Traffic jam in the lifts. Good morning. I'm Pavan Daswani, Citi's European Tech Analyst, based in London, and we're extremely glad today to be joined by Lorenzo Grandi, CFO at STMicroelectronics. Lorenzo, thank you for joining us today.
You're welcome. Thank you to all of you.
Could we maybe start, I've got a few questions prepared, and then I'll pass it on to questions from the audience. Could we maybe start with the near-term demand trends? At the recent results, you talked about strong bookings across all end markets, a book-to-bill of close to 2x , and improving visibility. Could you talk about what you have seen over the last month or so since the Q2 results in terms of orders, lead times, or inventory levels?
What can I say is that, actually, the situation in respect to what we were seeing during Q2 and what we said at the earning release of Q2 is unchanged. Means that the booking is still very strong. Our book-to-bill remain well above 1x. This is true in general, I would say, across the various market that we serve. At the end, the situation remain quite healthy. We see a very positive trend, similar to what we had said exiting Q2. No significant changes in respect to that. Yeah.
Any trends to flag in terms of end market demand?
Clearly what we see is that there is a strong demand for the AI infrastructure. This is definitely one trend that is very visible. I have also to say that when we look our market, like automotive and industrial, still there we see very strong demand. Industrial, definitely now the lead time for our STMicroelectronics is increasing significantly. For some of this product is even now reaching 50 weeks. So it's important lead time. Also in automotive, will be steadily the demand increasing, and the book-to-bill also here well above 1x.
How does that 50 weeks compare to last year?
Last year was completely a different situation. Last year, if you remember, we were still in a situation in which we were having an excess of inventory, distribution, these kind of things. Today, inventory and distribution is super lean, especially for this kind of product.
Okay. I want to come back on the automotive and industrial trends that you are talking about. Maybe let us start with the AI data center opportunity, which is clearly one of the biggest topics around ST today. You raised your data center revenue ambition to above $1 billion in 2026 and to well over $2 billion in 2027, which does leave a bit of room. What gives you confidence in guiding two years out, and what are the key capacity and supply constraints that controls how we should think about 2027?
No. Clearly, we see very strong demand, and as you know, we now see our revenue for this year above $1 billion in this application. For next year, we see revenue well above $2 billion. So means that we see really a strong demand in moving. Clearly, how we serve this application, we have served through, there are three, there is a thermal flow, we have the power flow and the connectivity flow. When we look at these three flows, clearly for us, the stronger revenues are coming from the connectivity flow, where we have the products that are the silicon photonics, we have the microcontroller, and we have the BiCMOS EIC that are for the optical transceiver.
Here, the demand is very strong, and indeed, what we expect, for instance, for next year is that mostly of our revenue will be in MDRF for around 80% of the billing. Only 20% will be in APMS where we serve the other two flow, substantially that are the thermal one and the power. On the power, clearly, we are marginal today, but we are creating our portfolio for the new architecture at 800 V, and we do expect that to start to have a meaningful revenue after 2028 for the power.
When you think when that does come in 2028 and when that starts to contribute more meaningful, how do we think about that opportunity beyond that in terms of how you are thinking about market share opportunity, et cetera?
At the end, what we may say is that, clearly for AI, we have a significant opportunity. We have the ability to have the portfolio that is serving the optical transceiver as we have all the ingredients, including our ability for the packaging, what will come, let's say, the NPO, the CPO, these kind of things. We think that we are well-positioned in this respect. Then, as I said, we have also the opportunity to grow where today we are not so particularly strong. That is when we talk about the power flow, the power delivery from the grid to the GPU, this is where we may have opportunity to grow, even if not short term. Short term will be mainly driven by the connectivity portion.
Yeah. So on the revenues this year, next year, silicon photonics, how do you see the market share? Right now you've got a significant market share in that space. How do you see that evolving? How do you maintain that market share?
Today, what can I say is that we have a significant number of customers, and these customers are asking us to do long-term agreement. What does it mean, long-term agreement? Means that they are locking, let's say, capacity, volumes, pricing, and also with cash advance for many of these agreements that we are signing. So I think that it's difficult to me to talk about a number in terms of market share, but I think that now, with our positioning, our technology, our PIC100, we are really, let's say, playing a leading role in these silicon photonics.
Okay, so you've talked about long-term agreements. You've got your revenue targets this year, next year, in silicon photonics. Do you feel your capacity is currently in the right place to meet that?
We have to invest. We have to invest in order to follow the demand. We have the infrastructure to do this because we have the 300 mm that is possible for us to increase in slicing and not to create a big, let's say, infrastructure. With this, get a way to create some capacity increase based on how we see the, let's say, the demand evolving. The positive is also that investing in silicon photonics is not an investment that is only specific for that. It's fungible also for other, let's say, technologies. Like, for instance, the microcontroller. This give us maybe in future, if something change in term of mix, the ability to use this investment for other products.
It's not something that if you invest in silicon photonics, then you are locked there and whatever it happens, let's say, you cannot use this capacity for different products in your portfolio. Yes, we will follow. We will invest in order to follow the demand.
Maybe that's a good transition into margins, which is probably the other key topic on top of investors' minds for ST. How should we think about the bridge from today's mid-30s gross margins moving back to that mid-40s target range that you have provided?
Well, the bridge is the following, let's say. Take the margin where we stand today. Today, we are guiding 37% in this quarter, 37% gross margin. This 37% is impacted by one side, still by unloading charges for around 70 basis points. This progressively will disappear. Then we have an impact of around 50 basis points related to the fact that we have some extra cost due to this reshaping program, duplication of products, duplication of technologies from one fab to the other fab. Then the big chunk of the improvement will come from the closing of two 200 mm old fab and two 150 mm for silicon carbide fabs. This will give more than 400 basis points positive impact on our gross margin. Then there will be the mix. I don't know. For instance, silicon photonics is accretive to our gross margin target.
These are the way that we may see, let's say, the evolution of our gross margin starting from now.
Yeah. Manufacturing reshaping is clearly a very important driver of that margin improvement. What are the key milestones we should be watching over the next kind of 18-24 months to gain confidence that things are on track to get that 400 basis points? Maybe if you could talk a bit about the timing of when you expect that.
Clearly, when we talk about the reshaping plan, we have to keep in mind that, let's say, the positive impact of this is a little bit a step function. To gain in term of improvement in your COGS and your cost, you need to close the fab. This is a step function. Either the fab is open or it closed. When we will be in the position to close the fabs is when, let's say, all our customer will have qualified the products and move the products on the new fab, for instance, from the 200 mm to the 300 mm. Today, the plan is in schedule. Means that what is in our hands as a company, creating the capacity, moving the process, duplicating the product on the new fabs, is done. Now we are sampling our customer and, let's say, waiting for their qualification.
When this will happen, let's say, that we will be in the position to close the fabs and so to see this step-up in our gross margin will be at the end of 2027 and maybe early 2028, depending on when we can really close the fab and to shut down the operation in the older fabs.
Yeah. I guess pricing is the other key driver in that margin bridge, which we haven't touched on in much detail as yet. Could you maybe give us some color on current pricing discussions? What product lines have you seen price hikes and what magnitude? How should we think about the trajectory of ASPs for 2026 and 2027 as well?
No. In term of pricing, clearly, coming back to the point that we were discussing before, in which there is definitely an unbalance between your capacity and the demand. Today, we have a backlog and demand that is higher than our capacity. Clearly, it's creating an environment in which you may have the opportunity to increase price. On the other side, you have also to keep in mind that on the input cost, you have a price increase. How the company here is handling this is clearly, let's say, having a price increase in our top line for our customer that at least, I will say, are netting the price increase in the input cost. In reality, we go a little bit beyond that. Let's say we increase price more than what are the input cost, but not in a way that is too much opportunistic.
Means that at the end, we will have some benefit, but will not be the situation similar to what, for instance, after COVID, in which there was a capacity reservation, increased prices significantly. We are increasing price. We will have some benefit of this price increase that are more than offsetting our, let's say, input cost. It means that at the end of this year, for sure the price will not see declining price in 2026. Overall, in the average, we will be, let's say, substantially flattish, slightly increasing. Remind also that there is a portion of our portfolio, while is, for instance, in the consumer distribution, small customer, medium customer, increasing price is not so complex, especially for product like our microcontroller STM32, some analog, some kind of product like that.
But there are engaged customer programs and bigger customer in which increasing price is a little bit more complex also because it's ruled by contracts that are somehow defining the price for this customer engaged programs. This is the reason why at the end we will see substantially pricing flattish, slightly increasing as a combination of increased price and maybe other business in which is more difficult to increase price.
Okay. Across product lines, pricing at least as much as the input cost increases.
This is the minimum. What we intend to do is really, to have a little bit of benefit of this price increase.
You mentioned flattish in 2026. How do you think about that in 2027 as some of these annual contract renewals come up?
But clearly we are not yet discussing pricing for next year. Clearly, what we have increased this year will stay next year. This is something that will not disappear. But I think that at the end of next year, now it's difficult to exactly say where we will position, but will be a year in which clearly the price will be stable, slightly increasing more. That is different from the normal situation that we usually see in our sector, in which pricing normally are going down. But I think if the situation, and today there are all the ingredients to say that will remain as it is today, there will be still a significant gap between the demand and the capacity available.
Maybe it is a good time to pause and ask if any audience have any questions. Yeah. Just at the front.
Sorry? Pricing? No, not really because today the situation is such that at the end, let us say our limitation is more in our ability to serve the customer than to try to use pricing, let us say in order to gain, let us say, business. Today, as I said, we are facing backlog and demand that is well above our ability to serve the market. So reducing price and then not to ship is not really that we are thinking to do at this stage.
Thank you. For your silicon photonics, the business, are you targeting the specific end application like NPO or CPO, or is that something that is kind of determined based on customers that you are working with?
No. In respect to this evolution, NPO, CPO, clearly we have all the ingredients to follow this. This will be driven by our customer. What we have in our hands, we have all the ingredients for this optical transceiver to be in the position, not only with the products but also our ability for the packaging, this kind of activity on which we are developing now this new application to follow the demand of the customer. So we feel ourself well-positioned in order, let us say, to continue to play a significant role in this activity. And this is what we plan and what we have embedded. We are confident in this respect.
Thank you.
Actually, I have a few questions. One, I want to clarify something. When you talk about the gross margin improvement, you talk about multiple things, under absorption, but also closing down multiple factories, and you said by end of next year, beginning of 2028, that should be done. Is that going to be linear or just everything's going to remain in place, and then at the end of 2027 everything shuts down? Or will there be things shutting down along the way? That's one question. Then question, if you could touch on trends within the satellite and mobility business, just what you see there. Thanks.
Now, in respect to the gross margin, we have to say the following. Clearly, we will see, moving forward from the 37% of today, progressively some improvement in the gross margin. The message that I want to pass is that the biggest improvement, it comes from the reshaping plan. The biggest improvement at the 400+ basis point will come, when we will close the fabs. So means that at the end, there will be a certain point at the closing of the fab, when the fab will be shut down, a step function in the gross margin. This does not mean that moving forward from the Q3, there will be some reduction in term of unloading charges, there will be some reduction in term of, extra cost because at the end, we will end this activity of duplication and so on.
So means that mid next year, these extra costs will be very marginal. There will be improvement in the mix, there will be improvement in the manufacturing efficiency. So we will see some progress over the time, in our gross margin improvement. But the biggest portion will come when we will be able to close the fabs. Here is where we expected significant change in our gross margin, and this will come when we close the fab. And when we close the fab will be at the end of 2027, beginning of 2028. Of course, depending on the fact that our customer qualify the product because they need to qualify the product in the new fab. The underlying assumption is the qualification of the customer.
For satellite and fiber?
On the satellite, this is a business that you know for us has been a significant business. Today is a business that is reaching closely $ 1 billion. Is a business in which we will continue to grow in the next three years. Of course, we have a position in term of market share that is very high. With our customers, Starlink, SpaceX, we are representing around 90% of market share. This is not sustainable. When the business is growing, and this business is growing, clearly in our industry, there will be second source, these kind of things. Clearly, the good news that we see here is that this market is expanding with new entrants, and in which we are well-positioned to serve.
This is the reason why is that if one side with our historical customer, we may have, let's say, some decline in the market share, even if compensated by the fact that customer is growing. On the other side, we will have, let's say, new customer coming in. We have already shipping to new customer already today. So what we see for the next three years is that our revenue will remain cumulative well above $ 3 billion. Personal electronic, clearly this year we have a seasonality that is different in respect to the past. We have already commented that. Why? Because at the end, there are some factors. One is the different way to introduce the product by our main customer that is not like in the past that everything was done in the fall. Now they think to split, let's say, the way to introduce product.
This, of course, is impacting somehow, let's say, our revenue. But then there is this new foldable, let's say, cellular phone that they will introduce that is not have onboarding our image sensor. Anyway, we see personal electronic, they are growing, continue to grow. Is a lower pace in respect to other markets, but still growing between low to mid-single digit. So at the end, still contributing to the growth of the company.
On the satellite business, the profitability? I know on the AI, the silicon photonics business profitability is above the average gross margins. What about on the satellite business?
No, satellite business is a business that of course it depends on the product because clearly the profitability is different when we talk about user terminal, when we talk about satellite, when we talk about gateway, is a different kind of profitability. But then when we look at the average of this business, the average profitability, I would say that in line with our gross margin target.
Target, okay.
So at this stage, I would say that these are creative. Yeah.
Any other questions? Maybe coming back to some of your comments earlier on automotive. What gives you confidence that the automotive recovery is more durable across demand, order rates, and channel inventory?
Today, what we see in automotive is definitely demand that is strong. This is clear. We see also that this demand is not short-term but is covering more quarters. We see traction in silicon carbide. We see recovery in silicon carbide. This especially when we look at the European car makers, we see, let's say, a positive trend for what concern this kind of. We do not detect any inventory build-up here. We see that, as soon as we are delinquent in some of our product, especially in BCD, there is immediately escalation. So means that, yeah, clearly there is no inventory in the channel. Unfortunately, we had a little bit of a hiccup during Q2 related to our Singapore fab. Immediately, this was escalated by our customer because they were expecting that we have in Singapore serving automotive for a significant portion.
Yeah, this is the reason why at this stage, we think that this trend is continuing. Since the beginning of the year, we have seen the forecast of our customer moving up, that this is normally not what it happened. Normally, they start the year with a certain level and then, moving forward, let's say, going a little bit down. Now, what we have seen during this year is continue, let's say, upgrade up of the expectation of the customers in term of demand.
In terms of sales channel inventory?
Yeah. We are in a situation that in average, overall, we are back to be in the normal situation. But for some of our products, like for instance, our microcontroller is very lean. After many quarters, let's say, in which our revenues to the distributor were lower than the revenue of the distributors to their customers, in which the inventory has went down. Now, when we look at this inventory, compare to the demand, we compare, let's say, to the final demand, is really below what we consider a normal level of weeks that we should have in inventory. Normal level of weeks is in the range of 12-13 weeks. Now we are situation in which we are much lower than that. But I would say that at this stage, the inventory is more than under control in distribution.
Okay. Maybe more broadly on silicon carbide. Two years ago, investors were worried about EV demand, and today the discussion seems to be shifting towards 800 V adoption and accelerating silicon carbide penetration as well. How do you see the silicon carbide opportunity more broadly evolving from here?
As I was saying before, we see now, let's say, demand increasing in silicon carbide. To be honest, today in silicon carbide, the limitation factor still is our capacity because we are producing silicon carbide at 150 mm. Of course, we do not intend to invest in the 150 mm, but to move to the 200 mm, the silicon carbide. Here we are back to the point of the qualification of the customer. Demand will increase. This year, demand is increasing. This year, revenue will increase double digit. The visibility that we have for next year in term of silicon carbide for our revenues with the programs that we have in our hands is that we will be back at $1.01 billion. The move of the silicon carbide to 200 mm should significantly improve, let's say, the profitability of this line.
We are, let's say, introducing the new generation, from Generation 4, Generation 5. Here we see, let's say, a trend for silicon carbide that definitely is in the recovery phase.
We've got a few more minutes left. Any final questions from the audience?
Still on silicon carbide, can you share an update of the production ramp in the Catania facility for 200 mm? Are you still expecting profitability no earlier than 2027, as you've said before?
In general, talking about the silicon carbide in Catania, in the Power & Discrete. Talking about Catania is such a facility that is quite effective in term of cost. You have not to forget that a significant portion of the investment in Catania has been subject to grants from the European Union. So means that we have a really cost competitive site over there in Catania. Now we need to move to the transfer. Clearly, today is not a secret that in our Power & Discrete , we are suffering. The 6 in production, the fact that we need to improve our mix in term of technology and also in term of mix of customers. But we expect that moving to 200 mm in Catania, that as I said, has a cost structure that is competitive.
Moving the 200 mm in China, Chongqing, that by definition is quite competitive in term of cost structure. This gives us the opportunity really to recover in term of profitability in our Power & Discrete , where of course you can understand silicon carbide is an important portion. Even if it will take time because we are back to the point, let's say, that it's not overnight that we can switch from one fab to the other fab. But this is expecting that we will, let's say, to be back to profitability at the end of next year, early 2028, also in Power & Discrete .
Any other questions? Maybe just to finish things off, you talked about accelerating bookings, improving visibility. What are the key indicators that you're personally watching to determine whether this recovery is sustainable into 2027 and beyond?
As I said before, today what we see in term of demand, in term of backlog is that it's covering more quarters. Today what we see is the fact that is extending not maybe one of two quarters, but well inside 2027. When we look, for instance, to the silicon photonics, as I said before, we have long-term agreements covering more than one year, two, three years. So at the end, this give us some comfort to say that, yes, this entering 2027 and moving forward, we should see, let's say, really our top line growing at a fast pace.
Great. I think that's probably a good place to end things. Thanks again, Lorenzo, for joining us and thanks everyone for the questions.
Thank you. Thank you.