STMicroelectronics Q2 2026 Earnings Call Transcript

Quartr
Provided by Quartr
July 23, 2026

Key Takeaways

  • Positive Sentiment: ST reported Q2 revenue of $3.49 billion, above the midpoint of guidance, with strong demand across automotive, industrial, and communications-related markets. Management said bookings were robust and book-to-bill was close to 2 overall, signaling improved visibility.
  • Positive Sentiment: AI data center exposure is becoming a larger growth driver: ST raised its 2026 data center revenue target to above $1 billion and now sees it well above $2 billion in 2027, driven mainly by optical connectivity and silicon photonics. Management also said this business should be accretive to gross margin over time.
  • Positive Sentiment: Automotive and industrial both accelerated, with automotive revenue up 14% sequentially and industrial up 20% sequentially. The company highlighted design wins in ADAS, powertrain, sensors, industrial automation, and power systems.
  • Neutral Sentiment: Q3 guidance points to $3.7 billion in revenue at the midpoint and gross margin of about 37%, with management expecting further gross margin improvement in Q4. However, they warned that manufacturing reshaping costs and underloading charges will continue to weigh on margins.
  • Positive Sentiment: Cash generation improved, with positive free cash flow of $75 million in Q2, inventory days falling to 126, and the net financial position remaining solid at $2.01 billion. Management also said it expects 2026 net capex at the high end of the $2.0 billion-$2.2 billion range to support growth investments.
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Earnings Conference Call
STMicroelectronics Q2 2026
00:00 / 00:00

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Operator

Ladies and gentlemen, welcome to the STMicroelectronics second quarter 2026 earnings release conference call and live webcast. I am Moira, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jérôme Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, Moira, and thank you everyone for joining our second 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. Marco Cassis, President, Analog, Power & Discrete, MEMS and Sensors Group, and Head of STMicroelectronics Strategy, System Research and Application and Innovation Office. Remi El-Ouazzane, President, Microcontrollers, Digital IC and RF Product Group. These live webcasts 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 results to differ materially from management expectations and plans.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

We encourage you to review the safe harbor statement contained in the press release that was issued with the result this morning and also in ST most recent regulatory filing 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 Chery, ST President and CEO.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Thank you, Jérôme. Good morning, everyone, and thank you for joining ST for our Q2 2026 earnings conference call. I will start with an overview of the second 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. Starting with Q2. Our second quarter net revenues of $3.49 billion came in above the midpoint of our business outlook range, driven by higher revenues in communication equipment, computer and peripherals, and automotive.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Gross margin was 34.8%, and non-U.S. GAAP gross margin was 35.2%. Both were in line with the midpoint of our business outlook range. Non-U.S. GAAP diluted earnings per share was $0.31. During the second quarter, inventory in our balance sheet remained flattish. In distribution, inventory further decreased and is now below our standard target. We generated a +$75 million free cash flow. Let's now discuss our business dynamics during Q2. During the quarter, demand increased further with strong bookings and book-to-bill close to two overall. We were well above one in whole end markets and significantly above two in communication equipment, computer and peripheral, mostly driven by optical connectivity, including silicon photonics.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

We saw improved visibility and signs of tight supply in several product categories. In automotive, revenues came in better than expected, increasing 14% sequentially and 16% year-over-year. This growth was driven by our solid position on application-specific ICs and sensors for conventional applications, electrical powertrain, and ADAS. Automotive design momentum continued to build across multiple OEM and Tier 1 ecosystems. We secured design wins across hybrid electric and conventional vehicles, including applications in onboard chargers, powertrain, and active suspensions. These wins were across our application-specific ICs and sensors.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Specifically, our smart power ICs wins include custom devices for airbags, electronic stability control, and suspension applications based on our proprietary BCD technologies manufactured in our Agrate 300-millimeter wafer fab. We have progressed well with the integration of NXP MEMS Sensors business acquired in February. As we anticipated, the complementary technology and product portfolio is strengthening our automotive sensor business with awards at key players for active safety application and tire pressure monitoring. Industrial improved 20% sequentially and 34% year-over-year. Importantly, inventory and distribution further decreased and is now below our standard target. This solid growth was driven by our general-purpose microcontrollers and by analog with their wide ecosystems, and by our application-specific analog products complemented by power conversion products. We are strongly positioned to support the ongoing transformation of factory automation, robotics, and power and energy infrastructure.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Our portfolio is uniquely addressing the emerging needs of physical AI, where intelligent sensing, real-time control, and efficient power management are increasingly critical. During the quarter, we saw design wins across industrial automation, power systems, building automation, and home appliances. We continue to introduce new advanced sensor for this application. We launched a new series of industrial MEMS sensors with embedded AI, tailored for the fast-growing industrial condition monitoring market.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

We also announced a new compact 3D LiDAR module delivering AI-ready output data for low compute edge AI systems running on microcontrollers and high-performance sensing in applications such as robotics, industrial automation, smart buildings, AR/VR, and healthcare. This is in line with our strategy to move beyond standalone sensors and deliver integrated sensing systems that support real-world edge AI. Finally, we announced a further expansion of our collaboration with NVIDIA to accelerate physical AI.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

As a partner in NVIDIA Helios for robotics and end-to-end functional safety system for industrial and humanoid robots, ST is bringing its microcontrollers, sensors, motor control, and security solutions to support Helios readiness across chips, evaluation kits, software, and reference designs. For personal electronics, second quarter revenues were up 3% sequentially and 20% year-over-year. This growth was driven by increased content by device in our engaged customer programs and better than normal seasonality. During the quarter, we introduced a secure chip that helps smartphone and personal electronics manufacturers prepare for quantum-ready security requirements. It combines post-quantum cryptography acceleration with NFC, secure element, and eSIM functions on a single die for use cases such as digital identity, payments, and digital car keys.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

We also introduced a new generation of ultra-low power global shutter image sensors that deliver high-quality, always-on-vision to compact devices operating on batteries or harvested energy, such as wearables, AR/VR and XR headsets, smart home appliances, and medical devices. They are engineered to deliver rich visual context and AI-ready-data under tight constraints on power, size, and cost. With the depth sensing technologies I mentioned earlier and this device for AI vision, ST delivers a complete perception stack for edge AI to customer. For communication equipment, computer, and peripherals, second quarter's revenue were above expectations, showing increase of 13% sequentially and 50% year-over-year. This growth was driven by our engaged customer programs with our custom-designed products, boosted by our microcontrollers for optical connectivity. ST is a core enabler for the cloud AI era.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

We see strong traction on optical connectivity driven by silicon photonics ICs, electronic ICs, microcontrollers. For the power stage of cloud AI, we are already successful with our microcontrollers and high voltage power and analog products, and we are building a pipeline of design wins for low voltage power and analog products. We are raising our revenue ambition for data centers. We now expect revenue above $1 billion in 2026, and assuming the current dynamics continues, and with the current engagements we have, well above $2 billion in 2027. During the quarter, we secured multiple design wins across a range of products, from optical connectivity driven by silicon photonics ICs, electronic ICs, and microcontrollers, to silicon and silicon carbide-based power solutions.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

We see a growing numbers of non-traditional AI server companies, including players coming from industries such as solar power and battery storage, where we are leveraging strong relationships to support their expansion into this field. In May, we held a webcast on the low Earth orbit satellite communication and new space opportunity for ST, highlighting how ST is positioned as a core semiconductor enabler across this new industry. We see a significant opportunity here with our addressable market expected to reach around $3 billion by 2030, or about four times the 2025 level. ST expects to generate well above $3 billion in cumulative space revenue over the period 2026, 2028, mainly with our BiCMOS, FD-SOI, and panel-level packaging technology.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

In June, ST joined the EUR 115 million Series A financing of Quobly to accelerate the industrialization of its silicon-based quantum computers and bring its first commercial product to market by the end of 2026. For ST, the scale needed by high-performance computing customers can only be achieved if breakthrough quantum systems can be industrialized and integrated with semiconductor-grade standards and backed by a robust ecosystem.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

We are leveraging years of shared expertise in FDSOI and deep technological collaboration to accelerate the commercialization of Quobly's products through our 300 millimeter silicon fab environment. In May, we held our 2026 STMicroelectronics annual shareholder meeting, where all resolutions were approved. Following the AGM, ST Supervisory Board appointed Mr. Armando Varricchio as the Chairman and Mr. Nicolas Dufourcq as the Vice Chairman of the Supervisory Board. Now over to Lorenzo, who will present our key financial figures.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Thank you, Jean-Marc. Good morning, everyone. Let's start with a detailed review of the second quarter, starting with the revenues on a year-over-year basis. By reportable segment, Analog products, MEMS, and Sensors grew 26%, mainly due to imaging and MEMS, and to a lesser extent, analog. Power and Discrete products increased by 3.7%. Embedded Processing revenues were up 35.5%, mainly due to general purpose microcontroller and, to a lesser extent, custom processing and connected security. RF and Optical Communication grew 32%. By end market, communication equipment and computer peripherals grew 50%, Industrial 34%, Personal Electronic 20%, and Automotive 16%. Year-over-year sales to OEMs and distribution increased 23.3% and 33.1% respectively. On a sequential basis, by reportable segment, Analog product, MEMS, and Sensors increased by 8.2%. Power and Discrete by 19.2%, Embedded Processing by 17.7%, and RF Optical Communication by 8.6%.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

By end market, on a sequential basis, Industrial grew 20%, Automotive at 14%, communication equipment, computer peripheral 13%, and Personal Electronic 3%. Turning now to profitability. Gross profit in the second quarter was $1.22 billion, increasing 31.1% on a year-over-year basis. Gross margin was at 34.8%, increasing 130 basis points year-over-year, mainly due to lower unused capacity charges and better product mix. On a sequential basis, gross margin increased by 100 basis points. non-U.S. GAAP gross margin was 35.2%. Q2 gross margin included about 60 basis points of negative impact resulting from a non-recurring cost related to our manufacturing reshaping program. The negative impact on gross margin, just mentioned, a non-recurring cost, is expected to remain at similar level over the rest of the year. Total net operating expenses, excluding restructuring, amounted to $970 million in the second quarter.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

non-U.S. GAAP OpEx stood at $960 million, in line with the expectation given in April. For the third quarter of 2026, we expect non-U.S. GAAP net OpEx to stand at about $980 million. The sequential increase is mainly due to startup cost and employee share award expenses that are more than offsetting the positive vacation seasonality effect. Excluding these two headwinds, Q3 2026 non-U.S. GAAP net OpEx would have been at about $920 million.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

For full year 2026, we now expect non-U.S. GAAP net OpEx to be slightly above $3.8 billion, taking into account increased employee share award expenses and the temporary impact of the startup cost, reducing our other income and expense positive line. For full year 2026, non-U.S. GAAP net OpEx are expected to increase low double-digit year-over-year. Excluding NXP MEMS business acquisition and the exchange rate impact, like-for-like net OpEx should be up high single-digit year-over-year.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Our cost-saving plan is delivering its expected benefits. At the same time, we are accelerating our investment in new business opportunities. In the second quarter, we reported $187 million operating income, which included $58 million for impairment, restructuring charges, and other related phase-out costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Q2 operating income also included $24 million purchase price allocation effect from our acquisition of NXP's MEMS Sensors business. Excluding these items, Q2 non-U.S. GAAP operating income stood at $269 million, and non-U.S. GAAP operating margin was 7.7%, with Analog product, MEMS, and Sensors at 10.1%, Power and Discrete at -21.4%, Embedded Processing at 19.7%, and RF Optical Communication at 21.2%. Second quarter 2026 net income was $222 million, compared to a net loss of $97 million in the year-ago quarter.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Diluted earnings per share were a +$0.24, compared to a -$0.11 one year ago. non-U.S. GAAP net income stood at $291 million, and non-U.S. GAAP diluted earning per share stood at $0.31. Net cash from operating activities totaled $502 million in the second quarter, including $44 million outflow related to restructuring, compared to a net cash flow from operating activities of $354 million in the year-ago quarter. Net CapEx was $409 million in the second quarter, compared to $465 million in the year-ago quarter. We now expect 2026 net CapEx to be at the high end of our $2 billion-$2.2 billion range, reflecting accelerating investments in the selected growth drivers, including cloud optical interconnect. Free cash flow was +$75 million in the second quarter, compared to a -$152 million in Q2 2025.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Inventory at the end of the quarter was $3.19 billion, compared to $3.17 billion in Q1 2026 and $3.27 billion in Q2 2025. Day sales of inventory at the quarter end were 126 days, in line with our expectation, compared to 140 days for the previous quarter and 166 days in the year-ago quarter. Cash dividends paid to stakeholders in the second quarter of 2026 totaled $75 million.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

ST maintained its financial strength with a net financial position that remains solid at $2.01 billion as of June 27th, 2026, reflecting total liquidity of $6.03 billion and a total financial debt of $4.02 billion. During the quarter, ST issued a new $1.5 billion dual-tranche senior unsecured convertible bond, Tranche A and Tranche B for $750 million each, due 2031 and 2033. Announce the early redemption of its $750 million convertible bond due in 2027. Now back to Jean-Marc, who will comment on our outlook.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Thank you, Lorenzo. Now let's move to our business outlook for Q3 2026. We are expecting Q3 revenues of $3.7 billion, ±350 basis points at the midpoint of our Q3 2026 net revenues will increase 6.2% sequentially and by 16.2% year-over-year. We expect our gross margin to be about 37%, ±200 basis points, including about 70 basis points of unused capacity charges. This business outlook doesn't include any impact for potential further change to global trade tariffs compared to the current situation. To conclude, in Q2, we saw demand further accelerating, strong bookings in all end markets, and improved visibility. In Q3, revenues are expected to continue to grow sequentially and year-over-year, and gross margin to continue to improve. As previously anticipated, personal electronic seasonality this year is different compared to previous years.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Revenue growth for personal electronics is expected to be below normal seasonality in Q3, moderating ST sequential growth in the third quarter. In Q4, we anticipate a revenue growth acceleration, mainly driven by our engaged customer programs in AI data centers and low-earth orbit satellite communication. We expect Q4 revenues to be above $4 billion, representing a sequential improvement better than normal seasonality.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

This translates into H2 versus H1 growth above our normal 15% seasonality. ST growth driver remains solid. We continue to see strong demand in AI data centers, reflecting the success of our product and technology portfolio. We are raising our revenue ambition for data centers. We now expect revenues above $1 billion in 2026, and assuming the current dynamic continues, and with the current engagement we have, well above $2 billion in 2027. This confirms ST's strong position in the evolving AI data centers. Thank you. 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 star and one on their touch-tone 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 star and two. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question only. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Janardan Menon from Jefferies. Please go ahead.

Janardan Menon
Janardan Menon
Analyst at Jefferies

Hi. Good morning. Thanks for taking the question. I was just looking into your second half guidance, trying to get a feel for your gross margin trend into Q4. I know you don't want to guide on Q4, but you are talking about a bigger increase in revenue quarter-on-quarter. We don't know how much it is, I agree, because you just said more than $4 billion. I was wondering directionally whether you can give us any qualitative comments on how your Q4 gross margin could proceed, and how you see that evolving into 2027 as well. Thanks.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Okay. Thank you for the question. I take the question, Jean-Marc, about the gross margin, the evolution. Clearly, let's say the midpoint of Q3 non-GAAP gross margin or gross margin for us in Q3 will be 37%. We have it guided at this level of gross margin that is increasing at about 180 basis points compared to the one of Q2. Clearly, starting from this Q3 gross margin at 37%, we do expect, let's say for Q4, a sequential improvement in our gross margin, considering that our revenue will increase significantly. You have to keep in mind that there is some headwinds as well. One is that our level of underloading charges will not change significantly in Q4 due to the fact that we are starting some fab, particularly in China, in which we will still have some negative impact on our level of underloading.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Clearly, there is also still these costs related to the transfer of technology, related to our shaping program in our manufacturing infrastructure that will be still there, similar to the one that we have in the current quarter in Q3. Yes, I confirm there will be improvement, but there will be also some headwinds that are impacting our gross margin. Overall, anyway, I confirm that in Q4 there will be an improvement in our gross margin compared, sequential improvement compared to the 37% of the Q3.

Janardan Menon
Janardan Menon
Analyst at Jefferies

Given that your revenue jump is going to be bigger, can we assume that your gross margin jump will also be bigger, or is that speculation?

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

As I said, it will improve, let's say, compared to the 37%, but still, let's say it will be impacted by some ingredients that is related to this level of underloading that will not decrease, let's say, while when you look, let's say the dynamic between Q2 and Q3, underloading was, let's say, decreasing. This will not be similar, what will happen in between Q3 and Q4.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Let's say, and as well as, don't forget that when we look at the dynamic of our gross margin moving from Q2 to Q3, we had also benefits from the FX, let's say, that was improving, in respect, while, let's say in Q4, this effect will not be there. It will be neutral. Yes, I repeat that there will be an increase in our gross margin. You have to also consider in your modeling that there are some headwinds, temporary headwinds, but there will be in Q4, let's say, that will be limiting somehow the improvement of our gross margin in Q4.

Janardan Menon
Janardan Menon
Analyst at Jefferies

Understood. Thank you.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you. Thank you, Janardan. Next question, please.

Operator

The next question comes from the line of Joshua Buchalter from TD Cowen. Please go ahead.

Joshua Buchalter
Joshua Buchalter
Analyst at TD Cowen

Hey, guys. Thank you for taking my questions. I guess I wanted to start with the data center number. Can you provide some more granularity on what's driving the big increase in 2027 versus the prior expectations? Like how much of this is optics versus power? It did sound like there was some positivity on the power side. I guess also, you mentioned you were capacity constrained before. Is that number greater than $2 billion, assuming you're still constrained as well? Thank you.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Before I pass the question to Remi to go in further detail. Well, it is clear that our growth in 2027 will be driven both by our specific engaged customer program on this field of activity. Clearly, the overall success on optical cable connectivity, clearly it will be the main driver of the significant growth we will do next year. I let Remi comment on more in detail.

Remi El-Ouazzane
Remi El-Ouazzane
President of Microcontrollers, Digital IC and RF Product Group at STMicroelectronics

To complement what Jean-Marc said, we see clearly an acceleration in the adoption of 800 gig and 1.6 terabit per second pluggable optics. Those are actually generation and categories of transceivers where now we are seeing a triple effect. This triple effect is a fairly large market share when it comes to the microcontroller, taking care of the control plane. A growing share when it comes to the electronic IC, driven by our BiCMOS technology.

Remi El-Ouazzane
Remi El-Ouazzane
President of Microcontrollers, Digital IC and RF Product Group at STMicroelectronics

Starting from next year, but really accelerating next year, is actually a growing revenue in silicon photonics, supporting photonic IC, that is being part of those pluggable transceiver. Like we've explained, we have a lot of scalability in terms of capacity on that technology because of the structure we have in our core factory. We are not right now gated by capacity expansion to go and capture revenue at this stage.

Joshua Buchalter
Joshua Buchalter
Analyst at TD Cowen

Thank you both for all the color there. Maybe to follow up on that also. I totally appreciate what Lorenzo you were highlighting from the manufacturing transitions and underloading charges, on a like for like basis, should data center, as it grows, be accretive to gross margins? Thank you.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Yes. At the end, yes. This kind of, let's say, clearly, this has been already, let's say, moving from Q2 to Q3 and will be also contributing from Q3 to Q4. Product mix is contributing in a positive way to our gross margin. Yes, I confirm.

Joshua Buchalter
Joshua Buchalter
Analyst at TD Cowen

Thank you, Lorenzo.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, Josh. Next question please.

Operator

The next question comes from the line of Jakob Bluestone from BNP Paribas. Please go ahead.

Jakob Bluestone
Jakob Bluestone
Analyst at BNP Paribas

Thanks for taking the question. I had a question and a follow-up. On the pricing, could you maybe just give us a bit of an update? What are you seeing in terms of pricing tailwinds, when do you think that might impact revenues this year?

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Yes. In terms of pricing, I would say that, of course, it's twofold. On one side, it's true that we see, let's say in our input cost, price increase. Clearly, let's say there are different materials or maybe, let's say, contract of activity that are increasing prices. On the other side, I would say that there is the other side that is, that we confirm that in this context, let's say of higher input cost and yes, we increasing the prices on selected products.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Clearly, let's say this is an ongoing process that is expanding in terms of price increase. I would say that at the end, what we see in our input cost is more than offset of what we do on our top line. I would say that at the end, at this stage, the two impacts are more or less offsetting each other.

Jakob Bluestone
Jakob Bluestone
Analyst at BNP Paribas

If I can just ask a quick clarification. On your data center revenue guidance hike, was that increase driven by increased demand outlook or by a faster expansion of your capacity and supply?

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

It's both.

Jakob Bluestone
Jakob Bluestone
Analyst at BNP Paribas

Sorry.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Clearly, above $1 billion 2026 revenue, the demand is well above. Thanks our capability to grow in full and with the values, assembly and test manufacturing. That the reason why we have increased our indication for this data center business. Next year is the same. Next year, clearly, we will closing the gap between the demand and our capability to supply. It is really driven first by demand, then it is covered by engagement. Backlog for this year, 100% coverage. Next year, engagement are covering our expectation. Definitively, our capability to grow on this advanced 300 millimeter technology is a very important competitive factor for us.

Jakob Bluestone
Jakob Bluestone
Analyst at BNP Paribas

Thank you.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, Jakob. Next question, please.

Operator

The next question comes from the line of Sandeep Deshpande from JPMorgan. Please go ahead.

Sandeep Deshpande
Sandeep Deshpande
Analyst at JPMorgan

Yeah. Hi. Thanks for letting me on. Could you talk about the revenue growth guidance into Q3 and then potentially into Q4 by your segments? You said earlier in the call that personal electronics was weaker in the third quarter. Can we look at how the growth was in the other segments, and based on what you're indicating for the fourth quarter at the moment of greater than EUR 4 billion, at least directionally, how to see the different segments in terms of your end markets into the fourth quarter based on your order book today?

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

I will take the question. I am starting by the key growth driver is clearly our verticals, communication equipment, computer and peripheral. I can say that in Q3, on a year-over-year growth, this segment will grow very similarly what we have achieved in Q2, so means close to 60% growth. Definitively, we will have in Q4 a very strong acceleration, means we will be about 90% growth. The second really positive growth verticals is industrial. Industrial in Q2, we grew 32%, and step after step, Q3 and Q4, we will go close to 40% growth year-over-year in Q4. Clearly, automotive is performing above what we expect and what the market is expecting. You know that for semiconductor industry, the automotive is expecting to grow about 13%-14% year-over-year. This is what we will achieve on this segment.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

PE is definitively a different profile, let's say in the year-over-year growth, because it will be slightly negative, let's say a mid-single digit, during Q3 and Q4, as we anticipated in our previous call. That will put this segment at the end of the year for the full year growing, let's say from low to mid-single digit that we already anticipated in the previous call. My takeaway is really very strong growth on computer and communication, moving from a 60% growth in Q2 to close 90% in Q4.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

On industrial, after a Q2 of 30% growth year-over-year, we will grow close to 40% in Q4. Automotive, let's say low double digit, as expected, consistently with the market. This year, a different profile for PE. We will be on year-over-year negative on H2 after having been positive in H1. On the full year, it is a low to mid-single digit, which is consistent with the market of a smartphone that is decreasing because on the low-end device, there is an impact because of the memory price. This is a profile of the revenue Q3, Q4.

Sandeep Deshpande
Sandeep Deshpande
Analyst at JPMorgan

Thank you.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Any follow-up, Sandeep?

Sandeep Deshpande
Sandeep Deshpande
Analyst at JPMorgan

Sure, would be that you've seen this significant strength in computer and peripherals associated with the AI market. Is there not any flexibility in filling your capacity in the third quarter itself? Why does this have to wait till the fourth quarter, given that you still remain underutilized in the third quarter?

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Let's say all the advanced technologies that are enabling our growing industrial market and communication and computer. We are in a permanent growth and exactly at what we'd expect. Yeah, the only flexibility we could have is to continue to accelerate permanently, which is already on a really competitive path. Clearly where we have still some, let's say, underloading and even sometimes, okay, in Q2, we face a slight delay in our capability to ramp up. It is on legacy, pure legacy analog technologies.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Because if you remember Q1, we were totally underloaded, the Q2 ramp up was challenging. We delay a little bit this ramp up. That, in a certain extent, has impacted also our capability on Q3 to fulfill the demand on legacy technology. This is this, let's say, pure temporary capability to ramp and some underloading charges specific to really legacy technology on analog that is, let's say, showing this figure.

Sandeep Deshpande
Sandeep Deshpande
Analyst at JPMorgan

Understood. Thank you so much.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, Sandeep. Next question, please.

Operator

The next question comes from the line of Domenico Ghilotti from Equita. Please go ahead.

Domenico Ghilotti
Analyst at Equita

Good morning. A follow-up on the gross margin. In the past, you were guiding, you were suggesting that at $4 billion sales per quarter, the profitability gross margin would have been at least in the 40% range. Now you are suggesting that you will probably not be at that point in Q4. I'm trying to understand, first of all, if you are still confident to get to the level of profitability you were suggesting, and there are some specifics, a temporary factor on Q4 that we should take into account. A follow-up on the AI data center demand and your customer engage program. Can you give a sense of how concentrated is today the demand there and the engage program supporting your $2 billion revenues for 2027?

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Maybe I take the first question about the gross margin at $4 billion in respect to our model to be, let's say, above the 40% gross margin. Yeah, I have to remind all of you that, yes, this is our model, but let's say we always said that there are the two conditions that we need to achieve in order, let's say, to be above 40% when the company will be at $4 billion. One is the revenue, of course, let's say, that this is what is happening. The other point is that we complete our reshaping manufacturing program. Means that actually we have, let's say, done this transfer from the 200 millimeters to the 300 millimeters for the silicon, closing the two fabs.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Let's say from the 150 millimeters to the 200 millimeters for the silicon carbide. We are not yet there. We are, let's say, in the middle of this transformation. Clearly here, we are not in the condition to have our manufacturing infrastructure at the right level of efficiency. The other way around, I would say that in this moment, in this quarter, Q3 and Q4, we have some kind of extra cost that are related to this transfer, the qualification of the products, the redo of the mask of the products, all these kind of things that are impacting our gross margin.

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Clearly, for sub-optimal efficiency due to this, let's say, transition. At the end, we confirm our model to be, let's say, above 40% when the company is there. Once we have done the, let's say, transformation, when we have completed our programs that as you know, it will be at the end of 2027, let's say, not before. This is the reason why, let's say, it's not enough to be at $4 billion to have a gross margin, let's say, at the right level of the model.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

The second question, maybe Remi, you can comment. The key growth driver that will put us on a trajectory well above $2 billion next year.

Remi El-Ouazzane
Remi El-Ouazzane
President of Microcontrollers, Digital IC and RF Product Group at STMicroelectronics

Yeah, we have discussed earlier about what we're doing on the optical front. I insist on the fact that we are now at the intersection of three main vector of growth, which is the oversized market share we have on 800 gig and 1.6 terabit per second in MCU, the growing adoption of our B55X BiCMOS process for electronic IC, and the steep ramp up we have on our photonic IC platform or silicon photonics platform in 300 millimeter which is proven to be really well adopted across the board by all the major actors. I think there was also a question related to the concentration of that revenue. We see an evolution of our revenue that is pretty consistent with market share distribution between hyperscalers, which makes us actually quite confident about the composition of our revenue.

Domenico Ghilotti
Analyst at Equita

Thank you.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, Domenico. Next question, please.

Operator

The next question comes from the line of Didier Scemama from Bank of America. Please go ahead.

Didier Scemama
Didier Scemama
Analyst at Bank of America

Yes. Good morning. Thanks for taking my questions. My first question is on the outlook. I think, Jean-Marc, in the opening comments, you mentioned that your book-to-bill was close to two, I think, overall and above two in certain segments, like optical interconnect in particular. I'm just wondering, does that imply that your first quarter seasonality might be a bit better than normal? And I've got a follow-up. Thank you.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Thank you. No. Yes, with this book-to-bill, what also is interesting is that out of the 100% of the booking we receive in Q2, well above 50% were for next year.

Didier Scemama
Didier Scemama
Analyst at Bank of America

Yeah.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Means the customer now they have understood that they have to provide us visibility. The good news is that now our total backlog is representing about an average of 4.5 to five quarters of Q2 average revenue, which is clearly an improvement step coming back to standard of visibility. Clearly, yes, Q1 is today on the dynamic to be well-loaded and clearly continuously boosted by our revenue related to AI data center.

Didier Scemama
Didier Scemama
Analyst at Bank of America

Okay. Great. Thank you. As a follow-up, I just wanted to make sure I got the right end of the stick on the financial models. I think in the past you were talking about 45% gross margin on $18 billion and then maybe 50% gross margin on $20 billion. Obviously, that's contingent on execution of the restructuring plan on manufacturing. Just wanted to make sure that this is still the case and whether you've got increased confidence that you can deliver these sort of numbers around 2028.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

No, we confirm our confidence level to reach $18 billion in 2028. Clearly, okay, announcing the dynamic and increasing our indication on data center, it is clearly one of key growth driver that will position our company on $18 billion by 2028. Second, Lorenzo already commented that this business related to AI data center is accretive our gross margin. We will have this mixed effect. Okay, I confirm that assuming we complete on time our reshaping program on manufacturing and that the FX will remain, okay, our model, we should be in position, okay, to reach the gross margin target consistently with our $18 billion model. About $20 billion, okay, for the time being, let's reach together the $18 billion target, we'll speak about the $20 billion.

Didier Scemama
Didier Scemama
Analyst at Bank of America

All right. Thanks very much.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, Didier. Next question, please.

Operator

The next question comes from the line of Stéphane Houri from Oddo BHF. Please go ahead.

Stéphane Houri
Stéphane Houri
Analyst at ODDO BHF

Yes, good morning. I would love to come back on maybe the satellite low Earth orbit opportunity and if you can tell us what is the dynamic currently, notably with your main customer and the ramp of your second customer, and if you confirm the target of $1 billion for this year and if you have a view for next year already. Thank you.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Thank you. I'll pass the question directly to Remi.

Remi El-Ouazzane
Remi El-Ouazzane
President of Microcontrollers, Digital IC and RF Product Group at STMicroelectronics

Hello, Stéphane. The dynamic is quite healthy. Overall, like Jean-Marc explained at the beginning of the discussion, we stick to well above $3 billion over 2026, 2027, 2028. You have noticed that, and we spoke about that in the past, that it's a very much a launcher-dependent business in the context of deploying satellites and then deliver the services in itself is a fuel behind user terminal consumption. Clearly things are progressing in the right direction for SpaceX. Over consideration, have faced a bit of a snag lately, which we expect to be fixed in the coming quarters. Directionally, nothing has changed. We see actually a strong 2026 and an even stronger 2027.

Stéphane Houri
Stéphane Houri
Analyst at ODDO BHF

Okay. Can you comment on the level of profitability on the gross margin on this business like you did for data center? Is it accretive?

Lorenzo Grandi
Lorenzo Grandi
President and CFO at STMicroelectronics

Yeah, clearly, let's say, is a business with a combination of different gross margin, because clearly there are different products there. The ones that are going in the satellite, the ones that are going in the gateway, the ones that are going, let's say, in the user terminal. Anyway, when we look, let's say, at the average of the gross margin of this business, yes, I confirm that that low Earth orbit satellite is contributing, let's say, to the improvement of our gross margin.

Stéphane Houri
Stéphane Houri
Analyst at ODDO BHF

Okay, thank you very much.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, Stéphane. Next question, please.

Operator

The next question comes from the line of François Bouvignies from UBS. Please go ahead.

François Bouvignies
François Bouvignies
Analyst at UBS

Thank you very much. My first question was on the capacity front. We see an acceleration of growth from a cycle perspective, but also from AI data centers. You are seeing some tightness, as you say in the release. Also, TI suggested as well some tightness. I was wondering, how do you feel about your capacity in the next, let's say, two to three years? Do you have, you think, enough capacity to deliver the different growth scenarios, or are you evaluating maybe some brownfield or greenfield expansion down the line? The capacity of ST in the next two, three years would be helpful.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

We have to see it under two angle. One angle is what is related now our capability to support AI data center. At this stage, the dynamic we have today on optical cable and microcontroller. Clearly here, the key success factor is Crolles. Crolles will reach 15K wafer per week and will go above to support the dynamic of this business. Where clearly we see some tightness is clearly what is related general purpose microcontroller. Why? Because first of all, we have two cumulative effect. There is first, the enormous success of the microcontroller developed by Remi team for optical transceiver, and there is the solid recovery of the overall industrial market. Where, remember I mentioned during my address that in distribution, the inventory are now well below our standard, and the POS dynamic is very strong.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

It is here that we are facing, at this moment, some tension on the supply and increasing lead time. Here, basically, we have some key competitive advantage. First of all, we have our two 300-millimeter FAB, where clearly our microcontroller will be processed. The good news now is Agrate 300 certainly will reach the full build-out pretty soon, before 2028, and will be capable to support the growth of microcontroller as soon as we will have qualified the 90-nm and 40-nm technology. The second important lever is our China for China strategy that will start to pay back, because if you remember, we have qualified 40-nm technology in China with our main partner that will enable us to support the growth in China. That is very demanding, both for industrial in distribution, but industrial OEM and also optical transceiver.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

On the other technologies and product, clearly the challenge for us is our transition phase between technology, and we are accelerating as fast as we can in synchronization with our customer that could create time to time, some temporary tightness on the supply. This is the overall picture. Three element. Short term on microcontroller, but we have exactly in our hand our capability to grow. All the new technology driven by AI data center, we have the path to grow. Some other tightness related to our reshaping, but only temporary. After, we have some pocket of capacity limitation time to time with OSAT, but we manage it.

François Bouvignies
François Bouvignies
Analyst at UBS

Great. Thank you, Jean-Marc. Maybe my follow-up would be on silicon carbide, actually. We see a lot of change in terms of silicon carbide demand. One driven by the Chinese EV car makers adopting 800 volts, supporting the silicon carbide growth. Also we see one of your main customer for that business, that would be great.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

Thank you. I will pass the question to Marco, who is managing the product line.

Marco Cassis
Marco Cassis
President of Analog, Power and Discrete, MEMS and Sensors Group at STMicroelectronics

That you just highlighted. Actually, in Q2, we saw the revenue growth in the low teens year-over-year. We are back to growth year-over-year. Mid-30s in terms of quarter-over-quarter. This is also supported by strong bookings, which book-to-bill that is well above one, which is resulting in a growing backlog. The dynamics are confirmed and are factual, is what we see. In this context, I can confirm that this year we should grow the silicon carbide revenues double digit in 2026 versus 2025, based on already design won and backlog, which is already visible. The dynamics are positive. Of course, we are facing the transition between the 6 in and the 8 in, which are sometimes create some tightness in terms of supply.

François Bouvignies
François Bouvignies
Analyst at UBS

Thank you.

Jérôme Ramel
Jérôme Ramel
EVP of Corporate Development and Integrated External Communication at STMicroelectronics

Thank you, François . This is ending our call for this quarter. Thank you very much, everyone, for joining us. We remain at your disposal should you need any follow-up questions. Thank you.

Marco Cassis
Marco Cassis
President of Analog, Power and Discrete, MEMS and Sensors Group at STMicroelectronics

Thank you.

Jean-Marc Chery
Jean-Marc Chery
President and CEO at STMicroelectronics

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

Executives
    • Jérôme Ramel
      Jérôme Ramel
      EVP of Corporate Development and Integrated External Communication
    • Jean-Marc Chery
      Jean-Marc Chery
      President and CEO
    • Lorenzo Grandi
      Lorenzo Grandi
      President and CFO
    • Remi El-Ouazzane
      Remi El-Ouazzane
      President of Microcontrollers, Digital IC and RF Product Group
    • Marco Cassis
      Marco Cassis
      President of Analog, Power and Discrete, MEMS and Sensors Group
Analysts
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