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

Okay. Good afternoon, everyone. Jean-Marc, welcome to San Francisco. We've got Jean-Marc Chery, he's CEO of STMicro.

Maybe just to kick off, you can talk about the momentum going into first half of the year. You gave a pretty good guide to Q1, talking about above seasonal aspect there, $3.04 billion. But as we've seen in a few weeks of this quarter already go by, are we tracking to those levels? And what other dynamics do we think we should be aware of for the first half?

I confirm that for the first half, the dynamic of booking we receive will enable us to do better than the usual seasonality in Q1. So we confirm our guidance. We have seen some distributor in Q1 that for the first year since many years, Q1 in Asia will be better than Q4, which is a pretty great sign because in Q1, you have the Chinese New Year. So to have Q1 better than Q4 is a signal that -- showing that something is happening. And in Q2, we confirm as well that to be at, let's say, seasonality, so plus 3% is at least what we can deliver. And the overall coverage to achieve this H1 that will be a significant growth compared to last year. Our backlog coverage is between 85% to 98%. So you see the confidence level today. Overall, for ST to grow significantly year-over-year and to do better than the usual seasonality is there.

Perfect. Super. So I mean if we think about now the puts and takes as we go through the rest of the year and how the phasing works, H2 on H1, maybe referencing things like mix and utilization, pricing and even the under-absorption on FX, how does that all impact margins as we go through this year?

To speak about H2, I think we have to go by segment. Well, on automotive first, for ST, the positive point is that we are now without any other inventory, so our major customer, OEM, the Tier 1, they are clean over inventory. The only headwinds we still have in 2026 is capacity reservation fee that will disappear basically over the year. So it means looking at the seasonality, we have usually on automotive, we can expect to have H2 growing. So contributing. I repeat, to the usual growth of H2 for ST, which is 15%. Industrial market, more clearly, Industrial Market, it is not a secret that what is related to power industrial. So all the power management or the thermal flow management for AI data center and power energy is very strong and clearly, our microcontroller general purpose analog and some Power and Discrete are taking benefits of this dynamic. What we call smart industrial, so factory automation, as an example, China is very solid. Asia Pacific is growing. Europe, we believe we touched the bottom in Q1, and we see sign of improvement. Americas, so far stable. What customers told us that for consumer industrial, inventory are clean and they expect to have H2 growing. So clearly, for ST, Industrial in 2026 will really contribute to the growth year-over-year and to the growth H2 versus H1. Personal Electronics. Personal Electronics, we don't expect to have growth overall year because the memory shortage impact, but we will have a growth H2 versus H1, maybe a little bit more moderated compared usually because the phenomena for our main customer would change a little bit, the introduction of new device profile because last week, they introduced a new one, and they will introduce foldable that has a deferred bill material for us. But there remain 2 interesting driver for ST over the cycle. First of all, it is low earth orbit satellite communication. But here, we receive significant upside that will enable growth for ST and that's the manufacturing of ST can support. So this will be clearly a very solid contributor of the growth -- of the goal H2 versus H1. More last, but not the least is AI data center. So AI data center, if we make it simple, you have 3 flow, you have the network flow. So from processor to data exchange. You have the power control management flow, where you know that ST is not yet really present, but this will come. And you have the thermal flow, so all the utilities, cooling and so on where we are. Well, clearly, the network flow, we see really, really strong acceleration of the optical cable. That we're supposed to start next year, Q2, Q3, but that will start in Q2 and strongly accelerate in H2. So this will contribute to a very solid growth of ST, H2 versus H1. So that's the reason why, okay, when at the earnings, I told more H1 seasonality better and H2 15%. This I confirm and most likely with the current dynamic we are seeing and with a booster on top of the cycle, this is what we can deliver.

Okay. So a lot to unpack there. Maybe we'll come back to some of that. Maybe let's start with data centers. So you have the strategy to be a sort of foundry supplier on silicon photonics and BCD technologies, but obviously, off to a great start with AWS partnership. Can you maybe just help us understand the timing and the potential size of the revenues coming out of that partnership?

Well, here, okay, if we look overall, the AI data center, so the 3 flow and we had also the data storage. Basically, ST today, we have 380, 390 products part of the bill of material. So we have 250 from analog and power, and we have 135 from microcontroller and RF optical device. So compare what we said end of January, so that this year, we can deliver USD 500 million. So thanks to the first effect of the AWS contract, but amplified by the acceleration of the demand on optical cable, this year, I can say we will be nicely above $1 billion -- $500 million nicely. And next year, well above $1 billion. So we have really boosting effect from the start of the optical cable and from the benefits of our overall AWS contract that I repeat is a multimillion-dollar contract for the next 5 years that will start this year and moving forward will grow. So this is the positive news, I have to say, since January, February, so I was last week in Taiwan, of course, discussing with a company and in China, working on optical cable. You know that ST provide as a foundry silicon photonics in 12-inch, which enable our capability to go fast. We provide electronic ICs. So it's the driver of the laser, in fact. And we provide the microcontroller. And we can start to see tension on this kind of microcontroller where the lead times are increasing. So that's the reason why because of the situation on microcontroller and the industrial market coming back to a positive trend. We have a customer to put the order to give us the visibility because if not sooner or later, okay, microcontroller could come back to some tension. And by the way, the lead time for micro now are between 10, 14 weeks up to 28 weeks.

Okay.

So this is the situation.

So you can step in and relieve some of that tension on the lead time given your position. Maybe just an addendum to that, the split between maybe playing into transceivers market, pluggables market and the CPO that is emerging. Is that an interesting split for you? Does that obviously change over the years? And how does that change?

No, we received already some demand for programs moving to CPO, but more next year, more mid- of next year. But short term, I think it's important that the supply chain adapt all the device. Well, as an example, today, a limitation factor on optical cable is laser. Then silicon photonics, sooner or later, microcontroller, DSP possibly, but laser and silicon photonics, sooner or later will be a limitation factor.

Okay. Makes sense. And maybe we jump to automotive. It sounded like in there, we are going to the end of the inventory correction. It seems to be consistent with other speakers at the conference. So maybe to your platform, how would you talk to that? Are we at the bottom in Q2, and then we ship to end demand? And maybe could we talk about a recovery or is that too soon at this point?

No, on automotive, okay. For us, now is more to understand the regional approach because okay, America, as you know -- in Americas, [ the story ]. The carmakers, they come back on more thermal combustion engine technology. And for sure, the demand on electrical powertrain is slowing down. Our main customer for electrical car so far this year will not be a decrease for us, will be an opportunity of growth. This following recent discussion we had with them. On Europe, now the visibility in Europe looks better than 1 year ago, 2 years ago. So the strategy of the main carmaker is more clear now compared to 1 year ago, whatever BMW, Daimler, okay, and Volkswagen. So for us, it will be an opportunity of growth. And the Tier 1, by the way, they have no more inventory correction. And then sometimes, okay, there is escalation of shortage on some [indiscernible] technology. APEC. So Korea, Japan, so far, so good because they are on hybrid car model mainly, so very stable. Well, what we have to monitor in China. So by in China, the forecast is 30 million, 31 million, 20 million vehicle -- new energy vehicles. So mix, hybrid and electrical. But we know that in China, the profitability is low. So here, we have to monitor exactly what will be the dynamic in China for exportation of car and the internal market. Again, I repeat for ST mechanically boosted by the fact that we have no more inventory correction to show a growth on automotive in 2026 between mid- to high single digit will not be a surprise.

Okay. And I think when you discussed earlier, you touched on some of the shortages affecting end demand, but you referenced handsets. You also referenced some design wins with your leading customer and how that might change the phasing through the year. Can you just repeat the phasing and the impact from the design wins, but help us understand really the impact of these shortages, particularly DRAM, as indirect on you guys?

I may bore you. I guess everybody has understood when you have the DDR4 price multiplied by 5 and DDR5 by 3 for the consumer or low end or middle end device, the bill of material is no more affordable because if they adjust the price, they completely consume the profit. So clearly, and in a shortage period, people will allocate the capacity to more high-end device and so on. But sometimes you have no choice. So yes, I know there is a number about smartphone that will decrease by multiple 10%, but we found it excessive, but as far as ST is concerned, as our main exposure is with our main customer, we do believe they are covered in terms of memory supply. So again, I repeat for us what is important is to follow their plan for the year. We know that they introduced at a different time compared to last year. So we have changed our revenue forecast accordingly. And again, the foldable phone has a different build of material. So, so far as a matter of results, we believe ST Personal Electronics in '26 will be a transition year, means a very low single-digit growth, no more impact than the one we could expect on low-end smartphone.

Okay. And when we lap that, the subsequent year, growth should be stronger for the ...

Yes, Indeed.

Got you. Maybe if we jump to industrials, I think it's one area that we left out there. It looks like inventory normalization is progressing quite well. I think you do have exposure to consumer industrial, but also, I believe, factory automation as well where orders do seem to be improving. Maybe just help us understand what is the hard evidence for this to be a strong growth year? Or what would be the level of growth for this year for industrial generally?

You know the KPI are [ classified ] in inventory turn and distribution. So for us, in our model and distributor is between to have 2, 3 months of inventory where in China, we are below, well below. In Asia Pac, we are in the target or below the target. So this is the sign #1. The sign #2 is a POS increase. So POS is increasing. We still control the POP clearly to finish, okay, to adjust the pocket of inventory. We are here and there, mainly general purpose analog and some discrete. But the positive sign is the POS. And again, I repeat what I said a few minutes ago, main distributor in Asia will see Q1 '26 better than Q4, including Chinese New Year and it's not because they have an effect before Chinese New Year of inventory buildup, it's because overall, this is something positive. By application, I repeat Power and Discrete is going very fast, driven by AI, but also energy, supply and commercial and transportation. Smart Industrial in China are accelerating APAC as well. Europe is starting. Qualitatively, between distributor in Asia and some customers in America, they saw that H2 consumer industrial could increase again. In H1, inventory are clean. So far for the time being is soft, but they expect really something growing in H2. That's the reason why we told to customers, please put orders, they commit that they will do it by April, May in order, okay, we avoid, okay, this panic that could happen because today, we have shortage in memory, we have shortage in passive. We start to have shortage in laser. So if we have this contamination of shortage, well after we have to pay attention to not go back to double booking and so on and so forth. So we have asked customers to say, please anticipate because we need to drive our manufacturing properly.

So slightly undersized channel, reinflation from an order book that has demand in the second half, but we're being mindful of double ordering at this point.

Yes, of course, we will monitor it carefully, taken the lesson of '22 and '21.

Makes sense. Maybe just staying with power then. Silicon carbide, I think you've called this out as being a decent year coming back to '24 levels. Specifically, it looks as though this is both EVs and in industrial. So maybe help us understand how are the drivers working as we started this year.

No, Industrial now with Tesla stop decreasing and the other program starting in Europe and in China, the priority for us is first, okay, to close our 6-inch ramp. Of course, in respect with the customer qualification timing and constraints, but it is a priority number one, okay, to go to a cost-effective 8-inch fab in China and in Catania or than to continue to introduce our upside in terms of technology. So now we start to give sample on the generation 5 and we prepare a generation 6 that will be a disruption, clearly, compared to the generation 5, even if we receive good feedback on generation 5. And again, this is a monetary condition for us to go back to profitability breakeven in 2027 on Power and Discrete and then to contribute to the operating margin starting 2028.

Got you. Okay. Very clear. Maybe if we could touch on pricing dynamics. We -- it looks as though we could be getting to the end of that price to clear phase. Just maybe if you can get some evidence of that happening? And what are the sort of types of price erosion you're seeing maybe in general purpose designs, analog power and maybe discrete generally?

No. Now again, on pricing, we are going back to normal, what we call the low single-digit price decrease. Well, as usual, in Q1, we discussed with the car industry, the price, but we didn't see this year something specifically strong. As usual, in China, the price pressure is higher. I do not exclude that sooner or later, very selectively, we could be in position to increase price on some products specific -- driven by some specific application, but avoiding to increase price across the board like memory, but specifically on application, lead time increasing, we could increase price selectively.

Got you. Maybe just turning to investments. I mean, you called out a CapEx over $2 billion this year, $2 billion to $2.2 billion, if I remember right. I just want to understand how does that spend split maybe across the $300 million capacity build, silicon carbide, advanced packaging and now photonics as well. So help us understand how do you prioritize that spend.

Clearly, for the next -- last year, okay, I repeat, we have done well below 2, at 1.8. As a whole, we want to stick with the CapEx equal or below the depreciation we have at company level. And this is enabling the company to go back to $18 billion revenue. Clearly, since a few weeks, we are seeing an acceleration of this optical cable. So where we have some specific equipment that we have to have on top of our capacity in [indiscernible] mainly we need to invest and pull in because the demand is permanently increasing for '27 and '28, but in significant magnitude, I have to say. So that's the reason why we say we can go $2 billion to $2.2 billion. And I repeat, we have the capability of microcontroller to use more foundry, we have 2 partners on microcontroller, it is TSMC and Samsung. On TSMC, they say that no, they will stop to invest on 14-nanometer or this kind of stuff. But here, we are covered. But with Samsung, okay, I do not exclude that we will increase our microcontroller activity in Samsung, keeping place, okay, in [indiscernible] for silicon photonics, by CMOS 55-nanometer to support this fastest increasing demand on optical cable.

Okay. Maybe just -- I'll touch on cost restructuring and then I'll open it up to the floor. Can you just maybe give us an update on where we are with restructuring, what sort of annualized savings should we expect? You've already engaged in a headcount reduction program? How is that going? And what sort of onetime costs should we expect this year and next?

You know there is 2 parties that is what is related COGS. Well, this will not be too much -- visible, sorry, in '26 because we are dependent to the qualification time of customer, and it's really complex. It's thousands of product transferring, okay, between the various 8-inch to 12-inch or 6-inch to 8-inch. So the contribution of this cost will be more visible exiting '27, where basically, it's 400, 500 basis point contribution to the gross margin. Expenses, we have already, let's say, in '25 and in '26 expense cost saving, so well above $100 million. But we have explained that on the expenses in '26, we have some specific headwinds. One was linked to the foreign exchange to dollar. But recently, we have seen is going down more, but I don't want to make a forecast on the dollar, I am not crazy. So we will see. But we have some inflation on the wage after 2 years where we contained a [ lot it ]. The nonrecurring additional costs we have is the cost related to the transfer of product and technology. But it is not recurring. It will cost an additional expenses for us. So means in '26, we will have a very few single-digit percent of OpEx increase, but we have the cost decrease linked to our program well above, it is 120, 130. And this will come again in '27.

So that offsets the inflation effectively.

Yes.

Got you. I did say it open up the floor, so I'll follow through on that. All right, not just now. Okay. So maybe I'll go back to -- we've seen some M&A from yourselves. You've recently acquired the NXP MEMS business. Just want to maybe understand how does that fit in as far as synergies, revenue, cost synergies and whether or not there is any dilution coming this year and next?

No. First of all, important to know that, okay, we were -- we cooperated with NXP as a foundry. So from a manufacturing point of view, the acquisition of NXP MEMS is zero risk, okay? Because we -- on the mechanical part, I have spoken. On the companion chips on the MEMS, we have an agreement of supply with them for the time we need, okay, to develop companion chips in our own factory. And as far as revenue is concerned, we have integrated and the backlog we have, okay, is consistent with this expectation. So it's a good deal for ST, it is accretive in terms of gross margin, will boost our revenue. From technology standpoint, there is really good technology block. And thanks to this acquisition, our MEMS will come back to the $1 billion club. We have capacity limitation, I have to say now. And you know that MEMS for the future what we call the intelligent sensing will open many opportunities linked to the physical artificial intelligence because sensor will be really instrumental. So I am really optimistic mid, long term with this acquisition. Now we have everything to address this new path on top of automotive of this physical artificial intelligence. So what we call human robotics or robotics, where sensor will be instrumental including sensor with some AI on board. So this is where we are. So overall positive. A year of growth, let's see the order coming, confirming and ST is boosted by optical cable. Agreement of AWS will open many other opportunities, including the power management and multimillion-dollar contract. Well, let's execute them.

Yes. Sounds great. I guess if I take a step back, we've seen good wins with sort of tentpole customers in different areas. So you've got Starlink in LEO. And you said, I think earlier, that's going very well. Obviously, you do very well with the iOS guys. Clearly, with Tesla as well. and it's -- you're a sort of strategic or technology strategic partner for a lot of these players. Where does this take you as a strategy over the next 5 years? I mean, where else can you go? And I guess I'm referencing the decision to be a BCD foundry here, doubling down on $300 million in Crolles. Should we always expect these tentpole customers and then maybe a fill out of the fat tail afterwards as a strategy or is there something else that we should be thinking?

No, I think about ST has demonstrated this capability to work in close cooperation-ship with this big customer. Maybe we can test different model with this big customer is to create ecosystem. So the big customer will enable us as a referral design for our product. We will put our product in their simulator. And by the way, they will deploy business, okay, making simulation and on robotics as an example, where we have no data, this is something that could happen in the future. So this is certainly a business model we have to develop, to be sure that we develop the right product in advance and the right go-to-market to capture the full essence of the application and not waiting that the customer drive us, okay? So it's point number one. The second point, I think ST is good performing to develop general purpose products like our microcontroller and so on and so forth. Where we have to make progress I say we are not bad, but we have to make opportunity of improvement is to better anticipate the application, the KPI, what matters for the application and to be sure that our product will enable KPI of the application performance. So it is what we call application specifics on our products. But this is where -- okay, I want to push the company in the near months, and that's the reason why we will set up some system engineering approach not spread across the various group, but more concentrated in comparison with our competent center worldwide and our marketing to better anticipate and this is certainly a strategic axis. But to work closely with customers and having a reputation on manufacturing to be very solid and don't put the customer light on is something, of course, we'll continue to leverage.

So quite interesting. You see the initial big customer play is a pipe-clean moment for you to get to ASSPs for that relevant market. And then you touched on robotics there as a plan. And I think we have heard you say that there's a large customer in the U.S. and one in China as well. Is that still the state of play in robotics for you?

Again, the human robotics, you will have a different way, okay? You will have go-to-market with some small player distribution. You will have big player integrated that will drive us and then you will have in the middle, some people that will provide ecosystem, simulation tool, test tool in order for customers to develop their ecosystem. It doesn't mean the guy will make the robot everything, but it will be capable to build a robot and then subcontract to different Tier 1. But it is a model of electrical car. So pretty integrated, but with some Tier 1 on some specific subject, software defined, okay? And design in advance using digital twins. Here, the components provider must been introduced in advance in order to provide the simulation of all the components to be sure that you are a full match with the need.

Clock's running against us, but maybe we got time for one question from the audience? All right. In that case, Jean-Marc, thanks very much.

Thank you.

Thank you.