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

So you mentioned flattish in 2026. How do you think about that in 2027 as some of these annual contract renewals come up?

Clearly, we are not yet discussing pricing for next year. Clearly, what we have increased this year will stay next year. We -- this is something that will not disappear. But I think that at the end of next year now, it's difficult to exactly say where we will position but will be a year in which clearly the price will be stable, slightly increasing or that is different from the normal situation that we usually see in our sector in which pricing normally are going down, let's say, I think if the situation -- and today, there are all the ingredients to say that will remain as it is today, there will be still a significant gap between the demand and the capacity available.

Maybe it's a good time to pause and ask if any audience have any questions. Yes, in the front.

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Sorry. Pricing, no, not really because today, there is, let's say, situation is such that at the end, let's say, our limitation is more in our ability to serve the customer then to try to use pricing, let's say, in order to gain as to gain, let's say, business. Today, as I said, we are facing backlog and demand that is well above our ability to serve the market. So reducing price and then not to ship is not really that we are thinking to do at this stage.

For your silicon protons, the business, are you targeting this specific end application like or CPRO? Or is that something that's kind of determined based on customers that you're working with?

No. In respect to this evolution MPO, CPO, clearly, we have all the ingredients to follow this in -- this will be driven by our customers. What we have in our hands, we have all the ingredients for this optical transceiver to be in the position not only with the products but also our ability for the packaging this kind of activity on which we are developing now this new application to follow the demand of the customer. So we feel ourselves well positioned in order, let's say, to continue to play a significant role in this activity. And this is what we plan and what we have better. We are confident in this respect.

Actually, I have a few questions. One, just I want to clarify something. When you talk about the gross margin improvement, you talked about multiple things, under absorption, but also closing down multiple factories. And you said sort of by end of next year, beginning of '28, that should be done. Is that going to be linear or just everything is going to remain in place. And then at the end of 2017, everything shuts down or will there be things shutting down along the way? That's one question. If you could touch on trends within the satellite and mobility business, just what you see there.

Now in respect to the gross margin, we have to say the following. Clearly, let's say, we will see moving forward from the 37 of today, progressively some improvement in the gross margin. The message that I want to pass is that the biggest improvement, it comes from the reshaping plan. The biggest improvement, the 400-plus basis point will come, let's say, when we will close the fabs. So it means that at the end, there will be a certain point at the closing of the feb -- when the Feb will be shut down a step function in the gross margin. This does not mean that moving forward from the Q3, there will be some reduction in terms of loading charges. There will be some reduction in term of, let's say, extra cost because at the end, we will and this activity of duplication and so on. So means that mid next year, this extra cost will be very marginal. There will be improvement in the mix. There will be improvement in the manufacturing efficiency. So we will see some progress over the time, let's say, in our gross margin improvement. But the biggest portion will come when we will be able to close the fabs. Here is where we expected a significant change in our gross margin. And this will come when we close the fab and when we close the fab, we'll be at the end of 2027, beginning of 2028. Of course, depending on the fact that our customers qualify the product because they need to qualify the product in the new fab. This is now our -- the underlying assumption is the qualification of the customer.

About satellite...

Sorry. On the satellite, this is a business that you know for us has been a significant business now today is a business that is reaching close to $1 billion. It's a business in which we will continue to grow in the next 3 years. Of course, now we have a position in terms of market share that is very high. Now with our customers that link SpaceX, we are now representing around of market share. This is not sustainable. When the business is growing and this business is growing, clearly, in our industry, there will be second source, these kind of things. Clearly, the good news that we see here is that this market is expanding with new entrants, in which we are well positioned to serve. And this is the reason why is that if one side with our historical customer, we may have, let's say, some decline in the market share even if compensated by the fact that customers is growing. On the other side, we will have, let's say, a new customer coming in. We are already shipping to new customers already today. So what we see for the next years, for the next years is that our revenue will remain cumulative well above the EUR 3 billion. And personal electronics. Personal electronic, clearly this year, we have a seasonality that is different in respect to the past. We have already commented because at the end, there are some factors. So one is the different way to introduce the product by our main customer. That is not like in the past that everything was done in the fall. Now they think to split, let's say, the way to introduce product. And this, of course, is impacting somehow, let's say, our revenue. And then you know there is this new [Audio Gap] We look at the average of this business, the average profitability. I would say that in line with our gross margin target. So at this stage, I would say that is accretive.

Any other questions? Maybe coming back to some of your comments earlier on automotive. What gives you confidence that the automotive recovery is more durable across demand, order rates and channel inventory?

But today, what we see in automotive is definitely demand that is strong. This is clear. We see also that this demand is not short term, but is covering more quarters. We see traction in silicon carbide. We see recovery in silicon carbide. This -- especially when we look at the European carmakers, we see, let's say, a positive trend for what concern this kind of -- We do not detect any inventory buildup. Here we see that as soon as we are delinquent in some of our products, especially in BCD, there is immediately escalation. So it means that, yes, clearly, there is no inventory in the channel. Unfortunately, you know, we had a little bit of up during Q2 related to our Singapore fab immediately, this was escalated by our customer because they were expecting that we have in Singapore is serving automotive for a significant push. So yes, this is the reason why at this stage, we think that this trend is continuing. Since the beginning of the year, we have seen the forecast of our customer moving up. that this is normally not what it happened. Normally, they start the year with a certain level and then moving forward, let's say, going a little bit down. Now what we have seen during this year is continue, let's say, upgrade up of the expectation of the customers in terms of demand.

In terms of sales channel inventory?

Yes. We are in a situation that in average, overall, we are back to be in the normal situation. But for some of our products, like for instance, our microcontroller is very, very lean. After many quarters, let's say, in which our revenues today distribute were lower than the revenue of the distributors to their customers. and which the inventory has went down. Now when we look at this inventory compare to the demand compared, let's say, to the final demand is really below what we consider a normal level of weeks that we should have an event or a normal level of weeks is in the range of 12, 13 weeks. Now we have a situation in which we are much, much lower than that. But I would say that at this stage, the inventory is more than under control in distribution.

Okay. And then maybe more broadly on silicon carbide. 2 years ago, investors were worried about EV demand. And today, the discussion seems to be shifting towards 800 adoption and accelerating silicon carbide penetration as well. So how do you see the silicon carbide opportunity more broadly evolving from here?

Well, as I was saying before, we see now, let's say, demand increasing in silicon carbide. Today -- to be honest, today, in silicon carbide, the limitation factor still is our capacity because we are producing silicon carbide 150-millimeter. Of course, we do not intend to invest in the 150 millimeter, but to move to the 200 millimeter, the silicon carbide. And here, we are back to the point of the qualification of the customer. So demand will increase. This year, demand is increasing. This year, revenue will increase double digit. The visibility that we have for next year in terms of silicon carbide for our revenues with the programs that we have in our hands is that we will be back at [ $11 ] billion. The move of the silicon carbide to 200-millimeter should significantly improve, let's say, the profitability of this line. But then we are, let's say, producing the new generation from generation 4, generation 5. So here, we see, let's say, a trend for silicon carbide that definitely is in the recovery pace.

We've got a few more minutes left. Any final questions from the audience.

So still on silicon carbide, can you share an update on the production ramp in the Catania facility for 10 millimeter. I'm still expecting profitability, no other than 2027...

In general, talking about the silicon carbide and Catania and the power and discrete. Taking about Catania, Catania is such as a facility that is quite effective in terms of cost. You have to -- not to forget that a significant portion of the investment in Catania has been subject to grants from the European union. So means that we have a really cost-competitive site over there in Catania. Now we need to move to the transfer. Clearly, today, it's not a secret that in our power and discrete, we are suffering a 6-inch production, the fact that we need to improve our mix in terms of technology and also in terms of mix of customers. But we expect that moving to 200-millimeter in Catania, that, as I said, is a cost structure that is competitive. Moving the 200-millimeter in China, Chongqing that, by definition, is quite competitive in terms of cost structure. This gives us the opportunity really to recover in terms of profitability in our Power & Discrete where, of course, you can understand silicon carbide is important portion. Even if it will take time because we are back to the point, let's say, that is not overnight that we can switch from one fab to the other fab. So -- but this is expecting that we will, let's say, be back to profitability at the end of next year, early in 2028, also in Power & Discrete.

Any other questions? Maybe just to finish things off, you talked about accelerating bookings, improving visibility. What are the key indicators that you're personally watching to determine whether this recovery is sustainable into 2027 and beyond?

As I said before, let's say, today, what we see in terms of demand, in terms of backlog is that is covering more quarters. Today, what we see is the fact that is extending and not maybe 1 or 2 quarters but well inside 2027. When we look, for instance, to the silicon photonics, as I said before, we have a long-term agreements covering more than 1 year, 2, 3 years. So at the end, this give us some comfort to say that, yes, this entering 2027 and moving forward, we should see, let's say, really, let's say, our top line growing at the first place.

Great. And that's a very good place to end things. Thanks again, Lorenzo, for joining us, and thanks, everyone, for the questions.

Thank you. Thank you.