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

I'm Chris Danely, your friendly neighborhood semiconductor analyst. I'm not Andrew Gardiner. He unfortunately had to stay behind. Something about refusing to travel to the colonies or something like that. But any way, I've been asked to use an American baseball term, pinch-hit for him. It's our pleasure to have STMicroelectronics, one of the leading semiconductor companies, and we've got the dream team here, Jean-Marc Chery, the CEO; and Lorenzo Grandi, the CFO.

So I'm just going to go through some broad-based questions at first and then turn it over to a couple of financial questions for Lorenzo. So Jean-Marc, maybe give us your perspective since you guys are so broad based on demand trends overall this year, especially there in Q3. Where do you see business trends as being a little bit better or a little bit worse than expected? Where are you feeling more confident or less confident as far as your business goes kicking off with that.

So maybe if you remember well, if we're moving backward, entering the year, we provide to the market a range in terms of revenue between [ $17 billion to $17.8 billion ]. It was at our Q4 earnings announcement. And it was after the Las Vegas show. And it was after when China decided end of November early December to reopen. And ST, okay, this range of revenue was based on a very solid and strong backlog on automotive, driven by, okay, the transformation that everybody knows, electrification, digitalization and ADAS, driven by the industrial part of renewable energy, power conversion, transportation, where everywhere the industry is transforming itself, okay, to -- for decarbonization and so on and so forth. It was based on the visibility provided by our engaged customer program, on personal electronics, computer, computer peripheral and communication. And it was based on noncancelable order and capacity reservation from medium-sized OEM, okay, to address -- hold the market. We always communicated that we do believe that we can be on the upper range -- upper part of our range if China recovered in Q2 and if the consumer market personal electronics, okay, will recover smoothly during the year. This didn't happen. That's the reason why okay, recently at our Q2 earnings, we confirm the midpoint, clearly, we narrow the range, which is, let's say, a business as usual range to, let's say, integrate random event you may face. But clearly, because moving during the year, personal electronics, computer peripheral, personal computers and specifically China, didn't recover as expected speed that we anticipated entering the year. We will deliver [ $17.4 billion ]. All the rest of the business performed as per our expectation.

Okay. And between China or the consumer/personal electronics, has either one of them been a little better or a little worse, any difference between those 2 markets?

No, it's clear if you deep dive in personal Electronics. But clearly, even if we have seen entering in the year versus, okay, the visibility provided by our main customer, we have seen adjustment, but we are used to see this kind of adjustment. But it is clear that this year, okay, the growth is limited, but they performed pretty well. Where we have seen, let's say, really the market weak on personal electronics is clearly the China phone maker in a significant extent and in a lesser extent, the Korean one. But clearly, China phone maker has been heavily impacted by the market down cycle on mobile phone, for sure.

Wait, let me guess, sorry. So let's talk about the good news first. Some of your competitors have been talking about their automotive and industrial business slowing. You seem to be saying the opposite. And there's other semi companies saying the same thing, too, that auto industrial is very strong. What do you think it's been about STMicro's auto industrial business that's enabling you to do well, whereas some other semiconductor companies are seeing some weakness there?

First of all, okay, it's important that I repeat that we are quite unique and it's not marketing, let's say, a sentence, we are quite unique why? Because ST is a unique company having the wide portfolio from power switches, power drivers, embedded processing solution, sensors, okay, MEMS, optical sensing solution and analog to address this market. And never forget that we are also participating to the high-end digital part of the automotive through the partnership we have with Mobileye. So clearly, we have taken advantage of all the high-growing application of the automotive market and of the industrial as well. So that's the reason why during our earnings in Q2, we confirm that, okay, this market are very solid and have driven the growth of ST. And that's the reason why, okay, in 2023, clearly, the growth we will have in automotive will clearly overperform the market, okay, and on this industrial as well.

Okay. Great. And we still have some room left to go in the year. Where do you feel best? And where do you feel most nervous about in terms of end markets or verticals?

It's not a question to be nervous, okay, we know it's a question to adapt yourself and to be resilient. And this we know. Now clearly, China didn't recover at the expected speed. When we discuss, okay, with our customers, we don't see now a recovery this year. It is clearly postponed Q1 or Q2 next year, not before. This is what is China related, clearly. Then personal computer are [ derived ] most likely, okay, similar path, our customer are telling us that, okay, they don't see, okay, to move out this down cycle before, okay, the first half of next year. Well, this is where we have to adapt ourselves. And this is where we have to adapt the inventory we have in the distribution channel in order to take into account of the POS. Because now, clearly, we go back to normal situation where inventory at the right level and you have to adjust your POP to the POS of the end market. And this end market, China and specific personal electronics and consumer must be put under scrutiny because we do not expect a strong restart of the growth, okay, before the first half of next year.

Okay. So let's transition into 2024 and your thoughts on the various big end markets for ST. Maybe start with auto, what are you most positive about for auto in 2024? Do you think it can grow in 2024 for the automotive market?

Yes. Okay. Auto will be clearly the growth driver of ST next year. Yes.

And how about the other positive end market for you guys, silicon carbide has done fairly well for not just you but the rest of the industry. How do you feel about silicon carbide for 2024?

For us, okay, this year, we will deliver $1.2 billion in the new. Taking into account, okay, all the programs we are engaged say, more than 90 programs, okay, customers, we are on the right path, okay, to be a $2 billion in 2025. Then in 2024, okay, coping the same transparency we have since 3, 4 years on a number of programs, okay, revenue we expect, we will provide the visibility. So it will be between the $1.2 billion and the $2 billion of 2025. But this, okay, we will know -- we know, but we are looking at the various scenario. We are still under allocation between automotive and industrial markets. The demand we have on industrial market is much higher than the demand we can sell. We are working harder to push our manufacturing. And when, okay, we will have the, let's say, the high-level confidence of the maximum throughput we can deliver, okay, we will provide the indication. But this business, okay, for sure, is one of the key growth driver of ST for the next 3 years and beyond.

Great. We'll dig into it a little more later. I guess, Andrew, really wanted me to ask about the ADAS business as well. So how do you see trends shaping up for ADAS in 2024?

ADAS, okay, for us, we participate to the vision processor or the main processor with our partnership, okay, with Mobileye. Well, clearly, 2023 has been -- I say, has been because I consider is the other one, has been a year where we have been capable in cooperation between them, ourselves and the supply chain partners like TSMC or the substrate maker and so on, to support Mobileye and business and to support Mobileye, building, the contractual inventory in most warranty to carmakers. So this is done. . In 2024, it will be a year where ST will provide the same demand of Mobileye. And we know that because inventory buildup has been done. And we know that the ADAS market, okay, is a growing market because sooner or later, if you want to be compliant according to rules everywhere in the world, you have to be equipped, okay, your car with Level 2, Level 2+, okay, ADAS. Clearly, in 2023, we have seen in the second part of the year, adjustment of the end demand because of China cars, but this is done. Now it has been adjusted. So yes, '24 will be another year where Mobileye is a material customer for us. Well, then we address more widely this market with peripheral components. But okay, we consider it's, let's say, our automotive business, I like to say, nothing specific.

Great. One other thing that Andrew wanted me to ask you about was just as you look at your total 2024 bookings because now we're in September, I guess. How is 2024 shaping up from a bookings perspective? And have you guys seen any changes, either continued strengthening over the last 3 months? Have you seen any sign of orders easing or push ourselves like 2024 as a whole sort of evolved over the last couple of months for ST?

It is clear that for our, let's say, diversified semiconductor, let's say, landscape, '24 will be a different year than '23, in a sense that you have basically 3 different dynamics. Dynamic #1 is, again, the transformation of automotive and industry. Our customers, they are still in the middle of this transformation. They cannot take any risk about the supply. So they discussed with us, they have negotiated, okay, agreement, capacity reservation or they have given us the right visibility. It means, okay, we have the backlog for 2024. And now we start to discuss beyond 2025. So this is one dynamic. Then you have the second dynamic, which is more industrial mass market for, let's say, automation, robotics, this kind of stuff or, let's say, activities which are more fragmented. Clearly, the main difference between entering '23 and entering '24 is the fact that [indiscernible] totally normal. So we faced during 2023 a book-to-bill, which has been below parity because customers, they have acknowledged that now the lead time are basically below 3 months. And they will provide the visibility they consider adequate with the business they manage. So for sure, entering in 2024, we will have not this 4 quarter of backlog. We will have 2 quarter or 3 quarter of backlog. So this is the dynamic we are seeing. And okay, it is consistent with the expected growth we will do next year on this business. But then there is a third dynamic, which is the one I described a few minutes ago, related to consumer. So personal electronics of the China ecosystem and the other phone maker than our main customer, where we have a clear visibility on 2024. Then all the smaller electronic device. This, okay, is question mark because the visibility is narrow and it's difficult, okay, to anticipate when, okay, the market will move out this inventory adjustment cycle and this down cycle. So this is something for sure, we clearly monitor and put under scrutiny in partnership with our distributors or in direct discussion with our customers. I think this are 3 years that we've been in.

Yes. And I think one thing that helps ST is you have a lot of these long-term contracts that you've signed and have mentioned. Can you talk about your sort of backlog coverage for the long-term contracts for the next, let's say, 1.5 years or for 2024?

Well, our long-term contract. In fact, it is clear that '21, '22, we have seen a disruption in the way the carmaker, they manage the supply chain of electronics systems between Tier 1, Tier 2 and various contract manufacturer. And clearly, today, ST, we have basically 15 carmakers having a contract with us for capacity reservation. And we have the visibility, '24, '25, '26, '27, that's good.

And has there been any attempt to renegotiate any of these contracts up or down?

Absolutely not. No, absolutely not. Then it's important to say that this is to address the automotive market. Then during the shortage period in 2022 and still in H1 2023 with a small OEM, we have negotiated, okay, noncancelable order approach to warranty them allocation. But this now is normally over, okay, because we come back normal situation.

So you're still seeing more and more customers come in and try and sign more contracts?

In car industry, yes, it is okay. Clearly, again, I repeat, they cannot afford the risk to be put in a trap during the transformation of their market -- marketing approach by semiconductor shortage, okay? So clearly -- and including the Chinese, okay? It's not only the Western companies or Korean companies or the Japanese, okay, it's all the industry that has this approach.

One other positive that we've noticed about ST is pricing. I think on your last conference call, you said pricing was better than expected. Just clarify why you think pricing has been so strong and the outlook for pricing into next year?

Again, it's clearly consistent with the market dynamics, okay? When we are addressing the automotive industrial and so on, what is important, price has been discussed, negotiated, okay? We have long-term agreement and so on. So it's a no-brainer, okay? Then when we address our custom design product with engaged customer program, same. Then when we discussed about mass market distribution, we are coming back to normal situation. So you have the pricing erosion smoothly across the years, okay, on legacy, then you introduce new product, okay, to absorb this pricing erosion. So this is totally business as usual. Specifically on Q3 and Q4 again, we have decreased our gross margin versus Q2, but only impacted by the unused capacity we have, okay, all the other factor has been a drag.

Yes. I'll talk with Lorenzo on the gross margin issue in a second. So I guess to sum that up, there are certain executives out there in semis that are saying that we're in sort of a new era of pricing, and it's never going down again. And then some others are saying that eventually pricing will go back to "normal" industry conditions. I guess, your stance as pricing should go back to normal at some point? Or do you think that we're in a bit of a new era in the semis?

What is -- is the same point, okay, when we face the shortage period, okay, shortage period, clearly, okay, when you put the industry under allocation, at a certain moment, you have to decide about rules, okay, or you allocate your capacity. And you don't play opportunistically, okay? You play through your strategic agreement and so on and so forth. For sure, okay, facing this situation, okay, your pricing power position is great. Is everybody expected that this will last forever? No, nobody. So we have not changed our pricing strategy. We do believe that our manufacturing is very strong, okay, because we have 200, 300-millimeter fab. We have many opportunities in the pipe to improve our silicon carbide efficiency from manufacturing cost point of view. Our [indiscernible], okay, let's say, well depreciated and very efficient. And then, okay, yes, we have 20% of our business related to foundry, and we have diversified from resources. So we do believe our supply chain is totally equipped and consistent with, okay, the market we will address. But new era, old era and so on and so forth. Now we face a shortage situation where basically, okay, it has transformed radically the industry on the automotive, with the carmaker, where instead, okay, through the Tier 1, I like, don't misunderstand my assessment, we are managers, okay, to say, you need to warranty 20% capacity available. You need to decrease every year 5%, okay, the price and blah, blah, blah. This is over for sure. Then the rest, okay, is business as usual. Again, legacy price erosion, new product introduction, you need to deliver the best quality and so on and so forth. This is yes, where we are.

Very well said. So let's talk about silicon carbide. Clearly, one of the best growth areas in semis and thankfully, it's -- you guys are part of the big 3, right, ST, Infineon and ON. I remember earlier in the year, you were saying $1 billion in revs for silicon carbide this year, and then you raised it to $1.2 billion. Was that increase just a function of you getting better supply or better pricing? Maybe give us the reasons why it went from $1 billion to $1.2 billion for this year.

It's because of our manufacturing throughput, silicon carbide is across the value chain is an activity, I follow on a weekly basis.

Weekly?

Yes.

All right.

Because, okay, we are in permanent ramp-up, okay, since many years now. And we are, let's say, not investing, okay, so overcapacity. Again, we are not capable to supply all the demand we have between automotive and industrial market. So for sure, this year, we have increased, okay, when we have increased our level of confidence of equipment receivable -- raw material receivable from our supplier because I have to say, they faced some random accident during the year putting in jeopardy, okay, their capability to supply our needs. But when we have fixed all these issues, we were confident, very confident to deliver the $ 1.2 billion. And on top of that, we have seen, okay, the diversification strategy we have started many years ago out of our main customers, okay, starting to ramp. So this makes us confident to give this guidance.

Yes. Great. Another question is just on the competitive environment. So in addition to the big 3, it seems like every other week, China is announcing some domestic supplier or domestic competitor to silicon carbide. How do you assess the competitive environment? And what do you think ST Micro's competitive advantages are?

We have anticipated, okay, this trend, which is not visible today. You have no Chinese device maker supplying the car industry, okay? They are supplying diodes, clearly, for the industrial market. They are supplying raw material, but there is no main Chinese player, device maker. We respect a lot the Chinese industry and the Chinese player. That's the reason why we have considered that strategically, in 2023, it was the right time to set up a strategic agreement, building a JV in China with Sanan is very well known, where we will have built a 10,000 wafer per week capability 8-inch where Sanan will build, okay, the raw material facilities to supply through JV and to address the Chinese market, where all the carmakers I have visited last year before they resume, okay, the situation on private, okay, discussion. In Q1 and Q2, they see very positively the fact that ST will support them with the right technology with the right product know-how with the right quality, their industry. So we have anticipated this move. Then we must be very careful to consider silicon carbide as a future community. It is wrong. The technology effort you have to do, the quality you have to warranty, the wafer size conversion 8-inch and most likely one day or another will be 12-inch, okay? It's a big challenge, big technical challenge. And you will see many innovation coming in silicon carbide. So this is by far not a commodity. But it is clear that China because, okay, they see this technology as a key enabler of smart mobility, electrification and the big decarbonization of the industry. Inverter for wind farms, inverters for solar cell, big motor control, they don't want to repeat the story of memory. So yes, they want to have an industry that warranties their supply. This is ST is doing setting the JV in China.

Okay. By the way, do you disclose the margin profile of your silicon carbide business? And as it ramps, do you think the margins will go up? Could it be accretive to corporate average gross margin? Do you guys talk about that?

Silicon carbide, okay, will contribute to our, let's say, economical model, okay, because economical model is, let's say, the result of the product mix, okay? Gross margin, okay, for sure, you will have product with higher gross margin than the reference of our economical model and product with lower gross margin, not because they are weaker but because they have less software content, there is less, okay, hardware design content. Typically, it's power electronics. But from an operating margin point of view, for sure, silicon carbide will be a key contributor to the 30% operating margin we target.

And one potential large customer for silicon carbide Tesla talked about a 75% reduction in silicon carbide. I'd appreciate your thoughts on that. How do you think they're doing this? Are they coming out with like a cheaper, lower-end car? Did they suddenly strike gold and figure out how to do this? Or what do you think happened there?

There is, let's say, well, the best is to as to -- well, why he has this strategy. But we know very well that they want to build in by design flexibility, okay? And flexibility for 2 reasons. Reason #1 is flexibility in terms of application cost of ownership and flexibility in kind of supply. Remember that during the shortage of semiconductors, it has been proven that Tesla has been one of the most efficient company capable to adapt itself to the shortage. So clearly, this 75-25, so inverter by design, okay, enabling a mix-and-match strategy is for flexibility, cost of supply. That's the reason why ST always said that the winning company in the power electronics are the broad range one. Company capable to deliver IGBT, GaN, SiC, high-voltage, low-voltage MOSFET, power driver in BCD 9, 10, module, package, good [indiscernible] the way to address the go-to-market in a flexible and broad range manner. This is a winning recipe. So for us, okay, it's a no-brainer, okay? Is a customer behavior, okay, to build in flexibility so we will address it. And we have seen, yes, the customer, okay, with a similar approach definitely. And for us, okay, it's absolutely not a no-brainer.

One more question on silicon carbide before I start to pepper Lorenzo with questions. What's your opinion on how the market silicon carbide will shake out in terms of automotive versus industrial? Do you think it's going to end up being like 2/3 automotive and 1/3 industrial? Or if you had to harbor a guess?

Today, okay, the ratio is 75-25. Certainly, it's not representing the exact ratio. We can expect more something 60-40 or 65-35. Clearly, as usual, the industrial market is more fragmented. Volume you can extract are lower. That's the reason why you have to address this market fully integrated. So providing application-specific on our module [ your die ], okay? And of course, to well address you must be integrated. When you address the automotive, you will have a mix and match go-to-market approach. You will have either the carmaker, they want to do their own module, custom design and they invite you to participate or they will do their module by their own and you have to provide die in the package or die. This is okay, the different, let's say, go-to-market approach we will see. That's the reason we again, only broad-range player, longer run will be the winning company.

Got it. Okay. Time to switch over to Lorenzo here. Let's talk on gross margins, like Marc was talking about earlier. Can you just give us a sense of the drivers of gross margins up or down going forward? And then maybe reference your gross margin guidance from the previous quarter's conference call.

Good morning. Yes, I can talk about the dynamic of the gross margin. At the end, the evolution of our gross margin this year it's mainly driven by what Jean-Marc was introducing at the beginning. When we entering the year, our expectation was, let's say, over the indication that we gave be more on the high side of our, let's say, range than midpoint. That's why in the first half of the year, actually, we were preparing for a stronger second half, let's say, moving towards the [ $17.8 billion ]. This was resulting and the fact that China was not recovering at the speed that we were expecting. The fact that the personal electronic was less stronger than expected. The fact that on the computer also, let's say, we have some demand erosion. At the end, let's say, we ended the second quarter with an inventory that was higher than our expectation. Then we decided put under control the situation. And this is the reason why in the second part of the year, we will have unloading charges in our fabs. We will not produce a full load. This will impact in the range of 100 basis points in the second half of our gross margin. So the first part of the year was slightly above 49%. The 100 basis point is lost in the second half due to the unloading charge. Then as you know, we will end the year as we were anticipating slightly above 48%. So it means that the second part there is still in the mass around the 100 basis point, let's say, decline with respect to the first half. This is mainly driven by 2 effects. On one side, we have the full impact of the inflationary cost in our manufacturing. Our manufacturing, let's say, will pay in the second part of the year. Part of this cost and now is sitting in the inventory, let's say, selling this inventory during the second part of the year will impact our P&L. And then we have the ramp-up of our 300-millimeter in the [indiscernible] This second element is there, is not the main one, but it started to be visible in our gross margin. So at the end, in the second part of the year, our gross margin will be in the range of slightly above 47% and the total year will be slightly above 48%. If you exclude, let's say, the impact of the unloading, you see that in the second half will be in the range of 48% that we consider including that in part of the 300-millimeter start-up, let's say, a little bit the baseline in which we enter for the next year in terms of gross margin. The other impact, let's say, mix pricing substantially offset the job. It's not as significant, let's say, component of our gross margin in the year.

Okay. And then do you think that if next year proves to be a better year that the utilization rates will start to rise in the first half and your inventory will be about where you will...

Our expect -- yes, of course, it depends how fast it will be the recovery, let's say, that we can expect from the market -- big markets like the one in China. Yes. In any case, yes, we think that progressively maybe not immediately in Q1, but progressively, let's say, this impact of unloading will going to disappear during the 2024 next year.

Great. I think we're out of time. Thank you very much, gentlemen.

Thank you.

Thank you.