Ladies and gentlemen, welcome to the 3rd Quarter 2018 Earnings Release Conference Call and Live Webcast. I am 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. You. The conference must now be recorded for publication or broadcast.
At this time, it's my pleasure to hand over to Mr. Tate Sorenson, Group Vice President, Investor Relations. Please go ahead, sir.
Good morning. Thank you everyone for joining our third quarter 2018 financial results conference call. Hosting the call today is Jean Marc Sherry, ST's President and Chief Executive Officer. Joining Jean Marc on the call today are Lorenzo Grande, President of Finance, Infrastructure And Services And Chief Financial Officer Marco Casas, 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 us T's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in 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. Also, to ensure I'd now like to turn the call over to Jean Marc, ST's President and CEO.
So, thank you, Ted. Good morning, everybody. And thank you for joining ST and our earning calls today. So let me begin with some high level comments. ST is on track to deliver a year of strong growth in revenues, operating profitability and earnings per share.
We are focused on driving sustainable profitable growth and our 3rd quarter is another step forward in our progress. Importantly, revenue growth and operating leverage are translating into expansion of profitability Based upon our results and outlook, we anticipate net revenues in 2018 to grow about 16% at the midpoint. This means we are outpacing the 2018 growth of the market we serve, in line with our expectations that we shared with you at our Capital Market Day back in May. Now let's move to our financial highlights. Our results were very much as expected and we see a solid 4th quarter ahead of us.
3rd quarter net revenues increased 18% year over year, a strong Crete And Automotive Products. On a sequential basis, ST's revenues increased 11.2%, 120 basis points above the midpoint of our guidance on higher than expected sales of Imaging Products. Our gross profit increased by about 19% year over year, to over $1,000,000,000. On a second share basis, gross profit increased by about 10%. Gross margin was 39.8 percent, 20 basis points above the year ago period.
Net operating expenses came in at $605,000,000. Operating income, operating margin and net income all grew substantially both year over year and sequentially. The increase in profitability translated into strong growth in our net cash from operating activities which was up over 18% on a trailing 12 months basis to almost 1.8000000000 Our free cash flow in the quarter was $114,000,000 back to a positive level compared to the 2nd quarter as we had expected. For the 1st 9 months free cash flow was $170,000,000 comparing favorably with our cash dividends year to date of $162,000,000. I confirmed that we will have a positive free cash flow for the fourth quarter much higher than our dividend and that we will exit 2018 with a higher net cash position compared to 2017.
Now let's look at our results by product group, beginning with our Analog, MEMS and sensors group. During Q3, AMS revenues reached $899,000,000, an increase year over year of 36.7 percent on triple digit growth in Imaging and growth in Analog And Metz. AMS operating profit grew about 82% to $157,000,000 and it operating margins expanded over 400 basis points to 17.5%. For AMS, we had anticipated second half twenty eighteen operating margins, to move into the mid teens as we benefit from revenue leverage, specifically from smartphone applications In Q3, we exceeded that operating margin target. Moving to our Automotive and Discrete group.
ADG's revenue increased 16.3 percent just above $900,000,000 on growth in both automotive and power discrete. ADG's operating profit increased 36.2% to $116,000,000. It operating margin increased year over year to 12.8% from 10.9%. For ADG, we had anticipated second half twenty eighteen operating margins to move into the low teens. Indeed, we made good progress in Q3.
As you know, other ST organizations also serve the automotive market. Overall demand for our automotive product continue to be strong. And we confirm that we expect ST's automotive business to grow above the company average for 2018 at about 17% year over year. Finishing our product group discussion with microcontrollers and digital Isis group. MDG's revenues increased 2.5 percent year over year.
On a sequential basis, revenues decreased 8.1% as we have anticipated early in September we have seen a softening of the market in China. This coupled with shorter lead time in microcontrollers, translated into some inventory correction. MDG's operating income was $119,000,000 in the first quarter, representing an operating margin of 16.6% compared to 18% in the year ago period. This was principally due to less favorable mix between microcontrollers and other products. On a year to date basis, all product groups are well balanced and posted double digit revenue growth.
Operating margins for all the product groups improved on a 1st 9 month basis compared to the year ago period. But this brings to me to our performance in the 4 end market we serve. A common theme across these markets is our capability to introduce and ramp innovative products. Often based on ST Property Technologies and offered first to market. Our ability to have the rights products available in high volumes translate into long lasting customer relationships and ultimately translate into long lasting growing revenues.
Recent examples include our success in imaging and in silicon carbide. Our coverage in automotive is very broad. We have an offer for the most of the car electronic applications, where the silicon content continue to grow much faster than car units. We have 2 areas of particular focus. The first is car electrification.
Here, we continued to win designs with our silicon carbide products for on board charger as well as charging station applications. As you know, silicon carbide is a strategic priority for ST and our aim is to be the leader here. We are well positioned together with industry leaders along the supply chain. We bring radical innovation to the automotive market. As a consequence, we are now working on more than 30 silicon carbide projects across the world with carmakers and Tier 1 suppliers.
We are ready to capture an important part of this market which is estimated to be about The second area is autonomous driving, where we won a power management slot for 77 gigahertz from our system. Our business in automotive sensors, a key component of autonomous car, also continue with positive momentum this quarter with a number of new wins. Another strategic area for us, industrial. We spend thousands of customers and hundreds of applications where we offer our leading edge products, complemented with our system solution approach, We sell products from all our portfolios such as power and analog, microcontrollers, sensors and connectivity. Some examples of applications behind the design wins this quarter include logistics tracking, industrial lighting, washing machines, medical power supplies, factory automation, predictive maintenance, metering and solar panels.
In personal electronics, our main focus is on smartphones. Where we pushed to increase content per device. During the quarter, we had a number of design wins with our time of flight sensors, motion sensors, power management ICs and low voltage matter drivers. We also began ramping production of 2 new products in secure MCUs with a new embedded SIM program at a top smartphone manufacturer and in imaging with a new generation of ambient light sensor for a major player. We also had success in smartwatches with sensors and our ultra low power microcontroller.
In Communication Equipment, Computers and peripherals. We leverage our in house processes on very specific application areas. During the quarter, we won a design with our biosimilars technology for an RF chip for cellular base station infrastructure, as well as a socket inside a power subsystem for 5g Networking equipment with our BCD technology. We also want multiple sockets for computer power management using a combination of our BCD and VA power technologies. Now let's move to our Q4 outlook.
In the fourth quarter, we expect net revenues to increase about 5.7% sequentially, translating into year over year growth of about 8 our sales growth sequentially will continue to come from Imaging Automotive And Power Discrete. While microcontrollers will still face soft market conditions in China and some inventory correction. We anticipate a gross margin of about 39.8 percent at the midpoint. In term of operating margin, we are overall on track with our second half twenty eighteen target just with slight differences in terms of product group dynamics. For ADG, we confirm the low teen operating margin target.
For MDG The product group is performing below expectations due to the less favorable mix between microcontrollers and other products. Therefore, we expect an operating margin in the second half similar to the results in Q3. For AMS, the product group is performing above expectations, moving toward the ITs. So we see sequential improvement for our gross profit, operating income and margin and for net income. Based on this outlook, we expect our full year 2018 revenues to grow about 16% over last year, Importantly, this revenue growth will come with substantial improvements in our profitability at the operating and bottom line.
We are now available to answer to your question.
We will now begin you. The first question is from Stefan Houri from ODDO. Please go ahead.
Yes. Good morning, everyone. I guess my first question would be about your feeling about the end demand in the market because everybody is worried that there is a discussion in the market yesterday, last night, it takes us a instrument. Did confirm that there was some slowdown in the market. So, could you, drive us your different businesses and tell us what you see, if I remember well, last time, you talked publicly, you talked about some weakness at distributors in China.
Could you be a bit more specific on the different market you
serve? Thank you.
Jean Marc is speaking. So let's look at the demand and the booking. More about the demand, more clearly, our industrial OEM, the demand is solid. In automotive, very strong. The backlog is really very strong and and you know that, okay, in some areas, we are still okay seeing some shortage.
So we have a very strong backlog in automotive. The new phone platform customer demand is well on track. There's with our current visibility. And I confirm that the China mass market is softening So we are seeing, okay, a POS flattening And of course, okay, when you have and specifically in China, this kind of softening, acknowledging that the lead time of our microcontrollers are shortening more clearly, we see and it is normal reaction and some slight inventory correction. So this is, overall, what we see in term of demand.
In term of booking, which is, let's say, providing a kind of dynamic more. In Q3, the level of booking was good. It was less strong than the first time for this year, again, except Automotive And Power Discrete were again the supply chain is still stretched, with really some, some shortage. But the reason of overall, let's say, booking, less strong than H1 is again, now we see this is what I said, late August early September. It is clean from inventory replenishment and acknowledge some shorter lead time on some device, okay, especially microcontroller.
And again, we are seeing on the China mass market, market softening and especially for microcontroller. So this is the color I can give to you for market ST address.
Okay. And I know it's very early, but can you tell us or share with us what you what you start to see for as dynamic for 2019?
No, the dynamic we are seeing is the one I just shared with you a few seconds ago.
Okay. Thank you very much. Thank you, Stephan. Next question, please.
The next question is from Alexander Petrich from Societe Generale. Please go ahead.
For taking my questions. I'd just like to come back a little bit on this microcontroller slowdown, particularly in China. Could you perhaps share with us which industries in particular or which end markets are seen as slowing? And also, is this just a kind of couple of quarters at worst, slowdown here? Or is there anything more serious brewing?
The end market and then certainly I will ask Marcus to complement end market address distribution channel is basically mainly industrial, but you know, is quite wide, okay, from a white goods consumer industrial doors, this kind of stuff. We also see some automotive commodities or aftermarket. So this is basically, in term of end market, after the distribution channel, the one which are showing some sign of softening. So, Marco, you want to Yes,
I will add just a little bit of color. What we have seen is different from the quarter before. We have seen the POS flattening. Let me underline that year over year, still we had the double digit growth, but the POS has been growing mainly due to the fact that the end markets are relatively cautious. And due to that, we have a kind of inventory correction.
But overall, in the channel, we have a level inventory, which is still healthy under 3 months, except, of course, the combination of effect of short lead time and inventory replenishment plus POS now in China not growing but staying flat. So overall, I think the situation is under control and we have, again, some softening, but nothing extremely particular.
Okay. And can I just have a quick follow-up on the smartphone demand there? Obviously, you had a strong third quarter. And so going into the 4th quarter build, on the smartphone side, you see demand being strong as expected or even a bit better perhaps? Thanks.
No, this is what I say with the current visibility we have, the customer demand for the new phone platform are really well aligned with the works expectation. And, as you know, our supply chain is very robust and is able to fulfill this customer demand.
Thanks very much.
Thank you, Alex. Next question please.
The next question is from Jerome Rommel from Exane BNP Paribas. Please go ahead.
Just a question on the inventory correction you are seeing to the best you can see how long do you think it will take to see a lead time to get back to normal and, and to get a kind of inventory, you know, well, where they should be in the supply chain? And I got a follow-up. Thank you.
Jerome, okay, this is what I say in our outlook, okay. So we will grow 5.7% sequentially, 8% year over year. So overall 16%. And we see that in Q4, we did see some inventory adjustment for microcontroller. More after it's mechanical, it will depend of the dynamic in 2019 and the POS and, and it's very mechanical.
Okay. So I think it's early to say.
Your follow-up, Jerome?
Yes. How should we model the OpEx for Q4? Thank you.
Good morning to everybody. Lorenzo speaking. How to model the OpEx for Q4. First, in Q3, our OpEx came a little lower than expected. If you remember in entering in Q3, I was modeling OpEx in the range of $615,000,000, $620,000,000.
Actually, the actual Q3 came at 605. This is lower than expected. This is mainly due to a seasonal effect that was better than planned. In Q4, we expect some increase compared to Q3. This increase is mainly due to the longer quarter and some unfavorable effect of the seasonality.
Anyway, I confirm substantially what I said entering in Q3 that the second half in average between Q3 and Q4, extends where we stay in the range of 615 and 6 20 as a average. So it means that with some lower expenses in Q3, a little bit higher expenses in Q4, but yes, average per quarter in the second half will be in the range.
Next question is from Sandeep Deshpande from JP Morgan. Please go ahead.
Yes, hi. Two questions, if I may. Firstly, I mean, in terms of the end market, I mean, there are various worries about the end market in the auto space as such, for instance, I mean, you are saying that you're going to grow more than your overall growth in 2018 into in the auto market Do you have visibility into 2019 in terms of the auto growth? Is there where you're going to see weakness or is it that you do not see that coming through in the supply chain at all at this point. The second question I have is regarding your gross margin guidance into the 4 quarter.
I mean, you've got revenue growing significantly from the 1st 4th third quarter to 4th quarter. Probably there's a lot of that incremental revenue is to do with imaging and a bunch of that imaging is built in your own factories. Given that this is built in the old taxis, why are you not seeing an improvement in the gross margin from Q3 to Q4? Are there some other impacts there? Thank you.
So I will take the first question and Lorenzo, the second one. Last I confirm that's okay. On automotive, we still see a very strong NLC demand. And we have basically no significant impact from carmakers and Tier 1 recent announcement. Absolutely no material impact.
Our backlog is very strong. We have a very, let's say, good visibility across the next quarter. So that's the reason why we are very confident in the in the in automotive. More, as I said, this year, we will grow better than the company average. Well, I also disclosed that, okay, on the retail market, okay, for infotainment in China, we see some little sofa, but it's really to be a transparent among ourselves.
The supply chain is really still structured for many components and many technologies. So as a takeaway for the dynamic for automotive for ST is is really strong and we are confident with our capability to continue to grow on a sustainable way.
About the gross margin, about the gross margin, you saw that in the Q3, our gross margin came at 39 to 80 20 basis points lower than our midpoint. This was mainly impacted by a different weight in the product group mix in term of revenues. What we see moving from Q3 to Q4 the drivers in the revenue will be definitely our image sensor together with Automotive And Power and Discrete. In this respect, we do not see significant improvement moving from Q3 to Q4 in the gross margin where the manufacturing efficiency substantially will offset declined a normal price pressure that we see. So at the end, we model a gross margin that will remain flat moving from Q3 to Q4.
The next question is from David Mulholland from UBS. Please go ahead.
Hi. I'm just coming back on the commentary you gave on bookings I wondered if you could just quantify what the actual book to bill in the quarter was. I think in Q2, you'd said it was 1.1%. And then just secondly, as you progressed through October, you've already said a few times you haven't seen any kind of impact in autos, but do you have any thoughts at this stage? Obviously, it also depends on what happens in imaging, but how we should think about kind of seasonality in the business as we head into Q1 would be really helpful just to have some understanding of that point?
On booking, I would answer, as Jean Marc already stated, We still saw a very good level, a good level of bookings in Q3 even if it was less strong than before because as already said, it's clean of the inventory replenishment effect. And our customers acknowledge it that we have a shorter lead time than previous calls. So, so we stay positive on the revenues evolution for the years. And this is the booking evolution that we see during Q3. What was the sale of that?
As in was it 1.0 book to bill or 0.9 book to bill in Q3 or?
I can answer that book to bill in the third quarter was below parity. It was above parity in and this mainly driven by low level of book to bill in the area of the microcontroller and as well we were explaining before especially in China. So we have a slightly below the parity.
So David, on your second question, was, did I read it right? Imaging seasonality, was that correct?
Well, I guess mainly overall seasonality, but I assume a lot of that's going to be driven by imaging. So just some idea on how you're thinking about seasonality into Q1, but I suspect one of the big drivers will obviously be imaging?
No, as usual, okay, we don't do not want to share, okay, what we see in Q1 because, okay, remember what happened this year, okay, is really, is really, okay, useless, okay, to give a number, okay, we will see, okay, late December or in January, what be okay, Q1, Q1 visibility, okay. We take lesson from this year.
We'll tell you in 3 months, David.
It was worth trying. Thanks guys.
Thank you. Next question, Wara.
The next question is from Johannes Schaller from Deutsche Bank. Please go ahead.
Yes, good morning. Thanks for taking my questions. So first one, just some of your competitors in power have talked about better pricing developments quite a little bit over the last few months because of the ongoing supply shortages there wondering if you could give us a bit of an update on what you're seeing on the pricing side in Power and I also do have a follow-up. Thank you.
Yes, I can confirm, this is Markus speaking. I can confirm that due to the structural situation on the supply and power, we can confirm that we'll see upside on the price levels.
And is that something that will gradually come through over the next quarters or is that already mostly in the run rate?
It will come in the next quarters.
And as a follow-up, I mean, you talked about the microcontroller weakness in China. Could you give us a bit of a sense what you see for some of the other end markets for STM32 and the MDG business more broadly, so outside of China.
U. S. And Europe?
Yes. I think in Europe, there was the seasonality due to the during Q3 during the summer vacation. Let's say, but we do not see, so there was some slowing there. But the major problem that we see on MCUs also due to the size of the business that we have in China is mainly related to China.
Good. Thank you.
Thank you, Anna. Next question please.
The next question is from Anthony Stoss from Craig Hallum. Please go ahead.
Thanks for taking my questions. Maybe you can help us with your Q4 revenue guide by division. Clearly, AMS is going to be up quite a bit. What do you expect both ADG and MDG to be up or down sequentially. And then also what levers can you pull either be a slowing wafer starts and CapEx for 2019, any thoughts on if things continue to be softer, what levers can you pull to help, try to keep gross margins intact?
About the revenue dynamic in Q4, what we do expect is to why it was saying before definitely AMS will be the driver of the growth and that will be followed by ADG. Where we see strong demand in both in automotive and in power and discreta. What we see for sorry for ADG and automotive and powering discretive. What we see for MDG, the microcontroller in digital, we see some slight decline, but much lower pace in respect to what it has been sequentially moving from Q2 to Q3. We see we continue to see weakness in the as we said in the distribution market in China, but at this stage, we do not think that there will be a stronger decline.
There will be still a decline in any case. Definitely imaging is driving our revenue next quarter. Automotive and powering discrete are contributing to the growth. Second question was about the level OpEx for this year, right? And gross margin levers, levers to keep gross margin.
Let's say, in term of gross margin, what we said that we got we are guiding in term of to stay at 39.8 in Q4. And as we said, that this level of gross margin will be we will be around 40% in the the few quarters. I think with the up and down, depending also on the seasonality. Irrespective to the CapEx, we do expect for 20 team to be in the range of 1,000,000,000.
Thank you.
Thank you, Tony. Next question please.
The next question is from Achal Santania from Credit Suisse. Please go ahead.
Hi, good morning. Just a question on, so I guess like when I look at last year, we had the same situation in microcontroller where the lead times were exceptionally long, and you had very strong growth in microcontrollers. And now we are exactly seeing the same situation in power discrete where you saying that the market being soft, lead times are still stretching or very high. So can you help us understand what gives the confidence that we go into 2019 And, power discrete, we don't see a similar situation involving what we saw with microcontrollers this year. Like any drivers, just help us understand what's different, maybe just longer lead times, longer duration projects.
Anything around those would be helpful. Thanks.
Again, sorry, we are not commenting on 2019. We are focusing on Q4 and I think you have all the information about what are going to be our growth driver for Q4, which are again automotive, our end discretes and imaging.
Yes, but my point was like what like how should we think about power and discrete and how is it different versus MCU going forward? Like, obviously, I'm not telling you to guide for 2019, but how should we think about that business? Like, and what's different versus MCU?
In this moment, we still see a very strong demand plus we have a strong position in in new technologies like Silicon carbide. So I think the overall position of our offer to the market is extremely appealing and this is supported by a very strong back While in MCU, as you said, we enjoyed a very strong first half. Unfortunately, the overall situation of China has driven to a POS that has not been developing as expected, which has created the necessity of an inventory action that we do believe is temporary and we will go back in the near future to growth.
And also, we can we can add that the power discrete are well spread across all the end markets we address. So as Marco said, for sure, the electrification of the vehicle is growing now very fast. So and is a secular demand in power. So industrial, clearly, everywhere we have electric call a motor, okay, you have power or you have power around, but also in personal electronics, around chargers, in computer, with power supply, in computer peripheral, okay, also have we have said in, in, autonomous driving. So really, there is a difference, okay, between power that, okay, the spread of this device across all the end market is very wide.
And with very strong growth driver lacks the electrification of the vehicle. So this is okay, what I can share with you now.
Okay. Thanks. Thanks a lot.
Thank you, Tahal. Next question, please.
The next question is from Aditiya Metuku from Bank of America. Please go ahead.
Yes, good morning guys. So two questions. Firstly, And just I just wanted to hear your views on PRS demand in China. When you look at this demand, can you give us some color on how it compares what you saw in late 2015 or maybe in early 2013? I'm trying to get a sense for how this could play out as you look out into 2019.
And then secondly, question is a second question is for Lorenzo. Just on OpEx trends into 2019, given where FX is and the hedging you have in place. Any color you can provide on that would be very helpful. Thank you.
I will take this. I do not have the numbers here, but just to give you an overall picture, we are coming from many quarters of POS sequential growth. What is changing in China now is that we see a flattening of these POS. So the POS are in this moment not growing anymore. And this is again linked to the due to these, again, the inventory grew according to a forecasted POS, which is not materializing with calling for an inventory correction, which is ongoing which was ongoing strongly in Q3 and still ongoing in Q4.
About the expenses. In terms of expenses, as you know, we have already commented some time that we believe that the structure of the company has today. So partially suitable for the ambition in term of growth that we want to have. So I do not expect to have a significant increase about the impact of the normal inflation, salary increase, You respect to your question on the exchange rate, definitely if the spot rate we remained in the range of 116, 115 today, our effective is more in the range of 118 These will give us some benefit. So all these put together, I would say that expenses should stay substantially flat, slightly increasing in the next year.
Understood. Very clear. Just if I could, just a quick follow-up on POS demand. I mean, when you look at it, do you ever compare internally on what this looks like versus 2015 or 2013? And if you do any color you can provide around that.
Apologies for belaboring this point.
The difference between what we have seen in 2015. But here, I think, okay, there's a many important point. It is clearly, we can call it softening or deceleration because we are the POS overall year over year is still growing, 10% which is important. So 10% growth year over year. Now we are seeing in Q3, a POS flattening And again, for ST, the mechanical impact, some slight inventory correction.
So our revenue are slightly below that the reason why microcontroller and DG, we decreased minus 8%. So what we can describe is the current situation. Current situation is a soft deceleration, still a good growth year over year, but the sequential flattening of the POS with some mechanical adjustments in term of inventory replenishment or adjustment which is for us back to normal situation and no more than that. So this is a main difference compared to 2015.
Understood. Thank you.
Thank you, Adi. Next question please.
The next question is from Andrew Gardiner from Barclays. Please go ahead.
Good morning, gentlemen. Thanks for taking the question. I had another one on the automotive space, please. This is sort of normally the time of year when you'd be having discussions with the OEMs and the Tier 1s about their plans for next year. Given what at least what the investment community clearly is concerned about in terms of the automotive space, can you give any sort of further detail sort of qualitatively on expectations from those partners in terms of volume and content and price into next year.
You've already commented that pricing, particularly on the power area, is a little bit better, but some of those other levers on the automotive revenue line into next year would be helpful. Thank you.
Mark, I understand your question, but I guess you understand that is really difficult for me. I cannot disclose, okay, the meeting we had at sales level or at my level with Tier 1 Europe and in U. S. Again, what I really want to confirm to you that our current visibility is a really, really good. Permian in a semiconductor, content in car is increasing tremendously and for sure, will, let's say, offset completely some slight adjustment in term of car units.
So as a consequence, the forecast demand provided from the Tier 1, are totally consistent with this visibility. And we see in front of us in our end a strong backlog and a very strong pipeline of new product coming within the planning horizon of product development. Well, about the price negotiation and so on, okay, I'm sorry. I must not comment. Very silly for that.
Understood. I had to try. Just perhaps another one on Silicon Carbide. You mentioned a few wins in the in the recent quarter. Can you give us a better sense as to when those might start to shift?
I presume it's not next year, but in terms of 2020, 2021, sort of how you're thinking about the ramp over time? Thank you.
Clearly with the usual product development lead time and incubation, okay, it will be more impact on 20 and beyond for ST, but for the time being, I confirmed that this year, we will execute and achieve our USD 100,000,000 revenue from Silicon Carbide. Our manufacturing machine is performing well. According expectation and this dirty projects are simply consistent with our ambition to be a leader of the Silicon Carbide market. And we know that with this market, we'll go very fast, okay, for the time being, we have visibility to see a $3,000,000,000 U. S.
Dollar in 2025. And we want to perform this market consistently with our current market share, generic speaking, automotive, well above 30%.
Thank you, Jean Marc. Thank you, Andrew. Next question, please.
The next question is from Janet Almenon from Liberum. Please go ahead.
Hi, good morning. Thanks for taking my question. I'm sorry, I just want to go back to this POS and your distribution channel for microcontrollers. So If I understand you're right, you're saying that your POS has flattened since around, August September and continues to be flat whereas you had expected growth, but you're guiding after an 8% fall quarter on quarter in Q3. You're guiding to a lower level of a decline in Q4.
And that's because the channel cleared more inventory in Q3 and now you think that there is less inventory to be cleared in Q4. And therefore, the decline into Q4 will be less than Q3. Is that understanding correct?
Yes, you are correct, plus you have to consider the lead times are also shortening. So we'll have some turns coming during the quarter.
Okay. And what gives you that confidence that the further correction of inventory in the channel in Q4 is going to be less than Q3. What visibility do you have as to how low the channel want it would want to take down inventories in the current phase of demand?
It's the feasibility that we do have we are on the field. And secondly is, again, it's mechanically, the level of inventory is down to a more reasonable level consistent with the level of the U. S. So
we have a turn of inventory slightly above 4 means, okay, below 3 months of stock overall. So which we consider let's say something close to normal. So that's the reason why, okay, we consider the inventory adjustment in Q4. Will be well below the one we faced in Q3.
Understood. I'm just going to to the sensing business. Can you just give us an update on what you're seeing in 3 d sensing design wins and how you would expect that market evolved for you outside of the big ramp that you have in the second half of this year?
Well, clearly, I repeat for 4.50, there is today short medium term, really, 2 kinds of market we are really, really leading is a proximity something and a ranging sensor based on our, let's say, time of flight technology. So we have accumulated 100 of 1,000,000 pieces shippered and here we continue to really perform well and we will continue to perform. Then I guess it is very clear for everybody now okay, ST is really focusing on the structured light and the key component part of the bill of material of the structured light, okay, working very closely with our customer. And we want to improve continuously the performance of the system through our component, through the performance of our component, and we are really focusing on it and we have a really strong ambition to continue to perform as we have done in the recent past quarter. Saying that we can also offer more components part of the future of light.
As I mentioned a few minutes ago, as you have seen, we have okay on ambient light sensor, which is a really good performance. I am very, very pleased about that. So no ST is positioning itself as a strong competitor on ambient licensing and ambient licensing is part of the bit of material structural light. So we will also have the ambition, to have more content in the structural light. Then coming to the rear facing, more certainly here, you know, that the winning architecture is certainly based on time of flight either indirect or direct time of flight.
We have a stronger, let's say, road map to address all the market, whatever is the ongoing market or other operating situation. And here, we see more, let's say, ramping business opportunities, second half twenty twenty and beyond. And if we are targeting, okay, to participate in this market timely with this perspective.
Just one small follow-up. Your ambient light sensor, is it all design win? Is it already shipping in the second
half of this year or is
that to ship next year?
No, no, it's not already shipper. It is a design win with an important smartphone maker.
Understood. Thank you very much.
Thank you, Janardan. Next question?
The next question is from Danica Bertuza from Intermonte. Please go ahead.
Hi, good morning. And thank you for taking my question. I have just one on the tax rate as a question on the end market has already been answered. We have seen a very low level of tax rate in the third quarter. Could you help us modeling the level for the fourth quarter and maybe also for what you see for the next year?
Yes. I take your question about tax rate. You're right. In the Q3, our tax rate is particularly low. And this is due to 2 discrete items terms.
Anyway modeling next quarter, it will be similar in term of tax rate. Will be slightly above. When we move to next year, I would like to remind you that we are enjoying now the positive part of NOLs that will not be any longer there moving in the next year. So next year, if you have to model tax rate, this will be more in the range of 15% 17%. So there will be an increase in tax rate and moving the next year.
Thank you very much.
Thank you. Next question please.
The next question is from Gunther Holseller. Please go ahead.
Yes, thanks. First question follow-up again on the power discretes. You know, if we just focus on distribute distributors in in China, you know, you mentioned here weakness, you know, in some of the areas like like white goods and others, so microcontrollers So so, also, you know, just focusing on distribution channels in China, you're you're not seeing any any, you know, slower demand for for a power creates units there?
On the power discret, we still see strong demand.
Okay, thanks. And your internal inventories, do you expect then a further increase then at the end of the fourth quarter due to this inventory corrections in microcontrollers and other issues?
You talk about sorry, you talk about our inventory in a new inventory in our inventory in SD. No, for what concern inventory in ST, we do expect in Q4 to have some reduction in term of inventory. And we do expect to have a significant improvement in what concern the terms. So we do not we see that moving from Q2 to Q3 that has been a slight increase and an improvement in terms was already anticipated entering in Q3. Now we do expect to stay to reduce a slightly our inventory and significantly improve the turns of our inventory.
Maybe it's a final question from my side. You mentioned some weakness in automotive in the offshore market in China. So I assume this is mainly related to the infotainment segment.
Yes, yes, you're correct.
Okay. Many thanks.
Thank you, Gunther. Next question please.
The next question is from Hamid Archandani from Citigroup. Please go ahead.
Good morning, all. Amit Archandani from Citi, and thanks for taking my questions. Firstly, if I may, just to go back and just clarify on the AMS segment, and the outperformance of the margins. Could you just reconfirm if you think the outperformance versus your expectations was driven by volume, pricing or was it mix? I asked this because there have been some concerns around pricing pressure exerted by big smartphone makers on the components suppliers?
And then I have follow-up.
No, I'm take the question, Lorenzo, about the performing better in AMS is mainly thanks to better performance that we then expected in manufacturing. And you see that overall in respect to our guidance in for the second half of this year, we substantially we are in line with the Automotive and Discrete group. We are due to this lower level of revenues than expected a little bit under our guidance in MDG, in the microcontroller and digital group, why we are better in AMS, mainly driven by better than expected performance in manufacturing. There are no different impact related to different pricing or what things like this. Overall, our expectation is to meet in the second half of what we were expecting at our Capital Market Day and so on operating margin in the second half increase in respect to the first half of about 360 basis points with a little bit different mix among the three group
That's helpful Lorenzo. Secondly, if I may, there's obviously this ongoing backdrop of the trade wars between U. S. And China. From your perspective, how are you thinking in terms your supply chains and your own operations in China.
At this stage, are you evaluating any potential realignment or change in supply chain. Just trying to understand where you stand in terms of how you're thinking and assessing the impact of the ongoing trade wars?
First of all, I have to confirm what I already said sometime talking about this topic. For us, of course, it's not welcome, these kinds of things, but it's not a strong big material impact for us. We had some impact, definitely, but it's not very big. Anyway, through that we are somehow slightly readjusting our supply chain in order to secure that for some customer, we may ship from maybe in different location where they need, let's say, where they ask to have the parts. Overall, I repeat that there are no major impact, no major changes in our supply chain.
And for the company, this impact is really not so material.
Thank you. And just finally, if I may, going back to automotive, a lot of talk about trends in China, but could you broadly confirm that there's been no material shift in the demand trends for you worldwide when it comes to the automotive business inside and outside China?
Again, what we are saying is that our backlog is extremely strong. We Of course, there have been year and there are some reduction in terms of volume in terms of cars, but perversion of the semiconductor is a such that with the backlog we have, we confirm what we already say that we will grow. In automotive this year in the range of 17%.
Thank you.
Thank you, Amit. At this point, we'll turn to Jean Marc for some closing comments.
So before we close this session, and I thank you, okay, everybody for all the question and debate. Before we close, I would like to update you on some changes to our investor relations department. So after 18 years in investor relations at ST. So Ted Torrington has informed our company about his desire and willingness to step down from his position in order to prepare for other professional opportunities within ST. More debt remained committed to the Investor Relations department during this period of transition.
He will support the investor relations team for some time to ensure a flawless transition. And in the meantime, I am very happy to announce that Celine Berche has been promoted to the end of Investor Relations. Affected immediately. I trust you all know and I expect Celine, as she has been with ST Investor Relations for over 11 years, And I am sure that you will join me and wishing them both all the best for the future. However, I would like to take opportunity to think personally that because we spent too many time together visiting you, visiting investors across the world during period, which were not so easy for us and I have always appreciated the cooperation spirit of debt and I have to say it is more than a colleague.
It is a frame. So thank you for your attention. So we will now close our Q3 call and looking forward to see you soon. Bye bye.
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