STMicroelectronics Q2 2024 Earnings Report

STMicroelectronics EPS Results

• Actual EPS: $0.38
• Consensus EPS: $0.34
• Beat/Miss: Beat by +$0.04
• One Year Ago EPS: $1.06

STMicroelectronics Revenue Results

• Actual Revenue: $3.23 billion
• Expected Revenue: $3.55 billion
• Beat/Miss: Missed by -$315.21 million
• YoY Revenue Growth: -25.30%

STMicroelectronics Announcement Details

• Quarter: Q2 2024
• Date: 7/25/2024
• Time: Before Market Opens
• Conference Call Date: Thursday, July 25, 2024
• Conference Call Time: 3:30AM ET

STMicroelectronics (NYSE:STM) is a global semiconductor company headquartered in Geneva, Switzerland, formed through the 1987 merger of SGS Microelettronica and Thomson Semiconducteurs. The company designs, develops and manufactures a broad range of semiconductor products and solutions that serve multiple end markets worldwide. ST’s offerings span from basic components to integrated systems, emphasizing energy-efficient and high-performance devices for modern electronics.

Product categories include microcontrollers (notably the widely used STM32 family), analog and mixed-signal ICs, power MOSFETs and power-management devices, MEMS and sensors, image sensors, and discrete semiconductors. ST also provides application-specific solutions and reference designs for battery management, motor control, secure connectivity and system integration, enabling customers to accelerate product development across consumer, industrial and automotive applications.

The company serves a diverse set of industries, with particular strength in automotive electronics, industrial automation, consumer devices, communications equipment and Internet of Things applications. ST operates an international footprint of research and development centers, manufacturing, assembly and test sites across Europe, the Americas and Asia, supporting global customers and supply-chain needs while investing in advanced process technologies and packaging capabilities.

ST positions itself as a technology partner to OEMs, systems integrators and electronic designers, offering software, development tools and ecosystem support alongside its silicon products. The company’s long-standing presence in the semiconductor sector and broad product portfolio make it a key supplier for firms seeking power-efficient, reliable components for complex electronic systems.

STMicroelectronics Q2 2024 Earnings Call Transcript

Key Takeaways

• ST reported Q2 net revenues of $3.23 B, above outlook midpoint but down 25.3% YoY, with gross margin at 40.1% (vs. 49%), operating margin 11.6% (vs. 26.5%), and net income of $353 M (-64.8%).
• For Q3, ST expects ~$3.25 B in revenues (-26.7% YoY, +0.6% sequentially) and ~38% gross margin (incurring ~350 bps of unused capacity charges), and has cut 2024 revenue guidance to $13.2–13.7 B (-~22% at midpoint).
• The industrial end market saw >50% YoY revenue decline due to ongoing weak demand and severe inventory correction, while automotive fell ~15% YoY with delayed EV recovery and Tier 1 backlog adjustments, partially offset by personal electronics gains from engaged customer programs.
• ST continues strategic investments with a €5 B multi-year plan (including €2 B EU support) to build a vertically integrated 200 mm SiC facility in Catania, alongside ongoing 300 mm silicon and 200 mm SiC conversion, backed by €2.5 B CapEx for 2024.
• Despite the downturn, ST secured key design wins in automotive SiC and IGBT traction inverters, MCUs and sensors, forged a long-term SiC supply deal with Geely, and rolled out new industrial solutions (wireless MCUs, AI sensors, eSIM), while maintaining tight cost control and strong liquidity (net cash $3.2 B, free cash flow $159 M in Q2).

Presentation

[Operator]

Ladies and gentlemen, welcome to the STMicroelectronics second quarter 2024 earnings release conference call and live webcast. I am Moira, the call's 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 * and one on your telephone. For operator assistance, please press * 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, madam.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Thank you, Moira, and good morning. Thank you everyone for joining our second quarter 2024 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, Analog, Power, and Discrete, MEMS and Sensors Group, and Head of STMicroelectronics Strategy, System, Research, and Applications, and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST's result to differ materially from management expectations and plans.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

We encourage you to review the safe harbor statement contained in the press release that was issued, that was issued with the results 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. Now I'd like to turn the call over to Jean-Marc, ST President and CEO.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Thank you, Céline. Good morning, everyone, and thank you for joining ST for our Q2 2024 earnings conference call. Let me begin with some opening comments. Starting with Q2. Second quarter net revenues of $3.23 billion were above the midpoint of our business outlook range, driven by higher revenues in personal electronics, partially offset by lower than expected revenues in automotive. Gross margin of 40.1% was in line with expectation. On a year-over-year basis, Q2 net revenues decreased 25.3%, mainly driven by a decline in industrial and to a lesser extent in automotive. Gross margin decreased to 40.1% from 49%. Operating margin decreased to 11.6% from 26.5%, and net income decreased 64.8% to $353 million.

[Jean-Marc Chéry, CEO at STMicroelectronics]

On a sequential basis, net revenues decreased 6.7%. For the first half of 2024, net revenues decreased 21.9% year-over-year to $6.7 billion, mainly driven by a decrease in the microcontrollers and power and discrete segments. We reported gross margin of 40.9%, operating margin of 13.8%, and net income of $865 million. During the quarter, contrary to our prior expectations, customer orders for industrial did not improve and automotive demand declined. For Q3 2024, our third quarter business outlook is for net revenues of about $3.25 billion at the midpoint, decreasing 26.7% year-over-year and increasing 0.6% sequentially.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Gross margin is expected to be about 38%, impacted by about 350 basis points of unused capacity charges. For the full year 2024, overall, in Q2, customer order bookings did not materialize as expected. Therefore, we now anticipate a delayed recovery in industrial and a lower than expected increase in automotive revenues in the second half of the year versus the first half. We will now drive the company based on the plan for full year 2024 revenues in the range of $13.2 billion-$13.7 billion. Within this plan, we expect a gross margin of about 40%. By segment, on a year-over-year basis, analog product, MEMS and sensor was down 10%, mainly due to imaging. Power and discrete products decreased 24.4%, with a decline both in power and in discrete products.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Microcontrollers revenues declined 46%, mainly due to general purpose microcontrollers. Digital ICs and RF products declined 7.6%, with a decrease in ADAS more than offsetting an increase in RF communications. By end market, industrial declined by more than 50%, automotive by about 15%, and personal electronics by about 6%, while communication equipment and computer peripherals increased by about 2%. Excluding the impact of the change in product mix in an engaged customer program, personal electronics was up about 14%. Year-over-year, sales decreased 14.9% to OEMs and 43.7% to distribution.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Overall, Q2 net revenues decreased 6.7% sequentially, with a decline of 4.3% in analog products, MEMS, and sensors, 8.8% in power and discrete products, 15.7% in microcontrollers, while digital ICs and RF products increased 8.6%. By end market, industrial was down about 17% sequentially, automotive down about 8%, and personal electronics down about 5%, while communication equipment and computer peripheral was up about 15%. Gross profit was $1.3 billion, decreasing 38.9% year-over-year. Gross margin decreased to 40.1% compared to 49% in the same quarter last year. The decrease was mainly due to the combination of product mix and sales price and higher unused capacity charges.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Operating margin was 11.6% compared to 26.5% in the year-ago period. All reportable segments were down on a year-over-year basis, with a main decline in microcontrollers and power, and discrete. On a year-over-year basis, Q2 net income decreased 64.8% to $353 million, compared to $1 billion in the year-ago quarter. Earnings per diluted share decreased 64.2% to $0.38, compared to $1.06. Net cash from operating activities decreased to $702 million in Q2 versus $1.31 billion in the year-ago quarter. Net CapEx in the second quarter was $528 million, compared to $1.07 billion in the year-ago quarter.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Free cash flow was $159 million, compared to $209 million in the year-ago quarter. Inventory at the end of the second quarter was $2.81 billion, compared to $3.05 billion in the year-ago quarter. Days sales of inventory at quarter end were 130 days, compared to 122 days in the previous quarter and 126 days in the year-ago quarter. During the second quarter, ST paid $73 million of cash dividends to stockholders, and we executed an $88 million share buyback, completing our $1.04 billion share repurchase program launched in 2021.

[Jean-Marc Chéry, CEO at STMicroelectronics]

On June 21, 2024, ST announced the launch of a new share buyback plan totaling, sorry, up to $1.1 billion to be executed within a three-year period. ST's net financial position of $3.2 billion as of June 29, 2024, reflected total liquidity of $6.29 billion and total financial debt of $3.09 billion. I will now go through a short update on some of our strategic focus areas. As mentioned, contrary to our prior expectation, we saw a decline in automotive demand during the quarter. This was characterized by some reduction in backlog already in Q2 and reduced forecasts from some of our customers, including adjustments related to electric vehicle production decrease, and with inventory adjustments going along the supply chain. We continue to execute our strategy supporting car electrification during the quarter.

[Jean-Marc Chéry, CEO at STMicroelectronics]

We had multiple wins in power discrete with both silicon carbide and IGBT technologies for traction inverters at leading car manufacturers. We also won business with our automotive Smart Power technology for power domain control in new electrical and electronic architectures. We announced a long-term silicon carbide supply agreement with Geely Auto for silicon carbide power devices in their battery for electric vehicles. We have also established a joint lab to share knowledge and explore innovative solutions related to evolving automotive architectures. In car digitalization, we saw further momentum with our portfolio of automotive microcontrollers. This includes wins with our later generation Stellar MCUs in a body domain application with a leading European car maker, as well as other MCU wins for battery management and HVAC systems.

[Jean-Marc Chéry, CEO at STMicroelectronics]

In automotive sensors, we introduce a six-axis module that enables a cost-effective solution for functional safety applications, such as precise positioning in navigation systems and digitally stabilizing cameras, lidars, and radars. Our design win activity in smart mobility highlights the robustness of our technology and product portfolio, positioning ST to leverage the structural growth of this key market. In industrial, during the quarter, the anticipated stabilization of demand did not materialize as expected, and customer orders did not improve, in particular, for general purpose microcontrollers. We continue to see weakness in the market for short cycle businesses, such as power tools, residential solar, lighting, and appliances, and more resilience in longer cycle business, such as energy storage, grid, electric vehicle charging, and process automation. This has resulted, entering the second half, in a weaker backlog than expected.

[Jean-Marc Chéry, CEO at STMicroelectronics]

In the short term, we are facing a longer and more pronounced correction in industrial than what we anticipated due to progressive weakening of end demand, amplified by a severe inventory correction along the industrial market value chain. In this environment, we continue to work with our customers to design in our product of today and to invest in R&D to build the next generation of products. A good example is what we are doing to build on our leading position in industrial embedded processing solutions. ST was present at the annual Embedded World Show in Germany, where over 5,000 people visited our booth. There, we receive very positive customer feedback on the new products and solutions we announced shortly before, including low-cost, wireless, and high-performance microcontrollers, as well as new 64-bit microprocessors for industrial applications.

[Jean-Marc Chéry, CEO at STMicroelectronics]

We also announced an innovative smart sensor with edge AI processing for motion tracking, industrial, and robotics application. We also introduced the first embedded SIM in the industry to meet the incoming GSMA standard for eSIM IoT deployment. This simplifies the management of large numbers of connected devices in support of the proliferation of secure, cloud-connected, autonomous things. Finally, we also continue to build momentum on edge AI enablement for our customers. In early June, the ST Edge AI Suite came online, bringing together tools, software, and knowledge to simplify and accelerate edge AI application development. The suite supports both optimization and deployment of machine learning algorithm, starting from data collection to final deployment on hardware, streamlining the workflow for different type of users.

[Jean-Marc Chéry, CEO at STMicroelectronics]

We are confident that our ongoing design in and development efforts with customers and distributors in the industrial sector will position ST to capitalize on the net market upcycle more effectively. In personal electronics, communication equipment, and computer peripherals, our engaged customer programs are running as expected.... Moving now to manufacturing. In May, we announced a strategic update with the construction of a new high-volume, 200-millimeter silicon carbide manufacturing facility in Catania, Italy. This facility will make power devices and modules, and will include both device manufacturing and testing, and packaging. In conjunction with the silicon carbide substrate manufacturing facility being prepared on the same site, these facilities will collectively form ST's silicon carbide campus. This development will fulfill our vision of a fully vertically integrated manufacturing hub for the mass production of silicon carbide devices, all within a single location.

[Jean-Marc Chéry, CEO at STMicroelectronics]

The program is projected to be a EUR 5 billion multi-year investment, including EUR 2 billion provided by the state of Italy in the framework of the European Union Chips Act. During the quarter, we also announced the expansion of the existing multi-year 150 millimeter silicon carbide substrate wafer supply agreement with SiCrystal. Now, let's move to our third quarter 2024 financial outlook and our plans for the full year 2024. For Q3, we expect net revenues of about $3.25 billion at the midpoint, representing a year-over-year decline of 26.7% and a sequential growth of 0.6%. Q3 gross margin is expected to be about 38% at the midpoint, impacted by about 350 basis points of unused capacity charges.

[Jean-Marc Chéry, CEO at STMicroelectronics]

For 2024, entering the second half with our current Q3 and year-end backlog and with ongoing market dynamics, we have further revised our plan for 2024 revenues, which we now see in the range of $13.2 billion-$13.7 billion, representing a decline of about 22% at the midpoint compared to 2023. Within this plan, we expect a gross margin of about 40%, impacted about 270 basis points of unused capacity charges at the midpoint of our 2024 full year indication. To conclude, following an unprecedented chips shortage situation, the current semiconductor cycle is impacted by a number of factors.

[Jean-Marc Chéry, CEO at STMicroelectronics]

The desynchronization between the values and markets in terms of demand normalization or weakening and inventory adjustments or corrections, the available capacity moving from tension to excess, and the nonlinear acceleration of structural trends towards sustainability in areas like renewable energies, electrification of mobility, right to repair and second-hand devices. This backdrop clearly affects the automotive and industrial end markets. As we have pointed to in our strategy, both of these markets are undergoing a deep transformation, also driven by a number of mega trends. This, coupled with the current cycle dynamics I have just mentioned, is bringing both opportunities and challenges in the short, medium, and longer term for ST and for our customer equally. In the short to medium term, we are working to best adapt our operating plans to this complex situation. We have already implemented measures and are adjusting them in response to the evolving situation.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Medium to long term, we continue to be convinced that this transformation will provide the basis for our growth ambition. We will be hosting a Capital Markets Day - markets day, sorry, on November twentieth in Paris, to provide an update. It will be an in-person event, and we will also webcast it live. Thank you, and we are now ready to answer your questions.

[Operator]

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press * and one on their touchtone telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press * and two. Participants are requested to use only handsets while asking a question. Anyone who has a question or a comment may press * and one at this time. The first question is from Jérôme Ramel, from BNP Paribas Exane. Please go ahead.

[Jérôme Ramel, Analyst at BNP Paribas Exane]

Yeah, good, good morning. One question, Jean-Marc, you, you mentioned on the gross margin, the impact of the underloading cost, but also a little bit of price. Could you update us on the pricing environment for, globally speaking and, and specifically for industrial and, automotive?

[Jean-Marc Chéry, CEO at STMicroelectronics]

...To Jérôme, I will let Lorenzo comment at this point.

[Lorenzo Grandi, CFO at STMicroelectronics]

Good morning. Good morning, everybody, and good morning, Jérôme. But in terms of price, I would say that it's consistent on what we have said also last quarter. We don't see at this stage, let's say, a significant difference in the price environment. Of course, it's different than last year. Now, what we see is that there is some pressure on the pricing, but overall, for the company, it remains at the low single-digit. There is some difference between the market. It's higher, let's say, in industrial, definitely. It's higher, especially when we look at our product line of the microcontrollers. Here, we are more in the mid single-digit. While when we look at automotive, it remains, let's say, the low single-digit.

[Lorenzo Grandi, CFO at STMicroelectronics]

There is no particular, as I said before, difference in respect to what we were expecting last quarter.

[Jérôme Ramel, Analyst at BNP Paribas Exane]

Thank you. And maybe a quick follow-up. Jean-Marc, you said on the short term, there's some overcapacity for the industry and for you. How are you addressing it, and in terms of CapEx, and maybe a ramp up of the different manufacturing site you had in mind? Thank you.

[Jean-Marc Chéry, CEO at STMicroelectronics]

We are adjusting the working hour of our manufacturing already in Q3, definitively, and it will follow in Q4. That's the reason why, okay, we have after the revised down of our sales and operating plan, we have immediately adjusted, okay, this activity. And of course, okay, we are cutting all the discretionary costs. And as I mentioned already, we have put the company on a hiring freeze. Well, this is a conjunctural measure. Now, okay, what is important for us is to focus to come back on the run rate of revenue we have last year.

[Lorenzo Grandi, CFO at STMicroelectronics]

If I may add, Jean-Marc. In respect to the CapEx, we confirm that, we are going to spend this year something in the range of EUR 2.5 billion. That is, and this is mainly addressing our conversion to, the, a, let's say, the 12-inch, that, and the, let's say, for the silicon carbide, you know, we have the plan, as we were mentioning before, about the campus to move rapidly our silicon carbide from the 150 mm to the 200 mm. These are the main, let's say, project that we have in this, in this, CapEx, of two point five, and these are confirmed.

[Jérôme Ramel, Analyst at BNP Paribas Exane]

Thank you.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Thank you very much, Jérôme. Next, question, please, Moira.

[Operator]

The next question is from François-Xavier Bouvignies, from UBS. Please go ahead.

['François-Xavier Bouvignies', Analyst at UBS]

Thank you very much. My first question is on the industrial and microcontroller general purpose, mainly. Obviously, it's sharply down, and I think there is kind of this talking happening. However, there is this I mean discussion on the market that maybe you would have much higher inventories that maybe to peers, you know, when you listen to peers, I mean, Renesas, and Microchip and TI, they said they are through the worst and that they are proactively, you know, or they did proactively manage inventories in the channel. So my question is like, I would explain why you saw a bit later than everybody else, you know, the industrial downturn and maybe why it's sharper in terms of downside.

['François-Xavier Bouvignies', Analyst at UBS]

So my question is, what's your view on this comment that maybe you have higher inventory than relative to peers that would explain this sharper decline, and more importantly, how it plays out, you know, for the rest of the year? How long this understocking would last for you? That would be my first question.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Okay, thank you. Well, I will not comment the benchmark with our competitor. But first of all, TI, they have a different go-to-market approach with the distribution, and they have much more inventory in house. About Microchip, I invite to check the number in detail, and for the other competitor, I will not comment. No, but we, let's say, first of all, okay, we have the widest product portfolio on microcontroller, and again, we are addressing all the region of the world. And as I mentioned in my speech, we are really addressing as well short cycle business and more long cycle business.

[Jean-Marc Chéry, CEO at STMicroelectronics]

On the sharp short cycle business, in fact, the end demand fluctuated a lot during the recent quarter, for different reason. And the inventory is not only at our distribution channel, and not only at EMS, is in the value chain at system maker and including at the end customer. So that's the reason why, first of all, it has taken much longer than the other, okay, to first absorb the excess of inventory at the end customer or system maker. And now, yes, there is still, let's say, some excess of inventory at distributor and EMS.

[Jean-Marc Chéry, CEO at STMicroelectronics]

The point I would like to recall for this business, this business is a business which suffers the most during the shortage of semiconductor, under the pressure of car makers, tier one, and big industrial working in the field of energy, power conversion, and, I have to say, energy transportation, electric vehicle charging. They suffer the most. That's the reason why, okay, when we allocated, we started to allocate capacity we have. I repeat, we negotiated with them warranted volume and non-cancelable order. So means up to March 2023, we ship according backlog they give to us, and this order were not cancelable. Most likely, we have assessed that already at this period of time, their end market were already on a, let's say, a down cycle, and that is the reason why they have continued to accumulated inventory.

[Jean-Marc Chéry, CEO at STMicroelectronics]

So when we have completely removed this policy of non-cancelable order, of course, we have just adopted a new policy and started to decrease our POP, and so on and so forth. But it will take time, and it will take time. Why? Because it is not only an inventory correction, it is also a real economic problem for this short cycle business. Now, we see a different path for the long cycle business. I repeat, renewable energy, what is related electrification of mobility, what is related, charging station, and so on. Here also, to a certain extent, some inventory were present, but we expect that starting Q4, this will start to grow again.

[Jean-Marc Chéry, CEO at STMicroelectronics]

So the reason why ST has a profile a little bit longer in terms of restart is related first to our wide exposure on general purpose micro, and we have the widest portfolio. The fact that in 2022, 2023, up to March, we have not considered order policy that increase the inventory for sure, that now we have to digest. Unfortunately, in 2024, this businesses has a problem of demand and demand. That the reason why it take longer. For the rest, okay, we behave very similarly our competitor, and they have a similar profile in terms of business recovery for this year. Well, and for the benchmark, okay, be careful of the rumor.

['François-Xavier Bouvignies', Analyst at UBS]

Right. Thank you, Jean-Marc. And maybe my follow-up, if I may, is on the automotive. You mentioned that it weakened. I mean, maybe you could explain a bit in details what exactly, you know, is happening in terms of automotive, and if you could remind us what you expect for automotive industrial for the full year, what your full year is based on for a division would be great. And I will leave it there. Thank you.

[Jean-Marc Chéry, CEO at STMicroelectronics]

But on automotive, there is, let's say three points. Well, the point number one, let's classify on legacy. On legacy, starting in May, we have seen, our, main tier one, let's say, pulling out the consignment stock, less pieces, because, you know, the tier one now, they came back with carmaker with two weeks off, so they have a very short-term visibility. And, and starting end of May, they, they start for us, okay, to pull out from our consignment stock, less pieces. So as a consequence, they cancel some frame order. So already in Q2, we have been impacted about less revenue than the forecast that was based on our backlog, about $100 million. This point number one.

[Jean-Marc Chéry, CEO at STMicroelectronics]

The point number two, still on this legacy business and, let's say, usual application in the automotive, they have declined, okay, their forecast for H2. So that's the reason why we have been obliged to revise down the forecast for automotive legacy, already impacted in Q2 about, let's say, $100 million and, let's say, about $350-$400 million for H2. The second point is the growth for what is related to electric vehicle. We will grow in H2, all of our components related to electric vehicle, but less than forecasted. And you know why? Because the production of electric vehicle in the world has been adjusted now below 13 million of cars.

[Jean-Marc Chéry, CEO at STMicroelectronics]

However, I confirm that H2 will be a growth driver for ST, for all the components related to electric vehicle, particularly for silicon carbide, and particularly everywhere, okay, in China and also with our main customer. That's the reason why we confirm our silicon carbide revenue, about $1.3 billion this year. Well, then, the third element is what we already mentioned. That is a little bit, let's say, increasing. You know that last year, one of our main customer for ADAS built a certain level of inventory. He is adjusting in Q3 a little bit more the inventory with us. So all in all, the automotive for ST will grow in H2.

[Jean-Marc Chéry, CEO at STMicroelectronics]

I have to say 4% versus H1, about $100 million, with a growth on electric vehicle with silicon carbide, offset by the adjustment of the legacy from our Tier 1 and some inventory adjustment from our main customer in ADAS. So this is what we face in H2 on automotive.

['François-Xavier Bouvignies', Analyst at UBS]

Thank you, Jean-Marc.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Thank you very much. Next question, Moira?

[Operator]

The next question is from Stéphane Houri from ODDO BHF. Please go ahead.

[Stéphane Houri, Analyst at ODDO BHF]

Yes, hello, good morning. I have a question about your main customer and the engage customer program. Can you give us some visibility on your expectations for the second half? There has been, you know, noise around better volumes for the smartphone and also some potential gain of content, so if you can clarify that for us. Thank you.

[Jean-Marc Chéry, CEO at STMicroelectronics]

But you have already seen the impact in Q2, because in Q2 we exceed a bit the midpoint of our revenue guidance thanks to personal electronics and thanks to our main customer. That has been offsetted, as I just mentioned, by automotive. In Q3 we have a solid forecast from for them. And now, as usual, Q3 is the biggest quarter. Well, in Q4 we will have, for the time being, we see a decrease versus Q3. Well, so far now the plan they gave to us are stabilized.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Well, about the content of semiconductor in ST, well, I repeat, second half this year and first half next year is lowest point in term of content of ST in our main customer. Why? Because we have lost this famous optical module. But I confirm to you that starting H2 2025, the content of ST in our devices for our main customer will increase because we win some design.

[Stéphane Houri, Analyst at ODDO BHF]

Okay. Thank you. And maybe a clarification on what you said earlier about the costs in the moment where you are now. Are you saying that you're going to limit the expansion of R&D and maybe cut a little bit the SG&A going forward? Thank you.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Today, on R&D, we don't cut, okay, our R&D programs, because all these programs are engaged and completely consistent, okay, with our strategy. ST, we have already cleaned and disengaged a product line we want to disengage, let's say, many years ago. So all the programs are strictly under control and executed, okay, under the decision of the executive committee. So now we continue to execute them. Of course, also, I repeat that, from the organization we have put in place early this year, we have already extracted some synergy and productivity that enable our capability to run this R&D program, minimizing or stopping any hiring. We just, let's say, focus some hiring on critical profile of expert.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Well, and on SG&A, of course, okay, we are,

[Stéphane Houri, Analyst at ODDO BHF]

Okay.

[Jean-Marc Chéry, CEO at STMicroelectronics]

We have put it on a very strict control.

[Stéphane Houri, Analyst at ODDO BHF]

Okay. Thank you very much.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Next question, please, Moira.

[Operator]

The next question is from Sandeep Deshpande, from J.P. Morgan. Please go ahead.

[Sandeep Deshpande, Analyst at JPMorgan]

Yeah, hi. Thanks for letting me on. I'd like to actually go into, you know, you've reduced your full year guidance by about EUR 1.05 billion for the full year now, again. How does that divide up into automotive, industrial? And you said in the quarter that you saw some weakness in the automotive market. Can you quantify how much weakness you saw, and do you see that continuing into the current quarter?

[Jean-Marc Chéry, CEO at STMicroelectronics]

By the Pareto of the variance between the two guidance, the famous $1 billion delta, is about 40% automotive, 60% industrial. I repeat, on automotive, already in Q2, about $100 million. The rest is on H2, and mainly on what we call legacy business, and partially on ADAS ASiCs. Again, I repeat, what is related to silicon carbide, okay, will grow, but at a lower pace than what was expected. On industrial, which is about 60%, no impact on Q2. On Q2, we have done an execution consistent with our forecast. The point is that in Q2, we didn't enter booking for industrial billable for 2024 at the expected level.

[Jean-Marc Chéry, CEO at STMicroelectronics]

That's the reason why we have cut our forecast by about $600 million. Also, we have seen the POS of our distributor, let's say, decreasing. Taking into account the feedback they gave to us, we don't expect now to increase our POP in Q3. On the contrary, we will continue to decrease the POP in Q3 on industrial to decrease our inventory at distribution level, but we expect our POP to increase in Q4. This is the dynamic. The takeaway is about 40% of the $1 billion automotive, already about $100 million in Q2, and about $600 million for industrial. Why?

[Jean-Marc Chéry, CEO at STMicroelectronics]

Because, okay, no order in Q2, and POS still decreasing in Q2, so postponing in Q4 the restart of the distribution POS.

[Sandeep Deshpande, Analyst at JPMorgan]

Understood. Thank you. Follow-up question is on automotive. We are hearing from many automotive companies that they are seeing weakness in the market. Do you think that the orders, more than the revenue now, you gave me this view on the revenue, will continue to be weak in autos for the next few quarters?

[Jean-Marc Chéry, CEO at STMicroelectronics]

But we receive from the tier one what they say a delivery forecast, okay? Now, the delivery forecast they gave to us is encompassing, okay, all the adjustment we have already seen in Q1. That has been a bit amplified in Q2. Now, we have our backlog. As I said, the tier one they are working with two weeks call off from car maker. Of course, okay, this is something that we have to put under a strict scrutiny and we monitor, okay, with all our customer, okay, the dynamic of the shipment and the order they put on us. On electric vehicle, I think it's a different story.

[Jean-Marc Chéry, CEO at STMicroelectronics]

The adjustment has been done, and we do believe that we will deliver our about $1.3 billion on SiC. But yes, on automotive, the market is dynamic, is more an inventory adjustment. But according some, let's say, analyst, for the automotive industry, looks like the production of vehicle is confirmed around 90 million vehicle. But we do believe that if it is confirmed, the inventory adjustment is basically done, so the backlog we have in front of us is reliable. However, we have to monitor the situation on a very dynamic way.

[Sandeep Deshpande, Analyst at JPMorgan]

Thank you.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Thank you, Sandeep. Next question, please, Moira.

[Operator]

The next question is from Sébastien Sztabowicz from Kepler Cheuvreux. Please go ahead.

[Sébastien Sztabowicz, Analyst at Kepler Cheuvreux]

Yeah, hello, everyone, and thanks for taking my question. On the OpEx for Q3 and 2024, how should we model the OpEx in the next two quarters? Are you expecting to have some benefit of some specific cost-saving impact?

[Jean-Marc Chéry, CEO at STMicroelectronics]

Yeah.

[Sébastien Sztabowicz, Analyst at Kepler Cheuvreux]

This is the first question. Thank you.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Yes, I answer about the OpEx. Well, in this, as we were commenting before, now, in this market environment, we will continue to have a strict control of our expenses. You see that in respect to our expectation in Q2, operating expenses, that I repeat, we consider net, including other income and expenses, came lower than we were expecting entering the quarter. This was also due to the fact that we were realizing the difficulties that we were facing for the second half. But for Q3, we now estimate something in terms of expenses between $905 million and $915 million. So means that we will continue to keep control.

[Jean-Marc Chéry, CEO at STMicroelectronics]

You know that during Q3, we have the positive impact of the seasonal vacation, especially in Europe, that is helping us on this. When I look at the total year, I think that also thanks to the fact that other income and expenses should increase in respect to last year. So it means that this year we expect something in the range of $150 million positive. Our expenses overall in the year will slightly increase in respect to last year. A very modest increase in respect to last year.

[Sébastien Sztabowicz, Analyst at Kepler Cheuvreux]

For Q4, where do you see the OpEx?

[Jean-Marc Chéry, CEO at STMicroelectronics]

You can make the math. At the end, we will stay substantially flat, and there will be some increase in respect to-

[Lorenzo Grandi, CFO at STMicroelectronics]

... Very mild, very mild on the very few percentage points, and overall in the AI, you can model something similar to what was the net OpEx of 2023, with a very mild increase in respect to last year.

[Sébastien Sztabowicz, Analyst at Kepler Cheuvreux]

In terms of dynamics for Q3, where do you see your revenue trending in Q3 by divisions or by verticals to understand a little bit the different dynamic to bottom in your flattish, I would say, sequential growth for the group? Thank you.

[Jean-Marc Chéry, CEO at STMicroelectronics]

On the revenue after Lorenzo, I come back. But if you buy end market first, compared to Q2, on automotive, we expect to grow 4% sequentially. On industrial, unfortunately, as I said, because of lack of visibility and weaker backlog, we continue to decrease -17%. On personal electronic, we will grow 17%. Well, this is a seasonality effect and the engage customer program we have with our main customer. And on communication equipment and on computer peripheral, we will decrease -8%. It's related to the legacy business we are disengaging progressively.

[Jean-Marc Chéry, CEO at STMicroelectronics]

If we move to reportable segment, so analog, MEMS and sensor will be flattish, almost flattish, 0.2%. On power and discrete, we'll increase 12.9%, driven by silicon carbide MOSFET. Our MCUs in Q3 will slightly increase 1.3%, but general purpose will continue to decrease and offset by auto MCU and secure MCU. On digital and radio frequency, it will decrease -17.8%, but mainly it is related to ADAS. Okay? It is the destocking of our customer that well was partially anticipated. So this is the two dynamics by end market and by reportable segment.

[Lorenzo Grandi, CFO at STMicroelectronics]

As you can see, we are very precise this time.

[Sébastien Sztabowicz, Analyst at Kepler Cheuvreux]

Exactly. Thank you.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Is it okay for you, Sebastian?

[Sébastien Sztabowicz, Analyst at Kepler Cheuvreux]

Yeah, that's perfect. Thanks.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Thank you very much. Next question, Mayra, please.

[Operator]

The next question is from Didier BofA. Please go ahead.

[Didier Scemama, Analyst at Bank of America]

Yeah, thank you so much. Few things. First of all, Jean-Marc, I mean, it feels to me like this is a downturn similar to what we saw at the turn of the, the last century, so it's a two-year downturn. And I think the lesson we learned from that downturn is that you need to be much more aggressive on cost. So two questions is, A, I know you've said you've sort of implemented a hiring freeze, et cetera, but, you know, what do you think about your CapEx? I know it's unchanged, but is that prudent at this stage to be spending that much money on CapEx and adding still capacity?

[Didier Scemama, Analyst at Bank of America]

I would like to come back to a comment you made at a conference recently, where you said you were thinking about upgrading your 6-inch and your 8-inch fabs to 300 mil. Should you accelerate that transition given that those fabs, you know, especially those in Europe, perhaps even in Singapore, are in direct competition with, you know, the CapEx being spent in China? That's my first question, sort of the fiscal discipline, being more aggressive into next year, and I've got a follow-up. Thank you.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Well, it is clear that we are facing, let's say, the strongest inventory correction, certainly, we ever face, since a long time. However, I would like to say to highlight two or three points. Well, first of all, we continue to be convinced that, even if, okay, it's not completely linear or less smooth than expected, that the transformation that our two main market, industrial, and automotive, let's say, will provide, okay, really for ST, the basis for our growth ambition. Also, supported by some specific and, let's say, initiative, every time we believe we can bring differentiation, in the field of personal electronics or including in the field of, server for AI with a power stage, or later on in an optical transceiver.

[Jean-Marc Chéry, CEO at STMicroelectronics]

So we have our mega trend there. Then we said that we are convinced that for us our capability to continuously improve the fundamental value of the company is to convert our activity to 300 millimeter for silicon-based technology. Of course each time it is a trend that is mandatory, and to convert to 200 millimeter the silicon carbide one. That's the reason why this year okay we have confirmed the engaged CapEx and the engagement we have with some supplier to go in this direction. Now the third point for us as a priority is to assess the baseline and in order to understand at which speed we will come back okay to 2023 revenues.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Well, then under the light of these three points, it is clear that the acceleration of the conversion respectively to 200 millimeter to 300 millimeter, acceleration of the 150 to the 200 millimeter in silicon carbide, is the best trade-off, to minimize, our CapEx at the right level, is what we are working on. It is what I said when I say we are adjusting our sales and operating plan consistently with what we see. But I repeat, we are convinced that ST will come back on a growth trajectory. We are convinced that we must convert to 300 millimeter and 200 millimeter, respectively. This is mandatory.

[Jean-Marc Chéry, CEO at STMicroelectronics]

Of course, okay, acknowledging the baseline and the dynamic of the market, we will decide which level of CapEx, okay, we have to cautiously spend, but maybe accelerating some conversion with all the implication linked to this conversion.

[Didier Scemama, Analyst at Bank of America]

Very clear. Thank you. My second question is about geopolitics. So I think, how are you thinking about the world we might enter into next year with sort of 10% tariffs on all products imported into the U.S.? I mean, one of your competitors is boasting about his, sort of domestic U.S. capacity, call it geopolitically dependable. You've taken the sort of, I would argue, a smart decision to partner with a local Chinese company to build your silicon carbide capacity over there, which I think is very differentiated versus your peers. But what are you thinking about, you know, the need to have maybe local capacity also in the U.S., which you don't have at this stage?

[Didier Scemama, Analyst at Bank of America]

Or do you think that your automotive and industrial customer base is European enough to not warrant really the need to have capacity in the U.S.?

[Jean-Marc Chéry, CEO at STMicroelectronics]

Well, at this stage, the manufacturing strategy that is, let's say, we have adopt, in order to take into account what you mentioned. So China for China, so is under the execution. So again, I repeat that, we are building an ecosystem in China, let's say, as independent as possible, along the value chain. So from raw material, device wafer processing, wafer sort, assembly, and test, but including application lab and design center. At this stage, we do believe that our European-based or recognized countries, reliable for America in term of location for manufacturing, where ST is already implemented, are good enough or adequate enough, to support and face this decoupling.

[Jean-Marc Chéry, CEO at STMicroelectronics]

However, we are always, let's say, open for some partnership with a player in terms of manufacturing arrangement on the model, okay, we have in Crolles with GF or the model we have in Agrate with TowerJazz. At this stage, there is nothing on the table, but this is a kind of model we are open. What I can confirm to you at this moment, we do not intend, okay, to build a fab from scratch in U.S. Why? Because ST, we have not the bandwidth to do it. We have already projects, okay, in our plate, like the campus in Catania, okay, to continue Crolles timely, to continue Agrate timely, to continue the JV with ST in China. We do not intend, okay, to build any infrastructure in U.S.

[Didier Scemama, Analyst at Bank of America]

Okay, sorry. Just one quick one that's very helpful. I think you had floated the idea that M&A was back on the table. Any more update on that?

[Jean-Marc Chéry, CEO at STMicroelectronics]

We are working actively on the right target.

[Didier Scemama, Analyst at Bank of America]

Thank you.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

We have time for a very last question, Moira.

[Operator]

The next question is from Joshua Buchalter, from TD Cowen. Please go ahead.

[Joshua Buchalter, Analyst at TD Cowen]

Hey, guys. Good morning. Thanks for squeezing me in. For my first one, last quarter, you were kind enough to give us details, and I think you mentioned that there was two months of channel inventory that you wanted to get down, and it was running above target. I know a lot of it's at EMS and OEMs, but would you mind updating us on maybe either, you know, where you feel like levels are at entering this quarter and, with, in particular, the down 17% industrial guidance for the third quarter, does the rest of the year outlook assume that you get channel inventory back in line during the third quarter? Thank you.

[Lorenzo Grandi, CFO at STMicroelectronics]

Maybe I can take this question. You know, during the second quarter, when we look at the distribution evolution, we see that the POS were not improving. In general, were not improving. We have seen some areas a little bit better, but in general, not improving. So at the end, through that, we were shipping less to distribution, and this is visible in the result, especially when we look at the Industrial. But when we look at the level of inventory, when we look at the situation of the inventory, I would say that is similar to the one exiting Q1. So I would say that still we don't see significant improvement in this respect, especially because, let's say, POS is not improving.

[Lorenzo Grandi, CFO at STMicroelectronics]

Probably, let's say, we will see some, some mild improvement in Q3. Our expectation is to start to see some more, material improvement and moving, inside the Q4. But for the time being, the situation of inventory remains, I would say, not particularly, on the positive side on the improvement, in respect to the one that we left exiting, Q1. But for what concern the inventory in our balance sheet, I can tell you that, today, you see we are in the range of 130 days. Will be most likely in Q3, similar at the end of Q3. We do not expect a strong improvement during this quarter, notwithstanding the unused and the level of, production has been reduced. Why we started to see the benefit in Q4?

[Lorenzo Grandi, CFO at STMicroelectronics]

In Q4, we expect, let's say, to decrease in the range of at least 10 days, an average of 10 days in respect to where we stand today.

[Joshua Buchalter, Analyst at TD Cowen]

Thank you for all the color there, Lorenzo. For my follow-up, I wanted to ask about gross margins. So down, like, 200 basis points in the third quarter guidance, but I believe it implies it needs to basically improve another 200 basis points in the fourth quarter. Anything with mix that we should be aware of, or is that all just utilization rates coming back up that's in your assumption, sort of, for gross margin improvement in the fourth quarter? Thank you.

[Lorenzo Grandi, CFO at STMicroelectronics]

But in the fourth quarter, the main driver of the improvement of our gross margin, in our model, is mainly coming from the mix. Of course, we do not expect to have a significant positive impact in pricing. As you know, we are not modeling any improvement in the price environment. We do expect price more or less be stabilized in the range of a low single digit decline. There is a mix that is improving. There will be also the level of underloading. This quarter, in Q3, underloading is hitting our gross margin by 350 basis points. It will remain a material also in Q4, but declining in respect to the one of Q3.

[Lorenzo Grandi, CFO at STMicroelectronics]

So these two components are the main one that make us to modeling the Q4 as an improvement in respect to the current quarter, Q3. Moving back the year, let's say, close to 40%.

[Joshua Buchalter, Analyst at TD Cowen]

Got it. Thank you, Lorenzo.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

Thank you very much. This was the last question.

[Operator]

That was the last question. I would like now to turn the conference back over to Miss Berthier for closing remarks.

[Céline Berthier, Head of Investor Relations at STMicroelectronics]

I think this is ending our call for this quarter. Thank you very much, all of you, for being there, and we remain here at your disposal, should you need any follow-up question. Sorry for the one that didn't have time to ask a question there. Thank you very much.

[Lorenzo Grandi, CFO at STMicroelectronics]

Thank you. Bye.

[Analyst]

Thank you. Bye.

[Lorenzo Grandi, CFO at STMicroelectronics]

Bye. Thank you.

[Operator]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

Participants

Executives

• Céline Berthier, Head of Investor Relations
• Jean-Marc Chéry, CEO
• Lorenzo Grandi, CFO

Analysts

• 'François-Xavier Bouvignies', Analyst at UBS
• Didier Scemama, Analyst at Bank of America
• Joshua Buchalter, Analyst at TD Cowen
• Jérôme Ramel, Analyst at BNP Paribas Exane
• Sandeep Deshpande, Analyst at JPMorgan
• Stéphane Houri, Analyst at ODDO BHF
• Sébastien Sztabowicz, Analyst at Kepler Cheuvreux
• Analyst