I think we're ready to start. Hi everyone. I'm Simon Coles, Head of European Technology Hardware and Semiconductor Research here at Barclays. Delighted to have Lorenzo, CFO of STMicro, with me here today. Thanks so much for joining us.
Thank you, Adrian.
Maybe we'll start off with sort of setting the scene a little bit. So 2025 was, let's call it, an interesting year. The industry was hoping for some recovery in the analog space, and it never really materialized as hoped. So maybe you could give us a sort of review of how STM saw the year, and then you could give us an update on sort of how you're feeling about the auto and industrial markets at this point.
Yes, sure. Good morning, everybody. Let's start to say that, looking at the current quarter, I can confirm that what we said entering the quarter is what is going on. Let's say we see the situation evolving consistently with our expectation, and maybe for some elements, even a little bit better than our expectation. But you know that this year for us in 2025, looking at 2025, clearly the first part of the year, the first half of the year, was impacted in automotive and also in industry by a significant inventory correction. Looking at automotive, clearly we had a few customers, important customers for us, that were significantly correcting this inventory in the first part of the year. And now I have to say that this is behind us.
Indeed, when we look, starting from Q2, we started to grow on a year-over-year, let's say, on a sequential basis in automotive, definitely. And still we think that we see that, also in this current quarter we will continue to grow, on a sequential basis, on a mid-single digit. And the evolution is consistent and in line with our expectation. Industrial was similar. In Industrial, the year has been characterized by an important inventory correction in 2025. And now if I look at the situation of the inventory, and especially the inventory that we have in distribution, we see now a normalization and in some region even a little bit better than what is the normal level of inventory that we should have. So I think also here we see, let's say, a positive dynamic.
You see that our revenue in industry were growing on a sequential basis. In Q3 we were also on a year-over-year basis improving. But we will continue to see some growth also in the current quarter, more low single digit. Why? Because we want to exit the year as clean as possible in terms of inventory. But looking, for instance, some dynamics like the book-to-bill, we see that the company has a book-to-bill that is above parity, and this is positive, let's say, especially when we look at our bookings in the industrial, so I would say that we are relatively optimistic on the trend at this point.
Okay, great. You touched on some of the inventory levels there. Is it fair to say that you're cautiously optimistic that the destocking risk that, or the destocking activity we've seen in 2025 is pretty much done, and by the time you've got through Q4 you don't really expect to see anything else on that front, and then you mentioned book-to-bill is above one. Are bookings sort of trending maybe a little bit better since sort of earlier in the year? And do you think you have sort of better visibility into 2026 than you did have going into 2025 at the same stage last year?
No, clearly when we look at the visibility entering in 2026 compared to the visibility that we had entering 2025, well, yes, the visibility is definitely improving. As I was saying before, at this stage we do not detect any inventory correction. Last year we were impacted significantly. But today clearly what we said at our earnings release, Q3 we said about our expectation now, there is no reason why to not to think that Q1 will be in the normal seasonality. Last year we were well below the normal seasonality. Today, frankly speaking, with all the indications that we have, we think that the next quarter should be in that range. So at the end now I would say that overall, definitely our visibility has improved.
We enter with a level of backlog that is, in the year, that is better than what it was one year ago. Maybe we are not yet in a situation in which we cover in terms of backlog the same level that was covered the year pre-COVID, but definitely we see the situation improving, definitely improving.
Okay, great. Maybe we touch on growth margins before talking about some of the revenue opportunities. I mean, they're not where you'd like them to be. There are a number of moving parts that you've been very helpful sort of laying out in the last few quarters. Could you maybe help us how to frame how to think about those into 2026? I mean, you're reshaping the manufacturing footprint, so there's some costs shifting around there. Underutilization should come down as revenues are improving. FX, like lots of things going on. Could you help us sort of frame how to think about those?
No, yes, definitely 2025 in terms of gross margin has been quite difficult, definitely. Let's say at the end, the midpoint of our Q4 guidance, our average gross margin in the year would be in the range of 33.8%, something like that. So clearly this year our gross margin has been definitely significantly impacted. Impacted by what? Well, first of all, impacted by a significant level of unloading charges. This year the unloading charges accounts for more than $400 million. That is, a little bit more than 300 basis points. So this was, clearly, a strong headwind. But when we look, next year, clearly at this stage it's a little bit difficult to define exactly where we will position in terms of gross margin. But definitely we can talk together with you about what it will be the dynamics about, of our gross margin.
For sure, one of the expectations is to have a significant reduction in term of unloading charges in respect to this year. Why we expect this significant reduction? There are two elements to consider. On one side we expect to an increase in term of revenues. This will better load our manufacturing infrastructure. And on the other side we do expect to start to implement our reshaping plan for the manufacturing infrastructure. It means to reduce some of our capacity. Especially next year we expect to reduce the one in silicon carbide, reducing capacity at 150 mm, and for some extent also some reduction in the 200 mm of silicon. This mechanically will reduce the level of unloading because we will transfer products in silicon carbide 200 mm in silicon to the 300 mm, but the increase of capacity it will be tuned based on the demand.
We will try to tune based on the demand. So this will be a positive impact. There is another positive impact always related to the manufacturing that is better loading, lower unused capacity, but also better manufacturing efficiency. This will come, let's say, of course we do not yet exploit all the positive impact of our reshaping plan, but we will start to see something already in 2026. Then I was talking, before, no, clearly let's say next year we will not have any longer the impact of the inventory correction, especially in the industrial market. Industrial market for us is the most attractive in terms of gross margin. So it means that we expect a positive impact of the product mix. More revenues in our microcontroller, STM32, more revenues in analog. These are bringing a positive impact on our gross margin. Unfortunately, not everything is positive.
There is also some headwinds. One headwind that we talked many times together is the one of capacity reservation fees. Capacity reservation fees this year are still meaningful, means that impacting in a positive way our gross margin for around 100 basis points. Next year this will decline significantly. Still some, but let's say if we have a 20-30 basis point impact positive is the maximum level that we can think about. And then on the other side we have not to forget that the dynamic of the exchange rate is not going in the right direction for us. Exchange rate this year in average for the company, the effective one means, considering the impact of the hedging has been 1.11, but next year at this level of spot rate most likely will be something between 1.15, 1.16. This clearly is a negative impact.
All in all, anyway, we expect improvement in the gross margin, more significant in the second part of the year in respect to the first part of the year most likely, also due to our seasonal dynamics in terms of revenues. But yes, at this stage I'm quite confident to see some recovery in terms of gross margin next year.
That's great. That's very, that's very clear. Maybe just quickly on OpEx. Seems like after the Q3 commentary is set to go up next year you have your cost cutting plan. Anything we can do to sort of accelerate that to sort of try and manage this increase or how to think about that into 2026?
In terms of OpEx, it's clear we continue with our plan of resizing our OpEx. Anyway, also here we have a different dynamic. First of all, let me remind you that when we talk about OpEx, of course excluding the restructuring cost at this stage, but including SG&A, R&D, and the line that we have in our P&L, other income and expenses. In this line other income and expenses we account mainly for the grants. And this year this line is positive for us in the range of $200 million plus. What are the dynamics of next year? Of course next year we will continue to resize our expenses. As you remember we were saying that in respect to the cost structure of 2024 we wanted to achieve a savings of between $300 and $360 million.
Let's say that my goal as a CFO is to be more on the high side than on the low side, but fine. This year has been more than $100 million in the range of 110, something like that. Well, next year we do expect it to be similar, maybe slightly a little bit, slightly higher, so the saving will be there. On the other side there are some negative impact and the main one is related to a reduction of the positive impact of other income and expenses. Why we think that other income and expenses will go down? Not because there is less grants.
More or less, the level of R&D grants that we will have in 2026 is not so far from the number that we have in 2025, but is mainly due to the fact that we will account in this line the startup cost, especially for our facilities in silicon carbide 200 mm. This is an impact that is one time, but it will be accounted in that line. But then there is the FX also in the expenses we will have the negative impact of the FX. You know that we are in our expenses quite exposed to the euro. We have a significant amount of expenses that are denominated in euro, so all in all, what is our expectation? All in all is an expectation of a slight increase when you take SG&A, R&D, and other income and expenses together.
Got it. Okay. Maybe moving on to some of the revenue opportunities that you have ahead. There's a lot of excitement around interconnecting in DCs and I think it was about a year ago you announced a sort of silicon photonics foundry business. How's the progress on this opportunity? How meaningful do you think this can be for, for STM? Is it a significant revenue driver in 2026 or already?
Silicon photonics for sure is a very significant opportunity for us. There is a strong traction here. You have to consider that we start now and we are now qualifying our products and really let's say here the opportunity. Yes, I have to say that is already in next year. We see some opportunity already next year, let's say some meaningful revenues in silicon photonics. More we go, more we see traction on that. Clearly, let's say 2027, it will be even higher and important than 2026. Anyway, we start to see already some revenues over there.
We think that silicon photonics could be a significant driver in terms of our revenues, but there is no reason not to think that in three or four years from now we may be, let's say, something in the range of $500 million of this business. And this business, by the way, so far is also bringing more than decent profitability, I would say, for the company.
Okay, great. Maybe sort of link to this then is the AI power opportunity. Some of your peers have obviously been announcing some big numbers recently, but you have all the same products as well: silicon carbide, gallium nitride. You talked about some of these opportunities at your CMD last year. I mean, are you expecting to generate revenue in this area soon?
As I see, I think we have a portfolio that is well fitting this kind of opportunity. As you know, we have also announced a cooperation with NVIDIA, let's say, within this field in order to provide and especially to target the 800 volt architecture for artificial intelligence in terms of servers for power. So here I think this is an opportunity for us. We have the portfolio that is covering with the silicon carbide, gallium nitride, but not only. We have a microcontroller, analog, all these, let's say, products, high voltage low MOSFET, and low power low voltage power MOSFET. So we have the portfolio that can cover this kind of portfolio. We think that we are well positioned, let's say, to address the new 800 volt architecture.
So it means that this probably a revenue that will come not immediately, not in 2026, but we will start to have revenues that are coming in the coming year 2027, 2028, and 2029. Also here we think that this is a market that as is visible to everybody, growing significantly. No reason why we should not position ourselves with a similar level of revenues as for silicon photonics. This could be a significant driver for us, bringing revenues in the range of $500 million and more in by the end of the decade.
Okay, great. So that's a billion potentially from AI in the next couple of, next few years.
Yeah.
The satellite business I feel goes under the radar a little bit and has been forming very strongly for you. I mean, how do we think about that business growing from here? What is there much competition in this space? How does STM differentiate? Could you give us a bit more color on the satellite opportunity?
You know that we are here in this area since a long time. I think something in the range of 10 years. Our cooperation and work together with Starlink has been pioneering this area. We have IPs, technology ability in design chip that are fitting very well this kind of application. But this is a significant growing area. We see that it is an area in which we have experience in the last years growth. We expect to experience growth also in the coming year in 2026 and 2027. On top of our historical customer, now we are enlarging the customer base. There are new actors that are coming in, some of them quite important in which we are present.
We start already shipping this quarter. In 2026 will be a growth driver and this is, for us, let's say, enlarging the customer base. And then we have also, let's say, design win in other constellation. You know that both in Europe and then in China there are, let's say, traction on this kind of things. So I think it is an area in which we are well positioned. We are well advanced. We have, let's say, the right technology both in front end and in back end in order to address and to enjoy growth and profitable growth here.
Great. Okay. Maybe we touch on silicon carbide then. That was seen as a huge growth opportunity the last year or so has been quite difficult, given what's happening in China. But it feels like the pricing pressure in places like China may be sort of bottoming out. How are you feeling about the silicon carbide outlook from here? You suggested growth next year already, I believe. So what are the drivers of that as well?
In silicon carbide clearly, 2025 has been, let's call a transition year for us. In 2024, we're seeing a significant decline in our revenues in silicon carbide. This is not a secret. But clearly here we were impacted by few factors. Clearly, let's say, our main customers had inventory correction, also reduction in respect, let's say, their penetration in the market. This was somehow impacting our revenues. And we were not in the position in 2025 to compensate with new sockets that were there but not at the level to compensate this impact. Moving forward clearly, our expectation for 2026 is to have some growth in terms of silicon carbide. Why I'm saying so?
Not only mainly due to our main customer, but because we have new sockets both in Europe and in China that in the course of 2026 will ramp up. Of course we do not expect in 2026 to be back at the level of revenues that we were in 2024. There will be some increase but still not at the level of 2024. Looking at what we have in our hands and looking what are the sockets, the platform, where we stand today, we believe that in silicon carbide we may be back close to where we were 2024 in 2027. Anyway, we believe that silicon carbide still, let's say, a technology, a product that has an important development. Maybe has been a little bit later and slower than what was expected maybe two years ago.
Still there is a significant opportunities, not only in the mobility but also in the industrial market and not to be forgotten, in the server for AI. So it means that at the end I think here, let's say, our target in terms of revenue of silicon carbide is still there.
Got it. Very clear. Humanoid robots starting to get some more attention. STM has an extensive MCU portfolio. You also do lots in sensors as well. How are you feeling about this opportunity? Are there any numbers you could share about sort of content? Is this something that's exciting for STM in the next couple of years?
Oh, yes. This, this is an opportunity, definitely a significant opportunity in, in this market. Clearly here, our portfolio is fitting quite well, this kind of application because, as you said, here is a microcontroller, analog motion control, let's say sensors, all these kind of things, sensor both MEMS and image sensor, positioning. There are a lot of products that are really fitting this, this kind of application. And we see also because already today we are selling in this kind of, market. But clearly the point of this market that today is still quite small. Even if the content can be quite high because, you may have as a minimum $200-$300 of content in one humanoid and that could grow also in the range of $500-$600. So it means that at the end this is a, is a, is a good opportunity.
But the question mark is the evolution of this market. The good point is that we are present. We are in more than one, let's say, customers for this kind of application. Then we will see how this application will move, how pervasive it will be in terms of pervasiveness in the market. Here there are possible different opportunity. One is the industrial market. Why not defense? Because this could be another area for this. Maybe consumer a little bit down the road, but definitely this is a market that we look very carefully and we think for us could be a good opportunity, and I repeat, we start already now to sell to some of these early, let's say, company in this field.
Fascinating. Okay, great. You've got an acquisition in progress, NXP's MEMS business. Could you give us a bit more color on sort of how you think that's going to fit into the group, and then it's going to cost you not far off $1 billion? Are you happy with sort of the cash position post-acquisition?
To be honest, I think that this acquisition has been very, very positive for us. I am quite excited about this acquisition. Clearly, let's say, is fitting perfectly our portfolio. As you know, let's say, in MEMS we are quite strong in when we look at the personal electronic consumer. With the acquisition of NXP we will rebalance our presence in the market with automotive and industrial. So it means that at the end for us is the perfect fit. The cooperation with the MEMS of NXP has been since a long time because we were working together. So it means that for us, this is a very good acquisition. By the way, well, I think looking at the last years, let's say, M&A activity, if you consider the multiple in which we buy this business is more than reasonable.
But at the end, you know, we have enough cash on hand in our balance sheet to sustain this kind of acquisition. The consideration has been fully in cash. It will be fully in cash because so far it's not yet closed. But I'm quite confident soon it will be. So I feel very, very excited about that because I think it positioned ourselves in a very strong positioning in respect to the MEMS. So we will be, let's say, among the two top players in this field. And frankly speaking, this field is growing significantly. There are many applications: industrial, automotive. We were talking now about humanoid robots, all these kind of things. There are many, many areas in which these MEMS are going. And to be honest, it's one of our most profitable product lines.
For me it has been a great achievement.
Okay. Brilliant. I'm being signaled time's up. So Lorenzo, thank you so much for your time. It was very interesting, very helpful. Hope it was useful for everyone else. Thank you.
Thank you very much. Thank you.