Ladies and gentlemen, welcome to the STMicroelectronics First Quarter 2023 Earnings Release Conference Call and Live Webcast. I'm Andre, the Chorus Call operator. I would like to remind you that all participants will be in listen only mode and the conference is being recorded. 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 Céline Berthier, Group Vice President, Head of Investor Relations. Please go ahead.
Thank you, Andre, and good morning. Thank you everyone for joining our first quarter 2023 financial results conference call. Hosting the call today is Jean-Marc Chéry, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Purchasing, ERM and Resilience, and Chief Financial Officer, and Marco Cassis, President of Analog, MEMS and Sensors Group and Head of STMicroelectronics Strategy, System Research and Applications, Innovation Office. This live webcast and presentation materials can be accessed on ST's investor relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause 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 result this morning, and also in ST's most recent regulatory filings for a full description of these risk factors. Also, to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. I'd now like to turn the call over to Jean-Marc, ST's President and CEO.
Thank you, Céline, and good morning, everyone, and thank you for joining ST for our Q1 2023 earnings conference call. Let me begin with some opening comments, starting with Q1. First quarter net revenues of $4.25 billion came in better than expected in automotive and industrial, partially offset by lower revenues in personal electronics. Gross margin of 49.7% came in 170 basis points above the midpoint of our guidance, mainly due to product mix in a price environment that remained favorable. Looking at our year-over-year performance, net revenues increased 19.8%. Gross margin at 49.7% was up from 46.7%. Operating margin increased to 28.3% from 24.7%, and net income grew 39.8% to $1.04 billion.
On a sequential basis, net revenues decreased 4%. Q2 2023, at the midpoint of our second quarter business outlook is for net revenues of about $4.28 billion, representing a year-over-year increase of 11.5% and a sequential increase of 0.8%. Gross margin is expected to be about 49%. For the full year 2023, we will now drive ST based on a plan for full year 2023 net revenues in the range of $17 billion-$17.8 billion, representing a year-over-year growth range of about 5%-10%. Let's move to a detailed review of the first quarter. Net revenues increased 19.8% year-over-year, driven mainly by ADG and MDG, while AMS revenues decreased slightly.
Year-over-year, sales increased 17.5% to OEMs and 24% to distribution. On a sequential basis, Q1 net revenues came in 110 basis points above the midpoint to our outlook. This performance was driven by better than expected results in ADG on continued strength in automotive, and in MDG with general purpose microcontrollers remaining strong in Q1. Overall, Q1 net revenues decreased 4% on a sequential basis with ADG up 6.5%, MDG lower by 1.1%, and AMS decreasing 20.3%, reflecting lower than expected revenues in personal electronics on top of seasonality. Gross profit was $2.11 billion, increasing 27.5% year-over-year. Gross margin increased to 49.7% compared to 46.7% in the same quarter last year.
The 300 basis point expansion was driven by improved product mix, favorable pricing and positive currency effects, net of hedging, partially offset by higher manufacturing costs. Q1 operating margin was 28.3%, up from 24.7% in the year or group area, with ADG and MDG contributing to the 360 basis point growth in operating margin. On a year-over-year basis, net income increased 39.8% to $1.04 billion from the $747 million, and diluted earnings per share increased 39.2% to $1.10 from $0.79. Looking at our year-over-year sales performance by product group, ADG revenues increased 43.9% on a double-digit growth in both automotive and power discrete.
AMS revenues decreased 0.9%, with lower revenues in analog and MEMS offsetting an increase in imaging. MDG revenues increased 13.2% with growth in both microcontrollers and RF communications. In term of operating margin, two of three product groups delivered year-over-year expansion. ADG operating margin increased to 32% from 18.7%. MDG operating margin increased to 36.2% from 33.7%. AMS operating margin decreased to 20.4% from 22.9%. Net cash from operating activities increased to 39.7% to $1.32 billion in Q1, compared to $945 million in the year-ago quarter. First quarter CapEx was $1.09 billion versus $840 million in Q1 2022.
Thanks to the strong growth in net cash from operating activities, free cash flow grew to $206 million in Q1 2023 versus $82 million in Q1 2022. Cash dividends paid to stockholders in Q1 2023 totaled $54 million. In addition, ST executed share buybacks of $87 million as part of our current repurchase program. ST net financial position of $1.86 billion as of April 1, 2023 reflected total liquidity of $4.52 billion and total financial debt of $2.66 billion. Now, let's now discuss the business dynamics. During the first quarter, demand in the automotive market and in the power and energy portion of the industrial market remained strong, driven by continued semiconductor pervasion and the ongoing structural transformation.
Factory automation, robotics, and building control grew revenues in line with our strong backlog, while new orders normalized. Demand in consumer industrial, communication infrastructure and networking, including data centers and servers, suffered, and demand for personal electronics and computer peripherals further weakened. Our backlog is now about six-quarter at the midpoint of our full year 2023 indication, still above a normal situation, but with different coverage consistent with the values and market dynamics. In automotive and industrial, we are still well above the capacity we can serve on some technologies and packages. In the other end markets we serve, we are back to a more normal level of coverage. Moving now to a Q1 review by end market. In automotive demand, the first quarter remains strong. Against this backdrop, we continue to execute our strategy for car electrification, in particular in silicon carbide.
The number of ongoing silicon carbide programs increased again during Q1. Between the automotive and the industrial markets, we now have 130 projects spread over 85 customers. About 60% of these projects are for automotive customers. We now expect to generate about $1.2 billion of silicon carbide revenues in 2023, broadly spread among many different customers. We had design wins in Q1 with both silicon and silicon carbide power discrete in automotive applications. This included an ACEPACK power module and silicon carbide MOSFETs for traction inverters, as well as project with silicon MOSFET in battery management systems. In mid-April, we announced that we signed a multi-year supply agreement with ZF for silicon carbide devices.
Under this agreement, we will supply a volume of double digit millions of devices that will be integrated in ZF's new modular investor architecture going into production in 2025. Speaking more broadly about our automotive portfolio serving car electrification, we won designs for multiple electrical vehicle makers, including our Stellar Automotive MCU for an onboard charging application. In car digitalization, we have a number of design wins in key areas. In next generation car architectures, our eFuse products for a zonal controller solution gained traction. In driver monitoring system, we were successful with our global shutter automotive image sensors. Legacy automotive remains dynamic, and silicon pervasion continues to increase. Here we had several wins for our SPC5 microcontrollers for vehicle body control, as well as our latest product for the secure door zone platform.
In our automotive sensor business, we won several new designs for vehicle dynamics, airbags, and anti-theft applications. Moving now to industrial. Across the industrial market, we see two main trends driving a structural transformation in the market and accelerating the increase in the semiconductor content. Digitalization of devices and systems and energy management and power efficiency improvement. During the quarter, demand remained strong overall in both OEMs and distribution, with different dynamics across the areas we serve. In B2B industrial, we continue to see strong demand in power energy, factory automation and robotics. Building control grew revenues in line with our strong backlog, while new orders normalized. Consumer industrial, such as battery-operated tools and home appliances, softened. During Q1, we continue to see an expansion of design wins across three areas of the industrial market we focus on: B2B, consumer, and specialized.
Our broad offering enables us to support our customer with full solutions, combining power, analog, sensor, and embedded processing products, leveraging ST unique position. Wins include system solution comprised of power discrete, power management, and STM32 MCUs in renewable energy applications, and multi-product solution for smart meters and smart grid applications. We also want circuits with intelligent power switches, motor drivers, industrial sensors and secure solution in applications such as industrial automation, asset tracking, and server power supplies. In the quarter, we made a number of announcements related to our STM32 product portfolio and ecosystem. This included a new highly affordable MCU series to replace 8-bit MCUs. A new high-performance MCU series with health security features, a new wireless MCU, and a new MPU products. We also continue to build the best developer ecosystem with two industry firsts.
We introduce a certified MCU security platform that combines hardware and software to simplify development of secure embedded applications. We launch the world's first MCU edge AI developer cloud that includes an online benchmarking service for edge AI models on STM32 boards. Moving to personal electronics. During the quarter, our products were selected for flagship smartphones, watches, and other wearable devices. This include NFC controllers and secure element solution, wireless charging products, main sensors, and Time-of-Flight ranging sensors. In communication equipment and computer peripheral, new wins here included products for LEO satellites, a number of products for computer peripherals, including secure solution, Time-of-Flight sensor, and MCUs, and ASICs for communication infrastructure based on our proprietary technologies. Now, I would like to mention that we issued our annual sustainability report last week. A couple of key points.
We are on track with our program to be carbon neutral by 2027. We further increase our global sourcing of electricity from renewable energy, growing to 62% in 2022, from 51% in 2021. We were recognized by environmental nonprofit CDP, so Carbon Disclosure Project, as a global leader in corporate transparency and performance on water security, being one of the few companies to secure a place on its annual A list. Let's move to our Q2 2023 financial outlook and our plan for the full year 2023. For Q2, we expect net revenues to be about $4.28 billion at the midpoint, representing a year-over-year growth of about 11.5% and a sequential increase of about 0.8%, both driven by solid growth in automotive and industrial, partially offset by the decline in personal electronics.
Gross margin is expected to be about 49% at the midpoint. 2023, we confirm our plan to invest about $4 billion in CapEx, with about 80% of this amount mainly related to increase of our 300mm wafer and silicon carbide manufacturing capacity, including, for silicon carbide, our substrate initiative. The remaining 20% is for R&D, laboratories, manufacturing maintenance efficiency, and our corporate sustainability initiatives. Based on our visibility, we will now drive the company based on the plan for full year 2023 revenues in the range of about $17 billion-$17.8 billion, representing a growth over 2022 of about 5%-10%. Automotive and industrial will be the key growth drivers of our revenues in 2023. To conclude, as we have discussed, we are operating in an environment with significantly different dynamics depending on the end markets we serve.
Based on our leadership position, strategic approach and current visibility, we anticipate 2023 another year of revenue growth and profitability improvement toward our $20 billion plus ambition and related financial model. Thank you, and we are now ready to answer your questions.
We will now begin the Q&A session. Anyone who wishes to ask a question or make a comment may press star and one on their touchtone 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. Everyone who has a question or a comment may press star and one at this time. The first question comes from the line of Didier Scemama with Bank of America. Please go ahead.
Good morning. Thank you so much for taking my question. Jean-Marc, I've got a maybe a first question, looking at the second half and the sort of changing dynamics that you highlighted. There's been a number of sort of conflicting reports, when it comes to the automotive market, during Q1 earnings season. Can you just give us a sense of what your orders look like for the second half of 2023 and perhaps the visibility you have into 2024? A question for Lorenzo. I think you mentioned previously that gross margins will be broadly flat for calendar 2023. Obviously, your first half is running quite a lot above that guidance. Any reason to change the full year guide on gross margin to raise that?
Do you have any other additional headwind that you want to flag in the second half? Thank you.
I will answer about the revenue for the year and H2 versus H1. Lorenzo will speak about gross margin. Let's say in H2, at the midpoint of the indication, we provided, we anticipate a growth of 4% H2 versus H1. Again, it's important that in H2, as I warn you, during our Q4 earnings announcement in January, we will have a specific mix change in important key customer program in personal electronics. This mix change is material. Here I am spoken, H2 year-over-year in personal electronics of an impact of half a billion EUR.
Despite this impact, the company will grow in H2, driven by automotive and industrial markets, 4% H2 versus H1, and will grow year-over-year, H2 2023 versus H2 2022. This is the demonstration that we are really resilient in front of the personal electronic market. More about the backlog. It is clear that the backlog coverage is following exactly the market dynamics. We are fully covered in backlog for automotive and basically industrial power energy-related and B2B automation, robotics and building controls.
Where we have still to hunter order for the second part of the year is more on consumer industrial, is more, let's say, on servers and definitively on pure consumer related, like personal electronics and computer peripherals. That's the reason why our confidence level to have raised the low end of our indication from $16.8 - $17 billion is very good. We have not raised the upper range because on power, energy and automotive, we are still facing some capacity limitation in the key technology cluster, that 40nm, silicon carbide, IGBT, all which are really driven our growth. This is the H2 versus H1 dynamic and the complexity, let's say, of the environment we are facing. About gross margin, Lorenzo.
I take the question. Good morning, everybody. About the gross margin, for the gross margin at midpoint of our revenue indication for the year, we do expect to have a gross margin ranging between 47% and 48%. In the year, of course, the positive product mix, we have manufacturing productivity improvement. Substantially, we will see an overall price stability. This will be offset by increase in good cost in our manufacturing. We have not to forget that in the second part of the year, we will have the impact of the ramp-up of the 300mm in Agrate that they will not be at their optimal capacity, and this will impact our costs in the second half. This is the dynamic, let's say, when we look at the current year with last year.
If we go a little bit more in specific to compare, let's say, the first half with the second half of this year. Of course, in H1, gross margin has benefited from a sequential positive price effect. We had also a strong positive impact on the product mix, while in the first half of the year, our gross margin has not yet been significantly impacted by the increase of the input and manufacturing cost. In H2, on the contrary, we expected to be impacted by some increased sales price pressure, even if in the year this will be, let's say, substantially neutral. In the second part of the year, we will see negative price pressure when looking sequentially. Manufacturing input cost will increase.
There will be also some less optimized production level in some specific fabs, the one that are more exposed to consumer or personal electronic. As I was saying before, in the second part of the year, there is the impact of our 300mm Agrate that today is in the startup, in the second part of the year will enter in our cost of goods sold. At the end, let's say the visibility, I repeat, the visibility for the year will be with a gross margin that will be ranging between 47% and 48%.
Got it. I just wanted to clarify. Jean-Marc, did you say that the headwind from your sort of marquee customer and personal electronics hit half a billion dollars year-over-year in the second half? Is that what you said?
Yes.
Okay. Got it. Maybe quick follow-up. I just wondered if you could discuss a little bit the pricing environment in the second half. In microcontrollers, there's a number of sort of reports out there in Asia that pricing is getting weaker, especially in the consumer and PC peripherals, et cetera, market. First of all, maybe remind us where you play in those markets and whether you are tempted to follow these this price action or whether you prefer to dedicate your capacity to automotive and industrial microcontrollers to protect pricing.
No, maybe, yeah, okay. My first comment is, you cannot speak about price generically across the board. As we described, okay, we are really facing a complexity with really significant different market dynamic. Of course, okay, you have to manage your price, let's say being selective. It is clear when you face, let's say competition on pure consumer connected device is absolutely not the same when you are competing in a power box where you are managing the power solution. We cannot speak about the price across the board.
Yes, we do believe that, in H2, in the field of consumer, where you will have, let's say, lead time of production supply coming back to normal and potentially here and there in some specific location, some capacity flexibility to see price pressure. Well, ST, we will manage it selectively. Overall, okay, it will end on what described, Lorenzo. Across the year, we should see a price, okay, basically stability.
Substantially neutral with respect to last year.
Exactly. In H2, yes, okay, we will see some minus.
Okay. Thank you so much.
The next question comes from the line of Matt Ramsay from TD Cowen. Please go ahead.
Thank you very much, everybody. Good morning. Guys, my first question I wanted to ask, the silicon carbide target, I guess you guys had talked for a while about $1 billion in 2023, and then I think in January you had said greater than $1 billion, and now you're talking about $1.2 billion, which is great. I think all of us saw the announcement with ZF and what that could potentially mean. I guess my question on that is, for the industry ramping material supply, we get a lot of conflicting reports, some bumps with your primary material supplier, some news of potentially ramping supply at other sources.
Jean-Marc, maybe you could talk a little bit about your near-term plans for getting silicon carbide material supply to support that revenue ramp. If there's any update, I think you mentioned in the script increasing investments on your internal substrates. If you could give us an update on the timelines there, where you guys can start to supplement your supply with internal supply, that would be helpful. Thank you.
I will not comment the other competitor and supplier. Clearly, I really confirm the $1.2 billion. We know that ST, according some number, we see that in 2022, we have about 40% of market share. With this $1.2 billion, looking like according to market data we have, that we will increase our market share. Thanks to our capability to deliver a wafer out and module and package out according customer expectation, and thanks to the multiple source we have in raw material.
Saying that, we are really on track to be in position starting 2024 to produce raw material for our own needs and going forward, okay, to achieve 40%. Now this will be first in 6-inch, definitively. We are preparing the 8-inch conversion. We have already produced one 8-inch ingot from our former Norstel, okay, let's say, facilities. We are qualifying the 8-inch device according our qualification protocol. We anticipate that we will start 8-inch activities, let's say in second half of 2024. After we have, let's say, other opportunity for silicon carbide. First to qualify also the SmartSiC technology, which will be very, very instrumental for cost decrease, but for 8-inch wafer size conversion.
We will qualify in the second half of 2023 our Generation 4 silicon carbide that we will start to ramp up in 2024. This is what I can confirm to you. Looking at the market evolution and the number of program and the number of customer we have, we are very confident to deliver about $2 billion in 2025, 2026. To have a target long term, well above $5 billion when the market will reach $15 billion. This is really the roadmap we execute. I don't say clock watch, but we execute every quarter and every year fully consistently what we said since the beginning.
Thank you, Jean-Marc for the detail. I realize the sensitivity on some of the near-term stuff there. As my follow-up, Lorenzo, you had talked about some of the potential gross margin impacts in the second half of the ramp of 300mm capacity. I wanted to ask about that a little bit, maybe just kind of follow on to Didier's question. There's certainly some angst in the system around pricing and margins. I guess the first one is could you maybe quantify if you could, the gross margin impact just from the 300mm ramp in the second half of the calendar year? I mean, really strong margins up to 49% in the guidance.
I think folks are wondering if that's, is that a peak? Is that a new normal? How would you consider that and that maybe if there's some price pressure, when do you feel like the 300mm capacity will be at a scale to be a positive driver of margins rather than a near-term ramp up headwind? Thank you.
My, clearly, in the second part of the year, when the fab, 300mm fab in Agrate will exit from the ramp-up counting that today is bringing, let's say, the equivalent of the insaturation cost or the excess cost in the line other income and expenses. We will see, let's say, this impact coming directly in our costs. How much this will impact? Of course, this is temporary because it's due to the fact that the 300mm is not at a reasonable, let's say, level that will reach in order to be substantially neutral and start to contribute positively to our gross margin in the course of 2024.
In 2023, for sure, this will not happen. We need to reach in 2023, our capacity will be still, let's say, at the level of below 1,000 wafer per week, let's say, significantly below. At the end, this is a size for a 300mm that is definitely not accretive for the gross margin. We'll be an increase in the cost. Looking overall, let's say the second part of the year, as I was saying before, there are three components that are impacting our gross margin. On one side, there is the impact of the 300mm. On the other side, there will be the impact, let's say, of the fact that we will start to see materially the increased cost in our manufacturing.
That today is partially, let's say, suspended in our inventory, but then it will come as down in our PNL starting already partially in this quarter, in Q2, but definitely with much, much higher level of impact during Q3 and Q4. The other side, there will be also, let's say, some impact related to the, to the price pressure that we were discussing before and the mix. How this will account when we compare the first half and the second half of our gross margin? I would say that one-third, one-third, one-third, more or less, let's say we can see that this is the impact of these three main elements that on one side are the impact on pricing in our top line.
On the other side is the impact of the increased cost in our manufacturing cost. On the other side is the 300mm. I repeat, just to clarify, this is a temporary impact, let's say. Of course, in the second part of the year, as I was saying before, there are some of our fabs that are not working at optimized production level. Why? Because of course, we are also keeping under control our inventory. As you see, we have some of these fabs, the one that are more exposed to consumer or personal electronic, let's say, we needed to be sure that we are not inflating our inventory.
This is another impact that is fully taken into consideration in our indication of gross margin of the year between 47%-48%, but will contribute in any case to add on our gross margin in the second part of the year as a detractor.
Thanks, Lorenzo. Appreciate it.
Any other questions?
The next question comes from the line of Stéphane Houri from ODDO BHF. Please go ahead.
Good morning. Thank you very much for taking my question. Actually, I wanted to come back on the prices dynamic, notably in the automotive segment, because in the past you have, you know, explained that the relationships with the automotive industry had changed a bit and that you were not expecting prices to, you know, collapse, but maybe come back to a more normal trend. Is that what you're seeing at the moment or not yet?
The question linked to that is with the temporary impact that you're talking about for the gross margin in the second half, are you still comfortable with your target to get back to or to go to 50% gross margin within the time frame of your plan? Thank you very much.
Yes. Definitively so, Lorenzo will further comment. Again, we repeat what are the key driver for gross margin improvement. I think Lorenzo elaborated that we have a temporary impact of Agrate ramp up, definitively, which is not, absolutely not a surprise. It is mitigated by the ramp up of Crolles at the same time. Each time we are increasing Crolles ramp up according the plan of record we have with the Liberty project. For sure, we mitigate also Agrate. When Agrate will reach the adequate scale, Agrate will contribute to the gross margin of ST. The 300mm is one of the main elements. I repeat, the second element is the silicon carbide.
Moving forward to 200mm, thanks to the SmartSiC technology, which is really key to make the 200mm successful, okay, we will have important leverage to decrease our cost and of course, okay, to contribute to the gross margin improvement. It is clearly the two important, let's say, contributor. Well, after the loading of our fab, temporarily, in H2, some fab, okay, will face, let's say, not fully optimized loading, but it is mainly related to personal electronics. Just to give you an order of magnitude, okay, in 2023 at the midpoint, personal electronics, okay, will decrease 25%.
Half of the decrease is not silicon impact because it is a optical module product mix change with no impact on the loading, but half as an impact on the loading. Of course, okay, in H2, we have this temporary non-loading that we will compensate moving forward because the demand on advanced BCD technology, advanced power technology for automotive industrial is more and more increasing. Okay, we will come back to a full loading of our fab starting 2024 definitively. That is the reason why we confirm to you that the $20 billion plus ambition, we will deliver the 50% gross margin.
Now, about the pricing on automotive, now, okay, we position this business and the demand of the customer on technology cluster that radically change compared few years ago. Now, okay, we are at 40nm technology, 28nm. Maybe tomorrow we will be at 18nm technology, silicon carbide, GaN, IGBT modules. It's a complete different mix compared to the past. On this technology, there is no excess of capacity. The investments are cautious. There are no excess of investment worldwide on all these kind of technology, let's say, clusters, because first it is either on 300mm or it is on wide bandgap. This is calling for CapEx that companies are spending cautiously.
You know that, in this field of activity, the foundry business is quite tight, okay? There is no, let's say, excess of foundry competition in competing in the field of automotive. That's the reason why, yes, we will go back normalize price discussion with the customers. More and more, we will have straight discussion with the car makers. Clearly, it is a trend we are seeing. The model, okay, moving forward, okay, is not the model we have five years ago or 10 years ago. While saying that, okay, Lorenzo, you can complement.
Yes, maybe just clarification. When we were talking about the impact of pricing in the second half of this year, is not actually in automotive. Automotive has been rediscussed. The pricing, as I was saying, is increasing. There is some declining price on a sequential basis on different areas than automotive. That are the one that are most exposed to the difficulties of the market. We are talking here about maybe consumer portion of the industrial. At the end, between automotive increasing pricing, maintaining pricing, and let's say some other areas in which there is a normal dynamic of price decline, at the end, the price will be substantially flat-ish in the year. In respect to the gross margin, I just confirm what Jean-Marc said.
Of course, also, we need to consider that reaching our target of the 50% gross margin at $20 billion plus is not linear. It means that we may have some quarter, like you have seen, in which we are very close already to the target, like in Q1, some other in which we will be a little bit down. One of the reason were discussed before. When we introduce our 300mm, not yet at the full size.
At the end, the trend will be that one, When the one that will bring the company to a gross margin, at 50%, let's say, when the size of our top line will be in the range of $20 billion.
Okay. Thank you very much.
Next question, please.
Next question comes from the line of Andrew Gardiner from Citi. Please go ahead.
Good morning, guys. Thank you for taking the question. Two follow-ups to questions that have been asked, if I could. First, Lorenzo, you mentioned inventories and making sure that you were sort of continuing to manage inventories pretty tightly given the end market dynamics that you're seeing. Inventories rose quite a bit on your books in the quarter. Yet of course, it doesn't seem as though you were, you know, you weren't short of demand per se in the quarter at a group level. Clearly, you beat your guidance, and you didn't need to pump the brakes on the fabs in the first quarter at a high level, right? You're still delivering gross margins well in excess of your guidance.
Can you just sort of describe what was driving the inventory increase in first quarter? Did that come as a bit of a surprise, perhaps towards the end of the quarter? Or is it, you know, it's really there in preparation for what you're seeing across the different end markets in the second half? I have a follow-up on silicon carbide.
Yes. For sure I take this question. You know, our Q1 came better than expected in term of revenues, let's say, mainly impacted by two elements. The first one was better mix in respect to what was expected. On the other side, let's say a better price environment. Means that at the end, let's say we were modeling pricing already started to decline in some areas, while instead this did not happen. These had a positive impact on the two sides, I would say, on one side on the revenues, on the other side, of course, on the gross margin.
Our Q1, let's say, inventory, as you rightly said, it came above the expectation in there are higher because we are at 120 days compare the starting point at the end of Q4 that was in the range of 100 days. This level is mainly associated to excess of inventory that has been done in personal electronic and in consumer, where the market were weaker than what we were expecting. We were, let's say producing, you know, the revenues came a little bit in a different way, let's say, with better mix, better pricing, but lower quantities in some product lines. This, of course, bring an increase in our inventory that was not forecasted, let's say, at the beginning of the quarter.
We will correct during the year such excess. where we will land, let's say, at the end of the year. Also considering the, that we will enter, let's say, the Agrate 300mm, the leap that we will have in Agrate 300mm. At the end, we do think that at the end of the year, let's say, our, the number of days of our inventory, let's say, will be slightly above the number of days that we had, let's say, at the end of 2022. It will be something, range of 105, 110, 10 days of inventory at the end, at the end of 2023.
Thank you. Then just quickly on silicon carbide. Jean-Marc, to the comments you made in your prepared opening now at $1.2 billion for 2023, let's say nearly 20% uplift relative to what you were explaining to us in the second half of last year. It's a 60%-70% year-on-year growth rate relative to 2022, and that's coming at a time when some of your peers seem to be struggling in terms of their silicon carbide ramp. Where are you able to get this extra capacity out? You also mentioned during your prepared comments that SiC remains pretty constrained. Although maybe that was a high-level comment. You know, where are you able to eke out an extra 20% of, you know, wafer or module supply in silicon carbide? Thank you.
Mark. First of all, in internally, now we have really our four manufacturing location. Two for fabs, so Singapore and Catania, and two for assembly, so Shenzhen and Bouskoura in Morocco, running all together full mass production. Thanks to the CapEx we spent in H2 2022 to increase the capacity. We have diversified our raw material source because also we anticipated some difficulties of one vendors in the second half of last year. We secure ourselves in term of sources. Well, and last, okay, I think it's important I mention that now the demand we have is really well diversified.
Our main customer is representing below 65% of the total revenue we expect. We have the program we won during the past three years that are starting to generate significant revenue for ST. All in all, I would like simply to confirm that we invested last year, and we have executed the capacity implementation properly. Now with four locations running full speed. We have our demand well diversified and new program ramping up on top of the main customer we have. We have secure worldwide with different sources located in different place in the world to secure our ramp up, waiting for our internal source to be ready to sustain our ambition to grow above $2 billion and towards $5 billion.
Thanks very much.
Thank you. Next question, please.
The next question comes from the line of Sebastien Sztabowicz with Kepler Cheuvreux. Please go ahead.
Yeah, hello and thanks for taking my question. On silicon carbide, could you please make an update on your technology roadmap there? You mentioned that the gen four is set to ramp, if I'm right, by H2 this year. Could you provide a little bit of timing for the ramp of gen four, but also gen five? What kind of improvement are you expecting from gen four and gen five versus your third generation of silicon carbide technology? The follow-up is on the inventory level on your two main markets, automotive and industrials. Where are the inventory standing with versus the normative level? Thank you.
The Generation 4 will be maturity, what we classify maturity mass production, in the second half of 2023. Ready for production in 2024. The timing will be, let's say.
Consistent with the qualification time we need to do on the automotive, let's say, market. We will ramp up smoothly in 2024, okay, according the timing of qualification. Internally, this technology will be qualified by the second half of this year. The Generation 5 will follow basically 18 months later. Generation 4 and Generation 5 are still planar technology where we significantly improve the performances and with absolutely, okay, no gap versus the best-in-class technology we can, we can assess. We will move to Generation 6, okay, where we will make a disruption, but I will comment in due time definitively.
Again, Generation 4 and 5, let's say will improve the performance of the device that is enabled by the technology. In parallel, do not forget that we will implement two important, let's say, process change. The 200mm, that is not a piece of cake for silicon carbide. I don't want to be technical, but it is not a piece of cake. You have many mechanical effects which are not so easy to control when you increase the wafer size of silicon carbide. Is point number one. For ST, the point number two, we will implement the SmartSiC technology, which will be really an important add-on that will enable better performance on the device, lower cost of the solution at substrate level, and will make easier the conversion to the 200mm.
two technology in the next three years implementation and two major process change, 200mm and SmartSiC introduction. Okay, later on, we will introduce the Generation 6, which will be a disruption in terms of architecture of the transistor.
On the inventory question on the autos industrial, where are we standing right now?
Inventory, you mean, in the channel, I suppose.
Yeah. Yeah, definitely in the channel. Thank you.
You know that we monitor pretty well the inventory at the distribution channel. Here, okay, it's clearly following the market dynamic, okay. When you are through distribution addressing mainly, okay, for us, the industrial market, we are coming back now to a normal coverage in term of inventory. Means we have our inventory term of three to four, whatever are the devices, microcontrollers, analog, power overall. Of course, we have some inventory which are, let's say, at the upper limit that we accept generally, like MEMS. Why? Because they have been impacted by the personal electronic market dynamics.
That's the reason why, we will control in our revenue target, the inventory at distribution level. Again, except the inventory in front of consumer market, we do not detect any excess of inventory. Inventory, our distribution are just at the level for distributor to manage term business, to manage a situation which is a normalized situation. Well, about our tier one and the supply chain supplying the car maker. At this stage, especially, of course, on all the technology driven by smart mobility and electrification, digitalization, we do not detect absolutely any inventory in excess.
on legacy automotive, it's difficult to say because for us, we are supplying 40nm, we are supplying BCD9, BCD8, and the demand is still very, very strong. We do believe that on this kind of technology cluster, there are no inventory in excess across the supply chain.
Thank you.
Okay. Thank you. Next question, please.
The next question comes from the line of Lee Simpson with Morgan Stanley. Please go ahead.
Thanks. Thanks so much for taking my question. Just trying to sort of tease out a little bit more the pricing headwinds you're talking about going into second half of the year. I think as others have suggested, we are seeing some signs of slowing demand in MOSFETs, you know, lack of tightness being seen in various areas and power semis. At the same time, the foundries are talking about slowing order book for autos. I'm just trying to understand, you know, which side of the fence or if both perhaps are impacting in the second half and what that means for order book momentum, you know, particularly Q3 of this year. Maybe if I could just come back to the overall backlog.
I mean, you've been very good in previous quarters to talk about the relative size of the backlog to the outgoing business over the next few quarters. Could you maybe just update us and give us a relative size of backlog? Thanks.
Well, I will start with the backlog. Today, the total backlog we have in our hand requested by customers represents about six quarters of revenue. I would like to say that it is pretty on balance versus the end market we address. Again, on automotive overall, on power energy and professional B2B industrial, the backlog coverage we have are well above the six quarters. The order entry we are seeing now are loading smoothly year 2024. Why? Because the lead time we can provide to this customer are still well above one year.
Moving forward, quarter after quarter, they are loading our backlog consistently with the end demand, which is very strong, and the lead time we can offer. You have another dynamic where the demand is solid, growing with existing backlog, where clearly we are reducing our lead time. Clearly when you are reducing our lead time, the customer order they take into account. They are temporarily reducing their order in order to have a backlog coverage which is consistent with your lead time. Here, the coverage, okay, will be between three to four quarter total backlog. On the consumer industrial, on server, okay, on this kind of activity, we are going in this direction. Now, you have some market where clearly there is a weak end demand.
There is clearly inventory correction. Okay, the backlog we have is reducing and the order we have are low. It is typically the computer peripheral, computer-related, and the personal electronic. Here, we are going back to a normal situation where we have, for some customer which are, let's say, well in control with their supply chain, they give us a rolling two years visibility, and there is some customer that are giving a usual three to four quarter visibility. I have to say, if I would like to classify overall our backlog, we are six quarter. We do believe we will finish the year 2023 with the coverage will be between four to five quarter, which is still above a normal situation. Normal situation is three to four quarter.
This is a dynamic, okay, I can tell you, and this is totally consistent, okay, with the indication we have provided to the year, to reach at the midpoint $17.4 billion, but still with the possibility to go to the upper range.
Does it answer your question, Lee?
Yeah, it does. Just wanted to circle back on perhaps the evidence or perhaps the product categories where you're seeing those pricing headwinds, and particularly as it relates to autos. I mean, are we vectoring more on power semis or do we see this starting to happen as, you know, perhaps a peak pricing dynamic around control? Thanks.
I mean, to come back to your MOSFET point. You know, MOSFET is part of the power supply or power management of some application in the field of servers and computers. Of course, okay, here, as this market is softening or is weakening, clearly, okay, the demand for this specific MOSFET is weakening. MOSFET is very large, okay? You have high voltage, you have low voltage MOSFET, then you have IGBT, you have the silicon carbide. Again, the MOSFET are going everywhere. are going everywhere in all the new application.
I can confirm to you that on MOSFET overall, addressing all the automotive application and importantly energy storage, energy conversion, energy transportation, the demand is very strong and the capacity are fully loaded. We are still struggling to support our customer at the level of what they demand on IGBT, on silicon carbide, on VIPower, vertical integrated power, on BCD9 for power switches and on low voltage and high voltage MOSFET as well. Everywhere it is for power management for automotive and industrial application. Yes, on computer, the demand is weak, this is not a surprise.
Okay. Thank you.
Thank you very much. We have exceeded the time, so I apologize this was the last question. Thank you very much, all of you. This will end our call session this time.
Thank you.
Thank you.