Ladies and gentlemen, welcome to the STMicroelectronics Q1 2026 earnings release conference call and live webcast. I am Myra, the conference call operator. I would like to remind all participants we have been in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jérôme Ramel, EVP Corporate Development and Integrated External Communication. Please go ahead.
Thank you, Moira. Thank you, everyone, for joining our Q1 2026 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call are Lorenzo Grandi, President and CFO, and Marco Cassis, President, Analog, Power & Discrete, MEMS and Sensors Group, and Head of STMicroelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation material can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST 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 ST's most recent regulatory filing 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 one question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO.
Thank you, Jérôme. Good morning, everyone, and thank you for joining ST for our Q1 2026 earnings conference call. I will start with an overview of the Q1, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. Starting with Q1. Our Q1 net revenues were $3.1 billion, including about $40 million revenues associated with NXP's MEMS sensor business, which we acquired during the quarter. Excluding this contribution on a sequential basis, net revenues were above the midpoint of our business outlook range, driven mainly by higher revenues in our engaged customer programs in personal electronics and in communication equipment and computer peripheral. Gross margin was 33.8%, or 34.1%, excluding the impact of the purchase price allocation, so-called PPA, following our acquisition of NXP's MEMS sensor business.
Excluding impairment, restructuring charges, and other related phased costs and purchase price allocation, PPA, effects from our acquisition of NXP MEMS sensor business, non-US GAAP diluted earnings per share was $0.13. During the Q1, inventory in our balance sheet increased slightly, and we continue to work down inventories in distribution. They are now normalized. We generated a - $720 million free cash flow, including $895 million cash out related to the payment of our acquisition of NXP MEMS sensor business. Let's now discuss our business dynamics during Q1. Well, first, we had a strong booking momentum during Q1 with book-to-bill well above one across all end markets and regions. In automotive, during the quarter revenue declined 10% sequentially. Year-over-year, revenues increased 15%, marking the return to year-over-year growth. Automotive design momentum progressed with various OEM and Tier 1 ecosystems.
We have design wins across electric, hybrid, and traditional vehicles spanning onboard chargers, DC/DC converters, power train active suspension, and vehicle control electronics. Key products include power semiconductors, smart power devices, automotive microcontrollers, analog devices, and sensors. In February, we completed the acquisition of NXP's MEMS sensor business. The acquired technology and product portfolio are highly complementary to ST's and strengthen our automotive sensor business. We are progressing as planned with the integration into our portfolio and operational flows. Industrial decreased by 1% sequentially and improved 26% year-over-year. Importantly, inventories in distribution further decreased and are now normalized. In industrial, our broad portfolio of microcontrollers sensing analog and power devices is strongly aligned with industrial transformation trends and the evolving needs of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, healthcare, and home appliances.
We announced our collaboration with NVIDIA to integrate ST sensors, microcontrollers, and motor control solutions with NVIDIA robotics ecosystem. This aims to help developers design, train, and deploy humanoid robots and other physical AI systems with higher efficiency, reliability, and scalability. We are also proud to have been ranked the number one vendor worldwide for general purpose microcontrollers for the fifth consecutive year based on research by Omdia. During March, we announced that the first batch of STM32 wafers fully produced in China for ST by our partner, Wayon, has been delivered to customers in China. This was a major step forward in ST China for China supply chain strategy. For personal electronics, Q1 revenues were down 14% sequentially, reflecting the seasonality of our engaged customer programs and up 21% year-over-year, reflecting increasing content.
During the quarter, we reinforced our position in mobile platforms and connected consumer devices supported by both engaged programs and a broad open market portfolio spanning sensors, secure solutions, and power management. We announced support for motion sensing and secure wireless technology on Qualcomm Technologies' newly launched personal AI platform based on ST smart sensor and secure NFC controllers. For communications equipment and computer peripherals, Q1 revenues were above our expectations, up 3% sequentially and 41% year-over-year. We continue to reinforce our position as a supplier of critical semiconductors that power, cool, and connect AI data centers from the grid to the core and from the core to the user. ST is now strategically positioned to capture upside from new AI-driven program, leveraging specialized technologies to enable the evolving AI infrastructure.
We confirm our data centers revenue expectation to be nicely above $500 million for 2026 and well above $1 billion for 2027. In a major development, we expanded our strategic engagement with Amazon Web Services through a multi-year, multi-billion-dollar commercial engagement to enable new high-performance compute infrastructure for cloud and AI data centers. This engagement covers a broad range of semiconductor solutions, leveraging ST portfolio of proprietary technologies. During the quarter, we secure multiple design wins for silicon and silicon carbide-based power solutions. This supports the drive for higher power density and increased energy efficiency for next generation AI compute and data center architectures. We announced the expansion of our 800 VDC AI data center power conversion portfolio with new 12 V and 6 V architectures in collaboration with NVIDIA.
With this, ST now provides a complete portfolio for the 800 VDC power distribution inside gigawatt-scale compute infrastructure, leveraging ST power analog and mixed-signal and microcontrollers products. We also announced the start of high volume production for our silicon photonics-based PIC100 platform used by hyperscalers for optical interconnect for data centers and AI clusters. The technology enables higher bandwidth, low latency, and greater energy efficiency. As I mentioned last quarter, the momentum in optical interconnect technologies is also driving demand growth for our high-performance microcontrollers in pluggable optics. We are also seeing initial demand for our Secure Element in data server power supply units to support authentication and detect data manipulation attacks. Our Low Earth Orbit satellite business, based mainly on our BiCMOS and panel-level packaging technologies, strongly progressed during the quarter.
We were selected to develop a power amplifier controller for direct-to-cell satellites based on our proprietary BCD technology by our main Low Earth Orbit customer, and we continue to ramp shipments to our second-largest customer. For sustainability, we issued our annual integrated report during the quarter. These reports integrates our sustainability statement detailing our performance in 2025. We made further progress and remain on track for our commitment to becoming carbon neutral by 2027 on scopes one and two, and on product transportation, business travel and employee commuting for scope three. We also target the sourcing of 100% renewable electricity by 2027 and achieve 86% in 2025. Now over to Lorenzo, who will present our key financial figures.
Thank you, Jean-Marc. Good morning, everyone. Let's start with a detailed review of the Q1. Starting with the revenues on a year-over-year basis. By reportable segment, Analog products, MEMS and Sensors grew 23.2%, mainly due to imaging and MEMS, and to a lesser extent, analog. Power and Discrete product decreased 1.8%. Embedded Processing revenues were up 31.3% due to general purpose MCU and, to a lesser extent, custom processing. RF & Optical Communications grew 33.9%. By end market, communication equipment and computer peripherals grew 41%, industrial 26%, personal electronic 21%, and automotive 15%. Year-over-year, sales to OEMs and distribution increased 24.5% and 19.2%, respectively. On a sequential basis, Analog product MEMS and Sensors decreased by 9.1%. Power and Discrete by 5.4%, Embedded Processing by 4%, and RF & Optical Communications by 9%.
By end market, on a sequential basis, communication equipment and computer and peripheral was up 3%, while the other end markets declined. Industrial was down 1%, Automotive 10%, and Personal Electronics 14%. Turning now to profitability. Gross profit in the Q1 was $1.05 billion, increasing 24.3% on a year-over-year basis. Gross margin was 33.8%, increasing 40 basis points year-over-year, mainly due to lower unused capacity charges and better product mix. On a sequential basis, gross margin decreased by 140 basis points. Gross profit included $11 million purchase price allocation, PPA, effects from our acquisition of NXP's MEMS sensor business. Non-US GAAP gross margin, excluding this item, was 34.1%.
Excluding the impact of NXP's MEMS sensor business and related PPA effects, gross margin stood at 33.9%, 20 basis points better than the midpoint of ST guidance, which did not include any impact related to our acquisition of NXP's MEMS sensor business. Q1 gross margin included about 50 basis points of negative impact resulting from a non-recurring cost related to our manufacturing reshaping programs. The negative impact on gross margin from the just mentioned non-recurring cost is expected to remain at similar level over the rest of the year.
Total net operating expenses, excluding restructuring, amounted to $904 million in the Q1. Excluding the purchase price allocation PPA effects from our acquisition of NXP's MEMS sensor business, non-US GAAP OpEx stood at $885 million. Non-US GAAP net OpEx included OpEx related to the acquired NXP MEMS sensor business, and a one-off impact related to a settlement with a supplier.
Excluding these two items, non-US GAAP net OpEx was broadly in line with the expectations given in January, which did not include any impact related to our acquisition. For the Q2 of 2026, we expect a non-US GAAP net OpEx to stand between $950 million and $960 million. The sequential increase is mainly due to calendar days effect, startup costs, and the one incremental month of OpEx related to the acquired NXP's MEMS sensor business. Excluding these items, Q2 2026 non-US GAAP net OpEx would slightly decrease sequentially. In light of our acquisition of NXP's MEMS sensor business and the new AI revenues opportunity, let me give you some more color on the 2026 OpEx. For our full year 2026, we now expect like-for-like net OpEx to be up mid to high single digit year-over-year versus our previous expectation for a low single-digit increase.
As we are accelerating our investment in new business opportunities, including NXP's MEMS sensor business acquisition and the exchange rate impact, net OpEx should be up low double digit year-over-year. In the Q1, we reported a $70 million operating income, which include $71 million for impairment, restructuring charges, and other related phase-out costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Q1 operating income also included a $30 million purchase price allocation effects from our acquisition of NXP's MEMS sensor business. Excluding these items, Q1 non-US GAAP operating income stood at $171 million, and non-US GAAP operating margin was 5.5%, with Analog products, MEMS and Sensors at 12.2%, Power and Discrete negative at 21.5%, Embedded Processing at 16.9%, and RF & Optical Communications at 14.9%.
Q1 2026 net income was $37 million compared to a net income of $56 million in the year-ago quarter. Diluted earnings per share were $0.04 compared to $0.06 one year ago. Non-US GAAP net income stood at $122 million, and non-US GAAP diluted earnings per share stood at $0.13. Net cash from operating activities totaled $534 million in the Q1, compared to $574 million in the year-ago quarter. Net CapEx was at $362 million in the Q1, compared to $530 million in the year-ago quarter. Free cash flow was -$723 million in the Q1, compared to $30 million in Q1 2025. Q1 2026 free cash flow includes $895 million cash out related to the payment for the acquisition of NXP's MEMS sensor business.
Inventory at the end of this quarter was $3.17 billion, compared to $3.14 billion in Q4 2025 and $3.01 billion in Q1 2025. Days sales of inventory at quarter end were 140 days, in line with our expectation, compared to 130 days of the previous quarter and 167 days in the year-ago quarter. Cash dividend paid to stakeholder in the Q1 of 2026 totaled $71 million. ST maintain its financial strength with a net financial position that remain solid at $2 billion as of March 28th, 2026, reflecting total liquidity of $4.57 billion and total financial debt of $2.57 billion. Now back to Jean-Marc, who will comment on our outlook.
Thank you, Lorenzo. Now let's move to our business outlook for Q2 2026. We are expecting Q2 2026 revenues at $3.45 billion, plus or minus 350 basis points. At the midpoint of our Q2 2026 net revenues will increase 11.6% sequentially and by 24.9% year-over-year. We expect our gross margin to be about 34.8%, plus or minus 200 basis points, including about 100 basis points of unused capacity charges. Non-US GAAP gross margin is expected to be about 35.2%. This business outlook does not include any impact for potential further change to global trade tariffs compared to the current situation. To conclude, in the Q1, despite the macroeconomic uncertainty, we saw improving demand with strong booking and normalized inventory in distribution. In the Q2, we expect revenues well above average seasonality, as well as an increased gross margin.
We have a clear path to improve gross margin while staying at the forefront of innovation. We expect 2026 revenues to show double-digit growth. Beyond our addressable market dynamics and our already engaged customer programs, this growth will be driven by new AI programs for which we leverage our specialized technologies to enable the evolving AI infrastructure. Before handing over to Jérôme, I am pleased to announce that as we did in March for Cloud AI and intelligent sensing, on May 4th, we will host a dedicated call on ST's low-Earth orbit satellites, explaining how we are going to achieve our ambition of well above $3 billion cumulative revenues over the period 2026 to 2028 for this opportunity. You will receive the invitation today. Thank you, and we are now ready to answer your questions.
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question only. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Joshua Buchalter from TD Securities. Please go ahead.
Hey, guys. Thank you for taking my question. Congrats on the very solid results. You have a lot of idiosyncratic growth drivers hitting this year across data center, silicon photonics, LEO satellite, and then your largest customers' normal seasonal ramp. Can you sort of help us with the shape of the year and how we should expect them to layer into the model? Should we expect three Q and four Q this year to also be above seasonal because of these company-specific growth drivers? Thank you.
Well, I am taking the question. Well, of course, I will not guide on 2026, but maybe we can share a few elements. Well, first of all, okay, the strong booking of Q1 has shown absolutely no pull in order. It is, let's say, a well-balanced loading of the 2026 quarter to quarter. The billable on 2026 from the booking we receive in Q1 represent approximately 85%-90% of the booking we receive. This is positive to make us confident that in H2, we could achieve the usual seasonality, H2 versus H1. Well, then what will be, again, positive on the year 2026, looking at the current dynamic in terms of growth. Well, in automotive, we confirm that 2026 will be a growth for ADAS, for sensor, of course, and also with the boost of the acquisition of MEMS from NXP and for silicon carbide.
In industrial, we will see a solid and strong growth on general purpose microcontroller. In personal electronics, okay, as we have already seen in Q1, our engaged customer programs in sensor and analog will be, let's say, a contributor of the growth, but not a big one in H2 because a change of profile in the introduction, okay, of the new device. Well, in data center, it is clear that here we are seeing a really strong growth in terms of demand acceleration, including cloud optical interconnect, both for our PIC100, for our BiCMOS, but I repeat, for our general purpose microcontroller and analog and power discrete as well. We confirm the revenue nicely well above $500 million.
Well, the only negative aspect of the revenue in 2026 is capacity reservation fees that will decrease, okay, $140 million compared to last year. This is how we see the year 2026. I repeat, backlog now well loaded. Great confidence level to have H2 versus H1 at the usual seasonality. On top of ADAS, SiC, sensor, general purpose micro, clearly, AI infrastructure and low Earth orbit satellite will be very strong contributor to the performance of ST in 2026.
Thank you for all that color. I really appreciate it. I was hoping you could comment on the pricing backdrop. One of your large competitors last night said it was coming in a little bit better than they originally planned, and now expect flat pricing. Have you seen changes in the pricing environment over the last three months, and what are your expectations on pricing for the year? Thank you.
Yeah, I let Lorenzo come in.
Yeah. Thank you for the question. If you remember last quarter, we were talking about pricing decline on low- to mid-single-digit expectation. Well, clearly, there is some evolution in respect to this expectation. I would say that in Q1, our price decline was as expected, low single-digit. What today we see, we see an environment in which actually there is some selected price increase that also we expect. At this point, I would say that in term of pricing, our expectation is to have a very low single-digit, let's say, price decline. Means that actually in term of pricing, we see a better situation in respect to what was a few months ago.
Thank you, Lorenzo.
Thanks, Josh. Myra, next question, please.
The next question comes from François-Xavier Bouvignies from UBS. Please go ahead.
Thank you very much. Maybe just a follow-up on the pricing. We have seen some announcements that you will increase your pricing in April, and you are not the only one. Can you just give us an idea of how much of your revenues would be impacted by the margins? And also, Lorenzo, what about the gross margin with this pricing increase? I would imagine it takes a bit of time to flow into your P&L. When we expect some gross margin impact from this pricing increase that we see in the price? That's my first question on pricing, gross margin.
Now, clearly, let's say when we look at the price environment, I would say that at this stage, yes, there is some selected price increase. It is not a price increase for what concerns us across all, let's say, customers and products. Anyway, what I can say is that when we look at the dynamic of our gross margin, moving from Q1 to Q2, and we may say that the pricing is quite neutral, in respect to this dynamic. It means that at the end it is not a booster, but it's not even a detractor. It will remain substantially flattish when we look at the evolution of the gross margin. That is not what is the normal trend when we look at, let's say, the seasonality between these two quarters. For sure, as a positive, when we look at our gross margin, there is the mix.
Mix is continuing to be, let's say, positive on our gross margin evolution. Clearly, there is also lower unused capacity charges. Our fabs are better loaded. Capacity charges is declining, moving from Q1 to Q2, but there are still some negative. The negative is mainly related to our manufacturing efficiency. Why? Because there is some temporary suboptimal efficiency in the context of our reshaping plan. We are moving technologies and products from 200 millimeter fab to 300 millimeter from the 150 millimeter of silicon carbide to 200 millimeter, and we are really in the middle of this kind of programs that for sure, let's say, are somehow impairing a little bit the efficiency of our fabs. This, I would say, is the main detractor when we look at the evolution on a sequential basis of our gross margin. Pricing, as I said, is really neutral at this stage.
Thank you, Lorenzo. Very detailed answer. Maybe one for Jean-Marc. If we look at your customer programs, if I exclude the personal electronics, so if I take silicon carbide, photonics and satellites, so your big programs, should we expect your revenues to grow quarter-on-quarter from here? Like, the fundamental that is increasing gradually, so no seasonality I would imagine. You should able to see a growth across the board here quarter-on-quarter through the year. Is that the right assumption?
Excluding personal electronics.
Of course, excluding personal electronics. This is what we expect.
Thank you.
Thank you. Thank you, François-Xavier. Myra, next question, please.
The next question comes from Janardan Menon from Jefferies. Please go ahead.
Hi. Good morning. Thanks for taking the question. Just to follow up on gross margin, Lorenzo, looking into the H2, what would you see as the various puts and takes on that gross margin evolution? Your top line is growing perhaps much faster than what we had thought a few months ago. So would it be that utilization and underloading charges will get used up faster? There's normally a lag between the revenue trend and the gross margin. So just if you could give us any commentary on how, not in terms of actual numbers, but just the puts and takes perhaps, of the H2. How do you feel about your model of getting to 45%, given the kind of strength that you're seeing in markets and the favorable product mix that you're seeing right now? Thanks.
No, what I can say about the gross margin is definitely that gross margin, let's say, this year will improve in respect to what has been in last year, definitely. Will improve sequentially when we look Q1, Q2, Q3, and Q4. This is something that definitely we expect. This is what we expected, to continue to see a sequential increase and a sequential improvement over Q3 and Q4. What are, let's say, the drivers we expect? Clearly, as you said, the unused capacity charge will improve, thanks to the fact that we will have higher revenues, even if I confirm that that will not completely disappear. We will still have some areas in which, especially related to the legacy technology, that we will still have a little bit of a unused capacity charge. Much lower than what we saw, let's say, last year, definitely.
There will be progressively some manufacturing efficiency improvement. Even if I repeat what I said before, we are not yet optimized because, let's say, we are in this transition. We will start to see this benefit of the transition mainly in 2027 more than in 2026. For sure, there will be some improvement moving forward from Q2. Mix will be another positive impact. We will continue positive impact on mix. Clearly, we know that capacity reservation fees now are out, I mean much lower, let's say. There will not be significant variation moving from Q2, Q3, and Q4, but are much lower in respect to what it was, let's say, last year. As I said, these costs are related to this transformation of our manufacturing infrastructure.
Maybe what we will have, let's say, in the H2, is a little bit higher input cost for our manufacturing, considering, let's say, the overall situation. Definitely, I confirm that starting from our, let's say, 35.2% gross margin in the Q2, we will continue to see progressively improvement in Q3 and Q4.
Maybe just a quick follow-up. On your Q2 outlook of 11.6, is there already a very significant contribution from the optical connectivity on the data center which is driving that upside? Or is the Q2 more driven by a pickup in industrial general purpose microcontrollers, et cetera, and the optical kicks in more meaningfully into the H2 of the year?
No. The optical are starting to contribute. In fact, since Q1, it is mainly through the high-performance microcontroller. The main part of the optical overall with photonics, BiCMOS, will be next, too. Microcontroller are already participating to the growth.
Understood. Thank you.
Thank you, Janardan. Myra, next question, please.
The next question comes from Gianmarco Bonacina from Banca Akros. Please go ahead.
Yes, good morning. I have a question more for the midterm. You gave some figures for your, say, AI revenues for next year, above $1 billion. I just wanted to understand in terms of commercial activity. We commented the big contract with AWS. Are you working on a commercial basis just to get potentially the revenues with other hyperscaler? And how confident you are that the, let's say, the opportunity you realized with AWS can be also generated with other hyperscaler, maybe, I mean, in the midterm, not just in the near term. Thank you. Bye.
No, you know, if we speak about midterm, our strategy on hyperscaler are the following. Basically, if you break down this, let's say, infrastructure in three main application domain. What we call the network flow. This is where we have spoken about, let's say, the optical cable and the near technology, let's say, evolution with co-packaged optics and pluggable optics. More clearly here, one of the main driver will be AWS, but clearly ST is positioned to be a provider of product and solution for optical cable far beyond only AWS. This is point number one. Well, then the second big domain is clearly well-known, is what we call the power flow. Means the capacity capability for electronics to enable the supply of the processor from 20,000 volt to 0.8 volt.
Here, ST is engaged now with a large product portfolio from, let's say, SPS, low voltage MOSFET, microcontroller, driver, sensing, and so on and so forth. This will come far beyond AWS. Of course, AWS will use this component that we will provide, and we will compete far beyond AWS. Well, then last but not the least is all the infrastructure around the thermal cooling of this infrastructure. We are already there with our power solution, microcontroller, and analog. Clearly, AWS will be a fantastic driver for ST for the growth of the revenue during the next 3-5 years. Our ambition is well above, thanks to our product portfolio.
I repeat, ST is a unique company capable to provide on this infrastructure from a photonics solution, MEMS solution that will come pretty soon, microcontroller definitively, power switches, power drivers, controllers, and including other sensor. This unique position clearly positions ST in the future to be important contributor in terms of supply to this business line.
Okay. Thank you. Just a quick follow-up for Lorenzo, if I can. The change in the guidance in the OpEx, just to understand correctly. You are talking about your clean OpEx, excluding PPA and restructuring. Thank you.
Yes. Of course, we exclude the PPA and restructuring. As I was saying before at the end, yeah, apart from the fact that we have the addition of NXP that when we were talking previously was not taken into consideration. I have to say that thanks to the fact that we see a significant, let's say, opportunity in terms of revenues, we have some programs accelerating in terms of, let's say, development and bringing a little bit more level of expenses.
Thank you.
I have to say that in any case, when we look at our net OpEx, the expense-to-sales ratio 2025 compared to 2026, let's say in 2026, the expense-to-sales ratio will have materially declined with respect to the previous year.
Clear. Thank you.
Thank you, Gianmarco. Myra, next question, please.
The next question comes from Andrew Gardiner from Citi. Please go ahead.
Good morning, gentlemen. Thank you for taking the question. Just a couple of, I suppose, follow-ups to some of the topics that have already been discussed. First, on the AI side, Jean-Marc, I think it's a reiteration of what you were saying last month in terms of the, quote, "Nicely above $500 million of revenue for this year," and quote, "Well above $1 billion for next year." I think they're moving very quickly in this part of the market, to put it mildly. What is the potential for upside there? And I suppose more importantly for you, where are you seeing capacity constraints at the moment that may indeed limit the level of upside relative to the demand that you're seeing? And then a quick one for you, Lorenzo, just again on the OpEx.
You said a low double-digit gain, 2026 on 2025 on one of the items that you were looking at. Could you just provide us the baseline of that? I missed that when you were saying it in the prepared comments. Thank you.
Well, it is clear that we are on some part of the technology and component that are enabling the solution we provide to customer. We are in ramp-up mode. Clearly on photonics and associated technology, we are in a ramp-up mode. Overall, what I can confirm today that unconstrained demand we have today for 2026 and 2027 is well above and nicely above $500 million and well above $1 billion. Our ambition is to fulfill this unconstrained demand, but the company first has to ramp up the capacity already installed. As in the H2 of the year to implement additional capacity, and our ambition here is to fulfill as much as we can the unconstrained demand of customer.
I will provide more color in July, clearly, during our next meeting, but I really confirm that 2026 will show a significant breakthrough in our revenue linked to AI data center.
For what concerns OpEx, I confirm that net OpEx sales ratio will decrease in 2026 compared to 2025. What we expect that when we say OpEx like for like, means let's say at the same effects and same parameter, means not including the NXP acquisition, to be at a mid- to single-digit, let's say in 2026 compared to 2025. You have to consider that half of this increase is related to the startup cost that we have, let's say in the 300 mm fab and 200 mm for silicon carbide that is, let's say, related to our transfer from the 200 mm to 300 mm, 150 mm to 200 mm for the silicon carbide. Means that this is something that is not structural, is coming this year but will not stay forever.
If we include the NXP MEMS business acquisition, it also include the impact of the exchange rate, excluding the restructuring, we should be up low double-digit versus 2025. This is assuming an exchange rate effective in the range of 115-116 and is of course including, let's say, the operation of NXP MEMS business that we can estimate in the range of $50 million additional expenses for us in this year.
Thank you, Andrew.
Thank you guys.
Myra, next question please.
The next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Please go ahead.
Yeah. Hi everyone. Thanks for taking my question. On the transformation program, where are you standing right now in terms of capacity build and so on? And when do you expect to have the full synergies benefit, is it for 2027 or more for 2028? And the second question is on silicon carbide and your JV with Sanan in China. Where are you in the ramp-up mode with the JV and when do you expect the first volume to start to ramp up meaningfully in China? Thank you.
For the transformation program, clearly now we are in the middle of the execution. Clearly, we have to respect the customer qualification time, when for analog technology we move from 200 millimeter to 300 millimeter. Well, there is a good incentive to do it because clearly our capacity potential increase is related to Agrate in 300 millimeter. We expect that the benefits of Agrate at full speed will be more in the end of 2027 and entering in 2028. Not related to the fact that we don't go at the high speed in terms of internal qualification, but more related to the customer normal constraint they have to qualify their own application. On silicon carbide, it's a bit similar in fact, okay, because here we are moving from 6-inch to 8-inch, and this is mandatory to do it. Well, here is the same.
We are not limited by our own capability, both in Catania and in Sanan in Chongqing. The limitation is more related to the qualification time of our customer. You know that we are engaged in a very famous platform, with important player in Europe, which currently has a great success for his new platform in electric car. Here of course we cannot take any risk and it take time before to move to 8-inch. For sure, here the same, the benefits will be more end of 2027 and entering in 2028. Well, in Sanan, okay, we expect to start the production and to load this nice infrastructure starting the end of 2026.
Okay. Thank you.
Thank you, Sébastien. Myra, next question please.
The next question comes from Sandeep Deshpande from JPMorgan. Please go ahead.
Yeah. Hi. Thanks for letting me on. My question is regarding the acquisition of the NXP sensors business. How did that business grow in the past and how will that contribute to growth in the current year? My follow-up question is regarding the gross margin of the company. You said that your underutilization charges do not fully go away this year, but should we assume that in 2027, the underutilization charges go away and with the mix shifting more to the AI products as well as some of the satellite products, et cetera, that there could be a much bigger move in the gross margin in full year 2027?
Thank you, Sandeep. Marco Cassis will take the first question on NXP, former NXP MEMS, and Lorenzo Grandi, of course, the second question.
Yes. On NXP, the combination of the capabilities of the two companies is translating in acceleration, of course, related to a market which is automotive, and clearly it is moving at speed of the automotive, but it's an acceleration of opportunities of design-in and design-win. Because we are putting together the best of the tools, which is a very strong positioning of NXP MEMS in accelerometers, where they do use, sorry for a little bit of technical, but monocrystalline silicon, which are extremely good in terms of temperature performance for automotive and our capabilities on six-axis. We do see that we are going to grow with NXP at faster speed than what is typically the market growth in a safety application. It's going to be a contribution of the growth of the overall MEMS business. I hope I'm answering to your question, Sandeep.
How much was the growth in the past couple of years in that business?
Well, it was in the range around low single-digit growth, which is the typical growth of safety application in automotive.
You expect that to accelerate is what you're saying?
Expecting this one to accelerate, yes.
Understood.
Maybe I take the one of the gross margin. Let's say, I confirm what I was saying before. Now the gross margin will improve, starting from our 35.2% this quarter of Q2. After, let's say, quarter after quarter, and this year driven by the seasonality of the revenues, the continued reduction of the Amkor's capacity, as I said before. Let's say still there will be some, but reducing over the second part of the year, and then the continued improve of the mix. Clearly, let's say this is our trend, leading to the path above 40%. We said that when the company, let's say, will be with revenues above EUR 4 billion, quarterly revenues. Let's say, we expect to have our gross margin at 40%. After that, our reshoring plan will be completed. This is going in this direction, let's say.
What I can say today is that clearly, let's say, in our gross margin, there is still some negative impact on this reshoring plan, temporary negative impact due to the activity that we are doing, that will progressively go down and transform, let's say, in positive impact when we will start to have, let's say, the benefit of these programs. Yes, I confirm that at the end, let's say, you will see a progressive improvement in our gross margin moving Q3 and Q4, and then of course in 2027.
Thank you. Thank you, Sandeep. We have time for a very last question.
The last question for today is from Lee Simpson from Morgan Stanley. Please go ahead.
Great. Thanks everyone. Thanks for squeezing me in. Maybe just a couple questions, if I could, around data center power and then on the photonic side. Just on the data center power, it did look as though you were saying you've seen some design wins. It looked as though with silicon carbide, most all of it first stage. I just wondered if you could give us a sense for, excuse me, the engagements you're seeing around gallium nitride, where regionally that may emerge, and then maybe just on the voltage regulation side on the second stage, anything really happening there, certainly as we look out to 2027. Thanks.
Marco will answer the detail. Well, interestingly for all of you guys and lady, maybe what I can tell you that the nicely above $500 million in 2026 will be spread approximately between 40% related to analog and power, and 60% related to microcontroller and radio frequency and optical communications. Just for you to have the span of our revenue for 2026. I let Marco to answer the detail.
Yes. For what is related to power compared to our positioning one year ago, we put a major effort in expanding the portfolio to be sure that we can cover basically from grid up to driving the GPUs. This goes through the full portfolio of ST, which is silicon-based, silicon carbide with different voltages and new packages that we are introducing where we are not present, and of course, the GaN, which is important for the 800 volts, where we are in sockets that I think will come to life during this year and next year. The positioning overall in terms of portfolio is now much stronger than it was, and this will translate in revenues during 2026, but mainly during 2027. This goes across the different ecosystem of suppliers, which means power supply makers based in many cases in Taiwan, and of course-
The ecosystem that we have in the U.S. Overall, the trend is going through the full portfolio of ST. Again, we have a portfolio that has been expanded and now is rich and covering all the stages of the power conversion.
Thanks. That's very clear. Maybe if I sort of move it on to the photonics side. It always seems ST is extremely good at getting a big lead customer, pioneering a new market opportunity, and creating advantages, if you like, in technology, leveraging some of the IP in-house. But that transition to a standard product in the market for us always feels like the real ROI, where margins can be accretive. Are we seeing when we look at the PIC and some of the engagements you have in the market, the possibility that this PIC100 becomes a standard product in the market? Thanks.
Standard product, I will not classify it as a standard product. Maybe application standard specific, maybe yes. But one thing, I prefer to share with you again, to show how ST is and will be a reference on silicon photonics. First of all, we are the unique company capable to provide silicon photonics technology on 12-inch. So we have the capability to increase our capacity both in Crolles and possibly later on in Agrate. So for sure, ST will compete on this market largely. But to become a pure standard, you will have many innovation coming in the optical cable and optical solution. Again, the near-package optics, the co-packaged optics, all this will come and maybe faster than expected. Silicon photonics is the key enabler of all these technologies.
That's great. Thanks so much, and well done on this quarter.
Thank you.
Thank you.
Thank you, Lee.
Okay. Thank you. Thank you, everyone. This is the end of this call. Thank you for joining us today, and we remain at your disposal if you have any follow-up questions. Sorry for the one we couldn't squeeze into the question. Thank you very much. Have a good day.
Thank you.
Thank you. Bye-bye.
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