On Thursday, STMicroelectronics (NYSE:STM) discussed second-quarter financial results during its earnings call. The full transcript is provided below.
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Summary
STMicroelectronics reported Q2 2026 net revenues of $3.49 billion, exceeding the midpoint of their business outlook, with a gross margin of 34.8% and non-U.S. GAAP gross margin of 35.2%.
Growth was driven by strong performance in Communication Equipment, Computer and Peripherals, and Automotive, with Automotive revenues increasing 14% sequentially and 16% year over year.
The company secured key design wins in automotive applications and integrated NXP's MEMS sensors business, enhancing their automotive sensor portfolio.
Industrial segment revenues improved by 34% year over year, driven by microcontrollers and analog products, with a focus on factory automation and AI.
STMicroelectronics raised its revenue ambition for data centers, expecting revenues above $1 billion in 2026 and well above $2 billion in 2027.
The company announced strategic collaborations, including with NVIDIA, and investments in quantum computing, positioning for future growth.
Q3 2026 guidance includes expected revenues of $3.7 billion with a gross margin of 37%, while Q4 is anticipated to exceed $4 billion in revenue.
Management confirmed confidence in reaching long-term revenue and margin targets, driven by AI data centers and automotive growth.
The company is managing capacity constraints in certain segments but is confident in supporting future demand with strategic investments in manufacturing capabilities.
Full Transcript
Moira, Operator
Please note, anyone who wishes to ask a question during the conference, press star and 1 on your touchtone telephone. Ladies and gentlemen, welcome to the STMicroelectronics second quarter 2026 earnings release conference call and live webcast. I am Moira, the conference 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 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast at this time. It is my pleasure to hand over to Jerome Bramel, EVP, Corporate Development and Integrated External Communications. Please go ahead.
Jerome Bramel, EVP Corporate Development and Integrated External Communications
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 and Discrete, MEMS and Sensors Group, and Head of STMicroelectronics Strategy, System Research and Applications, and Innovation Office; and Remiel, President, Microcontrollers, Digital, AI & RF Product Groups.
The live webcast and presentation materials can be accessed on ST’s Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST’s results to differ materially from management expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in 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 Chery, ST President and CEO.
Jean-Marc Chery, President and CEO
Thank you, Jerome. Good morning, everyone, and thank you for joining ST for the 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 questions. 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.
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 positive $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 2.
Overall, we were well above 1 in all end markets and significantly above 2 in Communication Equipment, Computer and Peripherals, mostly driven by optical connectivity, including silicon photonics. 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 on-board chargers, powertrain and active suspensions. These wins were across our application-specific ICs and sensors. 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 applications. In tire pressure monitoring, revenues improved 20% sequentially and 34% year over year. Industrial improved 20% sequentially and 34% year over year. Importantly, inventory in 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. 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 sensors for these applications. We launched a new series of industrial MEMS sensors with embedded AI tailored for the fast-growing industrial condition-monitoring market. 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, as a partner in NVIDIA Helios for robotics and end-to-end functional safety systems for industrial and new manual robots. ST is bringing its microcontrollers, sensors, motor control and security solutions to support L3D 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 per 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.
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, 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 customers.
In Communication Equipment, Computer and Peripherals, second quarter revenues were above expectations, showing an 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. Indeed, ST is a core enabler for the cloud AI era. We see strong traction in optical connectivity driven by silicon photonics ICs, electronic ICs and 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. Therefore, we are raising our revenue ambition for data centers. We now expect revenue above $1 billion in 2026 and, assuming the current dynamics continue 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.
In addition, we see a growing number 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 technologies. Finally, in June, ST joined the €115 million Series A financing of COBLY 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. We are leveraging years of shared expertise in FD‑SOI and deep technological collaboration to accelerate the commercialization of Cobly’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’s Supervisory Board appointed Mr. Armando Variccio as Chairman and Mr. Nicolas Dufourk as the Chairman of the Supervisory Board. Now over to Lorenzo, who will present our key financial figures.
Lorenzo Grandi, President & CFO
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, 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 Microcontrollers and, to a lesser extent, Custom Processing and Connected Security.
RF & Optical Communication grew 32%. By end market, Communication Equipment and Computer Peripherals grew 50%, Industrial 34%, Personal Electronics 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, 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%. By end market on a sequential basis, Industrial grew 20%, Automotive 14%, Communication Equipment and Computer Peripherals 13%, and Personal Electronics 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 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 non‑recurring costs related to our manufacturing reshaping program. The negative impact on gross margin from these non‑recurring costs is expected to remain at a similar level over the rest of the year. Total net operating expenses, excluding restructuring, amounted to $970 million in the second quarter. 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 costs 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 about $920 million. 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 costs, reducing our Other Income and Expense positive line.
For full year 2026, Non‑U.S. GAAP net OpEx is expected to increase low double‑digit year over year. Excluding the NXP MEMS business acquisition and the exchange‑rate impact, like‑for‑like net OpEx should be up high single digit year over year. 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 costs. Q2 operating income also included a $24 million purchase price allocation effect from our acquisition of NXP's MEMS sensor 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, MEMS and Sensors at 10.1%, Power and Discrete at minus 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. The earnings per share were positive $0.24, compared to a negative $0.11 one year ago. Non‑U.S. GAAP net income stood at $291 million and Non‑U.S. GAAP earnings per share stood at $0.31. Net cash from operating activities totaled $502 million in the second quarter, including a $44 million outflow related to restructuring, compared to net cash 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 $2.2 billion range, reflecting accelerating investments in selected growth drivers including Cloud Optical Interconnect. Free cash flow was positive at $75 million in the second quarter, compared to a negative $152 million in Q2 2025. 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.
Days sales of inventory at 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 shareholders in the second quarter of 2026 totaled $75 million. STMicroelectronics maintained its financial strength with a net financial position that remains solid at $2.01 billion as of June 27, 2026, reflecting total liquidity of $6.03 billion and total financial debt of $4.02 billion.
During the quarter, STMicroelectronics issued a new $1.5 billion dual‑tranche senior unsecured convertible bond, Tranche A and Tranche B for $750 million each, due in 2031 and 2033, and announced 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, President and CEO
Thank you, Lorenzo. Now let's move to our business outlook for Q3 2026. We are expecting Q3 revenues of $3.7 billion, plus or minus 350 basis points. At the midpoint, 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%, plus or minus 200 basis points, including about 70 basis points of unused capacity charges. This business outlook doesn't include any impact from potential further changes 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 Electronics seasonality this year is different compared to previous years. Revenue growth for Personal Electronics is expected to be below normal seasonality in Q3, moderating STMicroelectronics' 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 Orbital satellite communication. We expect Q4 revenues to be above $4 billion, representing a sequential improvement better than normal seasonality. This translates into H2 versus H1 growth above our normal 15% seasonality. STMicroelectronics' growth drivers remain 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 engagements we have, well above $2 billion in 2027. This confirms STMicroelectronics' strong position in the evolving AI data centers. Thank you, and we are now ready to answer your questions.
Moira, Operator
We will now begin the question‑and‑answer session. Anyone who wishes to ask a question or make a comment may press star then 1 on their touchtone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star then 2. 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 then 1 at this time. The first question comes from the line of Jeannard d'Artmenon from Jefferies. Please go ahead.
Jeannard d'Artmenon, Analyst at Jefferies
Hi, good morning. Thanks for taking the question. I was just looking into your second‑half guidance and trying to get a feel for your gross margin trend into Q4. So I know you don't want to guide on Q4, but you are talking about a bigger increase in revenue quarter on quarter, and we don't know how much it is, I agree, because you just said more than $4 billion. But 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.
Lorenzo Grandi, President & CFO
Okay, thank you for the question. I take the question, Jean‑Marc, about the gross margin evolution. Clearly, the midpoint of Q3 gross margin for us will be 37%, and we have guided this level of gross margin, which is increasing about 180 basis points compared to Q2. Clearly, starting from this Q3 gross margin at 37%, we do expect for Q4 a sequential improvement in our gross margin, considering that our revenue will increase significantly. But you have to keep in mind that there are some headwinds as well.
One is that our level of unused capacity charges will not change significantly in Q4, due to the fact that we are starting some fabs, particularly in China, in which we will still have some negative impact on our level of underloading. And clearly there are also still costs related to the transfer of technology, related to our reshaping program in our manufacturing infrastructure, that will be still there, similar to the ones that we have in the current quarter, Q3.
So 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 a sequential improvement compared to the 37% of Q3.
Jeannard d'Artmenon, 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, President & CFO
As I said, there will be an improvement compared to the 37%, but it will still be impacted by some ingredients related to the level of underloading that will not decrease. While the dynamic between Q2 and Q3 underloading was decreasing, this will not be similar to what will happen between Q3 and Q4. And as well, don't forget that when we look at the dynamic of our gross margin moving from Q2 to Q3, we had also benefited from an effect that was improving, while in Q4 this effect will not be there; it will be neutral. So yes, I repeat that there will be an increase in our gross margin, but you also have to consider in your modeling that there are some temporary headwinds in Q4 that will be limiting, somehow, the improvement of our gross margin.
Jeannard d'Artmenon, Analyst at Jefferies
Understood. Thank you.
Lorenzo Grandi, President & CFO
Thank you.
Jean-Marc Chery, President and CEO
Thank you. Jonathan, next question please.
Moira, Operator
The next question comes from the line of Joshua Buchalter from TD Cowen. Please go ahead.
Joshua Buchalter, Analyst at TD Cowen
Hey guys, thank you for taking my questions. 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. And 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.
Lorenzo Grandi, President & CFO
So before I pass the question to Remy to go in further detail, it is clear that our growth in 2027 will be driven both by our specific engaged customer program on this field of activity, but clearly the overall success on optical cable connectivity. Clearly it will be the main driver of the significant growth we will do next year. Now I let Remy comment in more detail to complement what Jean‑Marc said.
Remy
We see clearly an acceleration in the adoption of 800 gig and 1.6 terabit per second pluggable optics. And those are actually generations and categories of transceivers where now we are seeing a triple effect. And 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 a BiCMOS technology. And starting from next year, but really accelerating next year, is actually growing revenue in silicon photonics, supporting photonics IC that is being part of those pluggable transceivers like we've explained.
You know, we have a lot of scalability in terms of capacity on that technology because of the structure we have in our Crolles factory. So we are not right now gated by capacity expansion to go and capture revenue at this stage.
Joshua Buchalter, Analyst at TD Cowen
Thank you both for all the color there. Maybe to follow up on that also. You know, I totally appreciate what Lorenzo, you were highlighting from the manufacturing transitions and underloading charges. But on a like for like basis, should data center, as it grows, be accretive to gross margins? Thank you.
Lorenzo Grandi, President & CFO
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.
Moira, Operator
Thank you, Josh. Next question please. The next question comes from Jakob Bluestone from BNP Paribas. Please go ahead.
Jakob Bluestone, Analyst at BNP Paribas
Thanks for taking the question. So 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 and when do you think that might impact revenues this year?
Lorenzo Grandi, President & CFO
Yes, in terms of pricing, I would say that of course it is twofold. On one side, it's true that we see, let's say, in our input cost, price increases. Clearly, let's say, there are different materials or maybe, let's say, contractor 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, in this context, let's say of a higher input cost, yes, we are increasing the prices on selected products.
Clearly, let's say, this is an ongoing process that is, let's say, expanding in terms of, let's say, price increase. And I would say that at the end what we see in our input cost is more than offset by what we do, let's say, on our top line. So I would say that at the end, at this stage, let's say, the two impacts are more or less offsetting each other.
Jakob Bluestone, Analyst at BNP Paribas
And if I 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 so supply.
Jean-Marc Chery, President and CEO
It's both. It's both because, above $1 billion 2026 revenue, the demand is well, well above. But thanks to our capability to grow in Crolles and with the various assembly and test manufacturing. So that's the reason why we have increased our indication for this data center business. And next year is the same. Next year, clearly we will close the gap between the demand and our capability to supply. But it is really driven first by demand, then it is covered by engagement backlog.
For this year, 100% coverage and next year engagements are covering our expectations. And definitively our capability to go on this advanced 300 millimeter technology is a very important competitive factor for us.
Moira, Operator
Thank you. Thank you, Jakob. Next question please. The next question comes from the line of Sandeep Deshpande from JP Morgan. Please go ahead.
Sandeep Deshpande, Analyst at JP Morgan
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, because you said earlier in the call that personal electronics was weaker in the third quarter. But can we look at how the growth was in the other segments? And based on what you are indicating for the fourth quarter at the moment of greater than $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, President and CEO
I will take the question. Clearly, if I am starting by the key growth driver, it 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 to what we have achieved in Q2, so close to 60% growth. And definitively we will have in Q4 a very strong acceleration, means we will be about 90% growth. The second really positive growth vertical 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. Then clearly automotive is performing above what we expect and what the market is expecting. You know that for semiconductor industries, the automotive is expecting to grow about 13%, 14% year over year. This is what we will achieve on this segment. It 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 scope. So my takeaway is really very strong growth on computer and communication, moving from a 60% growth in Q2 to close to 90% in Q4. On industrial, after Q2 of 30% growth year over year, we will go close to 40% in Q4. Automotive, let's say, low double digit as expected, consistently with the market.
And this year, a different profile for PE. We will be year‑over‑year negative in H2 after having been positive in H1. But 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. So this is a profile of the revenue Q3, Q4.
Sandeep Deshpande, Analyst at JP Morgan
Thank you.
Moira, Operator
Any follow ups, Sandeep?
Sandeep Deshpande, Analyst at JP Morgan
Would be that, you know, 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?
Lorenzo Grandi, President & CFO
Let's say all the advanced technologies that are enabling our, let's say, growing industrial market and communication and computer, we are in a permanent growth and exactly at what we'd expect. And here the only flexibility we could have is to continue to accelerate permanently, which is already on really a competitive path. Clearly where we have still some, let's say, underloading and even sometime, okay, in Q2 we faced a slight delay in our capability to ramp up, it is legacy, pure legacy analog technologies.
Because if you remember Q1, we were totally underloaded. So the Q2 ramp up was challenging. So we delayed a little bit this ramp up that, to a certain extent, has impacted also our capability in Q3 to fully fulfill the demand on legacy technology. So 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, Analyst at JP Morgan
Understood. Thank you so much.
Moira, Operator
Thank you. Sandeep, next question please. The next question comes from the line of Domenico Gilotti from Equita. Please go ahead.
Domenico Gilotti, Analyst at Equita
Good morning. I follow up on the gross margin. So 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. So I'm trying to understand how this is. First of all, if you are still confident to get to the level of profitability you were suggesting, and are there some specifics, a temporary effect on Q4 that we should take into account?
And follow up on the AI data center demand and your customer engaged program. Can you give a sense of how concentrated is today the demand there and the engaged program supporting your $2 billion revenues for 2027?
Lorenzo Grandi, President & CFO
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. 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. But 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 millimeter to the 300 millimeter for the silicon, closing two fabs, and let's say from the 150 millimeter to the 200 millimeter for the silicon carbide. We are not yet there. We are, let's say, in the middle of this transformation. So 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 these quarters, Q3 and Q4, we have some kind of extra costs that are related to this transfer, the qualification of the products, the redo of the mask of the products, all these kinds of things that are impacting our gross margin, and clearly far from optimal efficiency due to this, let's say, transition.
So at the end we confirm our model to be, let's say, above 40% when the company is there, but once we have done the, let's say, transformation, when we have completed our programs that, as you know, will be at the end of 2027, let's say, not before. So this is the reason why, let's say, it is not enough to be a $4 billion‑per‑quarter company to have a gross margin, let's say, at the right level of the model. The second question, maybe Remy, you can comment again the key growth driver that will put us on a trajectory well above $2 billion next year.
Remy
Yeah, we have discussed earlier about what we're doing on the optical front, and I insist on the fact that we are now at the intersection of three main vectors of growth, which is, you know, the oversized market share we have at 800G and 1.6 terabits per second in MCU, the growing adoption of our B55X BiCMOS process for electronic IC, and the steep ramp‑up we have on our photonics IC platform, our silicon photonics platform in 300 millimeters, which has proven to be really, really well adopted across the board by all the major actors.
And I think there was also a question related to the concentration of that revenue, and 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 Gilotti, Analyst at Equita
Thank you.
Moira, Operator
Thank you, Domenico. Next question please. The next question comes from the line of Didier Che Mama from Bank of America. Please go ahead.
Didier Che Mama, Analyst at Bank of America
Good morning. Thanks for taking my questions. My first question is on the outlook. I think, Jean‑Marc, in your prepared comments you mentioned that your book‑to‑bill was close to 2, I think overall, and above 2 in certain segments like optical interconnect in particular. So 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, President and CEO
Thank you. No, yes. With this book-to-bill. What also is interesting is that 100% of the bookings we received in Q2, well above 50%, were for next year. So it means the customer knows, they have understood, that they have to provide us visibility. And the good news is that now our total backlog is representing about an average of 4.5 to 5 quarters of Q2 average revenue, which is clearly an improvement step coming back to standard of visibility. So clearly, yes, Q1 is today on the dynamic to be well loaded and clearly continuously boosted by our revenue related to AI data center.
We confirm, we confirm our confidence level to reach $18 billion in 2028. Clearly, announcing the dynamic and increasing our indication on data center, it is clearly one of the key growth drivers that will position our company on $18 billion by 2028. Then second, Lorenzo already commented that this business related to AI data center is accretive to our gross margin. So we will have this mix effect more then. Okay, I confirm that assuming we complete on time our reshaping program on manufacturing and that the effects will remain our model, we should be in position to reach the gross margin target consistently with our $18 billion model.
More about 20 billion. Okay, for the time being let's reach together the $18 billion target. Then we speak about the 20.
Moira, Operator
Next question please. The next question comes from the line of Stefan Uri from ODDO BHF. Please go ahead.
Stefan Uri, Analyst at ODDO BHF
Yes, good morning. So 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.
Jean-Marc Chery, President and CEO
Thank you, thank you. I'll pass the question directly to Amy.
Stefan Uri, Analyst at ODDO BHF
Okay, and 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, President & CFO
Clearly, let's say, it is a business, a combination of different gross margins, because clearly there are different products: the ones that are going to satellite, the ones that are going away, 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 those low Earth orbit satellites are contributing, let's say, to the improvement of our gross margin.
Stefan Uri, Analyst at ODDO BHF
Okay, thank you very much.
Lorenzo Grandi, President & CFO
Thank you.
Moira, Operator
Next question please. The next question comes from the line of Francois Bouvigny from UBS. Please go ahead.
Francois Bouvigny, Analyst at UBS
Thank you very much. My first question was on the capacity front. I mean, we see an acceleration of growth from a cycle perspective, but also from AI data centers, and you are seeing some tightness, as you say in the release. Also TI suggested as well some tightness. So I was wondering how do you feel about your capacity in the next, let's say, two to three years? I mean, do you think you have enough capacity to deliver the different growth scenarios, or are you evaluating maybe some brownfield or greenfield expansion down the line?
So the capacity of ST in the next two, three years would be helpful.
Jean-Marc Chery, President and CEO
We have to see it under two angles. One angle is what is related now to our capability to support AI data center. At this stage, we believe that we can sustain it and support it. Of course, under the assumption we are well assessed, the success factor is 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 to general purpose microcontroller.
Why? Because first of all we have two curated effects. There is first the enormous success of the microcontroller developed by Remy’s team for optical cable and there is the solid recovery of the overall industrial market. And where, okay, I mentioned during my address that in distribution the inventories are now well below our standard and the POS dynamic is very strong. It is here that we are facing at this moment some tension on the supply and increasing lead time.
But here basically we have some key competitive advantages. First of all, we have our two 300 millimeter fabs where clearly our microcontrollers will be processed. The good news now is Agrate 300 certainly will reach the full build-out pretty soon before 2020. But then the second important lever is our China-for-China strategy that will start to pay back. Because, if you remember, we have qualified 40-nanometer 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 cable.
On the other, let's say, technologies and products, clearly the challenge for us is our transition phase between respectively 6 inch to 8 inch silicon carbide technology and 8 inch to 12 inch analog — temporary tightness on the supply. So this is the overall picture. So three elements: more 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. Then after, we have some pockets of capacity limitation time to time with OSAT, but okay, we manage it.
Francois Bouvigny, Analyst at UBS
Great, thank you Jean-Marc. And maybe my follow-up would be on silicon carbide actually. I mean we see a lot of change in terms of silicon carbide demand, one driven by the Chinese EV carmakers adopting 800 volts supporting the silicon carbide growth. But also we see one of your main customers delivering strong deliveries. And on top of that you have these 800V opportunities for silicon carbide. So I was wondering if you saw an improvement on the silicon carbide front and if you could provide any maybe guidance on what to expect for that business, that would be great.
Jean-Marc Chery, President and CEO
Thank you. So I will pass the question to Marco who is managing the product line. Yes. Okay. All the positive dynamics you described, we see it, but Marco will comment.
Marco Monti, STMicroelectronics President, Automotive and Discrete Product Group
Yeah, I confirm that we see positive dynamics that you just highlighted. Actually in Q2 we saw the revenue growth in the low teens year over year, so we are back to growth year over year, and mid-30s in terms of quarter over quarter. This is also supported by strong bookings with book-to-bill that is well above 1, which is resulting in a growing backlog. So the dynamics are confirmed and are factual; it is what we see. So in this context I can confirm that this year we should grow the silicon carbide revenues double digit in 26 versus 25 based on already design wins and backlog, which is already visible.
So the dynamics are positive. Of course, we are facing the transition between the 6 inches and the 8 inches, which are sometimes creating some tightness in terms of supply because the products need to be qualified by end customers. But I confirm that the dynamics are positive and are growing positive day by day.
Francois Bouvigny, Analyst at UBS
Thank you.
Jean-Marc Chery, President and CEO
Thank you, Francois.
Jerome Bramel, EVP Corporate Development and Integrated External Communications
This is ending our call for this quarter, so thank you very much everyone for joining us. And we remain at your disposal should you need any follow-up questions. Thank you.
Moira, Operator
Ladies and gentlemen, the conference is now over. Thank you for choosing Caruschool, and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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