Ladies and gentlemen, welcome to the 2nd Quarter 2019 Earnings Release Conference Call and Live Webcast. I'm Myra, 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 and A session session. The conference must not be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Salinda Thier, Group Vice President, Investor Relations. Please go ahead, madam.
Thank you, Maria, and good morning. Thank you, everyone, for joining our second quarter 2019 financial results conference call. Fosting the call today is Jean Marc Sherry, ST's President and Chief Executive Officer. Joining Jean Marc on the call today are Lorenzo Grandi, President of Finance Infrastructure In Services And Chief Financial Officer, Michael Cassis, President of Sales, Marketing, Communications And Strategy Development. This live webcast and presentation materials can be accessed on ST 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 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 Estee's most recent regulatory filing for a full description of these risk factors. Also, to ensure all participants have an opportunity to ask I would like to turn the call over to Jean Marc Estee President and CEO.
Thank you, Celine. Good morning, everybody, and thank you joining ST on our second quarter 2019 earnings call. Let me start with some opening comments. First, on Q2 and H1. So our Q2 revenues at $2,170,000,000 came in above the midpoint of our guidance.
Gross margin at 38.2 percent was slightly below due to product mix. Operating margin was 9% and net income was $160,000,000. For the first half, we delivered results in line with our guidance with revenues of $4,250,000,000, gross margin of 38.8 percent, operating margin of 9 point 2nd, on Q3. For the third quarter, we expect strong sequential revenue growth of about 15.3% at the midpoint, driven by engaged customer programs and new products in a softer than expected legacy automotive and industrial market. Gross margin is expected to be 37.5 percent at the midpoint, including 140 basis points of unsaturation charges.
Regarding the full year 2019, We now expect net revenues to be in the range of about $9,350,000,000 $65,000,000,000. This level of revenues takes into account already engaged customer programs and new product introductions. It is still assuming improving market conditions in the second half in automotive, industrial and mass market. However, at a different pace compared with our prior expectations. 4 industrial and the mass market.
Last quarter, we indicated that March April point of sales revenues were showing signs of recovery. That trend continued in May June. However, this market recovery is taking longer than forecasted, particularly in Europe. For automotive, we continue to see very strong demand in smart mobility applications, driven by car electrification and digitalization. What has changed since Q1 and our Capital Market Day is a deterioration of market conditions in automotive with lower car registrations, particularly in China, affecting of our legacy automotive products.
We already moderated in April our 2019 CapEx plan to a range of $1,100,000,000 to $1,200,000,000. We are not changing our plan here as we focus on our strategic programs supporting our future growth over the mid term. Now let's move to a detailed review of the second quarter. Net revenues decreased 4.2% year over year on lower sales of analog, microcontrollers and digital ICs. We saw year over year growth in automotive and power Discrete, MEMS and sensors.
As planned, we returned to sequential growth in the second quarter with net revenue increased 4.7%, This performance was driven by specialized imaging sensors, RF products for front end modules, siliconcarbine Modefets And Digital Automotive. Zetrotor, where General Purpose Analog microcontrollers and legacy automotive products. Our gross margin was 38.2%, 30 basis points lower than the midpoint of our guidance, reflecting unfavorable product mix. It included 80 basis points of unsaturation charges. Our net operating expenses were $632,000,000, in line with our seasonally higher expectation of Evot $625,000,000 to $635,000,000 for Q2.
From a profitability perspective, Operating margin was 9% net income, $160,000,000 and diluted earnings per share, 0.18 dollars. Turning to cash generation, our net cash from operating activities was $324,000,000 in the second quarter, and $665,000,000 for the first half. Our CapEx in Q2 was $372,000,000, compared to $390,000,000 years. Free cash flow was negative $67,000,000 in Q2. We paid cash dividend, totaling $53,000,000 and share buybacks of $64,000,000.
Now let's move to our first quarter outlook. For Q3, We are expecting strong sequential revenue growth of about 15.3% as the midpoint. Our sequential growth will be driven by engaged customer programs and new products in a softer than expected legacy automotive and in the field market. All product groups are expected to grow. At the midpoint of our guidance, This means we will be back to about the same revenue level as in Q3 2018.
Our gross margin guidance at the midpoint is 37.5 percent, with an estimated 140 basis point of unsaturation charges. This represents a decrease of 70 basis points sequentially, mainly due to a higher level of unsaturation charges. On a year over year basis, the decrease is 230 basis points. We expect net operating expenses in Q3 to be between $6.20 to $630,000,000, And let me now share with you some important business, market and product dynamics. And let's start with Automotive.
In the first half, this part of our business increased about 10% year over year. We operated under 2 opposing dynamics. On the one hand, a declining legacy automotive business, in line with the year over year decline in the number of car registration worldwide, worse than expected. In China, specifically, we did not see a positive impact for the recent fiscal stimulus policies. And in Europe, demand for legacy automotive products has been deteriorating during the second quarter.
On the other end, we continue to see very strong demand in smart mobility applications. Driven by car electrification and digitalization. In car electrification, we had a number of significant design wins, during the quarter for electric cars and charging. This included a key component in an electrical vehicle investor application, as well as MOSFETs and power modules. We had a number of designs in onboard charging applications at American, Korean, and Chinese carmaker and Tier 1.
For silicon carbide product, We continue to increase revenues and the number of design in activities with multiple customers. We now have 33 ongoing programs. This number includes both Automotive And Industrial Programs. However, or in production, we are on track for over $200,000,000 of revenues this year. Card digitization for us includes applications such as ADAS systems, V2X communications and unbundled control units using powerful microcontrollers.
Here we continue to expand our footprint. We won a designer with a Japanese Tier 1 for our 32 bit MCUs for a new generation of ADAS system. Moving now to Industrial. Q2 was another quarter with softener market dynamics. The inventory correction that distributors that has been impacted seeing our analog portfolio and general purpose microcontrollers for some time is still ongoing and even slightly stronger.
Reflecting short term lead time for this product. We expect this correction to be over in the 3rd quarter, based on the positive sign we started to see since March for the point of sale at distributor worldwide, except in Europe. As we already share with you, industrial is a key area of focus for ST, where we plan to accelerate our goals. We target leadership in industrial longer debt processing, Here, we introduced 2 new STM32 MCU families. The first one with dedicated features designed for motor control and digital power applications.
Is already in production at several Chinese industrial OEMs. The second one is a dual core SCM32, with record cortex core processing power. Furthermore, we introduced high voltage motor driver ITs with unbunded STM32 MCUs, leveraging our system capabilities to strengthen our analog offer. We won a number of designs across many industrial applications, for example, with metering and digital power solutions for LED lighting and power supplies, as well as in Industrial Power And Energy Management with numerous design wins for power discretes. Moving now to Personal Electronics.
The global smartphone market is still forecast to decrease slightly. However, we are seeing an important positive trend of demand acceleration for 5G smartphones in Asia. In this end market, we confirm with target leadership in specific high volume smartphone applications, sensors, secure solution, power management and orange products for front end modules. And we also focus on the growing wearable and accessories market. During Q2, we had at least an imaging sensor and or a men's device in all of the top 10 smartphones currently on this market.
We had multiple wins for motion and pressure sensor in the flagship models for many of the world's top smartphone and wearable manufacturers. We also continue to earn design wins and around shipments for our time of flight sensor analog products and orange products for 4gfrotenemodules. This last point allows me to transition to communication infrastructure. I would like to conclude with a few words on our objective to capture opportunities in 5G with RF mixed signal technologies and products. During the quarter, we won multiple ASIC designs for 5g Infrastructure, 5g smartphone and Wi Fi routers.
This, thanks to our unique technology portfolio. To conclude my remarks, During the second quarter, we executed in line with our expectations, returning to sequential revenue growth. For the third quarter, we expect to see a strong increase in sequential revenue growth at the midpoint of our revenue launch. For the full year of 2019, we still plan for a strong sequential growth in the second half of the year compared with the first half Our expected level of revenues takes into account already engaged customer programs and new product introductions It is still assuming improving market conditions in the 2nd half in automotive, industrial and mass market, However, at a different pace compared with our prior expectations. Based our plans opened our plan, sorry, we will maintain a solid capital structure returning to positive free cash flow in the third quarter.
Thank you for your attention. We are now ready
you. Questions. The first question is from Alexander Petterk from Societe Generale. Please go ahead.
Good morning. Thanks for taking my question. I just on the outlook, if I may, firstly, when you see now things being slightly softer into in the second half in certain areas, is timing of the recovery unchanged, but the balance is lower than expected or is also the recovery a little bit later than you initially planned And then secondly, if you could comment maybe a little bit on the unused capacity charges, so the unsaturation charges why are we still seeing an increase in these charges in the third quarter despite the strong sequential growth, if you could go into more detail on that? Thank you.
So, I will take the first question and Laurento will take the second question. About the outlook, 1st of all, I would like to confirm that what is intrinsic to ST. So totally on the control, So it means all the programs related key program related to customer or a new product introduction are fully under control and will, will ramp according our expectation and our plan. Then what is not under our control and extrinsic to ST. So mainly market condition for industrial and when I say legacy automotive, I mean, it is linked to, let's say, usual caramel combustion engine based car.
For sure, it is related to the car registration. Here, okay, for these two markets, for industrial, it is more, let's say, a slight push out of the recovery and a lower amplitude of the recovery. So again, what I disclosed to you during my speech, we confirm that we do believe that in Asia 2, we will see a recovery, but at the softer pace than anticipated during the first quarter. So a smooth push out and with a lower amplitude. Now on the on the automotive market, it is totally related to the car registration.
Well, you know that at the end of, of H1 worldwide, we see something is around of minus 7% car registration versus last year and a specialist, forecast a total for the full year of minus 5%. So certainly, okay, that plan, a slight recovery in H2, any year with a similar profile, certainly a push out more recovery starting September rather than July August and with a lower amplitude than expected.
Thanks, Guillermo. I will take the second question about unsaturation. As you have noticed, in the second quarter, we were hit in our gross margin by 80 basis points of unsaturation. This is including a front end saturation for our fabs as well as in saturation in some lines that we have in the back end. Why we will continue to have the unsaturation also in the second half?
This is not something new. I was anticipating this already in our Capital Market Day. You see that in the first half we started with production, especially in Q1, very keeping our fab quite loaded. This has increased our inventory. I was anticipating this in our call in Q1 And today, our inventory are in the range of 125, 130 days.
So what we will do is in the second half of the year to reduce our production notwithstanding, let's say, the significant increase in our revenues. And these will be aimed to bring our inventory back to a level of number of days that will be closer to between 100 90 days.
The next question is from Matt Ramsay from Cowen. Please go ahead.
I think
from my side, the one of the things that I would love to hear some perspective on Jean Marc is in the auto business. Obviously, there's been weakness, globally that you just highlighted, but you guys have quite a bit of product ramping And so I'd really like to understand the weakness you're seeing maybe by geography. Obviously, a lot of us have heard and seen data that shows China is weak and maybe you made some comments in your prepared statements about Europe. But any comments that you could give us on a global basis on your auto outlook for the back half of the year and what you're baking in for a recovery potentially by region would be really helpful.
So I take the question and certainly, macro cases will complement it. Well, it is when not the first half to date. So overall, car registration worldwide is minus 7%. And clearly, China is a minus 12%, minus 13%. So there is a, let's say, a stronger impact in China.
Then in Europe, there is an impact as well. And in USA, So there is a slight decrease in car registration. So this is from the fact based point of view, numbers point of view, But then from qualitative point of view, it is clear that, ST, again, end of phase 1 our growth in automotive overall is 10%. So it is clearly demonstrating that our strategy on car electrification and car digitalization is paying back, because our micro controller our ADAS, our power modes fed silicon carbide base, our IGBT are really growing. And clearly, our ASIC, based on the either analog, analog technologies are impact it by the car registration.
So this is the overall picture. Now, to give more color about the car industry, well, we do believe that the car industry is passing through important change where the balance between thermal combustion engine based vehicle produced and electrical vehicles means battery based hybrid, plug in hybrid and mild hybrid, which changed during the next few quarters. But again, ST is very well positioned to capture this product mix change. So this is a situation. So Marco, you want
to add something more Yes. Hello, this is Marco. 1, as the general market say, the major detractor in terms of car registration has been China with only one bright spot, which is Japan, And we do see that the recovery that was expecting the second part of the in terms of car registration in China is not going to materialize. And this at the end is going to have an overall impact during the year of a minus 5% in terms of car registration. Considering that we have an exposure in the range of 70% in the legacy automatics, clearly this has an impact also in our automotive business.
Great, great. Thanks. Guys for the color. Just as a follow-up, AMS, I think consensus by a pretty wide margin and the C seasonal pattern in that business is a bit different than we saw in the second quarter of last year. Obviously, some new products I just wanted to maybe understand a little bit under the covers if it's just a different pattern with the large smartphone customer or if there's something else going on from a seasonality perspective in AMS?
Thank you.
Well, I will not comment the seasonality of over competitor. If you have to comment ST, well, again, as I said during my comments, ST, we have a strategy to focus on a growing application, high volume application, sensor, secure solution, power management, so wireless charging, mainly and RS product for front end module. Well, as I said, within the top the top player, the 3 big one and the other Chinese player mainly. So, the result of ST in Q2 is a mix of, let's say, this attachment rate to the to the smartphone. However, this is what we disclosed to you on our growth press release.
And my speech, clearly in Q2, the performance of growth, which was higher than the midpoint of our range. Is mainly related to specialized imaging sensors.
The next question is from Andrew Gardiner from Barclays.
I just had a sort of follow-up related to that last question and then another one perhaps around the trade war. Just you mentioned Jean Marc that sort of the biggest single driver of the upside in the quarter relative to the guidance was specialized image sensors I mean, are you seeing, does that change your view on the overall demand for that type of product over the course of the year or we perhaps just seeing it a little bit earlier in second quarter. And therefore, perhaps a slightly lesser ramp in the second half of the year. And then also just sort of more broadly speaking, trade war in particular related to Huawei, it doesn't seem like you have seen any impact from, from sort of the U. S.-based suppliers limiting their shipments into Huawei and then potentially Huawei, has a knock on impact to you guys in that regard.
And it certainly seems like some of the U. S. Companies are now starting to ship again. So I just, if you have any further insight to what's happening with that key customer would be helpful. Thank you.
So, as I said, if we change slightly our guidance, our expectation for the year. So from $9,450,000,000 $9,850,000,000 less at the midpoint is mainly related to the automotive market, so our legacy product and industrial. It is not linked to our, let's say, key programs at key engaged programs with customer. And if you remember well, what we disclosed to you at our Capital Market Day, it is clear that the smartphone programs are part of these key programs. So here, for the full year, we maintain, let's say, our expectation, slightly above, okay, but no more than that.
More. I bought the trade war and the customer, you you asked me the question. But here, I can only say one thing, 2 things. First of all, I repeat ST strategy is to focus and be a leader on sampler, Secure Solution, Power Management, NLS product for front end modules, whatever are the customers. Specifically to Huawei, of course, we will comply with the rules and regulation associated with sales The company is appearing on the entities list, including Huawei and his affiliates.
However, even so, due to the nature of our supply chain, we are able to continue supplying our product to Huawei and its affiliates. Enwayway is part of the top customer we are targeting with our work strategy. More than that, difficult for me to comment.
Thanks very much.
The next question is from Sandeep Deshpande from JP Morgan. Please go ahead, sir.
If you look at your guidance in the 3rd quarter, this 15.3 percent sequential growth is the highest you have guided to in the third quarter in the last 2 decades, such even better than what it was in 2009. So maybe can you help us break it down into existing customers, new customers or products so that we understand where this growth is coming from? And in terms of the mix from this growth, how should we be looking at the mix from the growth given that your product mix had some negative impact on the gross margin in 2Q. Is this kind of mix that you see in 3Q going to continue and does it have a positive or negative impact on which is excluding, of course, impact of under loading?
So for the Q3 revenue guidance, More clearly, it's a include the same, let's say, profile than the expectation for the second half. It is clearly a part of our, let's say, key programs with engaged key customer. And clearly here, the key driver for this program are a specialized imaging sensor and analog. Then as we said, as we have seen some positive sign of recovery in the distribution channel, mainly in Asia, with 2 very positive KPIs. 1st, positive CAPPI is positive trend increase in the point of sale of distributor, cumulated with the inventory decrease.
So that's the reason why a second driver of the growth in Q3 will be the microcontrollers. So this is the 3 main contributors to the growth in Q3. It is Specialized Imaging sensor, analog, related to key programs and microcontrollers related to distribution channel addressing industrial and mass market. So this is the Q3, the Q3 outlook. Then for the second question,
on the mix on the gross margin for the next quarter. In Q2, the gross margin came at 38.2 ending. And now what we are seeing is 37.5. These 70 basis points are 60 basis point related to the increase of unloading at the end because we moved from 100 and 40 to from 80 to 104. So the main reason is related to the unloading, the decrease in term of gross margin.
When I look at the mix this will not be a detractor. There will be some price effect, these kinds of things, but not really a big detractor moving from sequentially from the gross margin of 32.38.2, sorry, to 37.5.
Thank you.
The next question is from Achal Sultania from Credit Suisse. Please go ahead.
Hi, good morning. Just a question on your RF business for front end smartphones. And also the 4G, 5G infrastructure business. Can you just help us understand what are the what is the rough size of both these businesses separately? And when you talk about these ongoing wins on new projects, revenue ramping in this area, is this is this all like new design wins, because you did not have much presence in 4G and And now you are basically getting more presence in the 5G space?
Or is it just driven by incremental demand right now and things will normalize trying to understand how much it is market driven versus content driven? Thank you.
It is more driven by a content by content because, again, on 4g, we leverage our portfolio, tech, which is basically based on the RF mixed signal technology, like, a biosimilars 55 RF SOI. And for the 5G, we see a real acceleration of the demand. Clearly, compared to our expectation, answering in the year, the mix is changing. Overall, the number of phones will be slightly decreased, but clearly, the mix is changing. There is a really an acceleration of the 5G, certainly related to the current deployment of the 5G infrastructure in China.
We know that there is a big program in China to deploy your base station and all the related infrastructure to accelerate the 5G deployment. And as a matter of consequence, there is also an acceleration of the 5G devices. And it's see here is well positioned with our technology, mainly in 300 millimeter, at c5 nanometer and will contribute to H2. Now, okay, we never comment the detail numbers and weight of this contribution, but this is important, qualitative and trend I would like to disclose with
next question is from Amit Archandani from Citigroup. Please go ahead.
Tushandani from Citi. And thanks for taking my question. Firstly, if I may, you talked about certain improving data points, point of sale at distributors. At the same time, your inventories are high, which you're looking to run down Could you maybe walk us through potentially how lead times are looking like at this stage and how the visibility or lead times have shifted over the course of the quarter and potentially exiting into July, what do you see out there? And what is the degree of confidence do you have that whatever remaining improvement you're assuming should be coming through in the second half of the year?
And then I have a follow-up.
You referred to the market in distribution?
Broader market. Distribution as well as your direct business, the lead times across your families and visibility exiting the June quarter and the level of in the second half market recovery?
Yes. What we are seeing as was already introduced by Jean Marc is The market is acknowledging a return to let's say more normal and standard lead time, which means distribution is entering orders according to this new level of lead time. So I think the market is stabilizing towards a more normal situation with an exception still present, which is on the power portion of our portfolio.
Okay. And in terms of the OpEx and the gross margins. I know you're not necessarily guiding for Q4 at this stage, but given the mix effect we have seen in Q3, and potentially R and D, which looked a bit higher in Q2. Could you give us a sense for how we should think about gross margins and OpEx landing for the full year?
Well, in terms of OpEx, as I said, already sometime, we do think that the average quarterly level of our OpEx, it will be between 62630. So it means that if you will take the full year OpEx for the company, you divide it by 4, you will have, let's say, a number that will fall between 620,000,000 dollars, $630,000,000. And in the OpEx, you know, we include the net OpEx including other income and expenses. So at the end, having the guidance of Q3, Q4 is easy to be computed to where we will land. In term of gross margin, well, you're right.
We don't give a guide for the following quarter. What I said at the Capital Market Day when we met together there, I was indicating that at mid point of our guidance, at that time, it was 9.65000000000, we will be in the range of 38% of gross margin for the year. Today, we have lowered a little bit. Our guidance is now more in the range of $9,500,000,000 in term of revenues. In term of gross margin, I substantially confirm at these numbers.
Maybe we will be a few 10 basis points lower, but we will be in the range of 38% for the year. So I there is no significant change, irrespective of this number.
Thank you very much, Lorenzo.
The next question is from Anthony Stoss from Craig Hallum. Please go ahead.
Good morning guys. Thanks for taking my question. I also wanted to follow-up on gross margins.
In
the most recent goals for the company, you've talked about getting 40% gross margins and staying there, you're coming up a little bit light now on that goal. Can you now kind of suggest that 40% is out of the range for even 2020 calendar year or when do you think you can get back to 40% gross margins? Secondly,
it
seems like you're not reducing CapEx in light of gross margins coming down and revenues falling short. Why are what gives you the confidence to keep CapEx elevated and what markets are you spending most of your CapEx on?
In respect to the gross margin, as I was saying before, for this year, actually, we we don't change substantially our view. You know, our gross will be substantially in the range of 38% at midpoint of our guidance. Our target is, yes, to be at 40%. 40% can be achieved with substantially no level of unloading. This is our view and with the fab that are running our optimized loading we still confirm that this is our view, our target.
And for sure, now to give an indication on 2020 is a lead a bit premature if I if you allow me, but definitely, this is where we would like to on the company in a short medium term, not in Tanzania. So it means that in term of CapEx, In terms of CapEx, as you know, a significant portion of our CapEx is related to strategic initiatives. These strategic initiatives are not 100% linked to the market. Of course, we are modulating our in respect to how our level of revenues and the and the how, let's say, the company is moving. We have already revised the level of our CapEx entering in the second quarter, lowering our previous guidance.
At this stage, we think that the level of a CapEx is still appropriate in order to fulfill the need of the company. So there is no in our view view, in our view, needed to reduce the capacity at this stage.
However, I would like just to give some color about 2020 and recalls some important points by verticals. It is clear that for the automotive market this year and mainly in China and in Europe, on the, let's say, the legacy car, I am not spoken about the electrical vehicles. Has been let's say put under a kind of turmoil related to the impact of the WLTP and the China 6, in, in this country. And you know, that's the carmaker, the risk because you have in term of fine if they do not respect the target of 2021 in term of CO2 norms. Well, it is clear that it has created, okay, some turmoil in the end of 2018 and this year in 2019.
And with collateral effect, some inventory correction. But we do believe that, starting Q4 of this year, and let's say, in 2020, the situation will improve. I don't say we come back to full normal, but the situation will improve. On the reefers, it is clear that the megatrend related to electrical vehicle, whatever they are, battery, mild hybrid, hybrid plug in hybrid will continue to grow. And it is clear that the digitalization of the car will continue to grow.
So we expect, okay, the automotive industry next year. First, we'll move out progressively from this difficult situation in 2019 and we'll show, okay, some good sign of recovery. Now going to industrial markets. But again, industrial market has been in a certain extent as well in that by the by the automotive industry this year. Okay.
We have seen some factory automation investment push out and it cannot be push out forever. We have seen some of the verticals in this market slightly impacted. And with, let's say, inventory correction related to the overall mood mainly impacted by the trade war between USA and China. As a matter of fact, the inventory correction is ending, okay, we forecast that the inventory correction will be hand, in Q3 And starting Q4, we will go back to normal, POS, PoPs for distribution channel and demand visible to us without any filter from the inventory. So this is what we are seeing for 2020.
Now then to personal electronics and smartphone, what we described as an generation of the 5G deployment, mainly in Asia, mainly in China and the related 5G device will continue to accelerate in 2020, we know that the overall smartphone will be basically flat on slightly decreased, but the content will continue to increase. So all in all, I would like to say that too early to say about 2020 in term of number, but megatrends are there, positive trend are there, which make confidence ST to continue to grow in 2020 and, to go if we have, share with you at the Capital Market Day to achieve, in the midterm, 12,000,000,000 US dollar of revenue.
Thank you for
Next question is from David Mulholland from UBS. Please go ahead.
Hi. I just wanted to ask on some of the design win commentary that you gave in the in automotive. I think you mentioned you want a key component in an electric vehicle inverter, but can you just clarify what component that was? Is that IGBT inverter, silicon carbide MOSFETs? Or is it for gate drivers?
And then also on the onboard charging applications, if you can just clarify if those are silicon or silicon carbide. And then on some of the commentary you made in the consumer space and smartphone space, In terms of time of flight, we obviously started seeing for 1D ranging sensors a bit more commentary coming out of one of your competitors AMS around this. Just wonder if you could comment on how you see the competitive landscape in time of flight for ranging. And then also your positioning for time of flight, if we start using it for purposes as well?
Yes. Okay. Marco speaking here, I will take your first question about inverter on board charge, etcetera. Of course, there we are selling all our portfolios. So depending on the application, we are selling our we don't care about it, but of course, we are selling also IGBTs and we are selling also gate driver when necessary.
So our annual portfolio. So surely for inverters, the Lyon share parts is silicon carbide, but we are selling all the portfolio.
Well, I bought specialized imaging sensor. Again, I will not comment our competitor, but I will comment, okay, the visibility we have and what ST is doing, more, it is clear that you know, that ST is a key player in the 3 d sensing for the facial recognition. Since 2017 second half, the unique full proof technology based on what we call a structure site where ST is a key player and and we are still, let's say, growing in this kind of application. In parallel, embedded in the smartphone, there is clearly some other components, like ambient licensing, or, let's say, time of flight based proximity sensor or a auto focus assist or a ranging sensor. And clearly, okay, I repeat that we have accumulated a huge volume in the in the this time of flight and we continue That's the reason why, as I told you, in the top 10 smartphone on the market today, we have either a special imaging sensor, including this time of flight or a main sensor.
Also we disclosed to you during the recent quarter that no ST is important player on on their flight something on the smartphone or, let's say, other, other wearable application. Well, and in terms of trend, of the industry, it is clearly, that one kind of are seeing is an introduction of indirect time of flight for the world facing camera first. Which certainly will be, let's say, a future competitive solution to address the depth map sensing more ST here or I confirm to you that we have a very strong roadmap with a very, let's say, a competitive and a high performing product. That we will deliver to the market, whatever is iOS or Android count. So this is, let's say, the dynamic specific to ST, we have on this application for the smartphone.
Thank you.
The next question is from Jerome Gramal from Exane BNP Paribas. Please go ahead.
Yes, good morning. Quick question on the capacity utilization rate and the out sourcing, that you achieved in Q2. And just a follow-up on the guidance for the full year and specifically for Q4, we still have a huge range between the low end and the high range. So it's about $300,000,000 difference specifically for Q4. How come that, Jess, with 1 more quarter, you still have such uncertainties for Q4?
Thank you.
Jerome, good morning. So Lorenzo will take the first part of the question and I will be pleased to take the second one.
About the utilization in Q2, our utilization rate our front end fabs was in the range of 83% was down and respective to the 88 percent that was in Q1. We do expect, as you know, there is an increase in our unloading charges patient is to be in the range of 76% for Q3 in terms of utilization rate. Talking about our weight in foundry, where we stand. In Q2, we were in the range of 17% of the value production, total value production for the for the front end that is similar to the level of Q1. In Q3, we will be a little bit increasing this for 2 reason.
1, because there is a decline on the overall, let's say, production value in front end. And the second reason is that some of our engaged customer programs are exposed to foundry. And so there is some increase on foundry due to the fact that there is increase in the revenues of these engage customer programs.
So I bought the second part of your question. Well, it is clear that we have very high level confidence to execute properly is the midpoint of our guidance for Q3. Then about the range. Well, 1st of all, I guess, you acknowledge that we have reduced the range compared to the Capital Market Day. This is simply because, no, we are fully confident about what is under our control.
So the good execution of our programs and the perfect execution of the ramp up of the supply chain. So that's the reason why we narrow the range from plus minus to 100 to plus minus 150. Then about the plus minus 150, but I would like to comment that it is for us, adequate with risk and opportunities, we are facing, in the second half of this year, as I disclose, if I give only some color, but not weight, about these risks and opportunities, starting by, by verticals. But again, on automotive, you know that on automotive, we share with you that for the time being, the overall market will decrease 5% expected full year 2019 versus year to date minus 7%. So leads okay, means we will see a slight recovery.
However, we know that this recovery and especially in Europe, will be perceived after the summer period because you know that in Europe, we have a seasonality effect related to the standard period on car industry. So you know that the visibility confirming that we will have a slight recovery in H2 will be perceived in September, not yet. For all industrial clearly on industrial related to our distribution channel and with our device. Well, we have a very good confidence level on the microcontroller on the power discret. On pure discret, we have still, let's say, important inventories and here, we have not seen yet signed off a recovery.
So it is also something which is alerting our self more. And then you know that there is an overall situation between USA and China, which is not yet totally sold. And if you go back 1 year ago, if you remember where ST has been one of the first company, detecting some sign related to the collateral effect of this trade war. Well, we expect that this trade war will be sooner or later that mitigated. And but okay, we need a little bit of time.
Well, then last but not the least, personal electronics. You know, like me, that a new device will be introduced in September, with a range potential production. It is a business as usual, no work, no better than usual, but you know that there is a probability of a forecast change in Q4 as we faced last year when you see new introduction of device. So all in all, accumulating this, pre vertical analysis, we do believe that the current range, we disclosed today is well adequate taking risk and opportunities Of course, based on a very high level of confidence to execute perfectly over Q3 midpoint.
Thank you very much.
The next question is from Sebastian Stabovitz from Kepler Cheuvreux. Please go ahead.
Yes, thanks for taking my questions. 1 on your 5G market opportunity, you target more than 50% market share. Enough on trials for base stations, mid term. Do you have the design wins already in your hand today? And what kind of market sales opportunity are we talking about here, please?
Okay. So, I think you are mainly related to the our collaboration with MACOM. So what we can say in this moment is that we acknowledge the change of management at MACOM and we are continuously working with them and developing the market with them. So we have no further update from this point of view.
Okay. And one follow-up if I may on imaging because it seems that on imaging finally Sony, seems to be a little bit more aggressive on the 3 d sensing, now that they have 1 integrated apparently a soft kinetics. Have you seen any change in the competitive landscape in imaging 3 d sensing right now? No, no, I confirm to you that, you have in competition, for the timing, you have only 1 unique solution, for a facial condition, 3 d sensing, it is a structured light or other say, actually take during term of system are, let's say, less of full proof. And again, this what we confirmed.
We said to the Capital Market Day, we know that in the near future, certainly, architecture like structured light improved and, indirect time of flight will be in competition. ST address the 2 technology actually take you. And for sure, certainly Sony is a more addressing, the indirect time of flight kind of Citec too. And we would be in competition, but we do not see, let's say, a dramatic or material change in this dynamic, from the short term.
Next question is from Aditiya Metuku from Bank of America. Please go ahead.
Questions. Firstly, I just wondered if you could give us some color within your guidance for 3Q and 4Q, what you expect for the 3 different divisions. And secondly, obviously, you're seeing Infineon buying Cyprus recently. I just wondered if you could give any, give your thoughts around how you expect to change in the general purpose, market controller landscape and what your own thoughts are on getting involved in industry consolidation? Thank you.
Yes. Okay, Jean Marc. For the first one about some color on our guidance, for the current quarter in term of divisions. As we said, the driver of the growth will be the specialized image sensor, the microcontroller and the Mories, MMS, and we will a significant increase in revenues also in analog. While our auto and power and discrete, will contribute to the growth with a lower pace.
So at the end, when you look in term of product, but in term of division, AMS will be the driver of the growth, the stronger driver followed by MDG, where we have a significant increase in our microcontroller revenues in the next quarter. And then there will be some growth, a lower pace also in ADG, but as we were commenting during this hour, a little bit limited due to the automotive legacy products that are not contributing to the growth.
So about your second question, of course, I will not comment specifically Cyprus acquisition from the from Infineon. What I can say, from the recent past, from ST side, clearly, we have always seen Cyprus competitive on MCU for automotive. But not a key competitor in the field of a general purpose and CU. What is very important for General Purpose MCU is, related to that. The wide product portfolio.
So from ultra low power and CU addressing a IoT kind of business to the high performing MCU addressing the industrial market. What is important is to complement this MCU portfolio with industrial and in term of, of trend based on this strong ecosystem, it is clearly your capability to offer a general purpose embedded processing solution with security features and connectivity feature. More, this is what ST is doing. This is where ST is accelerating. And we acknowledge that the engineer has acquired Cypress.
But up to now, site price for us was visible on the automotive MCU, not too much on general purpose application.
Understood. And just any color on your own involvement and consolidation in the space?
M and A? M and A.
M and A. Of course, we are monitoring, okay, the value strength about ST, I confirm that our, let's say, strategy and our business model today is based on the organic growth. I can classify organic growth plus means, okay, ST will, certainly in the future, let's say acquire a small companies making our product portfolio stronger completing our IP portfolio in order to accelerate our growth on industrial market automotive as it is the main focus of our application strategy as I disclosed to you at the Capital Market Day. Okay, thank you.
The next question is from Janard Almenon from Liberum. Please go ahead.
Two short ones. One is on your gross margin and your capacity utilization trends towards the end of the year. You said you want to bring your inventories down to the sort of 1900 day level. And so your utilization is coming down to 76% if you assume that demand over the next few quarters is in line with your current expectations, would you be beginning to move up your loading levels sometime in Q4? And if so, what is the timeframe to cover that 140 basis points of hit on your gross margins from under loading?
Can we assume that sometime in either Q1 or Q2 next year that would be completed, based on your current visibility and expectations for inventory reduction. The second one is, you've alluded to, you know, specialized image sensors, microcontrollers and analog as your key drivers into the second the growth into Q3. I understand the specialized image sensor and the microcontrollers. I'm a little bit confused at what exactly you're meaning by analog and the strong growth what is driving that strong growth into Q3. Could you give us a little bit more color on what kind of products exactly are you talking about?
Is this the RF product or is there some other product in both? Thanks.
So I take this question and Marco Cassis will complement and then Lorenzo will answer the first question. When we speak about analog, basically it covers 2 parts of our groups. There is one part related to a key project with engaged customers. Mark, it is addressing one of the key focus of ST on the smartphone. I call it power management.
And the second part, so it is kind of technology, BCB like and the second part of Analog is the continuous growth addressing the industrial mass market for metering for motor control. So because, you know, motor control is one of the key application we are focusing on where ST address the full solution with the driver of the power, the embedded processing solution, And of course, okay, the power must say. So this is a analog part of power and energy control solution. Macu, do you want to
do that?
Yes, to
be a little bit, yes, this is Marco speaking, to be a little bit more specific, we'll have also a growth related to seasonality of hard disk drive where our analog is present and is growing H2 over H1 and plus some specific power management projects that will start during the 2nd part
of the year. So, no, Lorenzo, you can About the unloading, yes, for sure. Then as we said, unloading, the question is how we'll be the evolution on moving to our Q4, if I were to remember the question. In Q4, still we will have material level of unloading, even if less than in Q3. Overall, to give you an idea, it point of our yearly guidance.
So for the second half at 5,000,000,000, the unloading overall should impact our gross margin in the range of 100, 110 basis points. So means that the fab utilization will be still at a low level. We do see progressively entering Nexia in the first half of the situation and coming back to our normal loading for our fab
So it probably will be around q 2 before you reach optimal levels of loading.
It's a little bit early to say, but yes, at the end, I do expect that in Q2 next year, we will be back to the normal level of loading for our fabs.
Understood. Thank you very much.
In the interest of time, unfortunately, Tom is running. I think we have time for one more question.
Okay. The last question is from Johannes Schaller from Deutsche Bank. Please go ahead.
Yes, thanks for taking my questions. In your long term plan, you've obviously made some on revenue contribution from 3 d sensing specialty imaging from various customers. And now it looks like there's a lot of change for example, Apple has since recently pulled
a large project for 3
d sensing with Nanoco, which supplied quantum dot chemicals. There's a lot of movement here can you very broadly not talking about a specific customer, but very broadly give us an update if since your capital markets stay anything on your just on imaging or 3 d sensing, the roadmaps in particular has changed, based on kind of what you've embedded in your long term targets. And I have a quick follow-up? Thank you.
So I take the question and if Mark will want to confirm that he will take it. Now compared to what we say again as the Capital Market Day, there is no change in the way we see, the trend this specific application on the on the front face of the phone, so for face recognition and on on the world facing. It is clear as I told you, okay, during the call that for the timing, the structure of light for the front facing is the technology, okay, again, since H2 2017 and certainly, we'll continue for a while. As we disclosed to you, we do believe that at a certain moment of time, indirect time of flight based architecture will certainly come up on this kind of application, presenting as far as the performance is, is, that's consistent with the structure outline. Presenting, okay, some advantages, inform factor or something like that.
Well, this trend, okay, is confirmed. NST will compete overall on both architecture. And then you know that as a let's say generic trend for semiconductor, the challenge will be always to reduce the form factor to improve the factor of savings and to reduce the cost of ownership. Then on the world facing you, it is clear that the indirect time of flight based solution will be certainly the winning the winning architecture. And again, okay, here you will see maybe this year and certainly, next year, introduction of this kind of technology, for the short term means this year is not revenue for ST, but we are offering a solution for 2020 and beyond and we will be a key competitor in this market.
But then other component like on the own licensing, or let's say, ranging your sensor based on direct time of flight will continue as far as the RGB camera will have more and more pixel and you need to have a 2 focus assist in this kind of stuff. So no major change, no change compared to what we said in chemical market days.
Very clear. Thanks, Jean Marc. And just a very brief follow-up. You talked also about your NFC controller plus embedded secure element and embedded SIM going into production now in the second half. You haven't really brought it up as a big driver, I think, on this call for H2 revenues.
Just how should we think about the ramp of this product the contribution this year and next?
No, no, it is a this solution is part of the key program and an engaged program for Suresh 2.
With this, I think that this conclude our Q2 earnings call. Thank you very much all for your attention. If you have some follow-up questions, don't hesitate to reach out to the investor relations team. And with this, have a nice handout on this evening for all of you.
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