Good morning. Thank you everyone for joining our Q2 2022 financial results conference call. Hosting the call today is Jean-Marc Chery, STMicroelectronics's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our President and Chief Financial Officer, and Marco Cassis, President of Analog, MEMS and Sensors Group, and in his global corporate role, Head of Strategy, System Research and Applications and Innovation Office. This live webcast and presentation materials can be accessed on STMicroelectronics'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 STMicroelectronics's results to differ materially from management expectations and plans.
We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning, and also in STMicroelectronics's most recent regulatory filings for a full description of these risk factors. To ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to 1 question and a brief follow-up. I'd now like to turn the call over to Jean-Marc, STMicroelectronics's President and CEO.
Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q2 2022 earnings conference call. Let me begin with some opening comments, starting with Q2. Q2 net revenues of $3.84 billion and gross margin of 47.4% came in above the midpoint of our business outlook range, driven by continued strong demand for our product portfolio. Year-over-year, net revenues grew 28.3%. This revenue growth was accompanied by improved profitability, gross margin at 47.4%, up from 40.5%, operating margin at 26.2%, up from 16.3%, and net income more than double to $867 million. On a sequential basis, net revenues increased 8.2%.
In the H1 of 2022, net revenues increased 22.9% year-over-year to $7.38 billion, driven by growth in all product groups and subgroups. H1 operating margin was 25.5%, and net income was $1.61 billion. In Q3 2022, our Q3 business outlook at the midpoint is for net revenues of $4.24 billion, increasing by 32.6% year-over-year and by 10.5% sequentially, with a gross margin of about 47%. For the full year 2022, we will now drive the company based on the plan for full year 2022 revenues in the range of $15.9 billion-$16.2 billion, above the high end of our previous expectation.
We now anticipate gross margin to be about 47% for the full year. Now, let's move to a detailed review of the Q2 . Net revenues increased 28.3% year-over-year, with higher sales in our 3 product groups and all subgroups. Year-over-year, sales to OEMs increased 31.7% and 22.2% to distribution. On a sequential basis, net revenues increased 8.2% and were 240 basis points above the midpoint of our outlook. Gross profit was $1.82 billion, increasing 50.2% on a year-over-year basis. Gross margin increased by 690 basis points year-over-year to 47.4%, mainly driven by favorable pricing and improved product mix, partially offset by inflation of manufacturing input costs.
Our Q2 gross margin was 140 basis points above the midpoint of our guidance, driven by similar pricing and product mix factors. Q2 operating income doubled to $1 billion. Operating margin was 26.2%, increasing from 16.3% in Q2 2021, with improvements in all 3 product groups. Both net income and diluted earnings per share more than doubled year-over-year, with net income reaching $867 million from $412 million. Diluted earnings per share increasing to $0.92, up from $0.44. Looking at the year-over-year sales performance by product groups, ADG revenues increased 35.1% on growth in both automotive and in power discrete. AMS revenues grew 11.3% on higher analog, MEMS, and imaging product sales.
MDG revenues increased 39.5% on growth in both microcontrollers and RF communications. In terms of operating margin, all product groups demonstrated year-over-year expansion with ADG operating margin of 24.7% up from 9.5%. AMS operating margin of 23.8% up from 18.6%. MDG operating margin increasing to 34% from 22.9%. Net cash from operating activities increased to $1.06 billion in Q2 versus $602 million in the year ago quarter. On a trailing 12 months basis, net cash from operating activities totaled $3.78 billion, increasing 45.8% from $2.59 billion. CapEx in the Q2 was $809 million compared to $438 million in the year- ago quarter.
After the strong investment in CapEx, free cash flow was $230 million compared to $125 million in the year-ago quarter. During the Q2 , ST paid $54 million of cash dividends to stockholders, and we executed $87 million share buyback under our current share repurchase program. Our net financial position was $924 million at July 2, 2022, compared to $840 million at April 2, 2022. It reflects the total liquidity of $3.44 billion and total financial debt of $2.52 billion. Let's now discuss the market and business dynamics of the quarter. Overall, demand for ST products continue to be strong. Let me share with you a few data points.
Our backlog exiting Q2 covered 6-8 quarters of planned capacity, depending on the product type. Book-to-bill is well above parity. Our manufacturing capacity is fully saturated. From an end market standpoint, demand both in automotive and in what we call the business-to-business part of the industrial market, so factory automation, robotics, and industrial infrastructure, remains strong, driven by semiconductor pervasion and structural transformation. In the consumer electronics and PC markets, there are some broad signs of softening, but demand for ST products remains strong in the selected areas where we target in this market. Going now in more detail on the automotive market, we continue to see strong demand in Q2, still reflecting the combined effect of replenishment of inventories across the automotive supply chain and the ongoing electrification and digitalization transformation of the industry. Bookings remain strong across all customers and geographies.
Backlog visibility is now above 18 months and well above our current and planned manufacturing capacity through 2023. The accelerated transformation of the automotive industry with electrification and digitalization and semiconductor pervasion continued to drive wins for ST during Q2. For car electrification, we again increased the number of ongoing silicon carbide programs. Between the automotive and the industrial market, we now have 102 projects spread over 77 customers. These projects are roughly equally split between the 2 end markets, and we are in line with our revenue target of $1 billion silicon carbide revenues in 2023. We had a number of new design wins in Q2 with a range of silicon and silicon carbide power discrete.
This includes third-generation silicon carbide MOSFET dies with a module maker, rectifiers, ultrafast and silicon carbide diodes, and our ACEPACK power modules for traction inverter, onboard charger, and other electric vehicle-related applications. We also won sockets for power management ICs in onboard chargers, DC-DC conversion, and electronic parking brake application at multiple T 1s and carmakers. In-car digitalization, we announced last week a new cooperation model with the Volkswagen Group for our next-generation digital automotive solutions. The Stellar microcontroller family. This will include the direct usage of our high-performance Stellar microcontroller family and the joint development with Volkswagen CARIAD for a system-on-chip Stellar microprocessor. Both the MCU and the system-on-chip NPU will address multiple applications within the new zonal architecture platform of the Volkswagen Group, which is called Project Trinity.
In our automotive sensor business, we had multiple wins for devices in our 6-axis automotive sensor family, including our embedded machine learning core sensors. We continued to gain traction for our automotive global shutter product family with major OEM program design wins. Moving now to industrial. Here we saw strong demand through the quarter in business-to-business industrial from both distribution and OEMs, with distribution inventories of our products remaining lean across all product families and high inventory turns. Across the industrial market, we see 2 main trends accelerating the increase in semiconductor content. Digitalization of devices and systems and energy management and power efficiency improvements. These trends are driving a structural transformation in this market. We address the industrial market focusing on 3 areas, the business-to-business industrial segment, the largest part, which include automation, robotics, power, energy, and transformation.
Consumer industrial, which includes home appliances, smart buildings, and power tools, and a more specialized part addressing, for example, healthcare. Across these 3 areas, we have important wins with our broad portfolio. In business-to-business industrial, we have multiple design wins for products such as intelligent power switches, industrial sensors, high and low voltage MOSFETs, wireless charging solutions, and our STM32 embedded processing solutions. Application includes programmable logic controllers, robotics, energy storage, and wind turbines. In consumer industrial, we have design wins in applications such as major home appliances, power tools, cleaning robots, consumer power supply, point of sales terminals, and building air conditioner systems. In the specialized part, I would like to highlight just 1 innovative example in healthcare, where we announce the incorporation of an NFC tag into a connected syringe by Ampli- Plastibell.
Before closing on industrial, a few words on embedded processing, where we continue to build on our number 1 position in 32-bit MCUs, and where we announce enhancement to our security offer with Amazon Web Services, extension of our support for Microsoft Azure RTOS across the product range, and addition to our NanoEdge artificial intelligence studio. Moving now to personal electronics. Demand for our products in the selected areas we target in the smartphone market was above expectations. In this market, we focus on selected high volume smartphone applications, addressing them with differentiated or custom products, while leveraging our broad portfolio to address other high volume applications. During the quarter, we won sockets in these devices with motion and environmental sensors, time-of-flight ranging sensors, touch display controllers, and secure solutions. We also made progress with our wireless charging solutions with wins in flagship smartphones and smartwatch team.
In communication equipment and computer peripherals. We continue to see deployment of 5G infrastructure products and of low-Earth orbit satellite programs and services around the globe. Here, we target selected high volume application, again, with differentiated products or custom solutions, while leveraging our broad portfolio. New wins here include pressure sensor for hard disk, time-of-flight sensor for laptops, and our MasterGaN family for high power density charging adapter. I would like also to confirm our continued progress with key customer engagements in addressing selected applications in cellular and satellite communication infrastructure. Now, let's move to our 2022 Q3 outlook and plan for the full year 2022. For the Q1 , at the midpoint, we expect net revenues to be about $4.24 billion, representing year-over-year and sequential growth of 32.6% and 10.5% respectively.
Gross margin is expected to be about 47% at the midpoint. Looking at the full year, we now plan to drive the company based on 2022 net revenues in the range of $15.9 billion-$16.2 billion, representing growth of about 25%-27%. This plan includes a gross margin of about 47%. We confirm our 2022 CapEx investment range of $3.4 billion-$3.6 billion. Before concluding, I want to highlight the recent announcement we made together with GlobalFoundries. We signed an MOU to create a new 300 millimeter semiconductor manufacturing facility adjacent to ST existing 300 millimeter facility in Crolles, France. This is a projected multi-billion EUR collaborative investment that will include significant financial support from the state of France.
The project is subject to the execution of definitive agreements and various regulatory approvals, including from the European Commission's DG Competition. As you know, we are transforming our manufacturing base with a significant expansion of our 300-millimeter capacity, a major enabler supporting ST's $20 billion-plus revenue ambition. We already have a unique position in our 300-millimeter wafer fab in Crolles, which will be further strengthened by this important initiative. We continue to invest into our new 300-millimeter wafer fab in Agrate, near Milan, Italy, ramping back in H1 2023, with an expected full saturation by the end of 2025, as well as in our vertically integrated silicon carbide and gallium nitride manufacturing.
This new facility will enable us to support even more our European and global customers across all end markets and to advance our leadership objectives in automotive and industrial, as well as our focus activities in communication infrastructure. Importantly, we are targeting to make this new fab a leader in sustainable semiconductor manufacturing. For example, it is designed to be 10-20 times less emissive in terms of greenhouse gases than similar projects in Europe and in the rest of the world. Of course, working with GF will allow us to go faster, lower the risk thresholds, and ultimately reinforce the European FDSOI ecosystem. To conclude, our Q2 financial results and plan for the full year 2022 are aligned with our ST's strategic focus on core business and targeted high growth areas.
We continue to leverage our early investments in smart mobility, power and energy management, and IoT and connectivity. We are building on the unique strength of our integrated device manufacturer models, complemented by partnerships with foundry and suppliers, customer relationships, and our established end market and application strategy. These initiatives will support the $20 billion+ revenue ambition we outlined at our Capital Markets Day. Thank you, and we are now ready to answer your questions.
The first question is from Aleksander Peterc from Société Générale. Please go ahead.
Yes, good morning, and thank you for taking my question. The first question would be really on your full year guidance upgrade and the very strong traction in the Q3 . We could hear supply constraints for the rest of the year, and although there may be some price hikes, those were already baked into the previous guidance, I suppose. Could you explain where this extra $1 billion revenue is coming from, in the year? Is it improved foundry capacity access or better internal efficiency, more internal capacity? Although your CapEx plans unchanged in H1 was pretty much in line or a little bit below expectations. If you just explain what's driving this additional revenue for the year.
My quick follow-up would be on OpEx, which actually came in a little bit below expectations for the Q2 , so no sign of undue inflationary pressure there. How should we think about OpEx for the remainder of the year? Thanks a lot.
Thank you for your question. Lorenzo will answer on OpEx. About the H2 , let's say, improvement with our, let's say, indication for the year. Basically there is 2 cumulative effect. 1 effect, of course, is moving through the year, it is clear that we are able to secure our, let's say, supply chain, both the equipment arrival, setup, which were supposed to add capacity in our own manufacturing. Now, okay, we have better visibility. It was for us the opportunity to increase our manufacturing. As an example, okay, the production value of STMicroelectronics in Q3 will increase by 12.5%, versus Q2.
This is the reason why, okay, we have this capability to increase our revenue target. We have better support from foundry, from foundry partner, I have to say. Well, the second effect is pricing and mix. Clearly, we have still a favorable environment and pricing and mix is also contributing to this $1 billion additional target revenue for the full year. Lorenzo, you answer on the OpEx?
Yes. Good morning to everybody. In terms of OpEx, what we model now for the current quarter for Q3 will be to have OpEx and net OpEx, so including also other income and expenses similar to the 1 that we had in the previous quarter in Q2. Now we are, let's say, in a range between $810 million and $815 million. Of course, we are benefiting also from the seasonality this quarter, because as you know, in Europe, there is vacation, and this is a benefit for our expenses as well as also for the exchange rate.
For the year, I would say that if I look for the year, the total year and in the average, as you know, usually what I share with you is the quarterly average expenses in the year. I would say that the level will stay more or less in this range between $800 million and $815 million. This is where we see today, let's say, landing our expenses for the full year. This means that there will be an increase in Q4 as usual due to the seasonality, but in the average we will be there.
Very clear. Thank you very much.
Next question.
The next question is from Aditya Metuku from Credit Suisse. Please go ahead.
Yeah. Good morning, guys. Congrats, firstly, on a great guide. Just 2 questions. Firstly, can you give us some color on how you're thinking of growth by division in the Q3` and for the rest of the year? And secondly, I wondered, you know, when I look at the seasonality for the Q4 at the midpoint of your guide, it looks like you're assuming 4% sequential growth in the Q4 versus 5-year seasonality of 12%. So are you assuming, you know, some kind of underlying demand slowdown, or is that driven by your capacity increase plans? You know, what is driving that seasonality that you're assuming in the Q4 ? Any color there would be helpful. Thank you.
Maybe I comment on the H2 , okay, trend by group, and you comment on the seasonality, Lorenzo.
Yeah. No, no problem.
Okay.
I can comment, then.
Overall, for H2, Q3 and H2, well, clearly we continue to see a strong growth in ADG, definitively, both automotive and power, and power discrete. It is clearly sustained by our capability to increase our manufacturing supply chain. AMS will grow in H2, but well, you know that here it is the usual attraction of our engaged customer program, which are, let's say, increasing in Q3 and then in Q4. We will grow as well for analog and MEMS, but clearly this field of product group, here we are limited by our own capacity.
Microcontroller will grow, but similar to analog and MEMS, we have also a limitation in capacity. We will grow quite materially our RF communications division related to customer engaged programs.
Lorenzo, you comment on this seasonality?
I think you have covered that. At the end, if you want a little bit more color about Q3. For sure, Q3, there is our seasonality in personal electronics that is a strong driver for our growth. At the end, the driver of the growth in current quarter on a sequential basis definitely will be AMS. AMS is enjoying, let's say, is 1 of our group that is more exposed to personal electronics, as you know, so at the end, it will be the driver of the growth. Anyway, all the groups will contribute to the growth in the current quarter. We continue to see traction, strong traction in ADG that will continue to grow, let's say, as well as also in MDG.
On Q4 and on the H2 , Jean-Marc was covering, let's say, the evolution.
Got it. Essentially, AMS will be the main growth driver in the Q3, followed by ADG and then MDG.
Correct. Let's say this is not a surprise, no? Because at the end, you know that at the end, in the H2 , and in particular in Q3, personal electronics for us is a strong driver. Anyway, I confirm that all the groups will contribute. Let's say ADG and MDG will be 2 groups contributing as well to this growth.
Got it. Would you say that the growth in AMS would be abnormally strong this quarter?
I don't know what means abnormally strong.
You mean sequentially or?
Sequentially strong. Let's say.
Yeah. Is there any content growth that we need to think about, when we're modeling AMS revenues in the Q3 ? Any significant content growth?
Sorry? No, maybe I misunderstood the question.
Content growth.
The content growth. You know that now, let's say in AMS, in personal electronics, we have a variety of products, let's say, that are contributing to the growth. I would say that this is really a matter of volume here. Let's say the content is what it is.
No, we don't see any abnormal signature.
Yeah
in the profile of the revenue between H1 and H2 and related to the new device introduction. Absolutely a normal seasonality.
Got it. Thank you.
Thank you, Eddie. Next question please, Moira.
The next question is from Anthony Stoss, from Craig-Hallum. Please go ahead.
Morning, guys. My congrats as well on the exceptionally strong execution. Jean-Marc, you talked about having visibility through 2023. I'm wondering if you can comment on your confidence level in maybe the percentage of orders that are non-cancelable or what percent you think could be at risk to be downshifted. When you look into 2023 on the gross margin side, again, 47%, darn impressive for this year. Do you think based on mix, you can continue to grow gross margins into 2023?
Lorenzo will comment the gross margin. No, about the data point for 2023. I share with you the fact we have in our hand. I repeat that the backlog we have requested by our customer basically is covering, depending the product family, between 18- 24 months of planned capacity, not existing capacity, I have to say planned capacity, which are related to our CAPEX we will spend this year and a part of the CAPEX we intend to spend next year. First of all, we have 2022 sold out and basically we have 2023, which is either sold out or particularly sold out, depending of the product group.
On automotive, the full capacity of 2023 is sold out. That's the reason why when I am questioned about when we do believe we will come back to, let's say, normal lead time, capability to replenish inventories, I always say, of course, not before end of 2023 and then in 2024. This is what we say. What other data point I can share with you. We have, let's say, during H1 this year, change our policy of confirmation of order. Now we really schedule the order up to 2023, so on 24 months rolling.
For us, it was important to make this exercise because we have detected potential double ordering. I have to say that it was very marginal. Very marginal. We are absolutely not seeing, let's say, double ordering in the channel we are using. The inventory level at our distributor is lean. Inventory terms are below a standard level, higher, sorry, very high standard level to make business. There is still potential of inventory replenishment, but that we are not capable to do at this present time.
In the field of the 2 end markets I have spoken about during my address, the automotive and the industrial B2B, the pressure of customer demand is huge. We have multiple calls every day, every week to find solutions to supply them. Well, yes, we have seen some sign of softening. I confirm in Chromebook, notebook PC, middle-end low-end Android smartphone, not too much in accessories. The famous customer we serve in Q2 was above our expectation and will be strong and solid in H2. We know the engaged customer program we have for 2023, new circuit we win.
I confirm silicon carbide $1 billion revenue, at least in 2023. Well, this is all the data point we have and I can share with you. About the gross margin, Lorenzo?
About the gross margin, for sure at this stage, let's say it's a little bit early to go and to discuss about 2023. What I can say is that definitely, let's say we will have some tailwinds that definitely will be, well, the exchange rate will remain at this level, for sure will help. The mix, the product mix will be in the right direction in this respect. For sure, what I can say is that, yes, we see in terms of inflationary costs, these inflationary costs that, by the way, are impacting already the H2 of the year in 2022.
What I can say is that, let's say 2023 will be another year that will put us in our trajectory to be between 2025 and 2027, let's say in the range of 50% gross margin.
Great. Thanks for all the detail, guys. Very helpful.
Thank you, Tony. Next question, please, Moira.
The next question is from Sandeep Deshpande from JP Morgan. Please go ahead.
Hi, thank you for letting me ask the question, and congratulations on really strong guidance. It's regarding the guidance for the Q3 , your guidance in revenue growth is almost 33% year-on-year. How much of that year-on-year growth is coming from unit increase and how much from pricing increase? Is pricing still increasing in terms of your product? As a corollary to that, is pricing increases similar in all your end markets or in some particular end markets you're seeing much higher pricing increases than in other end markets? Thank you.
Lorenzo will answer.
Yes. Thank you for the question, Sandeep. When we look at the dynamics in terms of increasing of our revenues, let's say, for sure there are 3 components, if you want. On 1 side, there are, yes, price increase, because price increase this year, when we look at 2022 compared to the previous year, is an important component, as well as volume and mix, because mix was another ingredient. I would say that we are talking here, let's say more or less in the range of 40-60, let's say 40 is pricing and rest could explain for the rest 60%. When I look at the current guidance for the current quarter, actually, we do not have embedded any significant price increase on a sequential basis.
For sure, year-o ver- year, there is, because there's been increased pricing during the H1 . On sequential basis, we do not expect any significant price increase. We will be more or less stable in respect to that. Well, yes, of course there are differences in terms of pricing dynamics in the different markets. I would say that, for sure, when we look at mass market, when we look at distribution is where, let's say, we have the highest level of price increase. We have a price increase also in the area of automotive. That is materially mainly driven by the fact that, let's say, there is a significantly higher demand in respect to what we were able to produce.
While when we look at market like, the personal electronic, I would say that we have more a stabilization of pricing more than price increase. Here and there, we have some, of course, price acceleration. Overall, I would say that in this market, there is no significant price increase. While in respect to the past, maybe there is no strong price pressure, we will say more or less, we can say that we are more or less stable.
Sandeep, that's the reason why I share with everybody the number. In Q3, the production of STMicroelectronics will increase by 12.5%. Supporting this, sequential growth of 10.5% of Q3 and preparing Q4.
Yes.
Does this answer your question, Sandeep? Sandeep?
Probably, yes.
Probably, yes. I hope so. Moira, next question, please.
The next question is from Sebastien Sztabowicz from Kepler Cheuvreux. Please go ahead.
Yeah. Hello, everyone, and thanks for taking the question. Regarding the 300-millimeter fab build up with GlobalFoundries, what kind of CapEx should we add to our model going forward for this specific fab? The second one is returning to the question on sequential growth in your main divisions in Q3. Could you provide a little bit of more granularity on the kind of growth we can expect sequentially by divisions for Q3? Thank you.
That about the CapEx the project we intend to complete with GF is consistent simply with our $20 billion-plus ambition. Of course, when we have prepared this plan, we assessed many scenarios of manufacturing supply to enable this $20 billion-plus ambition. Well, I have to say that a scenario to build an adjacent fab to Crolles with GlobalFoundries with significant support from France is making the scenario competitive clearly. Then, okay, we'll let's say also give to both STMicroelectronics and GF some scaling advantage. The CapEx okay will be simply consistent with the $20 billion-plus ambition.
Another question.
Yeah, the sequential growth, maybe Lorenzo.
As I said before, AMS is the group that is driving the sequential growth. I think that this will not be a surprise if I say that it is our imaging products that are really, let's say, driving inside the AMS the growth. There will be contributions, sure, for analog and also MEMS that will be, let's say, less significant than the one of imaging. You know, in the H2 of the year, our, let's say, customer engagement program that we have in personal electronics with our main, let's say, customers is technically one that is important for us. Definitely imaging is quite exposed to that. At the end, let's say the growth comes from there in AMS.
I wanted to repeat that at the end it's not the only one, AMS, and we have a still significant growth in ADG and in MDG as well, let's say. We will continue, let's say, to see growing these groups.
Thank you. Thank you, Sebastien. Next question, please, Moira.
The next question is from Gianmarco Bonacina from Equita. Please go ahead.
Yes, good morning. Just for me, a clarification on the cooperation you recently announced with Volkswagen. It was not clear how broad it is within the Volkswagen Group, because I know you announced, for example, some time ago, a very important cooperation with Renault. Just to understand if it's basically a broad collaboration with Volkswagen on the future platform or it's just, let's say, will have a minor impact? And then related to this, I think you already mentioned that the Capital Markets Day that you are changing the way you interact with automotive OEM. Just wanted to know if you have continued in the last months to sign a new long-term contract with, let's say, attractive pricing for you. Thank you.
No, this first of all is a well-publicized project called Project Trinity at Volkswagen, aiming to develop the, let's say, software-defined vehicle architecture and zonal. This platform will be deployed across the board in all the Volkswagen Group full. Here, basically STMicroelectronics will have, let's say, participation today awarded in 2 critical components. The MCU, so the high-performance Stellar MCU developed on 28 FDSOI embedded PCM technology, which is a product developed in our technology manufacturing our technology. STMicroelectronics is participating to the development and the architecture of a complex system-on-chip embedded, let's say, processor, but also real-time processor, which are IP of STMicroelectronics called Stellar, which are also present in the MCU.
STMicroelectronics will have the ownership of, let's say, the engineering, the manufacturing of this system-on-chip in cooperation with TSMC. It is exactly a very similar model of what we have with Mobileye. When we have at Volkswagen Group level full deployment, the capability to have, like Mobileye, the ownership of the MPU system-on-chips in cooperation with Volkswagen, CARIAD, and TSMC, plus all the MCU that we will manufacturing ourselves starting 2026, it will be material for STMicroelectronics.
Okay, thank you. With the other OEMs, you have continued to change, let's say, the relationship on a LTA, that kind of contract.
It is clear that we see an evolution with the relation in the ecosystem between a car maker, T1 , AMS and STMicroelectronics. It is clear that our preferred, let's say, model is the traditional car maker, T1 and us. Of course, okay, changing the way the value chain operate, okay, I guess now everybody has understood that the semiconductors are not a commodity with infinite capacity and very short lead time. I guess everybody has understood that you have to plan investments, you have to plan capacity, you have to give visibility. When the value chain is car maker, T1 , and semiconductors, it's much better to keep it as it is.
What we are seeing some evolution in some car maker, that for some part of the system of the car, clearly there is an evolution where the car maker run the IP, start to design the architecture of the system and the device, and will operate more in a mode like a smartphone, where you will have the car maker using an AMS, but with a straight relation with us, imposing the type of semiconductor that the AMS will have to use. And clearly, we see this trend increasing a lot, definitively. This is basically the 2 models that we will see in the future. If there is some specific agreement between car maker ourselves, in any case must be done with the agreement of the T 1.
Okay. Thank you.
Thank you. We have time for 1 or 2 more questions, depending on the length. Moira, next question, please.
The next question is from Andrew Gardiner from Citi. Please go ahead.
Good morning, Jean-Marc. Good morning, Lorenzo. Thanks for taking the question. Just a clarification of your response, Lorenzo, to Sandeep earlier in terms of the pricing. I just wanna make sure I heard it correctly. You're saying of the sort of year-on-year growth in revenue that you're seeing in the H2 of this year, 40% of that is coming from pricing? Is that right?
Yes. Broadly, yes, in the sense that when we look at the growth in terms of revenues, there is a component of pricing. There are 3 components I said. 1 is price, 1 is mix, let's say, and the other 1 is for sure volumes, let's say. When we look overall, the price component is in the range of 40%, yes, on a year-over-year.
Got it. Okay.
While this quarter increases, when you look at year-over-year, while sequentially are substantially stable, the pricing.
Okay. In terms of your visibility into further price rises into next year, given that you are essentially fully booked, as you said, and, you know, particularly for the, you know, the OEM-related business where you've got these longer term contracts, I presume you've got visibility into further price rises into next year- on a like-for-like basis.
Today, let's say we have some contract that of course are defining the evolution of the pricing. Let's say in terms of mass market, I would say that probably will be a little bit more stable than this year, the price. Then, this is what is our visibility today in terms of evolution of pricing.
Okay. Just so a final one. In relation to the comment you've made about the rise in production capacity, internal production capacity in the Q3 , the 12.5%, yeah, clearly you're continuing to invest in terms of CapEx later this year and into next year. Is there any reason that that's not a good starting point for us to start thinking about, you know, the kind of capacity that you're looking to build into 2023? You know, so volume growth based on that kind of capacity increase plus a pricing element. Are those reasonable building blocks to start with for 2023?
Well, now to today, where we are. Well, first of all, well, it is clear that we know where we want to position the company next year, for a simple reason that our whole supply chain is, let's say, providing some constraints in terms of lead time. Now, you know that for scanner lead time basically is 24 months. For, let's say, thin film deposition, etcher or the wafer fab process tool is basically 18 months. For assembly and test, probe and so on is above 12 months.
It's clear that today we have put all the orders, okay, to book and we have a clear visibility on the level of investment that potentially we will put on the table next year. Now, today we are in the process to really secure it because this year we face a poor reliability in the delivery of equipment maker. And now this is something we are deep diving in because they have also their own constraints. Well, don't take it as a joke, but they are limited by semiconductors, in fact.
It is an end-to-end exercise that which is quite complex, but it is mandatory to make it because as I said, we change also our policy. Now we are confirming the order to our customer on 24 months rolling. It's very important for us, okay, to have, let's say, a secure and reliable forecast from the equipment maker. Now, this exercise is going on definitively and we will provide as usual the visibility of the CapEx spend and on the 2023 revenue indication, let's say in January, end of January during Q4 earnings.
Now, what is important is, again, in H2 2022, we will have benefits of, the CapEx we spent, let's say Q3, Q4 last year and Q1 this year, sorry, and beginning of Q2. We increase our capacity and volume by 12.5%. H2, okay, we will deliver a revenue of $8.7 billion.
Thank you guys, appreciate it. I had to try and ask a bit more about next year. Thank you, Andrew. We take a final question, not to stay with it. Moira, we take a very final question now, the last one.
The last question for today is from Didier Scemama from Bank of America. Please go ahead.
Oh, thank you for squeezing me in. That's lovely. Congratulations. Just 1 question for you, Jean-Marc. Clearly imaging is going to be a big driver in the H2 of this year. You've said previously that your engagement with that top customer was at least extended through calendar year 2023. I just wanted to ask you a question. If you were to lose that contract in the later part of 2023, given your current backlog and sort of book capacity, do you think that there would be much impact to the company in terms of top line or margins in calendar year 2023? I've got a quick follow-up. Thank you.
This scenario is not existing.
Now next question, I'm gonna go back to Andrew's question. He tried very cleverly, I'm gonna try very clumsily. If I take your Q4, add a bit of capacity, you're effectively guiding at least everything being equal for revenues in probably $17 billion-$18 billion, and I'm probably being cautious there. Is that the right way to think about it? Then Lorenzo said pricing sort of flattish next year. Presumably your depreciation will go up. Do you think gross margin would be stable, or would you think gross margins would decline even on a big revenue growth next year?
Lorenzo, you want to take that?
At this stage, I don't know why we should decline. I mean, at the end, let's say, for the time being, what I said is that, let's say today what we see is that, we will be some tailwinds that are the exchange rate, for sure some improvement in our manufacturing efficiency. There are, let's say, negative impact related to the cost, inflationary cost, these kind of things. But the rest, let's say, this is where we see. As I said before, I think that next year will be another year moving us to the path to the 50% gross margin in 2025, 2027. 2020.
$20 billion next year. Oh, okay. Oh, great. Okay. Thanks very much.
Thank you.
I think this will conclude our call. Thank you very much, everybody, for the questions.