STMicroelectronics N.V. (STMPA) Earnings Call Transcript

Ladies and gentlemen, welcome to the STMicroelectronics Third Quarter 2026 Earnings Release Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] At this time, it is my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead, sir.

Thanks, Sandra, and thank you, everyone, for joining our third quarter 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 Remi El-Ouazzane, President, Retrocontroller, [indiscernible] and RF product group. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the completion of difficult. This call will include forward-looking statements that involve risk factors that could collect the 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 Swan regulatory filing for a full description of these risk factors. We ensure all participants have an opportunity to ask questions during the Q&A session. please limit yourself to 1 question and a brief follow-up. Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO.

Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q3 2026 earnings conference call. I will start with an overview of the third quarter, 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 question. So starting with Q3, our third quarter net revenues of $3.76 billion came in above the midpoint of our business outlook range, mainly due to higher revenue in communication equipment and computer peripheral, driven by AI data center and lower orbit satellite revenues, communication and personal electronics. Gross margin was 37.3% above the midpoint of our business outlook range. No new west GAAP diluted earnings per share was $0.37. During the third quarter, inventory in our balance sheet increased slightly to support the expected increase in Q4 revenues. In distribution, inventory decreased and continued to track below our standard target. We generated positive free cash flow of $351 million. Let's now discuss our business dynamics during Q3. During the quarter, the ongoing recovery and secular growth across the end markets we serve, continue to gain momentum. Demand strengthened further in Q3 with bookings increasing sequentially and book-to-bill remaining well above 2 overall. Book-to-bill was well above 1 in whole end markets and significantly above 2 in communication equipment and computer peripheral and Industrial. Visibility improved inventory distribution continued to trio our standard target, and demand continued to outpace supply across multiple product categories. Automotive revenues were stable sequentially and increased 5% year-over-year. Our solid position in automotive continue to be driven by the application-specific ICs and sensors for core application, electrical powertrain and ADAS. We maintain our automotive design win momentum with OEMs and Tier 1 suppliers across the portfolio of ST product families, including Microcontrollers and Power and Discrete. These wins covered hybrid, electric and internal concussion engine vehicles in areas, including onboard charging, powertrain and active suspension as well as a first award for 48-volt electronic braking. We made progress with our automotive MEMS business, supported by the successful integration of NXP's main sensors, achieving several key customer awards in telematics cockpit control and tire pressure monitoring. We had another important design win with our in-cabin monitoring solutions, and we introduced a new automotive nation so for infrared in cabin sensing, designed to extend driver and occupied monitoring across more vehicles models. Industrial revenues improved 12% sequentially and 40% year-over-year. This solid growth was mainly driven by our general purpose microcontrollers, analog and power conversion products. During Q3, the broad-based recovery in industrial continued and inventory distribution declined further remaining below our standard target. We had design wins across industrial automation, robotics, power systems, building automation, power tools and home appliances. Our portfolio combines intelligent sensing, real-time control and efficient power management to support the transformation of factory automation, robotics and power energy infrastructure and the growing physical AI market. At the Embedded World North America event, we had a demonstration together with NVIDIA illustrating our broad cooperation on robotics. We showed an integrated robotics development paths for digital twin to deployed application based on our inertial sensors microcontrollers and imaging solutions. We are continuing to strengthen these capabilities with new products. Our latest launch is a miniature 6 assist motion sensor with a machine learning core designed to improve accident alerts, robot teaching broad stabilization and structural monitoring. By bringing AI processing into the sensor, systems can reduce energy use and save resources. [indiscernible] processing, we continue to expand our STM32 offering with a strong pipeline of new products and software innovations. You will hear more about this at our STM32 submit on November 3, followed by a dedicated STM32 analyst call on November 18. For Personal Electronics, third quarter revenues came in better than expected, up 12% sequentially and down 4% year-over-year. During the quarter, we had design wins with Secure Solutions Max and imaging sensors and microcontrollers across a variety of devices, including smartphones, gaming insets, airbeds and smart cans. For communication equipment and computer peripherals, third quarter revenues were above expectation, increasing 14% sequentially and 64% year-over-year. This strong growth mainly reflected the contribution of our company-specific cost drivers in AI data center and low earth orbit satellite communications. For AI data centers, we continue to see strong demand driven mainly by our silicon photonic ICs electronic ICs and microcontrollers as well as Power Solutions. This supports our revenue expectation for 2026 of about $1.3 billion. And assuming the current dynamic continues and with the current engagements we have, our revenue ambition of well above $2 billion in 2027 and further growth beyond. 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 third quarter, starting with revenues on a year-to-year basis by reportable segment. Analog product MEMS and sensors grew 8.8%, mainly due to MEMS and to a lesser extent, analog and MEMS. Power and Discrete products increased 11.3%. Embedded Processing revenues were up 24.1%, mainly due to general Parcus micro control. and the RF, optical communication grew 46.2%. By end market, communication equipment and computer peripheral grew 64%. And Industrial, 40% and automotive, 5%, while personal electronics decreased 4%. Year-over-year sales to OEMs and distribution increased 10.2% and 38.8%, respectively. On a sequential basis, by reportable segment, analog product MEMS and sensor increased by 9.4%, Power and Discrete by 2.8%, embedded processing by 5.7% and RF Optical Communication by 13.4%. In market on a sequential basis, communication equipment and computer and peripheral grew 14%; industrial, 12%; personal electronic, 12%, while automotive was flat. Turning now to profitability. Gross profit in the third quarter was $1.40 billion, increasing 32.2% on a year-over-year basis. Gross margin was 37.3%, increasing 410 basis points year-over-year, mainly due to a lower unused capacity charges and better product mix. On a sequential basis, gross margin increased by 250 basis points. Q3 gross margin included about basis point of unused capacity charges and about 40 basis points of negative impact resulting from nonrecurring costs related to our manufacturing shipping product. Looking beyond these near-term effects. Improving our gross margin remains a key priority. We remain committed to achieving the 44% to the 46% gross margin of our intermediated financial model. Once our manufacturing shipping plan is completed. Starting from the approximately 39% gross margin expected for Q4 2016, we see a clear path to margin expansion. First, temporary headwinds, including approximately 40 basis points from unused capacity charges and approximately 30 basis points from nonrecurring costs associated with our manufacturing shipping program are expected to largely disappear during the second half of 2027. Second, we continue to expect more than 400 basis points of structural gross margin improvement from the reshaping of our manufacturing footprint. This benefit is expected to materialize as a step function, either toward the end of 2027 or in early 2028, subject to the shutdown of legacy effects and customers' qualification time. Finally, we expect better mix and price to contribute to margin expansion over time, while input cost increase is expected to be a headwind. The timing and the magnitude of these effects remain more difficult to assess. Moving now to total net operating expense. In the third quarter, this amounted to $979 million, excluding restructuring, non-U.S. GAAP OpEx stood at $972 million, better than the indication we gave in July, reflecting continuing cost dividend. For the fourth quarter of 2026, we expect a non-U.S. GAAP net OpEx to stand at about 35 billion. The sequential increase is mainly due to the calendar base effect net of action. This would lead that the full year 2026 non-U.S. GAAP net OpEx slightly above $3.8 billion, in line with our expectations. In the third quarter, we reported operating income of $367 million, which includes $55 million for impairment and restructuring charges and other related cut costs. These charges are related to the execution of our company-wide program to reshape our manufacturing footprint and to resize our global cost base. Q3 operating income also included a $7 million in purchase price allocation effects from our acquisition of NXT's MEMS sensor business. Excluding these items, Q3 non-U.S. GAAP operating income stood at $429 million. And non-U.S. GAAP operating margin was 11.4% with analog products mean sensor at 14.1%. Power and Discrete are negative 17.1%. Embedded processing at 23.1% and RF Optical Communications at 26.2%. Third quarter 2026 net income was $291 million compared to $237 million in the year ago quarter. Diluted earnings per share were $0.31 compared to $0.26 Non-U.S. GAAP net income stood at $344 million and non-U.S. GAAP diluted earnings per share stood at $0.37. Net cash from operating activities totaled $1.02 billion in the third quarter compared to the $549 million in the year ago quarter. Net CapEx was $643 million in the third quarter compared to $401 million in the year ago quarter. Free cash flow was positive at $351 million in the third quarter compared to the positive $130 million in Q3 2025. Inventory at the end of the quarter was $3.25 billion compared to $3.19 billion in Q2 2026 and $3.17 billion in Q3 '25. Day sales of inventory at quarter end were 126 days better than our expectation unchanged from the previous quarter and compared to the 135 days in the year ago quarter. Cash dividends paid to stockholders in the third quarter of 2026, totaled $83 million. In addition, ST executed a share buyback of $91 million. as to maintain its financial strength with a net financial position that remains solid at $2.11 billion as of September 26, 2026 reflecting total liquidity of $5.31 billion and total financial debt of $3.21 billion. Following the exercise of the option for the early redemption of ST's convertible debt due in 2027, bondholders exercise their conversion rights on the total $750 million compatible bonds. ST settled the bonds on a net share basis, delivering $750 million in cash and about 4.2 million shares from treasury stock. Finally, while we are not providing a quarterly indication for 2027. For modeling purposes, please note that 2027 will have 86 calendar days in Q1, 91 in Q2, 91 in Q3 and 97 in Q4. Now back to Jean-Marc, who will comment on our outlook.

Thank you, Lorenzo. Now let's move to our business outlook for Q4 2026. We are expecting Q4 revenues for $4.15 billion, plus/minus 30 basis points at the midpoint. Our Q4 '26 net revenues will increase 10.5% sequentially and 24.7% year-over-year. We expect our gross margin to be at about 39%, growth minus 200 basis points, including about 40 basis points of unused capacity charges. This business outlook does not include any impact of potential further changes to global trade tariffs compared to the current situation. For 2026, the midpoint of this outlook translates into full year 2026 revenues of about $14.5 billion, representing a 22.8% year-over-year increase. Beyond the cyclical recovery across our heads, the year-over-year growth is supported by ST company-specific growth drivers, including AI data centers and no earth orbit satellite communications. Gross margin is expected to be about 36.4% Non-U.S. GAAP gross margin is expected to be about 36.6%, representing an improvement of 270 basis points versus the fiscal year 2025. To conclude, we continue to see a very strong demand for our AI data centers and low earth orbit satellite communications products and technologies alongside an ongoing cyclical recovery in automotive and industrial. With demand across many of the markets we serve, exceeding available supply we are expanding capacity in line with ST strategic road map growth opportunities. At the same time, improving profitability remains a key priority as we progress towards our intermediate financial model. As mentioned earlier by Lorenzo, this is supported by our company-specific growth drivers, combined with execution of our co-pay program to reshape our manufacturing footprint and resize our global cost base. Before handing over to Jerome, I would like to mention a few corporate developments. Earlier this month, the [indiscernible] XB to be reappointed in my current role for an additional year. I was honored and pleased to accept the proposal. By the appointment of Sherman Managing Board and ST's President and CEO, will be proposed for shareholder approval at ST's 2027 Annual General Meeting of Shareholders. Finally, earlier today, we announced updates to ST organization aimed at better aligning our vision and business objectives with evolving market dynamics. This will strengthen the coordination between our strategy, technology and product formats, accelerate innovation and time to market ultimately supporting our long-term growth opportunities. Remi El-Ouazzane is confirmed as President, Member of the Executive Committee and Head of Microcontrollers, digital, RF and optical communication products . He will also take on leadership on the imaging sensor group and be appointed ST's Chief Technology Officer. Marco Cassis is confirmed as President member of the Executive Committee and Head of Analog Power & Discrete and MEMS product. He will also take on leadership of R&D for Analog and Power & Discrete and MEMS technologies and be appointed as TCF Strategic Officer. The new organization and the related adjustment to our reportable segments will take effect on January 1, 2027 with implementation of the changes to be completed by the end of March 2027. Thank you, and we are now ready to answer your questions.

[Operator Instructions] Our first question comes from Josh Buchalter from TD Cowen.

Congrats on the results. I guess to start, I wanted to ask about some of the comments you made on gross margins. So I believe you said after the manufacturing transition headwinds abate, that would be a step function increase of 400 basis points to gross margin. Is that sort of going to hit all at once? Because I think you previously said we shouldn't expect gross margins to get to 40% until sort of second half '27 or first half '28. So I guess, is the expectation that it very quickly goes from 40 to 44?

Maybe I'll take this question. Clearly, in terms of gross margin, we -- what we said is that the impact of our reshaping planning manufacturing, it will factor in, in our gross margin once we will close our fabs. You know that there are 4 fabs, legacy fab that we intend, let's say, to close. And this, let's say, clearly, the impact, the positive impact will be visible when we will, let's say, be able to close. And this will happen in the second part of next year, let's say, so means that will happen towards the end of 2027 and, let's say, at the beginning of 2028. Clearly, here, it depends on the acceptance of the customer for 3 of these terms up substantially, let's say, we believe that we are holding our endless it's still some discussion for [indiscernible]. In this respect, I would say that in any case, we will continue to see improvement of our gross margin moving forward. Long-term various quarter also due to the fact that we have a positive part of the mix and improvement in terms of enacting variance. And as I was saying, progressively, let's say, reducing our unloading charges and reducing also the temporary impact of negative cost due to the activity to transfer product from the legacy fab to the new fab, 300-millimeter or in case of silicon carbide to 200-millimeter.

Lorenzo, a follow-up. Any help you can give us with either like context or any sort of tighter range on the data center contribution for next year of well greater than $2 billion. And any help you can give us on how much you expect to be MCUs versus electronics and picks and power?

Josh, your question was on revenues.

Yes, revenue contribution from data center.

Okay. So I will give the overall picture and Remi will comment on the detail. Well, as I said during my speech. This year, we will generate about $1.3 billion revenue for data center, 85% coming from MDR, so mainly microcontroller, silicon photonics and electronic ICs on bins. Next year, I will not give in detail, okay, we will be well above doubling this number, and we will communicate in January, of course, okay, number for '27 and an indication for '28. Or maybe, okay, Remi, you can comment some more detail?

Sure. My [indiscernible] in data centers will see a still growth year-on-year. to 2x revenue size, I won't give you a leg-up number. The contribution of silicon photonics next year will start to grow and become very relevant. I would say that actually, it would be in tens of percent of the net revenue consideration. We will not share the exact details. As by CMOS, I think the bulk of the effect we will see is 28 onwards because we've won a lot of buckets over the past quarter. And I think that you'll see the effects mainly in '28, even though it would be not negligible in '27, but I guess, from a contribution standpoint, it would be very, very visible in '28.

About $1.3 billion this year, well above doubling next year, and we continue to grow in '28, and we will communicate more detail in January.

The next question comes from Francois-Xavier Bouvignies from UBS.

I had just a question on the gross margin as well. I mean a bit more short term here about the I was looking at the history, and it's a bit all over the place, the gross margin direction in Q1, and it seems to be that in up cycle, it's up quarter-on-quarter, downcycle it's down quarter-on-quarter. The average is down 70 bps, but it's very, very diverse. So I wondering if you could help us on the direction on the gross margin given all the moving parts right now for the Q1, please?

For Q1 we see gross margin. Clearly, we don't give indicate of the gross margin of the following quarter. But what I can say is that we see gross margin at least at the current consensus for Q1, let's say, well, more than that, I would not say more on that at this stage.

Okay. And maybe 1 on the satellite. Could you maybe update on -- you mentioned data center, but what about LEO into next year? How is it shaping? I mean, you kept your guidance for a long time. It's a broad guidance of above $3 billion, but I was wondering if you could give more color on this year and next year as you get more visibility, please?

I pass the question directly to Remi.

Yes. We see a lot of momentum across the board not only in SpaceX, but other programs that are going to be ramping, I would expect actually next year to be as good, if not better than this year in terms of revenue contribution. As a matter of fact, I do believe that we are right now working hard to go and find more capacity to enable even more volume. So that's the momentum we're into [indiscernible] kind of very consistent with what we ring from 1 of our customers' earnings calls in terms of the momentum they getting.

Sorry, Remi, you mean that revenue contribution as a percentage of revenues or just growing on absolute, just to clarify this point?

My comment was the latter or the new market not larger than this year.

The next question comes from Sebastien Sztabowicz from Kepler Chevreux.

On a global basis, what kind of visibility you have for the coming quarters? And where the backlog is standing at the end of Q3. And attached to that, on the revenue side, how do you see the seasonality building up for '27? Should we expect a better than usual seasonality?

Your line was breaking up. Can you say the question , what is the seasonality for Q1, you were asking?

No seasonality for '27, do you expect better than usual or normal seasonality in '27?

Okay No, the seasonality will be different. Why? Because as I explained a few minutes ago, we are on the dynamic where we are basically rebalancing, okay, the spread of ST across the [indiscernible] vertical. As an example, okay, at the midpoint of the guidance we provide, okay, the automotive verticals weight total US will be 35% and then, okay, industrial will be, let's say, between 22, 24, CCO some the digital infrastructure also data center, lower satellite and some legacy will be slightly above 20% and personnel electronics 22%. For 2027, okay, we expect, okay, to see CCP continuing to grow. So you see the balance between the verticals will be significantly different. So of course, it will impact the seasonality. So this is some indication we will give okay clearly in January.

The first question was on a backlog level day and what kind of visibility do you have for the coming quarters based on your backlog right now?

You see, okay, with a book-to-bill that was well above to, okay, and the revenue of $3.75 billion. Now our backlog is well above $20 billion. So it's representing compared Q4 midpoint of the guidance, now about 5 quarters of revenue which start to be appropriate visibility to drive our operation. Now we are still far the peak of 2023 and 2022.

The next question comes from Janardan Menon from Jefferies.

I'll just start with a sort of clarification and then I have a question after that, but both on gross margin. You had said that you don't expect Q1 gross margin to be to be at least in line with current consensus. I'm just looking at it both visible Alpha and Bloomberg about 38%. So are you suggesting that gross margin could decline slightly quarter-on-quarter, given that you are guiding at 39% in Q4? Then the question also is on gross margin. So your target model, medium-term target model is 44 to 46. If you take more than 400 basis points from the fab conversion, that means you're sort of saying before that comes through, it's about 41%-ish. So should we assume that between Q4, you are at 39% and let's say, Q3 2027, your gross margin will essentially go up by will take around 200 basis points. And then as we go beyond that, you will get the full effect of 400, 450 basis points? And when you gave that target model, you did not have so much of visibility on the AI side. where you've said that your margin is above the target model on areas like silicon photonics. So given that, that is so strong, is there a chance that your gross margin in this cycle with the help of that as well as pricing could actually end up above that target model?

So basically, Janardan, you want to know the gross margin in Q1 and 2027, right? I will let Lorenzo guide for the margin going forward.

At the end, clearly in the past, and we said also before, clearly, 1 of our focus is to increase our sociability, increase the gross margin. One of the key elements on the gross margin definitely will be our reshaping plan. As we said, our shipping plan let's say, will factor in, in our gross margin towards the end of next year and in 2028, let's say, substantially. And this is 1 of the important element -- the other important element is that growth that we are in AI and the growth in the AI infrastructure and the growth that we have, let's say, now in the industrial, that is very significant. As you have seen credit for our gross margin. And this, we do expect a continuing, let's say, progressively for in 2027, so bringing a positive impact on the gross margin. As I said about the gross margin over the Q1 quarter, at this stage for me, I don't want to guide, but I sit what I said is that we'll be at least at the level of the current consensus. And what's to say more than that, clearly, let's say, there are other elements that we need to consider and 1 of the elements that you have to keep in mind is that we are also in an inflation, let's say, environment for which there is a cost increase in our input cost. This will, let's say, have some impact, but on the other side, there are positive. And as I said, the part of the improvement manufacturing efficiency, the mix that will enter and also some continued price increase on our top line.

Understood. Just on the first answer. So you suggested I understand that because of the strong AI growth, you could end up above the target model. Is that the way I should understand your answer?