Ladies and gentlemen, welcome to the STMicro Electronics Fourth Quarter and Full Year 2018 Earnings Results Conference Call and Live Webcast. I am Moira, 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 At this time, it's my pleasure to hand over to Ms. Salim Bastier, Group Vice President, Investor Relations.
Please go ahead, madam.
Thank you, Myra, and good morning, everyone. Thank you for joining our 4th quarter 2018 financial results conference call. Hosting the call today is Jean Marc Sherry, Estee'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, Communications 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, with a full description of these risk factors. Also, to ensure all participants have an opportunity to ask questions during the Q And 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's ST President and CEO.
Thank you, Selene. Good morning, everybody, and thank you for joining ST on our year end earnings call today. Before going through a detailed review, let me start with some opening remarks. 1st, on 2018, We had solid financial results in the 4th quarter for both revenues and profitability. For the full year, in line with our objectives, we delivered significant revenue growth across our product groups, a strong expansion of our operating profitability, net income and free cash flow, while investing to drive growth opportunities and operating efficiency over the midterm.
2nd, on 2019, our first quarter outlook reflects the combined impact of increased unfavorable dynamics on top of first quarter seasonality in some of the end markets we sell. Smartphone applications, computer hard disk drives, and distribution in China and also in Europe. On the other end, we see Automotive And Power Discrete holding well with significant growth year over year. After Q1, we plan to return to sequential growth in the second quarter with an acceleration in the second half of the year. Our key objectives for this year are to continue outperforming our sales market and to balance our end market and application focus.
Delivering sustainable profitability and returning value to shareholders. To support all of that and to execute on our strategic technology, R and D and manufacturing programs, We expect to invest in CapEx. Part of this CapEx is devoted to support pre strategic initiatives that I will detail later. Our financial results in the 4th quarter for both revenues and profitability were solid. Net revenues increased 7.4 percent year over year and double digit growth, across our Automotive And Discrete Group in Imaging And In Digital IceES.
On a sequential basis, our revenue increased 5%, very close to our midpoint target of 5.7%. Second shore growth was driven by Imaging, Automotive And Power Discrete. Our gross profit totaled $1,060,000,000, representing a year over year increase of 5.6%. Our gross margin was 40% 20 basis points higher than the midpoint of our guidance. In comparison to the fourth quarter of 2017, our gross margin was 70 basis points lower.
Our net operating expenses were $614,000,000. Operating income increased 7.9% year over year to $443,000,000. Our operating margin was 16.8%, 10 basis points higher than the year ago quarter. 4th quarter net income of $418,000,000 and diluted earnings per share of 0.46 dollars, both increased about 35% year over year. Now let's look at our 4th quarter results by product group on a year over year basis.
ADG revenue increased 7.8 percent to $960,000,000 and double digit revenue growth for both automotive and power districts. ADG I have to correct here. Sorry, sorry, okay. It is 17.8, okay. As you guess, it is much better than 7 point Sorry for my mistake.
Let's continue now. ADG operating margin expanded 220 basis points to 14.6 percent from 12.4 percent. For both the 3rd and 4th quarters, ADG's operating margin were solidly in line or ahead of our low teens second half twenty eighteen target. Moving now to our analog MEMS and sensors group, AMS, revenues totaled $988,000,000, an increase of 9.5% with double digit growth in imaging and single digit growth in analog and met. MS operating margin was 20.5%, stable with the year ago level of 20.8%.
For AMS, we had initially anticipated second half twenty eighteen operating margins to move into the mid teens, and we exceeded that level finishing our product discussion with a microcontroller and digital license groups called MDG, The inventory correction in microcontrollers continued as anticipated during the fourth quarter. Due to the mass market softening in China. In total, MDG revenues decreased 6.9% year over year, to $689,000,000, with growth in digital ICs, offset by microcontrollers and Memories. MDG operating margin was 17.7% below the 19.7% in the year ago quarter. For MDG, we had initially anticipated second half twenty eighteen operating margins.
To be about 20% and we came in below that level in both the 3rd and 4th quarters This was mainly due to a lower level, lower than expected level of revenues and less favorable mix between microcontrollers and other products. Turning now to our full year results. As I said earlier, 2018 was an important share of achievements. 2018 net revenues were up by 15.8 percent, compared to 2017, reaching $9,660,000,000 So in 2018, we achieved our objective to outpace the growth of our market we sell. Gross margin was 40% compared to 39.2% in the prior year.
Operating margin expanded 250 basis points to reach 14.5% in 2018. On sales growth and operating efficiency leverage. Net income and free cash flow were up 60% 73%, respectively, compared to 2017, while CapEx was slightly lower at $1,260,000,000 from $1,300,000,000 in 2017. Also in 2018, revenues were balanced across product groups, customer types, and region of customer origin. ST has over 100,000 customers.
By region of origin. 35 percent of our 2018 revenues were from the Americas, 34% from Asia Pacific and 31% from EABA. Sales to OEMs represents 65 percent of total revenues and increased 14% in 2018, while distribution representing 35% and growing 19% for the year. By product group, ST's total revenue growth of 15.8 percent was supported by all 3 product groups. ADG's revenue increased 16.2% with double digit growth for both automotive and power discrete.
However, looking at our We finished the year with a growth of about 18% above the same 17% year over year growth expectation that we have shared with you previously. AMS revenues increased 19.9% on sharply higher imaging sales and double digit growth in analog. MDG revenues increased 11.1% in 2018, with double digit growth for both microcontrollers and Memories and digital license. In parallel, all three groups delivered operating income and operating margin growth. ADG operating income increased by 48 percent to $431,000,000 and its operating margin increased to 12.1% from 9.5% in 2017.
AMS operating income increased 34% to $480,000,000 and its operating margin increased to 15.5% from 13.9% in 2017. And MDG operating income increased by 35% to $547,000,000 and its operating margin increased to 18.6% from 15.3% in 2017. In 2018, Our financial performance drove a 10% increase in net cash from operations for the year, reaching $1,850,000,000. Our free cash flow increased 73% to $533,000,000, welcoming our cash dividends of $216,000,000, as well as $62,500,000 share buyback under the program launch during the fourth quarter. Finally, as anticipated, we exited 2018 with a higher net cash position compared to 2017 at $686,000,000 compared to $489,000,000 Now let's Our first quarter outlook is for net revenues of about $2,100,000,000 at the midpoint This would represent a year over year decrease of about 5.7% and a sequential decrease of about 20.7 percent.
We anticipate a gross margin of about 39% at the midpoint. After Q1 2019, We plan to return to sequential revenue growth in the second quarter. With an acceleration in the second half of the year. This is in line with the objective I stated at the beginning of my speech, continue outperforming our sales market and balanced our end market and application focus, delivering sustainable profitability and returning value to shareholders. In order to support all of that and to execute our strategic technology, R And D And Manufacturing programs, we expect to invest between $1,200,000,000 to 1.3 CapEx.
Of course, This amount includes the maintenance of our infrastructure, fab and plant, and R and D required by all our manufacturing operations and also capacity addition in some of our existing technologies. However, part of this CapEx is also devoted to support 3 strategic initiatives. 1st, a new 300 millimeter wafer fab in Agate, our site near Milan. The construction work of the first stage to support R&D and 1st industrial deployment phase as already started. With related building and facilities to be completed and ready to host some equipment for R&D in 2020.
This new fab is designed to be expandable. Of course, according to demand, to start volume production starting from 2021, it will be focused on supporting our growth ambitions and leadership in BCD, IGBT and power technologies. 2nd, silicon carbide and the start of production ramp up for Gallione Nightride for RF devices. Here, our early investments in white bondgapcompound have already resulted in over $100,000,000 of silicon carbide revenues in 2018, and we have over 30 active silicon carbide projects with many players around the globe, both in automotive and industrial applications. Also earlier this month, we announced a multiyear supply agreement with Cree, our partner.
These investments support our goal to sustain an important share about 30% of the silicon carbide market, which is estimated to be over $3,000,000,000 3rd, our investments in the next generation of Imaging Sensors Technologies This will enable us to continue our leadership in our focused technologies for personal electronics and to address selected industrial and automotive application in the future. These initiatives are part of our strategy to reinforce our leadership in our end markets. Broad based in industrial And Automotive and with a selective approach in personal electronics and in communication infrastructure We will discuss in detail our end market and product strategy at the Mobile World Congress in Barcelona on February 26, and we will provide a more in-depth overview of our company when we will meet at our annual Capital Market Day in London on May 14th. To conclude, in 2018, we met our objectives with 15.8 percent year over year revenue growth across our product groups as well as a strong expansion of our profitability and cash flow from operations. In 2019, after Q1, we plan to return to sequential growth in the second quarter, with an acceleration in the second half of the year.
Our objective for the year is to continue outperforming our served market. To balance our end market and application focus, delivering sustainable profitability and returning value to shareholders.
We will now begin the
you.
Participants are The first question is from Jeanna Baumann from Liberum. Please go ahead. Hi,
good morning. Thanks for taking my question. I have one question and a short follow-up. The first question, Jean Marc, is just to find out where you're getting your confidence on the sequential growth into Q2. And the acceleration into the second half.
My point is, you have had headwinds in in the China distribution channel, there's signs of there's been a slowdown in the Chinese car market, etcetera. Do you expect some of those issues to recede into Q2, therefore, giving you the upside? Or is it coming from signs from your major smartphone customers? And into the second half, can you be a little bit more specific on what are the drivers of that acceleration? My second question is on your inventory days, which came down quite a bit in in the fourth quarter to 88 days from 95 days.
Given your sort of guidance into Q1, Where do you see those inventory days? Will they be going down further from this 85 in Q1? And where does that bottom out? And do you think your distribution channel is also having this sort of a profile of inventory days where it is coming down and came down in Q4 and will come down or will what will be the trend in Q1? Thank you.
Thank you very much.
So, thank you. I will answer the first, your first question and Lorenzo will take the second one. Well, clearly, the sequence for the year 2019 we overall, we do believe that we will see a similar pattern of what we've seen in 2018. I guess, okay, everybody remember it is a pattern of 2018 for ST. More clearly, with an acceleration, in the second part.
But why we plan this pattern of sequential growth again in Q2 and acceleration in the second half. Well, there is some, which are really specific to ST and some are, let's say, more related to the market. And of course, we will closely monitor on the permanent time, what is happening on the market. Well, today, 1st, we have no visibility that our market would decline on the full year. And instead, the indication we have are from some growth.
Overall, And certainly, the inventory correction we have seen started in Q3 continuing in Q4 and in Q1 will slightly continue in Q2, but should start to stop in Q2. On top, we have a growth driver allowing us to outperform. On automotive first, I recall to you that our silicon carbide is performing very well. We have new MCUs introduction at the 14 nanometer, and we are performing very well on ADAS components. In smartphone and personal electronics, we will see start of new programs in the second half of the year.
And in industrial end markets, we will introduce this year more than 10 new products to address this market with our general purpose MCUs. That's the reason why, linked to what is specific of our company we have a good confidence level to have a strong acceleration in H2 this year versus H1. And as we guide a low Q1 guidance. So this, that's the reason why we are confident to see this pattern very similar of 2018 with an acceleration, and on the second half. So this is our plan.
But definitively, it is our duty as management to closely monitor on a permanent basis, all the business metrics related to the market, our customers and the end market we address. Now I let Lorenzo to elaborate about inventories consistently with the plan I described.
Good morning, everybody. About inventory, as you rightly said, in the Q4, the inventory went down since we recently, our revenue grew, and the number of days of inventory went down. What did we happen in Q1? In Q1, seasonally, We have a shorter quarter. The production is today, we have our fab fully loaded What we see is similarly to what it happened last year to have a increase in term of inventory.
Today, the inventory is below 1 quarter. In at the end of Q1, it will be higher in term of days than than 1 quarter. This is quite seasonally, and this is also a plan in order to fulfill our growth ambition in the second quarter and for the second half of the year.
And any comment on the distribution channel inventory?
As Jean Marc already highlighted, the distribution channel, we're expecting a the inventory correction to be faster than what has been happening and this is why we have an impact in Q1 The main reason we had the POS that were expected to be flattish in Q4. Reality, they declined So the inventory correction will take a little bit longer than expected, but we do not see these as an impact on our growth in
The next question is from Sandeep Deshpande from JP Morgan. Please go ahead.
My first question is regarding your imaging business and your CapEx. I mean, are you adding CapEx in this environment in smartphones are in the imaging business? And are there wins that you have going forward, which is why you're adding cash effect there? And secondly, my question is on your gross margin. I mean, despite your guidance of a 21% revenue decline in Q1, your gross margin has remained 39%.
So, I mean, clearly, I mean, some of these products are built in house. How has your gross margin remained so at that level given the extent that the revenue is impacted in Q1? Thank you.
I will answer some deep to about CapEx and Imaging, and I will let Lorenzo to answer about the gross margin. Well, as I said in my, in my opening remark and speech, clearly, I confirm that the end market strategy and product portfolio is to be a broad range leader on automotive and industrial. And where we consider, we have a portfolio, which can put us in a position to be a leader or very close to the leader. And, we want to be very selective, on personal electronics, in sensor, in secure solution, power management and the RF and the millimeter wave devices. As you know, in sensors, overall, to address the personal electronics and the smartphone business and especially answering to your question on Imaging, we have an important R and D effort to continuously improve the performance of our device, especially addressing the time of flight applications and the 3 d sensing.
And intent and we will invest in CapEx in order to support, 1st of our R and D effort to make our product more competitive, better for our customer with better differentiation and of course, when you improve the efficiency of your device, time to time, you have to put additional let's say, equipment in order to bring additional process step or to improve your process in order to maintain your capacity to address the need of your customers. So this is the reason why we are investing in imaging to personal electronics. Not to grow at infinite capacity, but more to adapt our process, enabling much better device competitive device and better than the competition.
About gross margin of Q1, about the gross margin of Q1, as you have seen, our guidance for Q1 is to have a gross margin in the range of 39%, 39% at midpoint. There are different dynamics on the gross margin. First of all, you have to remind that in Q4, we work really a full speed with our manufacturing with all the fab fully saturated. This has brought a very good efficiency in terms of manufacture during Q4 that is reflecting in the gross margin of Q1. As you know, there is a delay due to the inventory of almost 1 quarter between the performance of manufacturing and the impact of Q1.
So we are enjoying a positive impact on manufacturing. There will be on the other side in Q1 the impact of the renegotiation of pricing with our customers, and this is embedded in our guidance. And we do expect that Q1 not to have any impact of unloading, thanks to the fact that some extent that we have leveraged just on some flexibility in the respect that what we have, we are to source outside And also on the fact that we will keep our fab loaded with some increase in inventory to support the revenue growth that we expect in the second quarter and in the second part of the year.
Thank you.
Next question, please.
The next question is from Alexander Pederk from Societe Generale. Please go ahead.
Yes, good morning and thank you for taking my question. The first one will be on Automotive. Can you confirm that growth patterns there are broadly unchanged? And could you share, what kind of growth automotive was at for ST as a whole in the fourth quarter? And whether we will say double digit territory going into the beginning of 2019.
And then secondly, could you give us any targets for Silicon Carbide for 2019 now that you have reached 100,000,000 milestone in 2018?
So you want, I take the first part of your question about the growth in automotive. As Jean Marc has said in his remark, initial remark, for the full year, we grew in automotive, slightly above 18%. This is the full automotive of the company. It means that it's encompassing products in the different groups and not only in ATG. When I look at the growth in automotive in Q4, it's closer to 20%.
We grow around 20% sequentially in automotive sorry, we grow, let's say, sorry, not 20% sequentially year over year, let's say in Q4 in automotive, in respect to Q4 of the previous year. And just to to give you an idea how much was the sequential growth in respect to Q3. This was more in the range of 8 percent.
So about silicon carbide, what I can say that we prepare ourselves and we plan to support and fulfill widely our customer's demand, whatever in term of mass production, for the car assembly and production, but also, delivering all the engineering sample we need to deliver to all the projects we won in 2018. What I would like to simply confirm you that our expected growth in 2019 is completely consistent with the expected market growth of the silicon carbide application, which I repeat that for the time being, people, they plan to have a USD 3,000,000,000 in 2025. And if my memory is still very up USD 600,000,000 in 2020. So our revenue growth will follow totally this pattern.
Okay. Thanks.
The next question is from Stefan Houri from ODDO. Please go ahead.
Yes, hello. You recently talked about the ability of the group to protect the margins above the 10% line talking about the operating margin, but you also said that you needed to check some of the parameters that should lead to that. So if I understand well, you're saying that you will growing at the end of the year, year on year, you have shown that, that you are able to protect your gross margin at the level of less say 39% and if we have growth, maybe it will get higher. So what does it mean in terms of OpEx? Are you just cutting the OpEx to make sure that the margins will hold or are you do nothing at the moment and you on moving that base?
So Lorenzo will comment on the OpEx model.
Yes, for sure. In terms of OpEx, we discuss about in terms of OpEx and our model. Now we said that the company is substantially, is a key to sustain the growth. And we do not expect to have a significant growth moving from 2018 to 2019. Apart, of course, the normal increase due to the salary, to the inflation rate.
Actually, we do expect in Q1 to have expenses in the range of between $600,000,000 $610,000,000. This does not come from, let's say, any capital or any action is you have to consider that Q1 there is some seasonality that is a shorter quarter. So it's also in terms of expenses. And also, you have to consider that that is in this number, we embed also some catch up in terms of grants. When I look, overall, the expenses, the average expenses by quarter during 2019, We do expect that to have a net expenses, including other income and expense in the range of $620,000,000 $630,000,000 per quarter.
This comes with, of course, some attention to our expenses, but without any plan to cut activity or to cut workforce.
Okay. Okay. And did I understand correctly that you said that you were expecting some growth for the year that for the moment you were not seeing any decline? It means that in terms of acceleration in, maybe probably in Q3, it means a double digit acceleration, sequentially, where do you see in which division do you see much of this actually, acceleration, sorry?
This is Jean Marc speaking. Exactly. I repeat what I say after the first question, there is element, intrinsic to our company and element, okay, related to the market. Related to our company, clearly again, automotive will accelerate in the second half. Thanks to the acceleration of our growth on a silicon carbide.
So this is what I just said a few minutes ago. Automotive And Discrete. Then acceleration related to introduction of MCUs on the 14 nanometer. And acceleration on the ADAS component. So this is the first dimension.
Well, then, definitively, we have also programs starting in the second half of the year, related to smartphone personal electronics. And this will support mainly IMS product group. More clearly, again, I come back to Marco Cassie's comment about distribution channel. As I told you, and anticipated during, let's say, various communication, our initial plan was to see inventory correction on the microcontroller mainly to shine up and the bit in Europe to end in Q1. Certainly, we'll continue a bit in Q2 because the point of sales, which was flattening in Q3 and supposed to be still flat in Q4.
Shown some sign of a slightly decrease in Q4. So in this condition, we do believe that the inventory correction will be longer the 1 quarter more. That's the reason why in the second half of the year and, let's say, starting in Q2, we will see an acceleration overall of microcontroller, here are more related to the overall market. However, on microcontroller, I would like to insist with that we would introduce 10 new products this year in order to embed in our controller more security, more connectivity and to address mainly the industrial market with a high performance ARMcore And this, of course, will contribute to the acceleration of our growth across the year. And you know, as usual, when we face such situation of market turning down, the growth is coming from new product.
The next question is from David Mulholland from UBS. Please go ahead.
Just to follow-up on a couple of the comments you made on the gross margin for Q1 and kind of hoping you can help us think of that through the rest of the year. Maybe comment on what you're planning to do utilization rates through Q1 then? And obviously, could that end up having more of an impact, on the gross margins as we head into Q2. Obviously, it depends on what snapback you see, but are utilization rates starting to come down a bit through Q1. It would be helpful if you could comment on that.
And then just secondly, as a follow-up, could you comment a little bit seen in terms of the book to bill in the quarter, particularly high bookings trended through the period. And if you can comment at all on how that has has started the year so far in January as well. That'd be really helpful.
Okay. I'm Lorenzo speaking. About coming back to your point about the gross margin about the utilization rate. As I said in the Q4, the utilization rate was substantially with the full, the fab or the fab pool. These are translating in an attilization rate that is 90%.
You know that for the fab cannot be higher than this level. This level is already stretched. When we move to Q1, the utilization rate will be slightly lower, but I would say that is in the range of 89, 88 89. So it means that there is still a very high level of utilization rate of our fab. And this of course is one of the reasons why we don't see any significant unloading during the quarter.
What is the expectation for the gross margin moving as you know, usually we do not guide on the next quarters. What we said last year is that at this stage, considering that in our COGS, we have some headwinds that is in particularly the cost of silicone. That is still quite high. We have headwinds in the cost of material and in the power that has increased significantly. On the other side, we do expect that we have some positive from still some improvement in our manufacturing we do expect to have in the second quarter based on the plan that we have today in terms of revenues.
A gross margin similar to the 1 of Q1 and then move, thanks to increased revenue. Back in the range in around 40%. That is say what we were saying a few quarters ago. This is about the dynamic of the gross margin in our plan. What was the other question?
Sorry.
I'm just wondering if you could comment on what happened to bookings in Q4 and the book to bill level And if you can help at all how that's been progressing so far this year.
Okay. Booking in Q4. Booking in Q4, as you can figure out from our guidance of revenue was not particularly strong. The booking in Q4 declined in respect to the 1 of Q3. Our book to bill was below parity was below parity, even if in some areas, if you take, for instance, automotive and power and discrete, the book to bill was close to parity.
So we see here still the market, the demand is still still solid. But overall, for the company, the book to bill was below parity during the quarter. And our expectation is that In the course of Q1, we will see to revert with some booking to support our plan, growth plan for the next quarter.
The next question is from Achal Sultania from Credit Suisse. Please go ahead.
Hi, good morning. Just one clarification, Jean Marc, I think you mentioned that when we think about second half of twenty nineteen, we should see a similar trend to what happened last year in the second half. Obviously, last year, you had a benefit with one of your large customers where you had a key design win ramping up materially. So I'm just trying to understand like this year, when you talk about similar trend? Are we talking about, like, what gives you the confidence of a similar ramp?
Is it content gain or is it a new customer wins? Or is it new design wins with existing customers? Just trying to understand what exactly is, is underpinning that confidence in second half. Thank you.
Thank you for your question. But the answer inside your question, it is everything It is, of course, some content increase, thanks to new programs start. It is, other customer growth, thanks to our, let's say, focus again on a personal electronics addressing the full market with some Secure Solution power management, charger, fast charger, wireless charger, and, and the air and millimeter wave. So all in all, okay? So it is due to the 3 reasons you mentioned in your question.
Next
please.
The next question is from Johannes Schaller from Deutsche Bank. Please go ahead.
Yeah, good morning. Thanks for taking my question.