Ladies and gentlemen, welcome to the third quarter 2019 earnings release conference call and live webcast. I am Moira, the conference 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, Head of Investor Relations. Please go ahead.
Thank you, Moira. Good morning. Thank you everyone for joining our third quarter 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 Relations website. A 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's President and CEO.
Thank you, Céline. Good morning, and thank you for joining ST on our third quarter earnings conference call. Let me begin with some opening comments. First, on Q3 and year-to-date. Q3 net revenues at $2.55 billion and Q3 gross margin at 37.9% came in above the midpoint of our guidance, driven by engaged customer programs and new products in, as expected, a soft legacy automotive and industrial market. Q3 operating margin was 13.1% and net income was $302 million. On a year-to-date basis, we delivered revenues of $6.80 billion, gross margin at 38.4%, operating margin of 10.9%, and net income of $640 million. Second, on Q4. Our fourth quarter outlook is for net revenues to grow sequentially about 5% at the midpoint. Q4 gross margin is expected to be about 38.2% at the midpoint of our guidance and assumes about 120 basis points of unsaturation charges.
Based on our fourth quarter outlook for the full year 2019, we expect net revenues to be about $9.48 billion at the midpoint. This confirms a strong H2 over H1 growth with a double-digit operating margin performance. Let's move to a detailed review for the third quarter. Net revenues return to year-over-year growth up to 1.2%, driven by imaging, analog, power discrete, and MEMS. On a sequential basis, we reported strong revenue growth up 17.5%, driven by specialized imaging sensors, application-specific analog products, general purpose and secure microcontrollers, RF products for front-end modules, silicon carbide MOSFETs, and digital automotive. This performance was partially offset by general purpose analog and non-power discrete products. Legacy automotive products grew at a slower pace than expected. Our gross margin was 37.9%, 40 basis points above the midpoint of our guidance.
Unsaturation charges represented 110 basis points, lower than our expectation of 140 basis points on better loading in our digital wafer fab. Our net operating expenses were $631 million. Moving to our profitability, operating margins was 13.1%, net income $302 million, and diluted earnings per share $0.34. Net cash from operating activities was $429 million in Q3 and was $1.09 billion for the first nine months. Capital expenditures were $244 million in Q3, similar to the year-ago quarter. On a year-to-date basis, we have invested $937 million for CapEx. As anticipated, we return to a positive free cash flow in Q3 at $170 million. During Q3, we paid cash dividends of $54 million and completed $62 million of share buybacks. Let's move to our fourth quarter outlook. We expect net revenues to increase about 5% sequentially at the midpoint of our guidance.
All three of our product groups will contribute to the sequential growth, with MDG expected to be the stronger contributor. Our guidance assumes a contribution from improving market conditions as well as from our engaged customer programs and new product introductions. Our gross margin guidance at the midpoint is 38.2%. We see some sequential improvement in gross margin at the midpoint. We do anticipate unsaturation charges to continue, estimated about 120 basis points on a year-over-year basis. The decrease of the gross margin will be about 180 basis points. Q4 net operating expenses are expected to be between $620 million to $630 million. Let me now share with you some important business, market, and product dynamics, starting with automotive.
In July, we said we were operating under two opposite market dynamics, challenging in automotive legacy, but very healthy in smart mobility application, driven by the electrification and digitalization of car systems and platforms. In early September, we confirmed this view, saying that we would keep on tracking the situation closely for September and then October. What we are seeing today is that the legacy automotive business, closely linked to car registrations, is recovering at a slower pace compared with what we were expecting when entering the second half. In smart mobility applications, car digitalization and electrification, positive market dynamics are there indeed. Our innovative technology and product portfolio enable us to support our customer shift to more electrification and more digitalization. In car electrification, we provide technology and products for all flavors of vehicles, from the mild hybrid to full electrical vehicles, with a broad range of products.
We saw continued traction and additional design wins with our silicon carbide MOSFET and diodes in applications like onboard charging and DC-DC conversion. We announced that we will supply high-efficiency silicon carbide devices to Renault, Nissan, and Mitsubishi for advanced onboard chargers. Overall, we can confirm that we are on track for over $200 million of revenues with silicon carbide devices this year. We have successfully completed our key milestone evaluation of silicon carbide wafer manufacturer, Norstel. Therefore, we have decided to exercise our option to purchase the remaining 45% stake. We expect to close this acquisition during Q4. It is part of our plan to install internal substrate production capacity to support the programs of our automotive and industrial customers from 2021. We also continue to progress on IGBT MOSFET and power modules with a number of design wins in applications like traction inverters in electrical vehicles.
Our offer for car electrification goes beyond power, with a complete range of products such as protection devices, gate drivers, battery management solutions, and microcontrollers. I will mention one example. During the quarter, we won a design with a major electrical vehicle manufacturer. Our 32-bit automotive microcontrollers will be at the heart of electrical vehicle charging adapters. Car digitalization for us includes ADAS systems, V2X communications, and the range of systems from embedded control units to domain controllers using our MCUs. Here, we continued to build momentum. An example, like I mentioned, is a design win with a European tier 1 for automotive microcontroller in a standalone body gateway. That's the central communication node inside the vehicle, enabling cross-domain communications and connected services.
Moving now to industrial, our second broad area of focus, and where we plan to accelerate our growth. The market dynamics of the third quarter were still soft overall with mixed performance across applications and products. There are some positive signs. First, the inventory correction at distributors, which has been impacting our general purpose microcontrollers business for several quarters, is now over. This business grew over 25% sequentially. Second, the positive signs we started to see since March for the point of sales increase at distributors worldwide are still there, with the exception of Europe. Power devices demand is facing different dynamics. Demand is strong for silicon carbide MOSFET, IGBT, and low voltage Power MOS, while high voltage Power MOS and non-power discrete are still suffering from soft end market demand, amplified by an inventory correction due to short lead time of the industry.
Moving now to a short preview of our achievement in the quarter for industrial. One of our targets for this market is leadership in industrial embedded processing solution. To that end, we are strengthening our hardware, software, and ecosystem offering around our microcontroller families. During the quarter, we introduced new hardware such as our first STM32 in an 8-pin package. This further expands the market we can address to simple embedded project that needs 32 performance in a compact and cost-effective form factor. We also added to STM32 ecosystem with the release of a number of software packages. In Q3, we also introduced new analog products for industrial, addressing lighting, power supply, and factory automation applications. We won a number of new designs with metering, industrial sensors, intelligent power modules, and power discrete for applications such as power tools, induction heating, home automation, white goods, and industrial compressor.
Moving now to personal electronics. The current visibility we have is showing strong demand for our key products. As you know, in this end market, we target leadership in specific high volume smartphone applications, as well as associated wearable, gaming, and accessories markets. During the quarter, we won designs and ramp production for new products in many categories. We were awarded design wins for our portfolio of sensors, Time-of-Flight, ambient light, motion, and pressure sensors. We also had wins for secure solutions, wireless charging, touch and display products. In addition, we had design wins and ramped up shipments for motor driver and display products for portable game consoles. I will conclude with a few words on our objective to capture opportunities in 5G devices with RF mixed-signal technologies and product.
During the quarter, we were awarded wins for digital and mixed-signal ASICs for RF SOI designs to be used in 5G smartphones and devices. 5G is an area of focus also for our efforts in the communication equipment market, on top of satellite communications and cloud computing. During the quarter, we continued to execute on programs and also won new designs across a range of applications. This includes a design with our latest generation of global navigation satellite system, ICs, chosen by an important provider of global internet access. To conclude my remarks. During the third quarter, we reported strong sequential growth, double-digit operating margin, a strong increase in net income, and a return to positive cash flow. For the fourth quarter, we expect to see at the midpoint of our guidance, sequential revenue growth and an improvement in our growth margin.
We do expect further improvement in our operating profitability and free cash flow generation as well. Combining together Q3 revenue results and our Q4 outlook at the midpoint, we are in line with our expectations of a strong sequential growth H2 over H1, with an uplift in revenues close to $1 billion. For the full year 2019, we expect net revenues to be about $9.48 billion at the midpoint. Our engaged customer programs and new product introductions across the end market we target are well on track and based on important secular electronic demand drivers, smart mobility, power and energy, and the IoT. This enable us to better navigate the macroeconomic and the market dynamics, both short and long term. Thank you for your attention. We are now ready to take 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 touchtone telephone. You will hear a tone to confirm that you've 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. Anyone who has a question may press star and one at this time. The first question is from Stéphane Houri from ODDO BHF. Please go ahead.
Yes. Hello, good morning. A question on the sequential evolution you're expecting for Q4. Notably, you talked about MDG as probably the biggest driver for Q4. Can you help us understand a little bit better if it is only linked to the end of the inventory correction that you have talked about, or is there anything more, i.e., market share gains, with the new range that you have launched? Thank you.
As I have said during my address, I think there is two positive points. First of all, we continue to see a POS sequential increase from March. This is point number one. As I told you, the level of inventory now in distribution for MCU is at a standard level or slightly below a standard level. Means we are in a, let's say, healthy situation where you have a POS increasing, a level of inventory at the standard to support demand, and more important in such market condition is to be capable to make turn business quarter to quarter. When you are facing, let's say, such business condition, your visibility is limited, but it is not an issue as far as you have a strong capability to make turn business quarter to quarter.
This is exactly the situation we are, and we offer shortly time to our customer and with our strong product portfolio, we are able to support their demand.
Jean-Marc, Lorenzo speaking.
Of course.
we talk about MDG, so there is the component that is related to-
Of course.
the microcontroller. In this area, we have also, let's say, the digital, we have customer programs that will contribute to this. It's not only
It's from satellite communication.
Okay. If I can have a follow-up on the margins, because it seems that your gross margin is resisting a little bit better than you initially thought earlier this year. Is it coming from the Forex side loading or the product mix? What is in your view the main element? Thank you.
About the gross margin, Lorenzo speaking. Looking at the gross margin of the quarter, let's start from the gross margin of Q3, where it comes, the better result than respect our original guidance is mainly driven by a lower level of unloading charges. These lower level of unloading charges are due mainly to the fact that our production was increasing in order to follow better revenues than expected for the quarter. There is also some component. The unloading charges account for around 30 basis points of improvement in respect to our original guidance. The remaining 10 basis points substantially is a better than expected exchange rate. At the end, let's say the gross margin came a little bit better on the way that we had a better level of unloading.
For Q4, we always said that our view was that the lowest point for our gross margin this year should have been Q3. This indeed is confirmed. Let's say next quarter we are targeting to be slightly above 38%.
Okay. Thank you very much.
The next question is from Andrew Gardiner from Barclays. Please go ahead.
Good morning, gentlemen. Thanks for taking the question. Two, if I could, one on the comments on automotive and then another one on the gross margin and utilization. Just in terms of automotive, Jean-Marc, you mentioned that the trends that you're seeing in the legacy business have been worse than you'd anticipated when entering the second half, when we last spoke around July. Can you confirm that it is indeed recovering, right? You feel that there is a bottom in that part of the market, it's just that the pace of recovery there is slower than you would have hoped. I'm just wondering what kind of perhaps sort of order linearity have you seen through third quarter and into October so far? Is there a consistent trend, albeit one that's just a bit weaker than you thought? I'll follow up on the utilization.
I confirm exactly what you have understood from my address. Clearly, when we enter in third quarter, our expectation was a recovery, improving condition for our legacy product. We always said, and I repeated early September that mid-September to mid-October will be critical period to assess the dynamic. What we can confirm that we see improving market condition, but clearly at a lower pace than expected. This is the point number 1. Other point, we do not usually comment. We also see improving booking trend on the automotive legacy, which is, let's say, make the assessment that things are improving. It is based on car registration. What we can say, clearly, we can say that we acknowledge that there is a kind of consensus that we will see improving worldwide internal combustion engine-based car registration starting now and certainly next year.
What is difficult to assess globally, it is how it will propagate through the automotive supply chain and how it will be transformed in semiconductor demand. Today, what we can only say, we expected improving market conditions for legacy. Yes, it is happening at a lower pace than expected. This is really the data point I can share with you.
Okay. Thank you for that. If I could ask another one on the fab utilization. Lorenzo, you said that sort of the four Q guidance clearly confirms that your three Q has been the low point for gross margin, and seems like utilization levels at a similar level for fourth quarter. How are you starting to plan for 2020? I realize it's early, but just in terms of your conviction around trends into 2020, and therefore what that can mean for fab utilization late this year and into early 2020. Thank you.
Well, let's say the fab utilization in Q3 was in the range of 77%. This was the loading. As you rightly say, in Q4 will be similar, slightly below because you see that overall the unused charges are a little bit increasing because we move from 110 basis points in Q3 to 120 basis points in Q4. We will be more in the range of 75%. What about, let's say, the unsaturation trend in the next quarters? In 2020, our plan is to keep our inventory under control. There will be some smoothing effect in the first part of the year, we want, of course, to not increase in a significant way our inventory. The expectation is that we will have an unsaturation in the first part of the year, in the first half of the year.
This is mainly driven by the fact that there is a significant change in the mixed demand. The technology. That is mainly impacting our mature technology. For sure, the level of unsaturation charges will depend on the evolution of the market condition, and our plan for 2020. At this stage, my expectation, as I said, is that we'll still have a level of unsaturation in the first half of the year, and we expect to improve in the second part of 2020.
Thank you, guys.
The next question is from Aleksander Peterc from Societe Generale . Please go ahead.
Yes. Good morning. I just have a little follow-up question on ADG, where you say that the revenue decreased in automotive. Could you maybe quantify maybe your year to date overall automotive sales, how they evolved versus last year or for the third quarter alone, whichever you can provide? Also in power discrete, you had an increase in the quarter. Could you be more specific on which customer segments were behind that? Then just finally on geography, you were implying previously that Europe was lagging, in certain markets, in terms of the faster recovery. Is that still the case today? Thanks.
Okay. Thank you. I take the question. What I can say that, if we assess and look our overall automotive segment, year to date, facing a market of car registration decreasing slightly above 5%, ST is increasing year to date about 5% compared to same period last year to date. As we said, our capability to enable a solution for our customer, to execute their transformation to more electrification and more digitalization is enable us to grow much faster than the market we are facing from car registration perspective. This is the point. We do believe that at the midpoint of our guidance of Q4 and the full year at $9.48 billion for overall ST, we will conclude the year for automotive with a growth full year 2019 versus 2018, about 5%. On the power discrete.
Clearly, power discrete is driven by our performance on silicon carbide MOSFET and diodes, and let's say, pushed by performance of one important customer. As I said during my address, IGBT MOSFET and low voltage power MOS also are key contributor to the growth. Where we are facing a different dynamic now is high voltage power MOSFET, certainly linked to some inventory correction, because now for this device, the industry lead time are quite short. Demand also is suffering, because the overall industry or the market weakness.
Excellent. Geography?
On the geography. On geography for power discrete, not for automotive.
What is your question, Aleksander? The question on geography, is it just for power discrete, or is it more global?
No, it was a general question. You were referring in the last quarterly call to Europe lagging, and you saw some pockets of weakness extending actually at the last call. I was wondering if this has changed somewhat in the current period.
No.
Overall for the group.
No. We confirm overall, okay, for, let's say, geographic, that we see the POS, let's say, increasing sequentially, materially in Asia. In America as well, in a slower pace. In Europe, for sure, it is still decreasing. We do believe it is consistent with the macroeconomic condition in Europe and in Central Europe related to the industrial market.
Thank you very much.
The next question is from Sandeep Deshpande, from J.P. Morgan. Please go ahead.
Yeah. Hi. Could I ask about a view of visibility that you have into design win activity into 2020? Clearly, in a year when the semi cycle is so weak this year, you've had significant new design win activity, which has held up your sales much better than your peer group. Do you have visibility in how this design win activity looks into 2020? That's my first question. My second question is, in terms of the mix as such, really, in terms of the long-term guidance on margin from the company, is the intention that the gross margin of the company remains at the kind of peak levels you saw last year? Is it that you intend to change the mix over the next few years to reach the midterm operating margin targets? Thank you.
I let Lorenzo to answer at gross margin midterm, even if I would be pleased to answer, but I let Lorenzo answer, and I will come back on the design win.
In terms of gross margin, midterm, we confirm. If you take, let's say, today, the gross margin, how we run in terms of gross margin. If you take, let's say, the gross margin at midpoint of Q4 for the year, it will be in the range of 38.4% for the full year 2019. This gross margin is overall impacted by around 80 basis points of unsaturation. In respect to this gross margin, it means that if you exclude the unsaturation, we are above 39%, with an impact on manufacturing efficiency that is not the best, because you know that when the fab are not fully loaded, not at the best. We confirm that our medium-term target for gross margin is in the range of 40%-41%. The main driver, it will be, for sure, let's say, optimization of our manufacturing efficiency with the loading.
We see some improvement also in the mix, but we will not be the strongest driver in terms of gross margin improvement.
Thank you.
About the design win and what I can say about 2020. Clearly, what we are acknowledging now, that first, we are monitoring for sure all the funnel of opportunities we have with our new product, new design, either when they are, let's say, general purpose device or application-specific device. This funnel of opportunities is growing. The conversion rate to transform these opportunities in real business is accelerating. I have to say, this kind of phenomena is a very well-known one when you go through a tough market condition. You have an acceleration of new product and new application, and you have a deceleration of mature product and mature technology. This is exactly the phenomena we have. Here again, ST overall, and then I can discuss about market, but overall with our wide bandgap materials, so silicon carbide, GaN, low voltage PowerMOS.
We address very well all the opportunities in automotive and industrial power and energy control. With our microcontroller at 40 nanometer today, we address, okay, the domain microcontroller. With our advanced BCD, we address also all the opportunities for automotive and ASIC for the industrial. Last but not the least, in personal electronics, clearly our Time-of-Flight, ambient light sensor, our secure solution, our wireless charger, and the RF mixed-signal technology, to address the front-end module, receive a great appetite from our customer. I have to say that 2020, it's too early to disclose anything about 2020. Certainly ST will take benefit next year about new product and program growing, as we have done this year.
Thank you.
The next question is from Sébastien Sztabowicz from Kepler Cheuvreux. Please go ahead.
Yeah, thanks for taking my question. Could you please comment a little bit on the dynamic you are seeing with the Chinese smartphone OEM and notably following the Huawei component ban. Have you seen any kind of pickup of demand while those guys are accelerating, I would say, the shift away from U.S. suppliers? Also on industrial general purpose analog, when do you expect to see the end of the inventory correction? Thank you.
I am sorry, but I will not be very contributor to your question. Okay, well, first of all, about the OEM you have spoken about, I will not comment. You know that it's a policy of ST to do not comment specific customer. What I can say that this is important customer for ST. It is fully embedded in our strategy to address high volume application, but being very selective for smartphone. Again, we target sensor, MEMS, and specialized imaging. We target embedded processing solution, embedded SIM. We target wireless charger and, okay, I think you have seen something public. Okay, we target front-end module with our technology. The demand is strong, okay, for our key product and technology.
About industrial general purpose analog, at this stage, it's very difficult to see when we can state that the inventory correction will end, driven by end demand growing and inventory level coming back to standard. For the time being, I will be prudent to give any time schedule of the end of inventory correction.
Okay, thank you.
The next question is from David Mulholland from UBS. Please go ahead.
Hi, thanks. I just wanted to follow on a little bit from the first question, but more generically in China. How has your business trended in this quarter and into Q4? Just part of the reason for asking, obviously TI, a couple of nights ago, was a lot more cautious on their commentary into Q4. I'm trying to understand what you think the delta might be between what you're seeing and how they're guiding for some of these markets into Q4, and whether some of that might be strength you might be seeing in China.
I do not want to, let's say, specifically speak about China, okay? It's more global for ourselves. We address the mass market worldwide. We see a POS increasing of our distributor in Asia, okay, with a strong pace. In Europe, as I said, it is the reverse, okay, and for obvious reason. In America, it's okay. About China, again, China is an important region. Totally, let's say, important for us, but totally consistent with our strategy to be a broad range leader in automotive and industrial market. You know that China, in automotive, is the most important region because they produce about 20 million car per year, so it's important region. Industrial as well. In personal electronic where we target high volume application, being selective, the appetite for our technology is very strong. There is no more than that.
For sure, China is an important region for ST.
Just one quick follow-up. On the commentary you've been giving around automotive and the design win traction you've been talking about for a couple of quarters now, both IGBT and silicon carbide. Can you just help us to quantify this? Is it possible to put a number on where you think you are in terms of value of design wins? Even if it's over a multi-year period, but just something to get a gauge in on what that success has been.
No, we cannot give a specific, let's say, number on SiC and IGBT. Well, okay. A well-known number, okay, that I disclosed during the past quarter was the number of program on SiC, so 35. Well, I simply say that now it's moving to 40.
Thanks very much.
The next question is from Matt Ramsay from Cowen. Please go ahead.
Yes, thank you very much. Good morning. Jean-Marc, I think I wanted to follow up a little bit to David's last question, contrasting your microcontroller business to Texas Instruments. I know that they recently made some pretty sharp changes in their distribution strategy, trying to go a bit more direct, taking Avnet out of their mix, for example. I think some of the prior questions were around your business trends in China. I think I wanted to see if you might comment on how you're seeing the overall distribution landscape, given the changes at TI. Is maybe some distributor-friendly business on your side, contributing to some of the strengths. I have a follow-up. Thanks.
Well, I fully respect TI's strategy and the consistency, okay, of what they are doing. About ST, you know that it is slightly different because our partnership on distribution is mainly targeting demand creation. We are very pleased with the partnership and various cooperation we have across the world, and especially in Asia, about this activity of demand creation. Which is, let's say, very complementary of the outstanding ecosystem we have developed around the STM32. You know that one of the main strengths of ST is a broad range portfolio we have in STM32, with a very strong ecosystem around that in term of user application, in term of tools to support the design, prototyping, and so on and so forth. We are very pleased, okay, with our partnership with distributor, between the demand creation and the strong ecosystem we offer to them.
This is our strategy. As I said, this year, we suffer, and we were one of the company announcing it at the earliest, last year, end of August last year. We have seen inventory correction during the past few quarter. Since March, the POS is continuously increasing. The stocks are at the right level. The design wins are coming. The funnel of opportunity is growing, and the conversion rate is increasing. We are pleased with this strategy. TI is following another one, but again, we have a lot of respect, and we see the consistency of TI. We have no more comment about that.
Anyone-
No, thank you for that. That's helpful perspective. Just a quick one, Lorenzo, on operating expenses. Looks like you're gonna be, I don't know, 2%-3%, something like that, higher OpEx this year. Is that sort of a growth rate we should anticipate? It seems like the opportunity funnel is widening a bit, so I just wonder on spending levels going forward into next year. Thank you.
Yeah. On expenses, actually, in Q3 expenses, when we talk about expenses, we talk about the net expenses, including also the line of other income and expenses that we have, SG&A, R&D, and other income and expenses. If you look in Q3, our expenses came at $631 million. This is a little bit on the high side of what I was saying, entering the quarter. If you remember, I was talking about $620 million-$630 million as a range. What will be in Q4, our expenses? My expectation for Q4 is, I confirm that we will be between $620 million and $630 million. In Q4, I do expect that to be on the low side of the range.
This is mainly driven by the fact that on the line, other income and expenses will be much more positive than what we have seen in Q3, due to the fact that we will be in the condition to, in some jurisdiction, to recognize a significant amount of R&D grants. It means that at the end, I would confirm what I have said last time during our last call, that overall, in the year, the expenses will came between $620 million and $630 million, if you take the average quarterly on our expenses. The evolution of our expenses, for sure next year, there will be some increase because there is some increase of activity, there is in the inflation rate, these kinds of things. I repeat, there will be not a significant increase.
We will increase, but we believe that the structure of the company at this stage is such that can support the level of business that we have and the ambition that we have with this level of business. You can factor in some increase in the range of 3% but no more than that.
Okay. Any next questions?
Next question. Yes, Maria, please. Another question.
Yeah. The next question is from Achal Sultania from Credit Suisse. Please go ahead.
Everyone. Just coming back to the silicon carbide business. Obviously, a lot of growth this year, it seems, is driven by one key customer in the U.S. I think most of them are going to ramp in 2021 and beyond. That's my understanding. Maybe I'm wrong. If that's the case, how should we think about the silicon carbide business next year, specifically in 2020? Is it still going to be predominantly driven by volume growth, at key customer or we can actually expect some new customer ramping already next year? Thank you.
If you allow me, for this year, I correct a little bit, okay? Your assumption that our silicon carbide is only driven by one customer was valid for last year, so 2018, but not this year. This year, okay, we have a significant amount of other customers, which have started mass production, and so for us, revenues, of course, in the second half of this year. What you say is a little bit, let's say, valid for last year, but not for this year. Next year, yes, we will continue to grow at, let's say, important path, okay? We are building capacity for that. This year, that's the reason why we invested, okay, material amount of CapEx to support the perspective of growth for next year on silicon carbide.
That's the reason why, thanks to the fact that the milestone about Norstel has been reached, we have decided now to take the full ownership of Norstel and forecast to start production by 2021. Now, next year, 2020, now with the current visibility we have, will be another year of material growth for silicon carbide. We are on track. This year we will outperform above $200 million, all our program are on track to go to $1 billion by 2024.
Okay. Thank you. One follow-up, if I may, on the margins. Historically, microcontroller I think has been the highest margin business for ST. Obviously, we've seen improvement in AMS also recently, while MDG has gone down because of inventory correction. Is that still a fair assumption in the long term, that microcontroller should still be well above every other product line in terms of EBIT margin contribution?
In terms of operating margin, yes, in the sense that if you remember what we said, what is our view, we said that, overall, we see, let's say, on the margin for MDG, that is including microcontroller to be in the range of 20% operating margin. When we look AMS in the average of the year, there is a strong seasonality in AMS, but we will be in the mid-high teens. When we look, let's say, to ADG, we will be more in the mid to low teens. This I confirm. I confirm that this is more or less the mix that we will have among our groups for what concerns the operating margin.
Okay. Thank you, Lorenzo.
Next question is from Jérôme Ramel, from Exane BNP Paribas. Please go ahead.
Yeah. Good morning. Jean-Marc, two questions. The first one is concerning the 3D sensing. How do you see on the mid-long-term, the technology evolving, with the current solution we have in the market from structured light and Time-of-Flight? How do you see the technology being deployed, let's say, within two to three years? The follow-up will be on the silicon carbide competitive landscape. Why do you see the reason for being vertically integrated, which seem to be the trend that you and your competitors are going forward, which is unique in the silicon industry. We don't have any other example of being vertically integrated with the wafer supply. Yeah. Just your view on these two points. Thank you.
Silicon carbide. You know that the characteristic of any power device to drive the cost down, and generate value expected by our customer is to really work on the device process itself, on the raw material cost down, and to optimize the design of the package or of the module. For both the wafer device and for, let's say, the raw material, for sure, the perspective to increase the wafer size will be a key growth driver for the cost reduction. ST, we do not want to be limited by anybody in our strong willingness to decrease the cost of this device. That's the reason why we have decided to control partially our supply chain. We always said that we do not intend to supply 100% of our raw material need. It's only the intention to support a share of our internal need.
That's the reason why, okay, we have signed a very important agreement with Cree one year ago, and the relationship with Cree is very good. We want really to look deeply in the raw material in order to accelerate as fast as we can wafer size conversion and cost reduction. This is about silicon carbide. Clearly about 3D sensing. 3D sensing, for sure, for the time being, ST is really focusing on structured light and 3D front-facing with important current customer we have. Our ambition is to support at the best, the performance improvement and the cost decrease of the solution. Overall, we do believe that the future of, let's say, 3D sensing, depth map sensing, face recognition, will evolve to a solution based on indirect time of flight, and driven by cost reduction objective. This is something, okay, we are convinced about.
That's the reason why we are running development and we have a roadmap adequate for that. We consider that ambient light sensing is important device to have. Okay, we know that the Android player are highly interested in 3D sensing solution for rear facing, and our roadmap is well adapted to that. Okay, you know, Jérôme, that to comment more deeply is trying to speak about secret, and this one I cannot.
Okay. No, fair enough. Thank you very much.
Thank you. Next question, please.
The next question is from Anthony Stoss from Craig-Hallum. Please go ahead.
Good morning. I wanted to follow up on your comment that you expect your auto business to be up about 5% year-over-year in 2019. When you look into 2020, I'm curious your thoughts on content expansion. For instance, if global auto units are flat, where do you think your revenue could grow in 2020? I had a follow-up.
On automotive, okay, let's share together, let's say fact and element of context and not make prediction, okay, because this is not our job to make prediction. About element of context. Again, okay, there is a very strong drive on electrification calling for silicon carbide MOSFET, diodes, IGBT, and low voltage PowerMOS. Mainly the low voltage PowerMOS are for the 48 volt. Here there is a strong demand of components and the growth will be sustainable and material in 2020. There is digitalization. Digitalization for us is clearly ADAS, and you know that we have a strong partnership with Mobileye. V2X communication and associated component of ADAS. It's not only the processor, but it is radar, LiDAR, okay, sensor, let's say sensor fusion, microcontroller, all this kind of stuff.
There is V2X communication, and there is more and more the change in the architecture of vehicle moving from, let's say, fragmented ECUs to domain controller. Again, here, similarly, okay, the demand will continue to be very strong for next year. About all the other legacy. Means powertrain and safety for internal combustion engine, infotainment, so this kind of legacy product. What we acknowledge now, we acknowledge that certainly for 2020, we will see improving condition for car registration about internal combustion engine vehicles. This year was terrible, because overall, okay, is a drop of -5%, -6%, and especially in China, -10%. We acknowledge that for next year, certainly we will see something stable, let's say flattish. Okay?
What is really challenging and difficult for the time being, is to assess that this car registration stability, how it will propagate through the supply chain of the car maker, of the automotive, and how it will transform in semiconductor demand because, let's say, a little bit disturbed, but some inventory correction here and there, change of architecture, acceleration of system, and so on and so forth. What we expect for 2020 is Internal combustion engine car registration flattish. Situation improving in terms of supply chain, struggling about excess inventory here and there. A transformation in semiconductor demand. It is still difficult to assess, okay, with a strong accuracy what is going on. What is really important at this stage is the capability for semiconductor vendor to be flexible enough, to be agile enough to react very fast to the demand to customers.
I have to say that here, ST, with our internal manufacturing, we have a good strategic position to support this kind of market situation.
Thank you for that. As a follow-up, you brought your inventory days on hand down to about 100 days in Q3. When I look at your revenue guide for Q4 is fairly similar, up a little bit year-over-year, yet your inventory is about $200 million above where it was a year ago. What's the goal on inventory days on hand that you're comfortable with? Thank you.
Yes, about inventory, you're right. At the end of Q3, we were around 100 days of inventory. Our expectation for this quarter, Q4, is that the inventory will going down further in respect to where we stand today. We should be definitely below 100 days, in the range of 90, 95 days of inventory by year end.
Thank you. Thanks, guys.
Thank you, Tony. We are now close to the end of our call in theory, but we are ready to take, Moira, we will take the few questions that are left, no matter if we extend a little. Next question, please.
The next question is from Johannes Schaller of Deutsche Bank. Please go ahead.
Yeah, thanks for letting me on. On silicon carbide again, a lot of the contracts in the market there, given that the volumes are quite low from your side, but also from what your competitors like Cree have announced. I would assume a lot of these contracts are largely or de facto single sourced at the moment. Can you share with us, in terms of the competitive nature, a little bit your expectation when these contracts will become multi-sourced? Actually, have you seen any contract in the market that is already multi-sourced on silicon carbide in a meaningful way? I have a follow-up on MDG.
It's really difficult to comment about multi-sourcing contract on silicon carbide, for two reason. Reason number 1, okay, we do not disclose the discussion we have with our customer, is point number 1. The point number 2, silicon carbide is a difficult device, okay? In ST, we have accumulated million of pieces and thousand of wafer, so we are totally perfectly comfortable with the reliability of our device and the success rate of the qualification we have at customer level. I am not so sure the competition is comfortable as well, to be qualified on time on reliability requested by automotive markets.
Thank you. No, that's clear. On MDG, you're running currently at a pretty similar revenue run rate, what you had in Q4 2018, but your EBIT margins are about 200 basis points lower. I understand underutilization is some of that, but is there maybe also a pricing element, a mix element with more digital and other stuff in there? Could you maybe break that down a little bit more for us, where that headwind is coming from? Thank you.
In terms of, for MDG, overall, it is true that we are running with an operating margin that is lower in respect to what it was. Here, we have some headwinds. One is, as you said, one is related to the fact that for sure manufacturing, even if I remind you that unsaturation charges are not charged in the various segments, but are in the others. Anyway, the impact of not good efficiency is definitely in manufacturing. Not good efficiency in manufacturing is impacting the result. Second ingredient is that the mix inside the group is not particularly favorable. It will improve, definitely, with improvement in the microcontroller, but it is not particularly favorable. For sure, these ingredients are not boosting our operating margin. These are the, I would say, the main impact. Yeah.
Okay, the non-microcontroller part has essentially held up better over the last few quarters than the microcontroller part, and that has driven the deterioration in mix. I would guess that will reverse.
Yeah
somewhat in Q4.
Exactly.
Understood. Thank you. That's clear.
Thank you, Johannes. Next question, please.
The next question is from Janardan Menon of Liberum. Please go ahead.
Hi, good morning. Thanks for taking my question. I just wanted to go back to the new program ramp, the design win activity that you talked about, and the funnel of opportunities that you are seeing, which is expanding, even in the low part of the cycle. I was just wondering, how does that now relate to your midterm revenue target of model of $12 billion that you talked about at your capital markets day? Given how those new programs have ramped in the second half of this year and the new design wins and activities that you're seeing, does that make you more confident or less confident versus May in terms of achieving that within a midterm of the $12 billion?
What we control by ourselves means our new product introduction and roadmap and related technology. We are on track with all the programs we are managing, but we have no, let's say, time delivery slipping, clearly, whatever are in the field of microcontroller, for MDG, AMS, or ADG. At this stage, we confirm our confidence level, as we said, the capital market debt to reach $12 billion, either as a run rate in the second half of 2021 or full year in 2022.
Understood. Just a follow-up on your RF front-end module business. You talked about some additional design wins on that. I was just wondering, are these new design wins at one customer, or are you now having RF front-end module design wins at multiple smartphone OEMs?
It's mainly one customer.
Understood. You talked about on the application-specific analog strength in the second half. Is that predominantly on wireless charging that you're referring to? Once again, is that at one customer or is that at multiple customers that you're seeing that traction on wireless charging?
It's wireless charging, multiple customers.
Understood. Thank you very much.
Thank you. Next question, please.
The next question is from Aditya Matuku from Bank of America Merrill Lynch. Please go ahead.
Yeah. Good morning, guys. Thank you for letting me on. Just two questions if I could. Firstly, again, on the analog business in the quarter, you talked about growth, but you also mentioned general purpose analog was weak. I just wanted to get a bit more color on what exactly drove the growth within analog. Any color on what this product does and whether it was a specific customer or multiple customers would be helpful. I've got a follow-up on the inventories after.
On analog, so what is related to general purpose and industrial and distribution is still weak because of over-inventory. We are facing inventory, still inventory correction, and also it is amplified in Europe. What has driven our growth on analog is related to application-specific, so either related to personal electronics, but seasonal effect on hard drive. You know that overall hard drive this year, okay, is a very strong reduction. The market of hard drive is decreasing 30%, but across the year, the profile of the business is backloaded, and it is linked to seasonal effect. We have taken benefit of this seasonal effect.
Understood. Just quickly following up on the inventories, I just wondered if you obviously talked about inventory correction being over in MCUs, but the inventory correction is continuing in other parts of the market. I just wondered if you could do a quick tour around the different verticals, and talk about how you see inventories in the entire supply chain, in autos, in industrial, and some of the key markets that you address. Any color here would be very helpful. Thank you.
Inventory, on what we monitor, again, we see a standard level of inventory on the channel for MCU and MEMS. We still, let's say, excess inventory in general purpose analog, in high voltage Power MOSFET, and in, let's say, non-power discrete. We see a healthy situation on low voltage Power MOSFET and IGBT. More then at our OEM, when we address the trend of our OEM is difficult to assess the inventory level overall. More and then at ST level, okay, you have seen that we are decreasing our inventory. I think for us, what is important is to have a distribution inventory level at a healthy situation in order to be sure that we will take immediately benefits of the end demand increase, especially when it will happen in Europe.
Unfortunately, for general purpose analog, it will take a little bit longer, and for high voltage Power MOS and standard discrete. For the rest, okay, we are totally ready to enjoy a growth, and this is exactly what we have done on MCU and especially in Asia and on MEMS. About the rest of the industry, more it's difficult to say. I think, important you read, okay, what industrial analysts are providing, okay. We know that some IDM are still at important level of inventory. Foundry, I don't know. This is what I can say.
Thank you very much.
Very clear. Thank you.
I think we have two more questions to come, Moira. We will take those two ones here. The next question, please.
The next question is from Tristan Gerra from Baird. Please go ahead.
Hi, good morning. Could you expand on the potential content and revenue opportunity that you see from 5G trends, both on the device and infrastructure side, over the next year? Also expand on the opportunities you see with SOI.
Well, you know that the RF front-end module for 5G, first, the content will increase. This is the main difference between 4G and 5G. It is an increasing demand in the front-end module. The front-end module involving globally four blocks. The filters, passive network components. You have power amplifier, low noise amplifier, and switches. The SOI RF technology is a good technology as far as you continue to improve and enable performance for switches and low noise amplifier. At ST today, we develop in the pace a well-known, let's say, great technology, eight-inch on RF SOI. In parallel, we develop a roadmap to convert to 12-inch on 65 nanometer, based on 65 SOI. This technology is fulfilling the expectation of our customer in term of performance enablement.
This is where ST is, and this is where ST is growing, between the RF SOI and the 65 nanometer SOI. There is other, let's say, opportunities for us, related to 5G. Definitively there is, in automotive, the vehicle to X connection. Industrial, we will have the IoT. That's the reason why in our roadmap, we are developing a system on chips, embedding data cellular modem to address IoT for 5G. It is a strong effort for the company, okay, to be able to deliver this kind of system on chip in the future. Personal electronics, I have spoken about, it is mainly the RF module. In communication equipment, well, it is clearly that technology for millimeter wave communication links will be important, like the GaN, or the FDSOI. This is where ST is focusing as well.
This is basically, okay, ballpark, the picture I can share with you.
Great. Thank you very much.
Thank you. Next question and last question, Moira, please.
Today's last question is from Gianmarco Bonacina from Equita. Please go ahead.
Yes, hello. Two quick questions from me. The first one is, if you can just confirm the final cash out for Norstel, if this will be in the region of $60 million. The second one, in terms of the impact of the stocking on your revenue for the full year 2019, you are guiding for $9.5 billion, which is a 2% decline year-over-year. I wanted to know if you tried to make an estimate of how much this year, overall, the stocking was a headwind for you, on this figure. Thank you.
In term of Norstel, yes, I substantially confirm. We have signed the agreement. The valuation is known. At the end, in the range of $60 million, this is what will impact our cash flow in the next quarters. In respect to how much has been the impact of the stocking, this is not easy to say, let's say, in the sense that, of course, is a component, the lower demand. I would say that probably on our declining revenues has been probably a significant component. We start to see this already last year in the second half. For sure, the first half of the year in 2019 has been significantly impacted. To be honest, to give you a hard number is not so simple, I would say that at least, let's say, half of the decline is from .
Okay, maybe just a quick follow-up. In terms of your addressable market, do you have, let's say, an estimate for the full year 2019, in terms of year-over-year change?
In term of-
Minus three, minus four.
Yes, exactly. Let's say what we see is that it should be in the range of minus three, minus 4%.
Okay. Thank you.
I think this conclude our Q3 earnings call. Thank you very much for your participation. Speak to you next quarter.
Thank you.
Thank you. Bye-bye.
Ladies and gentlemen, the conference is now over. Thank you for choosing Conference Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.