Ladies and gentlemen, welcome to the STMicroelectronics fourth quarter and full year 2019 earnings conference call and live webcast. I am Alessandro, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Céline Berthier, Group Vice President, Investor Relations. Please go ahead, madam.
Thank you, Alessandro. Good morning. Thank you everyone for joining our fourth quarter and full year 2019 financial results conference call. Hosting the call today is Jean-Marc Chéry, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Infrastructure and Services, and Chief Financial Officer, Marco Cassis, President of Sales, Marketing, Communication, and Strategy Development. This live webcast and presentation materials can be accessed on ST's investor relation website. The replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning, and also in ST's most recent regulatory filings for a full description of these risk factors.
To ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. I'd now like to turn the call over to Jean-Marc, ST President and CEO.
Thank you, Céline. Good morning, everybody, and thank you for joining us for our Q4 2019 earnings conference call. Let me begin with some opening comments. Starting with Q4, we delivered a solid quarter. Net revenues at $2.75 billion, grew 7.9% sequentially, above the midpoint of our guidance of 5%, with all product groups contributing to the growth. Q4 2019 gross margin was 39.3%, 110 basis points higher than the midpoint of our guidance. This was mainly due to better-than-expected manufacturing efficiencies and improved product mix. Our operating margin was 16.7% and our net income was $392 million. Moving to the full year 2019, we delivered results aligned with the full-year expectation we provided in April 2019. Net revenues of $9.56 billion with a gross margin of 38.7% and an operating margin of 12.6%.
Our free cash flow for the year was $497 million, including CapEx of $1.17 billion, and our net financial position was $672 million. On Q1 2020, our first quarter outlook is for net revenues of $2.36 billion at the midpoint, a year-over-year increase of 13.7%. The gross margin in Q1 is expected to be 38% at the midpoint, including about 80 basis points of unsaturation charges. For the full year 2020, we plan for year-over-year growth outperforming the market we serve.
The broad long-term trends in electronic systems that we are focused on are driving demand for our products. These trends are smart mobility, power and energy applications, and IoT and 5G. We plan to invest about $1.5 billion in CapEx to support our strategic initiatives and revenue growth to progress towards our midterm revenue ambition of $12 billion. Now, let's move to a detailed review of the fourth quarter.
Q4 net revenues confirm our return to year-over-year growth that started in Q3. Net revenues increased 4% year-over-year in the fourth quarter, driven by analog, microcontrollers, imaging, and MEMS, partially offset by lower automotive sales. AMS grew 9.9%, MDG grew 7.6%, while ADG was down 4.5%. On a sequential basis, revenue increased 7.9%, 290 basis points above the midpoint of our guidance, with all three of our product groups contributing to the growth. AMS performed above expectations on strong demand for our key products for personal electronics. The two other business groups perform in line with our expectations, with a solid growth in MDG, especially in general purpose microcontrollers and digital ICs, and growth in automotive and power discrete products. Our gross margin was 39.3%, 110 basis points above the midpoint of our guidance, mainly due to better than expected manufacturing efficiencies and improved product mix.
This gross margin embeds about 100 basis points of unsaturation charges. Our net operating expenses were $618 million, in line with our expectations. Our operating margin was 16.7%, up 360 basis points sequentially. On a year-over-year basis, our Q4 operating margin was down 10 basis points, with an improvement in the AMS operating margin, fully offset by a decline for MDG and ADG. Our net income was $392 million, and diluted earnings per share were $ 0.43. Let's look now at our full year results. Starting with a recap of the market and business trends we saw during 2019. Clearly, during the year, we have operated under global soft market conditions, although with different dynamics for each end market we address. In automotive, we saw on one hand, very healthy demand for smart mobility applications, driven by the electrification and digitalization of car systems and platforms.
On the other end, the legacy automotive business, which is closely linked to the number of car registration worldwide, faced challenging situation, with global registrations down 5% in 2019. The industrial market and distribution have been operating under soft conditions since Q3 2018. Starting from March 2019, point of sales for our distributors in Asia restarted sequential growth. There was an acceleration in the fourth quarter with a return to a year-over-year growth. Since March as well, America stopped declining but remains flat. In Europe, we have not seen any recovery and it is still declining. In general purpose microcontrollers, the inventory correction at our distributors was completed in Q3 2019, while some excess inventories remain in general purpose analog and non-power discrete. In personal electronics, demand for our key product was solid, getting stronger during the year and exceeding expectations in the second half.
All devices, smartphones, accessories, wearables, contributed, with some early contribution from 5G smartphones. In communication equipment and computer peripherals, the hard disk drive market decreased as expected, dropping 13% in 2019 with a recovery in the second half. We saw 5G infrastructure growth, compensating the wind down of our legacy ASICs and set-top box business. Looking now at our results. They are in line with the full-year expectation we provided in April 2019. Net revenues were $9.56 billion, decreasing 1.1% year-over-year and within the range we had indicated. We had a strong H2, H1 growth of about $1 billion, driven by a stronger than expected contribution from engaged customer programs and new products. Sales to OEMs represented 70% of total revenues, while distribution represented 30%. By region of origin, 38% of our 2019 revenues were from Americas, 33% from Asia Pacific, and 29% from EMEA.
In terms of revenue by product group, two of them grew while one declined. ADG revenues increased 1.4%. Revenue from automotive product subgroup were substantially flat, reflecting two opposing dynamics, growth in car digitalization with ADAS and microcontrollers, and a decline in legacy products. Revenues for the power discrete subgroup increased, mainly driven by silicon carbide products, Power MOSFETs and IGBTs, and partially offset by the non-power discrete. AMS revenues increased 4.6%, driven by personal electronics application and partially offset by lower sales in industrial and hard disk drive. MDG revenues decreased 10.3%, mainly due to the inventory correction at our distributors, which affected general purpose microcontrollers during the first half of the year. MDG restarted year-over-year growth during the second half of 2019. Gross margin was 38.7% at the high end of our April 2019 launch, impacted by 70 basis points of unsaturation charges.
Controlling our operating expenses in line with our model, we delivered an operating margin of 12.6%. By product group, AMS posted an operating margin of 18.1%, MDG was 13.4%, and ADG was above 10%. Net income was above $1 billion, translating into $1.14 diluted earning per share. Moving now to other financial indicators. Net cash from operating activities increased 1.3% to $1.87 billion. CapEx was $1.17 billion, in line with our investment plan. Free cash flow in Q4 was $461 million, bringing the full year free cash flow to $497 million, net of $127 million paid for the acquisition of Norstel. Cash dividends totaled $214 million. As part of our existing share buyback program, we repurchased shares totaling $250 million in the year. From a balance sheet perspective, we exited 2019 with a net financial position of $672 million, substantially stable compared to last year.
Now, let's move to our first quarter 2020 outlook and the full year 2020. For Q1, we expect at the midpoint net revenues of $2.36 billion, increasing year-over-year by 13.7% and decreasing sequentially by 14.3%. On a sequential basis, revenues from all of our three product groups are expected to decline in what will be a shorter and seasonally lower quarter. We anticipate better than usual seasonality for personal electronics products. On a year-over-year basis, main revenue growth drivers are expected to be personal electronic products, mainly imaging and analog products, general purpose microcontrollers, and silicon carbide products. Our gross margin guidance at the midpoint is 38%, including about 80 basis points of unsaturation charges. The sequential gross margin decrease is mainly due to the impact of the usual annual contract pricing negotiation and unfavorable product mix.
Year-over-year, the decrease is mainly due to unsaturation charges and related manufacturing inefficiencies, including the start-up of the 200 mm fab we acquired in Singapore last year. Unusual price declines, not fully compensated by improved product mix and a positive currency effect net of hedging. For the full year, we plan to return to solid revenue growth, outperforming the market we serve. We are operating in a market driven by broad long-term trends in electronic systems. This is driving demand for semiconductor content and as a consequence for our products and solutions. We also see that the supply chain has now substantially normalized from the excess inventory effect we saw last year. The current view for the market we serve is positive, and we expect the next three months will be important to confirm these dynamics.
In terms of CapEx, we plan to invest about $1.5 billion in 2020 to support our strategic initiatives and revenue growth in order to progress towards our midterm revenue ambition of $12 billion. This amount includes the addition of capacity for some of our existing technologies and investment and mix evolution for our 200 mm fabs. It will also support the R&D activities and the maintenance required by our manufacturing operations and infrastructure. It also includes about $400 million of investments for strategic initiatives, continued investment in our new Agrate 300 mm fab that will support our growth in BCD, IGBT, and other power technologies, R&D for gallium nitride power technologies and production ramp-up for gallium nitride for RF devices, and investment for silicon carbide. These include substrate activities following the acquisition of Norstel.
They also support our plans to establish internal manufacturing of 150 mm wafer and drive the evolution to 200 mm wafer. To conclude, our 2019 financial performance was aligned with the full year expectation we provided in April. Revenues were within the range. Operating margin was above 12%, and free cash flow covered our cash dividends and share buybacks, maintaining our financial flexibility with a stable net financial position. At the same time, we invested $1.17 billion to support short-term demand, as well as our strategic program for our future growth. For 2020, we plan to return to solid revenue growth, outperforming the market we serve. Smart mobility, power and energy management, the IoT, and 5G are driving the demand for semiconductor content. ST is very well-positioned to support its customers across the strengths, thanks to our product portfolio enabled by our differentiated technology.
We continue to progress towards our midterm revenue ambition of $12 billion and deliver sustainable, profitable growth. We look forward to meeting you at the Mobile World Congress in Barcelona on February 25th, and at our annual Capital Market Day in London on May 6th, to discuss our end market and product strategy in detail. Thank you. We are now ready to answer your questions.
We will now begin the question- and- answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question. Anyone who has a question may press star and one at this time. The first question comes from Stéphane Houri, from ODDO Please go ahead.
Yes. Hello. Good morning. This is Stéphane Houri from ODDO. I just wanted to come back a bit on the automotive market, because you said that you are seeing some contradictory trends between the mass market and smart automotive products. Can you give us some details on how you see the growth in this market for you, in 2020? If you could give us some outlook for the silicon carbide projects that you have. Thank you.
I will take the question, and certainly Marco Cassis will complement it. Well, first, to go straight to the point, about silicon carbide, let's say, initiative, we see our revenue in 2020 above $300 million. In automotive. In automotive, clearly, we confirm that next year overall, certainly the car registration will be flattish. We see different dynamic, Europe, America, and Asia, China. Before to go inside this dynamic, we clearly confirm that overall, what is related electrification, so means a car moving to electrical powertrain, or hybrid car or mild hybrid car is really a solid trend. Clearly, we see as well that ADAS perception, level one, level two, are still solid and continuing. A little bit more specific to ST microcontroller, or let's say advanced microcontroller in 40 nm is really solid in term of growth perspective.
Clearly, if we assess by regional, we do believe that in America, the vision is stable between thermal combustion engine and electrical car powertrain. In Asia, certainly, we expect that, and in China, you know that the main driver is China. We touched on the bottom in Q4, and we will see stability in Q1, and we expect slightly some growth starting Q2 and remaining part of the year. I have to say that Europe is more complex. Certainly Europe is more complex because you know about the WLTP effect, and clearly this is something we are monitoring very carefully in term of mix between electrical car, full electrical battery car, hybrid car, mild hybrid car, and gasoline thermal combustion engine, and the trend on the diesel. The mix here is more complex.
Again, we do believe that we touched on the bottom in Q4 last year.
Okay. This is Marco. I would like to give you a little bit more color on silicon carbide. We are, in this moment, engaged in 50 projects with 26 customers, and roughly this is 50% with automotive customers and 50% with industrial customers. This is just showing you that our pipeline of opportunities, expansion of opportunities in silicon carbide keep accelerating, and we are extremely well-positioned there.
For what is related with automotive, I just reconfirm what Jean-Marc has just said to you. Clearly, 2019 was a difficult year in terms of car registration, with a -5% year-over-year, and -8% specifically on China. The forecast for this year is to go to a stabilization with small growth of +1%. This, combined with an increase of penetration of ADAS and electrification, should help us to grow during this year. The legacy market is stabilizing now, and we see how it's going to evolve.
Okay. Thank you. The follow-up is still on silicon carbide. Last year, I think that one customer was about 80% of your sales, if I'm correct. In 2020, how many customers will be live and driving growth in automotive and in industrial, if you can give us the detail? Thank you.
Main revenue contributor, okay, this year is still our main automotive customer because you know that other, let's say, electrical car, phase I, they move more on the IGBT. It is clear that for us, still the main revenue contributor is our main customer. Moving to a three-year horizon, we clearly believe that the contribution from this customer will account for above 50% our total SiC revenues, and thanks to significant growth with other automotive and industrial customer. Means we will start to have contributions from the other one next year.
Okay. Thank you very much.
The next question comes from Achal Sultania from Credit Suisse. Please go ahead.
If you can talk about the inventory on your books. Inventory is down $100 million a quarter in Q4, Q3 and Q4 both. We're still looking at the unsaturation charges, which is down from 100 basis points last quarter to 80 basis points, your guidance for Q1. It seems you're still trying to manage inventory on your books very carefully. Should we expect some level of fab utilization pickup starting from Q2? Secondly, again, on inventory in the channel. We saw a pickup in your microcontroller business, starting from Q3 last year. I guess, some of the inventory in general purpose analog and discrete, you mentioned previously, was still running a bit higher than expected or normalized level. Where are we on those two products in terms of inventory in the channel? Thank you.
Good morning. Lorenzo speaking. I take the question. I will start from our inventory in the books. As we have seen in Q4, our inventory went down materially. We are now in the range of 90 days. As usual, in the first part of the year, our inventory will likely increase. Will increase due to the fact that, of course, we are preparing also the revenues for the growth revenues expected in Q2 and in the second half of the year. I do expect to have some increase in the number of days in our inventory, but will be definitely lower than what it was last year. You remember last year, we end the Q1 with an inventory on hand in our books that was in the range of 125 days.
This year, I do expect it to be materially lower than this number of days, something in the range of 110 or something like that. An increase, but not a huge increase. In term of unsaturation, actually, we are in the first quarter, as you know, an unsaturation that is impacting in the range of 80 basis points our gross margin. What is our visibility at this stage for unsaturation along the year? Yes, the unsaturation will continue also with a lower level in Q2. Our expectation is that we will substantially go full saturation of our fab, almost full saturation of our fab in the second part of the year. We will impact in the first half for some unsaturation, moving down from Q1 to Q2, and then in the second part of the year, we should really see this level be substantially not material.
In terms of inventory in the channel, maybe I leave Marco to answer the question.
We see in this moment the supply chain now normalized from excess inventory effects. The only exception is for few standard products, such as general purpose analog and non-power discrete. Overall, again, we see the supply chain now normalized.
Okay. Thank you.
Maybe I can add a little bit more color about unsaturation, because to be honest, unsaturation for us in this first part of the year, more than on the control of our inventory, that of course, we put in place, is not this the point, but is also related to the fact that unsaturation related to the factor that we see a quite significant change in term of the mix, with an acceleration in demand on new technology, most advanced technology, and low demand on the legacy technology. This is creating lack of capacity, if you want, the need to invest for improve our mix, moving toward most advanced technology while we have, in this first part of the year, more excess on the legacy technology.
This will be curbed during the first half, and this is also one of the reason why we will see unsaturation moving down during the year.
Okay. Thanks a lot, Lorenzo. That's clear.
Next question, please.
The next question comes from Sandeep Deshpande from JP Morgan. Please go ahead.
Thank you, for letting me on. I have a couple of questions. Firstly, I have a question on your spending. You raised CapEx in the year. In your prepared remarks, you indicated that you are spending on various devices. Is there any particular segments that you are spending on, such as, is majority of the spending going towards Power MOSFETs, or it is going towards your optics and sensors? Maybe you can give us some product color in where the spending is happening, given that there is a significant increase in spending. I have a follow-up, regarding overall, your sensors business. Maybe you can give us a roadmap on what you see at this point, where your optical sensors are going towards. Thank you.
Thank you, Sandeep. It's a very exhaustive question. About the CapEx, clearly, I think I have been quite clear about the strategic initiative, I do not come back on it. The remaining $1.2 billion, a part of it is to invest in R&D, equipment, more for differentiation. New materials, okay, new film for imaging, this kind of stuff. Overall, let's say maintenance, okay, to continue to have a really efficient fabs and assembly plan. About the capacity increase, I have to say, it is driven by advanced technology-enabled award products. I would like to speak about BCD8, BCD9, 40-nm secure microcontroller, 28 FD-SOI, advanced imaging sensor. It is really a Power MOSFET, IGBT, low voltage MOSFET, okay, driven by a mild hybrid car, hybridization of the car. It is widespread across our product portfolio and driven by differentiated and advanced technology.
As Lorenzo mentioned a few minutes ago, one part is for additional capacity increase to support our solid growth we expect for 2020, second half and the first half of 2021, because there is a lead time, okay, between the CapEx and the revenue. It is point number one. Another part is the mixed adaptation of our fab, mainly Singapore, where we will have to adapt this fab, okay, to support advanced technology I mentioned. This is okay for the CapEx. About our sensor. Clearly, ST, first of all, direct time-of-flight for ranging sensor, autofocus support, and so on and so forth. We continue to grow. Basically, we address all the smartphone player. About depth map sensing front side, ST really will continue to act as a leader, to address front-facing face recognition, both for structured light and other technology, if they are requested.
ST is also a key player for the rear facing, so we develop a strong product and technology, to address the world-facing and back side of the smartphone. We do expect to start to grow on this business starting next year.
Thank you very much.
The next question comes from Matt Ramsay from Cowen. Please go ahead.
Yes, thank you very much. Good morning. You guys covered some of the silicon carbide stuff for 2020, in the commentary. Really appreciate the detail. I wanted to ask the first question on longer term visibility in the silicon carbide business. You closed Norstel and obviously signed a new agreement with ROHM for supply. Maybe what do you see for sort of a multi-year visibility of design wins across silicon carbide? How long might it take you to integrate those deals into the supply? Then I have a follow-up. Thanks.
I see. After again, okay, Marco will complement, but, I confirm that the current program we have, so 61 well spread between automotive and industrial. It's totally consistent in term of funnel of opportunities for ST to sustain our objective of 30% market share of this business and achieve by 2025 minimum $1 billion of revenue extracted from this MOSFET on silicon carbide. Clearly, that's the reason why in order to secure short mid-term our supply chain, we have increased our agreement with Cree, and we have agreed a strategic agreement with SiCrystal. In parallel, as many time share with you, we have invested in Norstel, a European-based raw material provider to develop an internal supply chain. We will decide timely what will be the weight of this internal supply chain. More important, this internal supply chain will be also a key driver for R&D.
Means the conversion to 200 mm and for sure, a key driver to improve ourselves in terms of yield efficiency and productivity for the raw material. At the end, to support our $1 billion target by 2025, we will have a well-spread and balanced supply chain between two key players, Cree and SiCrystal, and one internal one to secure our supply from Europe and driving our R&D and conversion to 200 mm. This is our strategy on silicon carbide.
Thank you very much for that, Jean-Marc. As a follow-up, for Lorenzo, I wanted to ask about gross margin. There was some fairly significant upside in the fourth quarter. You guys mentioned mix and manufacturing efficiencies, but the guidance for March is sort of back towards where consensus was. You also mentioned sort of a negative mix effect and some pricing negotiations. Maybe you could break out some of the pieces of that gross margin on a sequential basis, and that would really be helpful on the drivers. Thank you.
Yes, sure. In Q4, actually, our gross margin came better than expected. We were guiding the range of 38.2%. We came at 39.3%. Actually, there were two important components. We will remind about that. One was related to the mix. The mix went better than expected. This was driven by products, I would say, some of our products related to personal electronics and also, let's say, products related to the microcontroller that came with an improved mix in respect to what was our initial expectation. Second point, there was a much better performance in our manufacturing, especially in back-end. Because you know that substantially our manufacturing machine is different between front-end and back-end. Front-end is something that efficiency in the fab is somehow reflecting in the next quarter gross margin.
While back-end, if you perform better in the second part of the production phase, that is back-end, this is also reflecting during the quarter. We had a good surprise, mainly driven by higher level of volume on the back-end side. This was the reason that brings the gross margin higher level than expected. The other side, when we look at the dynamic of the gross margin moving from Q4 - Q1, we see this decline of 130 basis points. There is definitely an impact related to the price renegotiation that we have at the beginning of the year. This is impacting our gross margin in Q1. This is usually seasonal. In terms of prices in negotiation, we have this impact with step down beginning of the year.
We recover partially during the year, of course, thanks to efficiency mix and so on, but it's difficult to recover in the first three months. We have a mix that is not as favorable as was in Q4. What we see in this quarter, the mix is substantially a detractor on the gross margin. If you want, you can model something in the range of 100 basis points at the pricing and 50 basis points in the mix. We have some recovery here and there, but in term of some manufacturing efficiency. At the end, let's say we lose substantially this 130 basis points due to these two big driver for Q1.
Thanks very much.
The next question comes from Aleksander Peterc from Société Générale. Please go ahead.
Yes, good morning, and thanks for the question. Can we first touch upon the OpEx? Where do you see it in the first quarter, and how we should model it, going into the remainder of the year? Then I have a follow-up. Thanks.
About the OpEx, you see that the substantial OpEx in Q4 came in line with the expectation. You have also noticed, when I talk about OpEx, I always include also the impact in the line other income and expenses. That was quite positive in the quarter due to the fact that we had grants, as I was anticipating, entering the quarter, recognized during Q4. The expectation for the next quarter is to have expenses that will stay in the range of between $620 million and $630 million. Net OpEx, including other income and expenses. The quarter is shorter, so you will see, let's say, lower negative expenses in SG&A and in R&D, and a little bit lower level of other income and expenses positive.
When we will look at the year, I'm pretty sure that sooner or later I will have this question, maybe I will anticipate what is the current visibility today. As I was saying, last year when I was discussing with you, in terms of structure, we think that the company could sustain the growth that we target. Saying that, of course, there will be some increase in our expenses at the level of the inflation rate, plus, let's put in this way. At the end, including other income and expenses for the year, what I see for the full year 2020, an average in the range between something that will range between $640 million and $650 million.
Okay, thanks. Thanks for this. Secondly, you had very strong AMS margin. I'd just like to understand if this was a particularly favorable mix, or is this the new now for the seasonally strong fourth quarter at ST? Thanks.
Well, I was mentioning that Q4 was impacted by favorable mix and good performance in manufacturing, especially in the end. I would say that the group that was enjoying more these two effects is actually AMS, as you can see from the result of the quarter, from the operating margin of the quarter. Yes, I confirm. This group was enjoying these two positive effects during the quarter.
Thanks.
The next question comes from Alexander Duval from Goldman Sachs. Please go ahead.
Yes, hello. Good morning. My first question was just to come back on this new CapEx guidance of $1.5 billion. Obviously, that's decently up year-on-year and a bit ahead of consensus. Obviously, you've given a lot of detail on some of the specific technologies you're investing in. I just wanted to clarify to what extent this is about safeguarding projects that you already had envisaged when you issued your $12 billion target, and to what extent it's about going after new opportunities that recently have come onto your radar. If so, any more color on that would be interesting. Also, related to your smartphone activities, there have been some reports recently there could be lower smartphone unit shipments than expected at one very large Chinese smartphone player.
Therefore, given that that potentially could have been a big incremental opportunity for ST, to what extent do those kind of situations in China have an impact for ST? To what degree can you diversify within China or taking other steps in order to mitigate any impacts on that incremental opportunity? Many thanks.
Thank you for the question. I take the CapEx one and Marco will comment about smartphone. About CapEx, I repeat. $ 1.5 billion, out of which there is $400 million, again, for our strategic initiative. I repeat. It is Agrate 300 mm fab, because beyond 2021, starting 2022, and beyond, we will need to have advanced analog and smart power technology, going to 90 nm and shrink a node. We must prepare ourselves. Second, it is initiative on gallium nitride, both for our power and energy control strategy. Again, ST, starting two years from now, we have totally completed our position to address this market with, I repeat, high Power MOSFET, low power mosfet, IGBT modules, Silicon Carbide MOSFET, and soon, Gallium Nitride MOSFET.
We have the full spectrum of technology package and module to act as a leader on this market and capture the mega trend. This is the second strategic initiative on the GaN. Consistently, with the acquisition of STMicroelectronics, we will start to elaborate our own facilities on substrate. This is about strategy. About the remaining CapEx. Remaining CapEx, it is clear that what is happening in 2020. After a global soft market condition of 2019, is quite usual. You see the demand for high-end technology, a great acceleration. For us, all the demand, I repeat, BCD8 shrink, BCD9, BCD10 soon. 28 FD-SOI, 40 nm for secure solution. 28 nm, okay, for microcontroller automotive. 40 nm for general purpose microcontroller. IGBT for hybridization. Low voltage for mild hybrid.
All these applications are calling for capacity increase in our fab because we offer solutions enabled by differentiated technology. Our CapEx is either to add on capacity on this technology and applications, or to adapt the mix of our wafer fab. You know very well the model, because I very often share with everybody. Basically, you need to increase capacity $0.08 per dollar of growth. To maintain your infrastructure, adapt the mix, put new equipment in R&D, basically, you need to spend 7% of your sales. As we subcontract with our partner 20% of our production for foundry and about 30% in assembly and test, of course, this model is discounted by this external production ratio to total production. This is the model. This CapEx is fully consistent with the model and with our strategy. This is about CapEx.
Now I let Marco to speak about smartphone, sorry.
About smartphone. As you know, 2019 still was a year with number of smartphone declining year-over-year. 2020, the expectation is that the smartphone are going to increase again, leveraging on the introduction of the 5G smartphones coming to the market. There will be an increase of number of phones with an increase of ASP inside the phones. On top of that, for the Chinese smartphone maker were asking, we are leveraging, of course, on leadership position that we do have, for example, on wireless charging or on MEMS, and we are expected to gain market share in those sets.
Great. Many thanks.
The next question comes from Jérôme Ramel of Exane BNP Paribas. Please go ahead.
Good morning. Jean-Marc, two points on the strategic initiative. Interesting comment on gallium nitride. You seem to be more active on that field. Two question on the gallium nitride. When are you expecting to start shipping the gallium nitride on silicon for RF power? On power that you reviewed, should we expect some traction in automotive for the 48 V anytime soon? Thank you.
It's very technical question. About RF, by next year, we expect to start to generate revenue starting 2021. For power device, what is clear that why GaN is so important in our technology portfolio, is because each time you need to increase the frequency, and you need to have power, the GaN is a good answer. For charging, whatever is on board charger for automotive or other kind of device charger, where you need to go fast and with higher power, this technology is great. Silicon carbide is a key success factor each time you go to very high power. As an example, to move to 850 V, to have a very faster charger and to optimize the battery and the footprint, silicon carbide is mandatory and is a killer in front of the IGBT. This is the breakdown.
Well, clearly, for power GaN, we are developing the technology. We are in parallel other initiative that I cannot disclose now, because okay, it's confidential for the time being. Very clearly, this initiative are to boost our positioning on this power device using GaN, and we expect it will contribute to our three years plan toward about $12 billion revenue.
Thank you. Maybe as a follow-up on the comment you made on 3D sensing, developing new films. Are we talking about polymer films?
It's a new film.
I'm trying.
Thank you.
Next question, please.
The next question comes from Andrew Gardiner from Barclays. Please go ahead.
Good morning, guys. Thanks for taking the question. Just had another one on the CapEx spending. If I could sort of try the question a different way. Clearly, you're spending a lot more this year than you have done in the prior two years. I can understand what you're describing, Jean-Marc, in terms of the strategic initiatives and why they need investment. I'm just wondering if this step up in plan was always on the cards for this year in terms of your internal planning. In fact, are you seeing the opportunities materialize a bit sooner and therefore you've actually had to pull forward some of the spending to get things in place to drive the product RAMs, drive the revenue.
Therefore, relative to the $ 12 billion target you set out there for the medium term, is this higher level of CapEx suggesting that we could see that a bit sooner rather than later? Thank you.
Yeah. If you remember what we mentioned, okay, at our capital market day. We said basically two important things. We speak about 2019, okay, which facing global soft market condition, we have to go through delivering a solid performance. In step time, okay, we need to spend the CapEx between $ 1.1 billion-$ 1.2 billion in order to support the second half of growth and to support strategic initiatives. What we say, on another side, we say in order to support our ambition toward the $12 billion midterms, we know and we share clearly with you that our CapEx will be by year in the range of $ 1.1 billion-$ 1.5 billion. It was in May. You know that the main outcome of this past 2019 year, which was really a global soft market condition, but really with very different dynamic.
I repeat again, on legacy automotive, on industrial market, clearly we see an acceleration of the obsolescence of the mature technology. In same time, we see an acceleration of demand for more sophisticated technology, analog or embedded processing solution in order to enable more complex product. Here we see an acceleration. This is calling for capacity because ST are specially developing technology targeting this kind of market. On other end, okay, we comment about personal electronic. Personal electronic, whatever are the device, smartphone, wearable, and accessories, our content of semiconductor ST specific is increasing. It is calling for capacity increase, but let's say according to the demand. For the microcontroller overall embedded processing solution, again, you know that here, we subcontract widely in foundry, that clearly, for secure microcontroller, automotive microcontroller, and some specific system on chips embedding microcontroller in 40 nm.
Here we see the same phenomena for more, let's say, acceleration of new technology and product. That means overall, according to the plan we have today in term of revenue growth, in term of mix, in term of technology for the second half of 2020 and the first half 2021, we need to spend this CapEx on top of the strategic initiative I have shared with you. Again, always targeting above 20% of outsourcing in foundry, thanks to the partnership, the main partnership we have with companies like TSMC or Samsung, and with OSAT and Assembly and Test, where we are well above 30%. This is again the color about CapEx.
Thank you very much.
Sorry. Go on.
I was just gonna say thank you for that detail. I was just wondering if I could follow up. In terms of what you're describing there, in terms of the growth in the second half of this year into the first half of next, you guys have talked clearly for some time now about outperforming the market which you serve. You didn't specify a number there for what you think the served market is going to grow. You just mentioned TSMC. They've talked about semis ex memory growing 8% this year. That's not perfectly analogous to your served market, but there are similarities. How do you see your served market growing in 2020?
You know, okay, this is public information. Okay. The latest forecast from WSTS for the market we serve, is about 2020, a year of growth of 7.5%. We expect that the next three months will confirm this dynamic. This is a number we have taken into consideration elaborating our business and industrial plan to drive the company.
Got it. Thank you very much.
Okay, Alessandro, we will take the last question. The last question for today. Obviously, investor relation team remain available for any of your other question. We can take some calls after this call. Thank you very much.
The last question comes from David Mulholland from UBS. Please go ahead.
Hi. Just two quick ones from me. Firstly, on the trends you're calling out into Q1 in AMS and for personal electronics to be better than seasonal, can you just give us some color on whether that's because your largest customer there is trending better than seasonal, or if this is part seeing other products that other customers starting to ramp up a bit more, I guess things like your RF power amplifier business. Secondly, just on the various silicon carbide supply agreements that you've signed, can you just help us understand the structure of those and whether they have some sort of take or pay arrangement or whether there's just flex in that? What are you giving to get this commitment from the supplier on the capacity?
About the better than usual seasonality on smartphone, it is well spread. Well, we cannot comment in detail the customer rationale, but I can say it is well spread, and there is a various, let's say, good reason behind. It's better, okay, really than usual seasonality. It is for ST, it is well spread across our customer base. We address all the customers, okay, whatever, they are Chinese or American. More about silicon carbide, you know that I cannot comment the detail of strategic agreement and contract. Again, I do believe that companies like Cree and SiCrystal, well, they perceive ST as a strategic partner, key player, with today a leading position on silicon carbide. Thanks to the 51 programs we have, in a good position to achieve a 30% market share and $1 billion revenue by 2025.
I guess this is the reason why these two companies are in trust with us to participate to our success.
If I can just clarify on that, because there's a lot of variation and expectations on how pricing will trend for wafers. Have you already potentially pre-agreed things like pricing over the next two to three years as part of that?
Our ambition is a sustainable and profitable growth. We are acting consistently.
I tried. Thanks, guys.
That's fair. Thank you very much. This will conclude our call, I think. Thank you very much, all of you, and see you next quarter for this type of calls. In the meantime, as Jean-Marc has reminded, we have a presentation at Mobile World Congress on the 25th of February and our capital market day on the 6th of May.
I take the opportunity because it is still possible to wish everybody a happy and profitable New Year 2020.
In France, it's still possible.
It's still possible in France.
Okay.
Thank you. See you soon.
Thank you. Thank you. Thank you. Bye. Thank you.
Thank you.
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