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

Hello, everyone. Good afternoon. Good morning. I'm Dom Olszewski from the Morgan Stanley European semis and hardware team. I'm delighted today to introduce Jean-Marc Chery, President and CEO; Lorenzo Grandi, CFO; and Marco Cassis, President of Sales, Marketing and Strategy Development from STMicroelectronics. We'll be discussing the business outlook and conditions today. For investors on the portal, we encourage you to participate. So please do feel free to submit questions online. That should be visible to you on the panel at the bottom of your screens. Firstly, just a brief disclaimer before we start. For important disclosures, please see the Morgan Stanley research disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. Okay. So welcome, gentlemen, to the call. Given all the latest headlines on semiconductor shortages, you must be some of the most popular people in the industry, and I can only imagine how many incoming phone calls you have.

So perhaps the best starting point is to address your latest view on how 2021 is shaping up. We've obviously seen an acceleration in demand at the year-end and at the start of this year. So does that bring the $12 billion revenue figure into view for this year and accelerate the outlook from the December Capital Markets Day?

Indeed. Thank you. Thank you for the question. Well, very rapidly -- okay, I will not go back too much on 2020. But again, yes, I confirm since, let's say, last August 2020, we have seen a continuous acceleration of the demand through a very solid booking, continuously well above the parity for ST, while, okay, we increased last year continuously across Q3 and Q4, our revenue. Then in Q4, clearly, something happened, okay, during the second half of Q4, so mainly end of November and December, where, clearly, let's say, the automotive market on top of, let's say, the mega trend, okay, certainly, we will come back later on, like electrification and digitalization. Clearly, the demand of automotive increased, okay, tremendously. And the business plan, okay, we elaborated, let's say, in end of Q3 and Q4, have been definitively reviewed in January, as I mentioned, during our Q4 earnings. And call, okay, for capacity increase or demand increase to our partners. This is what we see up to January. Now on Q1, the booking continues to be solid in Q1. Up to now, I have to say, very similar Q4 with, again, book-to-bill, which is well above 1, from the strongest Q1 to date, which is automotive and Power Discrete for ourselves, again, driven both by legacy and automotive, but electrification of the car as well. So silicon carbide, IGBT, low-voltage power MOS for 48-volt. We see also a strong book-to-bill on our MDG group. And here, I have to say, it is driven by the overall industrial and mass market. And clearly, okay, our general-purpose microcontroller is the lead product. Now where we see, let's say, clearly, a more, let's say -- I have to say, reasonable book-to-bill. So slightly above the parity is on IMS. But IMS, clearly, is, let's say, the seasonal, the usual effect of personal electronics in Q1. But what is related, IMS analog addressing the mass market and the industrial market here, the book-to-bill is very high. Well, it's also important to see that, clearly, the order entry dynamic is basically quite well balanced since, let's say, November -- October, November. So the booking, okay, 60% of the requested debt of customers are within the next 2 quarters, so it means the current quarter and the next 2 quarters, which obviously is building a very solid coverage for ST in H1. And now in Q3 versus revenue, we expect to do with our -- the capacity we have and the foundry allocation we have. But 40% of the booking is beyond the next 2 quarters, so starting to load very properly, let's say, Q4 of this year. So yes, I confirm that, with the current visibility, we will be ahead, let's say, what we communicated, let's say, last December. But now, okay, to tell you what would be the indication about our year, I will do it in April, okay? Because, okay, usually, I see, okay -- we want to see really what is happening Q1 wide and -- but our sales and operating plan is ready. Our planned CapEx, you know that I have increased it, okay, in January to, let's say, $2 billion -- $1.8 billion to $2 billion, mainly to increase the capacity in coal, to mainly increase the capacity in silicon carbide, to mainly increase the capacity in advanced BCD for the automotive. So all are driven by the demand -- by the short-term demand. But I will communicate this indication for the year in April. But clearly, compared to what we said, December, we are well ahead.

Very clear and good useful color around the bookings into the late part of this year. Perhaps you could describe the latest trends you're seeing around component demand. In particular, maybe could you differentiate the situation you're seeing on microcontrollers where obviously your own significant capacity versus other products that have seen the shortages in autos to help people understand how -- what's going on today.

Today, I think we have to look certainly by product and verticals as well. Well, let's say, the most simple verticals, which is, let's say, for the timing immune, any let's say, panic, okay, of -- which is following the high trend, okay, the trend we see last year, driven by the digital lifestyle, okay, now to return to work at home is all what is related to Personal Electronics. So booking in Q4, booking in Q1, okay, the view we have for Q2, the view we have for the full year, our ongoing program, here, okay, honestly, the visibility is, let's say, quite smooth and the relationship we have with the customers, the intimacy we have with the customers is making us confident that, okay, we will follow a trend and we will execute our program. And here, you know that, on Personal Electronics, okay, yes, we are selective with some custom-design products like optical sensing solutions, imaging analog solution, secure solution and -- but also, we proliferate our general purpose portfolio. Well now then, the Industrial. Industrial, okay, I will split in 2. So OEM that basically I will associate, okay, to automotive as well. But distribution mass market, whatever the product, the situation is very clear. The POS is very strongly growing, both, okay, sequentially quarter-over-quarter, so on rolling 3 months and year-over-year. I have to say the inventory turn is incredibly high and for some product family is really close to the safety stock, okay, but not to the stock we need to make usually business. So the demand is very dynamic, and we don't see from, let's say, the distribution channel for the time being, okay, any, let's say, inventory buildup. And I confirm and I repeat, on the contrary, okay, the level of inventories are really incredibly low and the turn incredibly high. Well, than automotive and industrial. But clearly, now, in automotive, I have to say there is a, let's say, 3 different ones. The dynamic one, which is the most easy one. It is a dynamic related to electrification and digitalization. So first, it is very simple. It's one of the important customer you know, but the other one as well. And related to our power solution using silicon carbide or using IGBTs. Here, the demand is very solid and will increase a lot. You know that I communicated a number between USD 450 million and USD 500 million for silicon carbide, where, okay, the other player than the usual one will be about 20%. Here, the visibility is really good, okay? And there is no special panic, okay, or let's say, emergency. So we are, let's say, managing the business and the operation and the sales, okay, quite smoothly. And this is basically the same on digital, okay, with our partnership with Mobileye. And then there is legacy. And now I would like to associate the other OEM for legacy industrial. But clearly, here, I don't tell you to panic, but we are clearly in every day on emergency, okay? We managed Q1, Q2 very closely, okay? Checking part number by part number at the highest level of the company of ST and customer and sometimes including customer -- of customers, okay, to really manage the minimum strong demand of all this business. And now we are starting, of course, since, let's say, a few weeks to discuss about H2, where clearly we see, on H2, really a very, very strong increase of the demand since January -- early January and last December. Well, and definitively, our duty is to discuss our customer to understand the demand; to understand, okay, the demand is consistent with a number of vehicles, which will be produced, okay, this year, next year; to understand, okay, the mega trend of the economy and the mega trend of the industry, so -- in power and energy control, in automation. So we have clearly, okay, very close discussion to understand H2, but I have to say that, at this stage, the demand is very high and is very strong. So this is what we see. And I confirm, okay, what I said a few minutes ago. The order on 3 dynamics is very healthy. I say 55%, 60% of the booking is within the next 9 months, okay? So Q1 quarter now very low because capacity, let's say, overloaded. So there is, of course, no place. But the next 2 quarters, definitively, and 40%, 45% of the booking is beyond. So this is a situation now which is lasting since, let's say, November, December and continuing through the quarter at this stage. So this is the situation.

Very clear. Just as it dovetails nicely into an investor question as well, is just around shortages on particular parts. Are there any particular elements that are causing a particular bottleneck within the auto part, particularly on the legacy side?

On automotive, okay, the shortage are basically about all the product, either you have a microcontroller, okay? We know that MCUs, our supply is really under stretch, let's say, worldwide, whatever are the partner and supplier. But it is valid for ST. So clearly -- especially on, let's say, all the new products we introduced during the last 3 years on 14-nanometer. We see also, let's say, difficulties to supply on power solutions. So both what is a BCD driver or power switch, okay? So power MOSFET, some IGBT. And then there is all the ASIC, okay, on BCD that we are doing, especially those we are on, let's say, advanced technology. Now -- and more recently, we have also some difficulties to supply some device on mature technologies and mature ASIC, okay, more simply because the demand has not been anticipated overall at this level. So our perspective is that all the products are impacted for the automotive industry. And now, clearly, there is a kind of, let's say, implication on the industrial and mass market. On MCU, okay, clearly, we know that some foundry has, let's say, reallocated more volume to automotive industry and, for sure, with an impact on the industrial market. So -- and this is valid for MCU mainly, maybe not yet at the level of general purpose analog or, let's say, general purpose power. Clearly, MCU is the most stretched, let's say, supply as far as devices are concerned for the time being.

That's very clear. Just with regards to what -- the expedited orders you're seeing from customers. And could you describe the risk of overheating? And maybe sort of related to that, perhaps this is to Lorenzo around what extent the impact this has on pricing and margin for the business?

About pricing, I will comment overall, then I will let Lorenzo. About pricing, clearly, we have adapted, okay, our pricing, let's say, policy. We started, okay, last quarter because, okay, first of all, from the cost of goods sold, we see inflation on some materials. Whatever there are direct materials or process materials. We are seeing inflation on logistics, okay? Up to now, okay, it's more complex, okay, to transport goods, okay? So there is clearly inflation in logistics. So all are impacting the cost of goods sold. But then we are doing, let's say, to support the demand, we are doing [indiscernible] for. Again, I would like to say that, up to September, okay, altogether, we expected a market, okay, basically flattish in 2020 and growing 5% to 6% in 2021. Well, now it's basically double or something like that. And all the industry has planned its capacity, particularly, end of Q3, let's say, very early Q4. No, all the industry is reacting as ST has reacted, but it is calling for CapEx, it is calling for extra OpEx. And this, okay, must be fairly rewarded. So we have been, okay, one of the first company reacted and adapting our price policy. Now, okay, if my -- Lorenzo want to complement what I say?

Well, good morning to everybody. I think you have covered at the end, let's say, our price increase is not opportunistic. It's somehow to share with our customer what we got from our supplier. So at the end, let's say, in a certain extent, this will counterbalance the increase in cost that we see. For sure, this is a very -- there is a high level of tension on the market. One of the problem also that we are facing with our supplier is to secure the availability of our parts, let's say, in order to produce. So this is another important ingredient that we have to take into consideration. So as said by Jean-Marc, we were not opportunistic, but we were trying to be fairly, let's say, on this price increase.

Very clear. Maybe moving to another division, looking at the Imaging business. And this actually matches [Technical Difficulty] you have there. I believe at the last quarter results you noted expectation for stability through 2021. So perhaps, it would be interesting to hear whether that remains your latest view? Do you feel comfortable that the upcoming planned design rule changes in some personal electronic devices see you retaining that business? And how do you think about the revenue trajectory there?

Well, about Imaging, okay, I would like to confirm, and let's say, simply repeat the following. Of course, okay, you know that I will not comment some specific, okay, imaging product with [indiscernible], okay, because I have never done it, and I will not do it. However, I would like to repeat, okay? Really very, very simply, okay, what is our strategy on Imaging? First of all, okay, we do believe, thanks, okay, to our IP technology, current portfolio and road map and, let's say, and our engineering base, our design base that we want to remain our main customer, okay, Face ID reference. While clearly we intend to expand the breadth of our IP and technology portfolio for optical sensing solution to -- across a growing range of platform at this customer. Because, okay, I guess everybody know that this customer has many, many platforms, okay, from, let's say, smartphone, but tablet, but let's say 2-way wireless stereo, so the [indiscernible] port, iPad, PC and so on and so forth. So clearly, we have a strategy to remain the main Face ID partner. But because we feel confident we can sustain it and to proliferate, okay, our solution to the very healthy platform on this customer. And generally speaking, it is through custom solutions. So because we have this intimacy. But on side, we want to proliferate all the optical sensing solution we have, okay, which are more application-specific standard to the other player. So either the player of, let's say, smartphone and accessories, okay, of the Personal Electronics, but PC as well. Why? Because time-of-flight technology, so both direct and indirect, is, let's say, now is well established and very promising technology, where the number of possible case, possible, let's say, subsystems, you can set up in Personal Electronics is huge. And here, okay, we have a clear strategy. We have already engaged program. Of course, not yet certainly at the level of the main one. But this is something, okay, we are pushing, and we will sustain. Now last but not the least, there is something specific. So as ST is, let's say, a broad-range supplier and leader in the automotive vertical. Clearly, what is about driver monitoring systems. So inside car, okay, monitoring system will use or are using because we have already our other program, either, let's say, Face ID identification-like technology. So either a switch or light or time-of-flight technology. And ST will be a major player. So this is, let's say, the trend of Imaging. So this division, okay, was basically close to 0 a few years ago. Now it's well above $1 billion, and we have a clear road map and product strategy and go-to-market strategy to develop this division.

That's very clear. Also staying, I guess, within AMS, other investor questions we have around the wireless charging business. But broadly summing up some of these questions, are you seeing growing competition and any potential design losses here? And if so, to what extent?

Well, honestly, again, I would like to confirm that, okay, as it is clearly highlighted in our, let's say, the main item of our, let's say, strategic objective and, let's say, strategy. We want to lead the worldwide market in wireless charging. We want to expand in display driver. We can engage ourselves in, let's say, sub-PMICs, okay? So not, of course, a big PMIC of the smartphone because we know that today, it is, let's say, intrinsic, the value of the company. But okay, everywhere, you have an embedded processing solution. Generally speaking, you have a PMIC. And you know that ST is one of the leader in embedded processing solution. So we would like to leverage it and to attack and to be more and more present in the sub-PMIC, okay, part, both in Industrial, in automotive and in Personal Electronics. Well, then about specific point you mentioned or rewards, okay. Here, okay, it's -- again, when you achieve, okay, on -- with a customer like Apple because now it's a public number. Let's say, a turnover of about $2.4 billion, which, of course, has been driven by the success of the platform of this customer, but also what happened last year related to the digital style of consumer, okay, linked to the COVID. It's moving from basically less than USD 500 million 5 years ago is not by chance. It's because, okay, you have been able to proliferate many product with many, let's say, IPs, many technology. So definitively, okay, I will never comment now, okay, with this installed baseline of revenue, okay, which is okay. Of course, in 2020, a great achievement, okay, from ST, plus/minus, okay, one product because I cannot. But believe me, okay, when you have this widespread range of product portfolio and platform address with an important customer, yes, time to time, okay, you win sockets, you will lose sockets, okay, this is the day-to-day. But last comment I would like to do, believe me to move, okay, from this revenue well below USD 500 million to USD 2.4 billion in a few years is not a question of opportunity. It's a question of the best products, the best IP, solid execution in design and very, very solid and reliable operation in terms of supply. And this has a value. And now, this is a business, okay, we would like to sustain, we would like to develop, but not, let's say, with a strategic view, but not to comment, okay, each single socket in out, which is with the magnitude of the business now is, let's say, for me, not adequate.

That's very clear. One other question from the investor side is around, obviously, high growth sort of accelerated recently. But supporting that growth into the future, do you -- did you take a look at various inorganic opportunities that have presented themselves across the European space? Or are you focused on developing onetime solution?

I'm not sure we capture your question, Dominik.

Sure. I think there was some disruption on the line. Broadly speaking, how do you think about organic versus inorganic investment? Obviously, there's been a lot of consolidation in the industry and just in the last few months. So should your thoughts there?

Again, we have a strategy to achieve, okay, the famous $12 billion as fast as we can. And clearly, the current situation we are facing we have to manage properly in terms of allocation is an acceleration path, demonstrating, okay, that our, let's say, organic growth strategy and acquiring, let's say, a small company to, let's say, fill some gaps in terms of IP or product, okay, where adequate, to put the company on this trajectory. And we will continue. The management is -- the operational management, product management is totally focused on this objective and to achieve, as fast as we can, a solid, sustainable $12 billion and with a sustainable profitability. But on the other side, we look the market dynamic, first in terms of product because it's important to confirm, let's say, every day, that we have all the IP, more in our embedded processing solution. This is what we have done on connectivity. I would like to complement and to push on artificial intelligence, okay? Definitively, we have to accelerate, okay, our standard microprocessor road map. Everywhere, okay, we have opportunity to accelerate consistently with our strategy through a small acquisition, we will do it. It is valid as well on power. Here, we have done it. I do believe that here we are, let's say, already there is no gap to fill. We have all the wide bandgap capability. So SiC again, low-voltage IGBT power. On module, we have both internal strategy plus partnership. Maybe we will expand some partnerships on module to continue to compete, okay, with the main player in the market. Now, on analog, definitively, here is more a question of, let's say, bandwidth in terms of design, in terms of product engineering, in order to capture, to attack more market and leveraging, let's say, the other solutions. So the embedded processing solution and the power solution. Again, here, this is the same. So each opportunity, we will grab. And if we are convinced, okay, that it can boost our expansion on analog where here versus a leader there is some gap to fill, we will do it. But on sensors, MEMS, okay, we have, let's say, -- what we did on the MEMS we want to focus on and on optical sensing solution as well. And here, it's a same approach, okay? If there is one specific IP block or technology know-how, we do believe it will be critical to support and sustain our strategy, we will do it. So this is the overall picture of the company. And sooner or later, when we will update the market, the stakeholders about our model. So I expect, okay, the $12 billion will be delivered sooner or later. But we will define the next step. We will confirm this, if okay, we do believe we can do it for organic growth, which maybe, okay, will be the case. Well, besides that, it's my duty as a CEO to look, to be aware about, let's say, the opportunity we may have on the market. Now however, we will always operate with, let's say, I guess, an adequate discipline in terms of acquisition that -- yes, okay, if we do something, okay, we will pay it at the right fundamental value, okay, with the synergies, okay? But we will not make resisting, it is clear.

That's very clear and lots of exciting areas for growth. Unfortunately, that brings us to the close in terms of the time we have allocated for today. There's more we could discuss. But I appreciate the management team's time. So thank you to everyone, for the investors who asked the questions. And thank you to Jean-Marc, to Lorenzo Grandi and to Celine Berthier from Investor Relations. Thank you, everyone.

Thank you.