Ladies and gentlemen, good morning or good afternoon. Welcome to the STMicro Electronics First Quarter 2018 Earnings Release I'm Ora, 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. After the presentation, the a Q and At this time, it's my pleasure to hand over to Mr. Tate Sorenson, Group Vice President, Investor Relations.
Please go ahead, sir.
Financial Results Conference Call. Hosting the call today is Carlo Bozzotti, ST's President and Chief Executive Officer. Joining Carlo on the call today are Jean Marc Sherry, Deputy CEO and designated President and CEO Carlo Ferro, Chief Financial Officer George Pinnelver, Chief Strategy Officer and Lorenzo Grande, Corporate Vice President, Corporate Control. This live webcast can be accessed through ST's website. A replay will be available shortly after the conclusion of this call.
This call will include forward looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the Safe Harbor statement contained in the press release that was issued with the results this morning. And also in ST's most recent regulatory filings for a full description of these risk factors. 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. And now I'd like to turn the call over to Mr.
Carlo Bazzotti, ST's President and CEO. Paolo?
Thank you, Tate, and thank you for joining us on our first quarter 2018 earnings conference call. Our agenda today includes a summary of the quarter, a detailed product group review and our second quarter outlook. So let us begin. Our objective for 2018 is to have the results we achieved in 2017 continuing on the path of broad based sustainable and profitable growth. Based on our first quarter results, we have started the year well on track.
Revenues grew 22.2% year over year to reach $2,230,000,000. And this is our 6th quarter in a row of double digit year over year sales growth. Also this quarter, we posted double digit sales growth across all product groups and regions, thanks to our focus on smart driving and IoT applications. On a sequential basis, revenues decreased 9.8 percent, 20 basis points better than the midpoint of our guidance. We delivered a better than seasonal performance in 2 end markets.
Automotive And Industrial, well balanced between large customers and distribution, which represented 37% of our revenues in the first quarter. Gross margin increased 220 basis points year over year, to 39.9%. Manufacturing and manufacturing efficiency was the largest contributor followed by product mix. These two improvements were slightly offset by normal pricing adjustments at the start of the year, as well as negative currency effects of about 80 basis points as well as some one time negative impact specific to the quarter. On a sequential basis, Our gross margin was 40 basis points above the midpoint of our guidance on better product mix.
Operating income more than doubled to $269,000,000 in comparison to the 2017 first quarter thanks to strong improvements across all product groups with higher revenues, increased manufacturing efficiencies, and improved product mix. As a result, our operating margin reached 12.1% increasing 480 basis points year over year from 7.3%. Net income increased more than $131,000,000 year over year to $239,000,000 driving diluted earnings per share to $0.26 more than double compared to the year ago period. Free cash flow increased by 53 percent year over year to $95,000,000. In the last 12 months, free cash flow was $372,000,000 while exceeding the level of our distributed cash dividend.
We also strengthened our balance sheet with our net financial position increasing to $522,000,000. Now let's move to a detailed review of our product groups. Beginning with our Automotive And Discrete group, ADG, revenues were high year over year by 15.4 percent on double digit growth for both automotive and power discrete products. On a sequential basis, ATG revenues were substantially stable, reflecting better than seasonal performance, in both areas, with a small decrease in power discrete products, mostly offset by slight growth in automotive. Considering all of our product groups and not only ADG, Revenues to the automotive market grew 17.4% year over year in Q1.
ADG's operating margin doubled to 11% from 5.5% on a year over year basis. With significant progression for both Automotive And Power Discrete, reflecting higher revenues and improved gross margin. Moving to the product review of ADG, our proprietary technologies dedicated to automotive applications allow us to develop leading edge products for each of the needs of the car. For example, our vertical intelligent power technology allowed us to win awards for motor control in a door zone application with a worldwide leader and a high end body control module for European premium carmaker. We also capture an award for our ucheap power supply and drivers for engine management and battery management systems from a major Chinese Tier 1 and we received the multiple design wins from German Tier 1s for electric power, tranche applications.
Our automotive microcontroller business saw multiple wins, including a design for a chassis stability control unit in Japan. In infotainment, we received awards for telematics solutions from European And American carmakers, and we earned multiple design wins for our Accordo processor family for mid level car radio systems from several Asian OEMs. Where we were also chosen to supply class D audio amplifiers for an emergency call module a major electric vehicle maker. Let's now discuss Power Discrete that are pervasive across all the end markets that we address. In automotive, we continue to grow our silicon carbide business with our silicon carbide MOSFET in the traction inverter applications of 2 carmakers in China.
We also maintained strong momentum in Silicon Carbide Diodes with multiple design wins for electric vehicle on board chargers. In industrial, our silicon carbide diodes and power MOSFETs were selected for higher efficiency power conversion systems in servers, solar energy, solar energy and the hi fi audio systems with both U. S. And European customers. Power modules for washing machines and dishwashers from a market leader and landed a win for MD Mesh Power MOSFET in an implanted cardiovascular defibrillator from a top American medical player.
We also won a battery charger socket with our Moss from a leading smartphone manufacturer and earned a major design win for integrated passive device. Filters in 5g base stations. Moving now to our analog, MEMS and sensors groups, AMS. Revenues increased 26.5 percent year over year on sharply higher imaging sales as well as double digit in analog and MEMS combined. On a sequential basis, AMS revenues decreased by 27.4% principally reflecting the negative impact of smartphone applications to our imaging business, while analog and MEMS posted better than seasonal performance with lower quarter to quarter sales declines.
AMS operating margin expanded to 9.8% from 7.6% in the year ago period on higher revenues and improve the gross margin. Year over year margin evolution reflected on the one hand strong expansion of our MEMS business operating performance as well as improvement in analog and on the other hand, the unfavorable effect of smartphone sales on our imaging business. Moving to the AMS products, our analog portfolio was very successful with industrial customers. Here, we recorded many design wins for our high end solutions for smart metering, motor control, solar power appliances and power supplies. This is thanks to our portfolio of dedicated solutions that have been defined together with industry Leaders built on ST Proprietary Technologies and refined over the past years.
Good examples include our SPIN motor control solutions and our metering ICs. With smartphone makers, our end of Portfolio won an award for a linear regulator from a top OEM, several design wins for analog smart power products with leading OEMs and designs for touch screen solutions with Chinese players. In MEMS sensors and actuators for industrial, we are seeing an increasing demand in applications such as such as equipment condition monitoring and asset tracking. These applications often require multiple sensors and sensor fusion know how and STI is very well positioned to target this broad industrial customer base. Also, our FlightSense proximity and ranging sensors achieved a number of designs in industrial applications such as robots.
In MEMS and sensors for consumer, we ramped production for Samsung Galaxy S9 and S9 plus of a full collection of sensors, including a 6 axis MEMS in our inertial measurements unit, sensor and an optical image stabilization gyroscope. Our success in optical image stabilization gyros is visible at 6 of the top 10 smartphone models as ranked by DXO Mark, a leading source for independent image quality measurement, use ST-six over the top 10 use ST optical image stabilization products. We capture a number of socket for accelerometers and pressure sensors in a top tier wearable supplier and in a Chinese smart watch manufacturer. And we earned design wins for our time of flight proximity and ranging sensors with several leading Asian smartphone manufacturers. Turning now to our microcontrollers and Digital IC Group, MTG, revenues were up 26.6 percent year over year, largely driven by a strong expansion of microcontrollers sales.
On a sequential basis, microcontrollers and digital ICS group revenues increased 1.3%. MDC operating margin increased to 19.4% from 10.3% in the year ago quarter, reflecting higher revenue growth as well as improved gross margin with respect to our microcontrollers business. We have also achieved a sustainable level of operating profitability for our digital business. Moving to MDG products, Our general purpose STM32 microcontrollers, which are used across a very wide range of products and applications, achieved another quarter of record billings. A few of the many STM 22 design ins include devices from major OEMs in applications such as a digital controlled smart home air vent a new generation of electricity smart plugs, insulin pumps in medical and fast charging, so solutions for smartphones.
Our success with the STM32 built on our broad and deep device portfolio and our continuously expanding ecosystem. In the first quarter, we began sampling our STM 22 WB wireless system on chip which adds Bluetooth low energy and lower rate wireless connectivity to our to ours STM32 family. We have further expanded our ecosystem with the cooperation with SIG Fox to support the growing demand of connected devices to low power wide area network and added new discovery packs for the fast connection of IoT devices to cloud services over cellular networks. Moving to security. We earn wins for our latest near field communication controllers in various smartphones from key OEMs.
Here, we are benefiting from the cooperation we announced last year with MediaTek to integrate our near field communication technology into their mobile platform designs. We also won socket for our trusted platform module solution from 2 leading PC manufacturers. In our tags and readers business, We capture wins, design wins for an ST-twenty five near field communication reader and associated near field communication tags for authentication authentication and of consumable growth from a major medical equipment company. We also ramped production for ANISCO PROM and the SIM card used in the Samsung Galaxy S9 and S9 plus. In our custom silicon business, we earned a design win for a digital ASIC in a 7 nanometer, FinFET technology from a new customer active in communications actual and we won 2 ASIC designs in BicyMOS Technology at an optical market leader.
Moving now to our second quarter, based upon the expected mix of our product groups, anticipate 2nd quarter revenues to increase by about 1.5% on a sequential basis, plus or minus 3.5 percentage points. As we already anticipated and now this is well known by the industry. The second to quarter is another quarter of weak sales in smartphones, particularly for our imaging business, while we certainly see another quarter of sequential growth and solid year over year growth in automotive and industrial for our broad range of products, automotive ICs, power discretes, analog, microcontrollers and digital, so very broad. Indeed, despite this weak demand for smartphone, In the first half of twenty eighteen, we anticipate Second Quarter And First Half Revenues to grow year over year about 17.5% 19.8%, respectively, at the midpoint of our guidance range. This will be driven by the continued better than seasonal sales trend in the automotive and industrial end markets and in internet of things applications.
We see healthy demand for the second half of the year with the backlog supporting our expectations for strong revenue growth across all our product groups and end market and this time, including also smartphones and regions. In terms of profitability, We expect the 2nd quarter gross margin to be about 40% plus or minus 2 percentage points. This expected gross margin which we have delivered in the past 2 quarters, results in a solid level of profitability and return on invested capital. As part of our annual general meeting resolutions issued earlier this month, our supervisory board is proposing to shareholders to declare a cash dividend of $0.24 per common share, payable to shareholders in equal quarterly installments. The annual general meeting of shareholders is scheduled for May 34, 31, 2018.
To conclude, we look forward to meeting with you at our 2018 Capital Markets Day on May 15 in London. As you know, this would be for me a special Capital Markets Day, the last one before my retirement. I will be pleased to meet with you all and thank you in person for your support and continuous interest in ST throughout the years. My colleagues and I will now be happy to take your questions. Thank you.
We will now begin questions. The first question is from Alexander Duval from Goldman Sachs. Please go ahead.
Yes, hi. Many thanks for the question and congrats on the solid quarter. Just a couple of quick ones me. First of all, I wondered if you could give a bit more detail on auto and industrial inventories. What's the latest update on the levels you're seeing across the market, both more broadly and at your own distributors, and, are there any signs to double ordering or anything like that?
Second of all, on Silicon Carbide, you talked about multiple design wins in that area for EV and onboard the car. What do you see as a key differentiating features you have there that have allowed you to have this first mover advantage? Many thanks.
Yeah. Well, I think let's start from, the inventory we see a strong demand on automotive everywhere. It is across the board. From an technology point of view, the products, the application, the geography is very, very strong. And we don't see any sign of accumulation of inventory, just the opposite, very, very strong demand.
Distribution point of sales, in Q1 was our record ever. It was the point of sales of our distributors in Q1 increased 17% year over year. And they increased 3.4% sequentially despite the Chinese New Year. So which is quite unusual, in fact. And I think the situation on inventory is healthy.
Now, of course, the question on double order here is not that black and white. We have in certain areas, backlog coverage that is even above the budget of the year. Also we could not exclude that there is some doubling order ordering, but the backlog is very, very strong. Covering, covering several quarters. Now if we move, if we move to silicon carbide, Well, of course, I think that the major differentiation is the fact that we are really striving and working very, very hard to make sure that this is transforming from today initial interest low volume business into a much bigger business.
And it is the industrial industrialization effort effort that we are putting to make sure that this is good quality, good yield, very high volume, very quickly in 20 2018 is an important differentiation because we want to be the 1st. Of course, this is built on a many, many years of innovation in the development of the technology. I think we have accumulated a lot of know how I think is absolutely critical, the performance in terms of power dissipation. And we believe that we have some competitive advantages. And we see now more and more with more carmakers, also in industrial applications.
There are challenges. It is not an easy, an easy journey, but I is, it is a unique opportunity for the company. And we are trying really to lead here. We are working very, very hard to lead and to keep going in this phase of transforming this initial volume in massive volume and spreading in terms of customers and applications.
Great. That's very helpful.
Thank you. Thank you, Alex. Next question, Mario.
The next question is from Sandeep Deshpande from JP Morgan. Please go ahead.
Thank you for letting me on. I have a question for you. I mean, longer term, Carlo, I mean, clearly your microcontroller business has been a huge winner in your tenure in at ST. What are the next big businesses at ST as as you see them, I mean, in terms of being able to create stable consistently growing businesses going SD and clearly, I mean, that has been one of them. And secondly, on the gross margin califero, I have a question on, how we should be looking at incremental gross margin from here given your level of utilization remains very high.
Should we be now looking at that you will be building new fabs and that will have an impact on your gross margin on a 1 or 2 year view from here? Or is it that most of the incremental growth for SP from here is going to be outsourcing? Thank you.
Well, I think I think, let's talk to microcontrollers. We started with the STM32 in 2007. And the perimeter of what we have in MDG that is, of course, our microcontrollers and digital group in that perimeter that is general purpose microcontroller and the secure microcontroller in 2007 the company was number 12, okay. We had a small presence in 8 bit and adding on the 32 bit. And I would say already a good position in secure microcontrollers.
And I think last year, we were number 2. So in 10 years, we move from position number from position number 12 to position number 2. And I think what we see in microcontrollers is an important acceleration of the market. And we see this acceleration on a very strong and industrial. And we want to keep going.
Of course, we want to become number 1. This is this is obvious. Again, this is the perimeter that is under MDG, that is general purpose and secure microcontrollers. And there are some important trends that we see here. The first is connectivity.
The second trend is certainly security. So even on a general purpose microcontrollers, we want to put on board more security and crypto keys and solutions for more secure applications and of course, also distributed form of artificial intelligence. These are 3 important drivers. We want to leverage on a very, very successful ecosystem now. More than 50,000 customers.
Here again, we want to move from more than 50,000 to 60,000 very quickly. And I think also on a base of Silicon Technology that I believe is quite unique. What the range of 14 nanometer, but also at the range of 28 nanometer. So Sandeep, I'm saying all of these because we want to become stronger in the things that we do. We do not want to do many more things.
I think there is enough to do on the portfolio that we have. And I believe we have the opportunity to become stronger in any of this product block and many of these broader blocks are real instrumental to be successful in automotive and industrial. And these are, from an end market point of view, very, very important applications for us. Our presence in smartphones, as you know, is more limited to more special products. We are not in the digital core, for instance, is more on the peripherally important peripheral products.
But more specialized, while industrial and automotive are very broad market for us. And there is a lot that we can do in terms of covering, for instance, all the new wave of applications in the IoT world, particularly in the IoT for factory automation for these new form of applications. So really trying to focus on what we have and become stronger on what we have and growing faster.
So on the gross margin, Carlo will take it. Good morning, everyone, and good morning, Sandeep. Thanks for the question. So, on gross margin, you noted the result of the first quarter and then really this 39.9% that came seen with first the absorption of a large chunk of the currency impact as we have already basis points negative impact from 1 year ago quarter and also including a number of one time of somehow associated with the summary shipping of products and the program plan for the year. That have a hit and about one point of the gross margin, a portion already included in our guidance for even on top of that.
So we have now another quarter solidly at the 40% and the 42nd quarter midpoint, we anticipate 40%. And this, you know, now is coming with a currency rate at 1 21. So almost absorbing where the eurodollar exchange rate stands now. This is reflecting a clear improvement in the product mix and this is something that certainly is that as opportunity of continuing across the portfolio of the company and these reflecting the manufacturing efficiency. Overall, at the end, what we needed in manufacturing, in terms of flexibility, Now it's there.
The technology, the flexibility in the technology mix in the fiber, particularly in those 300 millimeter that are more asset intense. The flexibility with a third party partner is increasing. Have reached the internal value now 18% of the value of our silicone from Silicon Foundry about 1 third of our assembling and testing activity at Ozata Partner and disease a process which is continuing. So the flexibility is there. Then look 4, we are starting from this situation.
Clearly, there is a great overall opportunity for the company on the margin expansion on operating leverage and on the overall evolution over time of operating profitability and return on invested capital. Then to go on the gross margin dynamic, beyond the second quarter. I would not expect me to make a change today in respect to the usual habit to guide on margin quarter by quarter.
The next question is from Anthony Stoss from Craig Hallum. Please go ahead.
Good afternoon guys and my congrats on the quarter and the guide. Carlo, perhaps you can help us out a little bit more on each of the product segments in terms of your Q2 guide. For instance, on the AMS side, how much you think that group will be down sequentially? And likewise, ADG and MDG, how much you think that'll be up? And then also just following up on the gross margin side of things over the next call it several years, where do you think gross margins can go?
And I apologize if I'm stealing any thunder from your upcoming Analyst Day. Thanks.
Yes, maybe I take the question on the 2nd quarter revenues guidance at the end that is one point 5% as mentioned, reflect, a quarter, even weaker than a prior quarter. In the Imaging Division. Who do we, at the end, exclude this impact in the Imaging Division, the Q1 to to sequential dynamic this year is expected to be above the normal seasonality. And for us, normal seasonality in period is a growth between 4% to 5%. This is solidly with the automotive and the district group.
This is also in the microcontroller and digital group. And this overall at the end almost is reflected. Also in the overall analog and MEMS business with as Carlos said, solid demand supporting each of these specific subgroups for the company.
And then on the gross margin side?
The gross margin side, what is the question, second quarter dynamic?
No, further out where you think it can go.
Okay. It was not the same question. I already answered and deep with, again, if you want, I could repeat a lot of, encouragement and positive and optimistic view on the over dynamic in general, the usual cushion and prudence to do not give guidance beyond the quarter by quarter approval. Certainly, there is the opportunity to have,
I would say, to continue to grow. I think we see important opportunity to grow. In fact, it was in my script. And we fully confirm what we said 3 months ago. And also H1, it is anyhow close to 20% growth year over year.
Now it's with the guidance is 19.8%. H2, we said 3 months ago, we are reconfirming today. Is going to be a material growth H2 over H1, but also H2 over H2. So is a is a operational DCR over H2 last year. So and we will really remain discipline to make sure that a part of this growth is transformed into economic leverage.
We have done a big way last year And of course, it is kind of unprecedented because we were starting from a law that was a level that was pretty low. This year, we are starting from a level that is significantly higher, higher, but with the evolution that we see in terms of in terms of revenues and moving from H1 to H2. Certainly, we see another wave of economic leverage coming. And of course, we want to remain disciplined to to get it done.
The next question is from Stefan Houri from Natixis. Please go ahead.
Yes. Hello. Good morning. I'm afraid question is again around the gross margin, but I'd like to understand what you did during the quarter in terms of manufacturing, meaning, did you repatriate some product that were manufactured outside to compensate for the for the weakness of the smartphone market that seems to be even stronger in Q2. And did you have time to react And does it explain the reason why the gross margin is expected at around 40%.
And the follow-up is on the level R and D, there is a step up in Q1. I think you have alluded to some exceptional items. Is that in the R and D line? And is that the level we should mind going forward? Thank you.
So Jean Marc, so I will take the first question. But this is clear that we have built in flexibility in our internal fab. And you know, mainly in call 300, which is exposed to the smartphone end market. So clearly, we have built in a capacity able to address embedded non volatile memory, enabling microcontroller either for automotive a general purpose usage or a secure micro. We also, build the capacity able to address digital ICs to address automotive.
And during the past 2 years, taking benefits of the 6 quarters in a row of growth, we have built activity outside with the main partner. For now, with this situation, taking into account, as a smartphone activities, we have the full capability to maintain a call 300 fully utilized with adequate mix.
Okay. Well, on the expenses, while I space it, we have we do not talk much about the euro dollar rate, but it's certainly not helping. Carlo will comment on the expense in one year, the impact of the euro dollar moving from the last year, Q1 last year to the situation today. Certainly, we are not enjoying enjoying a favorable evolution. But but at
the end of Stephane, I see frankly no surprise on the first quarter result. On this metric, we entered with, if I were to remember, sharing an expectation of net of tax somehow above the $600,000,000. We have delivered at the 598. I have a fair way to say that these 598 includes a $5,500,000 one time gain from a sale of a small participation on strategic So at the end, if you make the math at $604,500,000 is somehow above $600,000,000. So it's well in in the expectation.
Then on the year over year dynamic, it's clearly at the end a combination of good progress on the completion of the set of box restructuring, which is now completed. At the consequence of this completion, the good news is that Q1 2018 is the last quarter that we report restructuring charges associated with the restructuring and restructuring programs and there are no other on the prospect. We have overall at the end also to pay the currency as Carlos said and the overall impact of currency on the operating Europe area is a negative of $40,000,000 and also some of the not only inflation dynamic So some of the variable cost component that clearly in with better results are also somehow inflate on top of supporting the fast growth of the company, which means that sometimes in the R and D of the product groups particularly in sales and marketing and our regional footprint of interfacing with a customer at Zomex Airport.
So I think, overall, we remain very disciplined in expense control. There are, as Carlos explained, some aggravation. However, for the first time, in Q2, restructuring is 0. Q1 was $21,000,000. It is nice to see that the restructuring cost in the second quarter is 0.
Okay. Thank you very much.
Thank you, Stephan. Next question?
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 auto space. Your auto revenue growth continues to accelerate it's moved from mid single year on year growth this time last year to mid to sort of high teens. It looks like in the second quarter.
That's coming at a time when auto units are roughly flattish globally. So it does seem to suggest a step up in share or in content relative to what we've been seeing previously. Do you have a view as to sort of the balance between those two factors? How much do you think is content gain sort of generally across auto? How much is sort of market share gain for you?
And as a quick follow-up afterwards, if that's all right?
If we look back at 1 year ago, in 2000 if you look back at 2017, the coverage situation the number of car registration in the world increased by about 2.5%, okay, slightly less than 2.5%. This is last year. In this in this frame, I believe that the overall here I'm talking about all the products for automotive applications, the growth for me last year was in the range of 10%. Automotive year over year. And we improve last year about 10% taking into consideration all of our automotive dollars.
However, starting from the 2nd part of the year and particularly for last year, we accelerated the growth. In Q4, the growth was for us about 17%, 17%. And in the press release, we report APG, the Automotive Product group that does not represent all the products that the company has for Automotive customers. But in my script I read that in Q1, we grew more than 17% year over year in automotive on with automotive customers. I believe that with this level of growth, let's say that of course we want to keep going, maintaining a drop in the range of 15% to 17%.
I am confident that we are now materially gaining market share. And I have to say that it's a combination of many things. In the car, we do not the modem, the 4 g modem. We do not have the high end application processors. But for the rest, our presence is very global.
Many microcontrollers, car infotainment, safety solutions, very complex ASICs, And then all the smart power and the more recently also the power discret and the sensors for for our developing applications. So you see it's very broad and moving on with the growth that is in the range between 15% 17% year over year. We believe that we will certainly gain market share in 2018.
So you can see that kind of revenue growth rate continuing into the second half sort of the qualitative statement you made around sort of the strength within auto, it can remain at those levels?
Absolutely. This is what we see.
And then just a quick one on inventory. It stepped up in the quarter. Just wondering if you can make a comment sort of across if there's any particular build across certain areas or whether it's sort of just broad based planning for growth?
Almost all the evolution of inventory in Q1 is on the semi finished product with in the front end diffusion process and the Dibank. So it really is for preparing growth in the second quarter and beyond.
The next question is from Alexander Petterk from Societe Generale. Please go ahead.
Yes, good morning and thanks for taking my question. So congratulations on naming the guidance really nicely. I was just wondering about the second half seasonality because your smartphone is or increased quite substantially in the fourth quarter last year. Would we see a similar pattern this year or should we expect more of smartphone recovery broad based across the 3rd fourth quarter. And then just secondly, in terms of CapEx timing, it was quite strong in the first quarter.
You be more specific on where that went and what we should think about the phasing of CapEx for the year?
Well, I take the first part. I we see pretty strong Q3, not in Q4. And so, yeah, I mean, normally, Q4 is higher than Q3, but we see a step up step forward, step up in Q3. And from what we see, of course, this is the visibility that we support by new programs, products, whatever customers information, we see a step up already in Q3 that smartphone is material and that we see a further acceleration during the course of the last quarter of this year. If
we go to CapEx, Carlos, is broad, to support mostly automotive and power. Again, the CapEx in the year were already anticipated to be significantly front loaded to prepare for revenues growth across the board and also to campaign these process of technology evolution in the fab that as a market as described earlier. So as you note, the overall, like, contest for the year. In the demand, in the industry, in our revenues, expectation, is very much similar on the past. What did happen last year.
So like last year, I believe now the question came set a time where the company is reviewing his capital spending plan. And at the end, based on overall demand visibility of revenues for the second half of the year, need of increasing the flexibility on the technology mix on the fab. I would not exclude that we may have, the company may have to review upside the CapEx forecast for the year. As usual, I believe the May 15 and the Market Day is a good appointment to make the point on these metrics.
Excellent. Thank you very much.
You're welcome. Thank you. Thank you, Alexander. Next question, please.
The next question is from Jano Domenon from Liberum. Please go ahead.
Hi, good morning. Thanks for taking my question. I've got 2. One is, you just talked about automotive growth and how expect that to be in the region of 15% to 17%. I was just wondering whether you can give a similar kind of analysis for your IoT market or the broader /industrial market, your microcontroller and part of the analog business has been growing in the mid-twenty kind of range.
Is that indicative of what kind of growth you're seeing in those segments and how do you see that continuing in future? And my second question is on the sort of 3 d sensing space. Some of the other players in 3 d sensing have been reporting multiple design wins in android space. I was just wondering what is your interaction there, especially from an image sensor or dual packaging kind of a standpoint, are you seeing any design wins which will translate into revenues in future years?
Well, I think the first part and then Jean Marc takes the second part. Well, as you know, it's not that's simple to track the large fragmentation of IoT applications, but we are working with regard to that. And we have now a new very, very comprehensive application tree in the company. And with Andres and Dan of application branches. And for any of this branch, we will put a tag.
This is IoT and this is not IoT. So we are making very systemic, systematic work in this respect. But, however, there is another indicator that may be is simpler for me to give to you. And it's our presence in mass market. We see that in Q1, our distributor POS year over year increased 17%.
I do not believe that this level of increase is sustainable at this high teens level. However, what we see moving from 2017 to 2018 is certainly a double digit growth in all the mass market activity of the company. And for us, the mass market activity does not include just to be very, very clear our top 10 customers plus another about 50 customers that are those customers that we manage globally. In the world. So the rest, if you wish, is what we define in the category, of mass market.
This is a big part of the company is becoming of course, an interesting part of the company. And this is a double digit. Double digit growth, but not at the level of the 17% growth that we had at Q1 over Q1. So pretty solid, pretty robust, and very, very much broad based with today and increasing efforts in industrials. We are investing, we have been investing a lot in industrial.
Just a few examples, the longevity program for our MEMS, these are 10 years longevity on MEMS. This is for industrial applications. Another example is the new is all the new higher end microcontrollers and the new development for industrial processors for industrial applications, a way of smart power products in our analog domain And so you'll see many the seek, of course, the silicon carbide, not only for automotive, but also for industrial. So there are many elements And this is a market that is very fragmented. It's a very important market for us.
This market is very much through distribution. And this is a big block close to $4,000,000,000. And this year, we will certainly be above $4,000,000,000. And we see this as a double digit step.
Okay. So your IoT broader industrial market, you would say is about $4,000,000,000 and will grow at double digit?
Last year was below $4,000,000,000. This year will be above $4,000,000,000. Is mass market and the definition of IoT technically is not one to one as I explained because However, if we take the mass market that is all the business of ST, basically, without the the top 10 and other 50 customers that have the customers that we manage globally, so about 60 accounts in the world. It was below $4,000,000,000 last year. It is certainly above $4,000,000,000 this year and this is another 10% or more step is certainly double digit, but as I said, not at the level of the automotive.
As you know, we'll have more details on this at our Capital Markets Day for sure. Got it.
Thanks. And on the I on the 3 d sensing,
Okay. So Jean Marc speaking. So now, it is really well known that in the depths, something technologies to address mobile device. Basically, there is 3 big families. So as a state of vision, the structure of light and the time of flight.
And some are more adapted to address depth sensing for the front of the camera. And some are more adapted to address the depth sensing for the back of the camera. It's important to say that STMicroelectronics has currently a portfolio of IP's building block silicon technology and complex module assembly and testing to address everything. And we have a road map related to that as well. So of course ST will address with the most adapted solution one of this kind of application and of course, including the Android world.
Okay. But so far have
you got any wins as yet?
We have, but design win in Android world.
Okay. Thank you very much.
Thank you, Janard. Next question.
The next question is from David Mulholland from UBS. Please go ahead. Hi, thanks.
Just one, I'm coming back to the comments made on silicon carbide. I don't know if you can just give us some color on the timing of when you actually expect these design wins to ramp, and how you about the RAM schedule in the context of the wafer supply in the industry on that. And then one quick follow-up on the other income line, still a, I think, $16,000,000 profit in the quarter. Obviously, in the past, that's been R and grants that I thought were going away this year. Can you maybe just update us on what's happening there as well?
On the silicon carbide, I think we reconfirm what we said in Boston, Barcelona, this is the 1st year of production on the silicon provide. I think our target, as you said, also recent events is going to And I'm talking about the more, of course, it's to be in the range of $100,000,000. And then, of course, depends, very much on we see a lot of design, design of work, design wins, etcetera. I think it will be a gradual increase and we take some years, but this can become very, very important because the addition business opportunity for us in this field of the current electrification, it would be enough, you know, to have few percentage of the total volume of cars in the world with the silicon carbide with the silicon carbide content in the inverter to drive the motor to make a big step because, of course, there are many, many drives us in any of this in any of this inverter. But it would be gradual.
So we confirm the plan for this year. And then I think it will, it will take some time, with our, particularly with our automotive customers. To grow. But we see a lot of design award, a lot of testing with ST products and on top is not only, as I said before, is not only automotive in is also industrial application. So I think it's broad.
I think it's a good opportunity. We need to also to make our own work. Yeah, there is a lot to do, but certainly a great, great opportunity for the company.
On the other income and expenses line, as I mentioned earlier, the $16,000,000 other income report in the quarter in through the one time gain on a sale of a minority participation. If we exclude this amount, it's about $1,000,000. And then these reflect the R and D findings that, as you know, has reduced, but this is something we have anticipated and also this line includes some of the patent defense expenses. So overall, at the end, I would say that starting from this clean $10,000,000 in Q1 for the next quarter, you may expect something between the same number of a couple of mediums. If you take an average of 8,000,000 per quarter for the next three quarters, is a good approach, I'll say.
Thanks very much.
Thank you, David. Next question please.
The next question is from Aditya Metuku from Bank of America. Please go ahead.
Good morning guys. So I have two questions. Firstly, can you give us some color on the linearity of orders in the quarter? Did that strengthen as you go through the quarter? And secondly, you give us some color on what gives you confidence on growth in the smartphone market in the second half of the year?
Thank you.
Yes. Well, I think as I said, we have a very, very strong back coverage. So of course, the order entry, during Q1, gains tracked also, the the strength of the backlog and the coverage of the backlog, right? So we have, we have reasons where the backlog that we have in the year is above the yearly budget. Covering.
So, of course, bookings reflect this coverage of the backlog. I think there are few areas where today we expect, for instance, in Q2, we expect some form of term business is very limited. The area where we have expectation for additional term business, very, very limited. I think Of course, we see moving on. Now if we look at the smartphone, of course, as I said, this is an area where our presence is more with special products, with limited number of customers on more proprietary technologies and the information that we give is based, of course, on information that we have that we cannot disclose because it is impossible, but this is coming from the information that we have from our customers around the world and is simply based on that.
So we report what what we know. Personally, I believe that what we are reporting is nothing strange in terms of evolution in the smartphone market. It's not unusual things. And this is more our content is our content that is making the difference here. We are certainly not counting on volume increase certain smartphone manufacturers.
So we are, we are simply taking into consideration the opportunity that we have with the silicon content contribution from our company.
Content growth in the second half of this year versus second half of last year?
Yes, we expect content growth and we expect a larger deployment. We expect meetings. And what we do not expect is we've been increasing the, in the volume of performing. This is not in our calculation. Our calculation is, we are in more models.
We are, with more content, but it's not the more volume per se.
And now I'm in content profile, not more models.
We are in more models.
We'll just
talk about some, you know, a couple of new models, some of the guys, S9 and S9 plus, you know. But we can talk about what way to issue.
Please.
The
next question is from Basil Hayes from ODDO. Please go ahead.
Yes. Hi. Thank you for taking my questions. The first one would be a color around the quarterly OpEx run rate for the rest of the year would be very helpful there. And I have one follow-up.
Carlo, I can take the question on our Lorenzo speaking. On expenses, you see that on the core first quarter, we were in the range of $600,000,000. If you take it also into consideration the other income, what do you expect for the second quarter is to the second quarter in term of seasonality is not favorable. And there is also the impact of the exchange rate. So what do expect also considering the other income will be in the range of $7,000,000 to $8,000,000 to be on net expenses for the next quarter range of $610,000,000 $615,000,000.
Then there will be the huge seasonality in Q3, a little bit mitigated then there will be some increase in Q4 as usual, due to the length of the quarter, the calendar.
But no more restructuring cost, which is good news. And in Q1 was $21,000,000.
Okay. And then on your silicon carbide business, let me it was in Q4 first revenues, high single digit. And then, there was something 1000000 to 1000000 for this year, but are you like you are now in the 2nd quarter? Are you happy with the progression of your silicon carbide revenues in the outer space? Because there have been a lot of my speculation with one of your lead customers, not able to ramp volumes.
So, how was the first half there?
Well, I think as I said, we have a working very, very hard. We cannot say are happy. We are not happy. We need to always really to strive to do more to go faster in improving you know, the quality of the yield, these are new programs. It's certainly a big effort in the company is also a big opportunity.
We want to keep going with the same level of determination in Q2 to continue with the ramp up and move to higher volume for sure in Q2 and then higher volume again in Q3 and then in Q4 is a continuous progress. Overall, I think there is an opportunity to make a difference here and we certainly want to make a difference. So we should never be happy in these kinds of things. We need to just push more and go faster and make the difference for us and for our customers.
Okay. And then quickly on the fab question, it was addressed before, but I'm not sure if you answered that. On the fab question, I mean, if you look at one of main competitors, it's speculated that they will ramp a new fab and they were all just a rumor speculation in the market that you might be a new fab 2020, 2021. I mean, if you say the level of growth, let's say, stays at the high single digit it. Is that something you need to definitely think about to ramp a completely new fab?
No, we did not, I mean, today, the only we want to have is a smart power technology on 12 inch, and we are working on that, but it is a it is a what we foresee here is a pilot. It's a pilot line to make sure that on the very advanced smart power technology and talking about the power, smart power ICs technology, we could move the development 12 inch, but we did not have any, you know, initiative for new fab that there are opportunities opposed to exploit better the dimension of scale in certain fabs and this is an opportunity to grow the volume and at the same time to reduce the cost, for instance, in ground 300, we have opportunities in the same infrastructure to grow further if needed. But as we said, the priority is also to invest to build up flexibility because we want also to build that flexibility. So I know we do not have any plan for a for a new big credit, if you don't.
Okay. Thank you very much. Next question please.
Next question is from Robert Sanders from Deutsche Bank. Please go ahead.
Are you seeing foundry wafer pricing becoming more benign at all given there's quite a lot of excess capacity now out there. I was just wondering if that could contribute to your gross margin. And then secondly, what is your level of concern around the sustainability of your position in imaging at your largest customer smartphone customer? And what's the length of that contract you have in place? Because clearly, Apple and Water startup, there are obviously other companies wanting to compete for that socket.
So I was just interested in what your confidence level was around that, Saket? Thanks.
Maybe I'll take the first question on a I think with Foundry and Frankly again, we see normal business trend, clearly, pricing reflect the maturity of the different technology in order. So I'll say, no, nothing special in this respect.
And Jean Marc can speak again on imaging. So I repeat, today clearly ST, we have the IPs building blocks the silicon technology with innovation, strong innovation as a complex, complex specialized module assembly capability. And with this set of capabilities and the roadmap associated, we can structure of light, time of light or a part of the stereo vision. So thanks, okay, to this position, our imaging position is very strong. So we can address custom design with a big
customer, whatever is operating system. And I repeat, okay, Android, Android as well. But we cannot comment on specific customer. You know that. And of course, these are very complex initiatives, you know, so and, but certainly, we are not in the condition to comment on specific customer.
Okay.
Thanks a lot.
Thank you, Rob. Next question?
The next question is from Guilher Holfeder from Baaderville. Please go ahead.
Yes, thank you. Two questions left. Maybe one follow-up on the new capacities. You there's this 300 millimeter pilot line project in Agarache, I think, going on. So I was wondering, is it one scenario.
Could it be, you know, like a conversion to 300 millimeter here? And, if you could provide an update, And the second question would be, in general, about Gallium nitride. Could you update us on your activities there and when you expect 1st major sales contribution from gallium nitride, transistors going forward?
Yeah. Well, maybe I start from the gallium nitride and then Jean Marc is taking on the on the R and D activity in 12 inch for Smart Power. Priority today is to really ramp up nicely the sick this year. We have cooperation in the area of gallium nitride, we even announced an important design award This is an activity that is a running cooperation with happen. I think we can say because it was a press release and this is more for a power RF applications in the area of 4G and 5G base stations.
And the technology is running in ST. And of course, they cannot describe the detail of the contract, but there are areas where the contribution from our side It is not only technology and manufacturing, but is also marketing and applications, while there are areas where the contribution is exclusively in terms of technology and manufacturing. So this is, this is one area and this is more on the area of, powerRF, a gallium nitride, application and technologies then. There is another area that is more for power applications. This is an activity that we run-in another site of the company.
And this is an area where we do not have yet short term manufacturing initiatives, but it's more in R&D. So you see is really to blocks in the area of Ghana. Having said, all of that, the major priority for us in 2018 is, of course, the ramp up of the the silicon carbide fab. The second one
is about the pilot line. And the pilot line will be set up based on new equipment, in our current infrastructure facilities and capabilities. Today, our equipment capacity in 8 inches and a current 12 inch equipment capacity are close to the full saturation above 90% of saturation. So there is no space, okay, for equipment conversion from 8 inches to 12 inches. However, as Carlos said a few minutes ago, we have still opportunities to expand some R and D pilot line or manufacturing capacity in a work current infrastructure.
And this is what we will leverage. According to the demand or according to the request in term of technology development.
Thank you, Esther.
Thank you.
The next question is from Achal Sultania from Credit Suisse. Please go ahead.
Hi, good morning. Two questions
if I
may. It's on your MDG segment. So if I look at MDG, I think there are basically a general purpose microcontroller, secure microcontroller and your digital IC. And given the growth that you've seen, can you just help us understand or give us a range of how are all of those three segments growing year on year in MDG And any color around the level of growth you're seeing in those segments? And then on the margin side, you've already like touching close to 20% EBIT margins.
In that business. And I remember like in the past, you've said microcontrollers is the highest across the whole group. So just trying to understand if there's still any, like areas where you can improve margins, whether it's digital ICs or secure microcontrollers, or if there's any other headwinds or dilutive businesses in that MDG segment?
Maybe I'll take the first part of your question, the end, indeed, in the micro control and digital ICs group. As you said, we have 3 blocks. 1 is the digital. 1 is the prom and the message is and the other one is the 8 bit 32 bit microcontroller for general purpose or secure applications. They can confirm that all these three blocks are expected to grow year over year in the second quarter based on the midpoint of the guidance.
So the other question is the margins on the
margin structure. No, I think here there is a big difference of between what we call, defined as MMS, you know, that is a microcontroller, secure microcontrollers, disclosure, basically, and digital. We are coming from digital for a massive loss, okay. And now there is an initial profit. And this was achieved certainly not thanks to is grow.
There was a on the opposite decline in certain areas, phasing out certain products. And of course, the major restructuring. And I think in the group here, we have been working on the product mix, big way. And now in digital, I think we are at the level of the first, as I said, as I defined before as the first sustainable level of profitability and gross margin ambition is pretty good here. We need to keep going with our effort, particularly in Essex, particularly in in, by CMOS for instance, in RF, RF solutions, basic solutions, ASIC also for Space And Defense.
And certainly from a technology point of view, everything that is beyond 28 nan is not in the company. We have announced a 7 nanometer AC Queen. This is done, this is made with the that technology, of course, is not technology that we ran in ST. So here, it was a global change, sales did not contribute, to turn around. It was really, mix management and also a reduction of the R and D resources in this area.
Looking at the future, as I mentioned in the Bicy Moss, GRF, the FD SOI radiofrequency, the Space And Defense, and certain very advanced ASIC solution using FinFET technology, here it may open up to a new wave of growth. In the future, but keeping a level of gross margin that is higher than the average of the company. Now, the completely different story is MMS, because in MMS, we have been traditionally very good in this program, always now one since many, many years with a pretty good gross margin and pretty good profitability and return on investment. And then there was this a big evolution in microcontrollers. In 10 years, we went from number 12 to number 2.
We want to become number 1 in this in this perimeter. We need to keep innovating, structurally microcontrollers, together with this group prom, together with analog ICs are general purpose microcontroller, this group on analogue ICs, these are those families where I believe we can enjoy the higher level of margins and profitability.
Okay. Thank you. Thank you, Karl.
Thank you, Ashaun. We have time for one more question, please.
The last question is from Jerome Rommel from Exane BNP Paribas. Please go ahead.
We hear from your competitors and some of your customers that lead times for some specific products. I'm thinking about power. Which are expanding. So I'd like to know the what the situation today for SMITO in terms of allocations, in terms of lead times, And if any, have you increased on prices for discrete and power components? And just to follow-up, just to be curious, what is the current capacity in Call 2?
Well, yeah, we confirm. It is a lead time step very long on power this feet. The demand is very strong. We talk a lot about silicon carbide, but I have to say that is is a pattern of longer lead time on both our MOS and high voltage power MOS. Since we merge our Power Discrete division with our Automotive division, our presence on PowerMOS at out autics customers is, let's say, becoming more important continuously.
So this is another area of opportunity. And I believe is an area that we want to that we want to push you is an area where we want to be stronger. And I think we have, let's say DR2s to be to play a bigger role in these products here. We do not have any sign of, getting better in terms of, in terms of lead time on on PowerMOS. The second question was on growth 300 capacity.
Other call 200. 2 is call 300.
So, for Jerome, so call 300 millimeter capacity today is a flexible 4.8 K wafer per week between the mix of with a well balanced mix between a budget flush, specialized imaging, analog, mixed signal, RF on the same notes. And standard semas below 28, equal or below 28 nanometer. So this is our current capacity.
Okay. Thank you very much.
Thank you. Thank you very much everybody at this point. We'll go ahead and close call. We appreciate your participation. And again, we'll have our Capital Markets Day on May 15th in London.
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