then signal times up. So Lorenzo, thank you so much for the time. It's very interesting, very helpful. I hope it is for everyone else. Thank you.

Thank you very much. Thank you.