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Transcript Summary

STMicroelectronics (ST) delivered a solid Q1 2026 with $3.1 billion in revenue and a book-to-bill ratio well above 1.0, indicating strong future demand. The company is successfully pivoting toward the AI data center market, announcing a massive multibillion-dollar partnership with AWS and collaborations with NVIDIA. Management projects AI-related data center revenues will exceed $500 million in 2026 and $1 billion in 2027. While Q1 gross margin was 33.8%, management anticipates sequential improvements throughout the year as manufacturing utilization increases and distribution inventories normalize. ST is currently undergoing a significant manufacturing transformation, moving to 300mm wafers and 200mm Silicon Carbide (SiC) production, which currently weighs on efficiency but prepares the company for long-term scaling. The acquisition of NXP’s MEMS business was integrated this quarter, bolstering ST’s automotive sensor portfolio. For Q2, ST guides for $3.45 billion in revenue, reflecting better-than-seasonal growth. Key drivers for the remainder of 2026 include the LEO satellite business, SiC for automotive, and high-performance microcontrollers for AI clusters. Despite a rise in OpEx to support these growth initiatives, ST remains focused on its path to a 40% gross margin as utilization improves and manufacturing synergies materialize by late 2027.

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STMicroelectronics N.V.: Government Subsidies and Inventory Bloat Mask Operational Decay

Full Earnings Call Transcript — Q1 • 2026-04-23

Operator: Ladies and gentlemen, welcome to the STMicroelectronics First Quarter 2026 Earnings Release Conference Call and Live Webcast. I am Moira, the Chorus Call operator. [Operator Instructions] The conference is being recorded. The conference must not be recorded for publication or broadcast. [Operator Instructions] At this time, it's my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead.
Jerome Ramel: Thank you, Moira. Thank you, everyone, for joining our first quarter 2026 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call are Lorenzo Grandi, President and CFO; and Marco Cassis, President, Analog, Power and Discrete, MEMS and Sensor Group, and Head of STMicroelectronics Strategy, System Research and Applications and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST 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: Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q1 2026 earnings conference call. I will start with an overview of the first 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. So starting with Q1. Our first quarter net revenues were $3.1 billion, including about $40 million revenues associated with NXP's MEMS sensor business, which we acquired during the quarter. Excluding this contribution on a sequential basis, net revenues were above the midpoint of our business outlook range, driven mainly by higher revenues in our engaged customer programs in Personal Electronics and in Communication Equipment and Computer Peripherals. Gross margin was 33.8% or 34.1%, excluding the impact of the purchase price allocation, so-called PPA, following our acquisition of NXP's MEMS sensor business. Excluding impairment, restructuring charges and other related phase-out costs and purchase price allocation, PPA effects from our acquisition of NXP's MEMS sensor business, non-U.S. GAAP diluted earnings per share was $0.30. During the first quarter, inventory in our balance sheet increased slightly, and we continue to work down inventories in distribution. They are now normalized. We generated a negative $720 million free cash flow, including $895 million cash out related to the payment of our acquisition of NXP MEMS sensor business. Let's now discuss our business dynamics during Q1. Well, first, we had a strong booking momentum during Q1 with book-to-bill well above 1 across all end markets and regions. In Automotive, during the quarter, revenue declined 10% sequentially. Year-over-year, revenues increased 15%, marking the return to year-over-year growth. Automotive design momentum progressed with various OEM and Tier 1 ecosystems. We had design wins across electric, hybrid and traditional vehicles, spanning onboard chargers, DC-DC converters, powertrain active suspension and vehicle control electronics. Key products include power semiconductors, smart power devices, automotive microcontrollers, analog devices and sensors. In February, we completed the acquisition of NXP's MEMS sensor business. The acquired technology and product portfolio are highly complementary to STs and strengthen our automotive sensor business. We are progressing as planned with the integration into our portfolio and operational flows. Industrial decreased by 1% sequentially and improved 26% year-over-year. Importantly, inventories in distribution further decreased and are now normalized. In Industrial, our broad portfolio of microcontrollers, sensing, analog and power devices is strongly aligned with industrial transformation trends and the evolving needs of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, health care and home appliances. We announced our collaboration with NVIDIA to integrate ST sensors, microcontrollers and motor control solutions with NVIDIA Robotics ecosystem. This aims to help developers design, train and deploy humanoid robots and other physical AI systems with higher efficiency, reliability and scalability. We are also proud to have been ranked the #1 vendor worldwide for general purpose microcontrollers for the fifth consecutive year based on research by Omdia. During March, we announced that the first batch of STM32 wafers fully produced in China for ST by our partner, Huahong, has been delivered to customers in China. This was a major step forward in ST China for China supply chain strategy. For Personal Electronics, first quarter revenues were down 14% sequentially, reflecting the seasonality of our engaged customer programs and up 21% year-over-year, reflecting increasing content. During the quarter, we reinforced our position in mobile platforms and connected consumer devices, supported by both engaged programs and a broad open market portfolio spanning sensors, secure solutions and power management. We announced support for motion sensing and secure wireless technology on Qualcomm Technologies' newly launched Personal AI platform based on ST smart sensor and secure NFC controllers. For Communications Equipment and Computer Peripherals, first quarter revenues were above our expectations, up 3% sequentially and 41% year-over-year. We continue to reinforce our position as a supplier of critical semiconductors that power cool and connect AI data centers from the grid to the core and from the core to the user. ST is now strategically positioned to capture upside from new AI-driven program, leveraging specialized technologies to enable the evolving AI infrastructure. We confirm our data centers revenue expectation to be nicely above USD 500 million for 2026 and well above $1 billion for 2027. In a major development, we expanded our strategic engagement with Amazon Web Services through a multiyear multibillion U.S. dollar commercial engagement to enable new high-performance compute infrastructure for cloud and AI data centers. This engagement covers a broad range of semiconductor solutions, leveraging ST portfolio of proprietary technologies. During the quarter, we secured multiple design wins for silicon and silicon carbide-based power solutions. These supports the drive for higher power density and increased energy efficiency for next-generation AI compute and data center architectures. We announced the expansion of our 800-volt DC AI data center power conversion portfolio with new 12-volt and 6-volt architectures in collaboration with NVIDIA. With this, ST now provides a complete portfolio for the 800-volt VDC power distribution inside gigawatt scale compute infrastructure, leveraging ST power, analog and mixed signal and microcontroller products. We also announced the start of high-volume production for our silicon photonics-based photonics ICs 100 -- PIC100 platform used by hyperscalers for optical interconnect for data centers and AI clusters. The technology enables higher bandwidth, low latency and greater energy efficiency. As I mentioned last quarter, the momentum in optical interconnect technologies is also driving demand growth for our high-performance microcontrollers in pluggable optics. We are also seeing initial demand for our secure element in data server power supply units to support authentication and detect data manipulation attacks. Our low-earth-orbit satellite business based mainly on our BiCMOS and panel-level packaging technologies strongly progressed during the quarter. We were selected to develop a power amplifier controller for direct-to-cell satellites based on our proprietary BCD technology by our main low earth orbit customer, and we continued to ramp shipments to our second largest customer. For sustainability, we issued our annual integrated report during the quarter. This report integrates our sustainability statement detailing our performance in 2025. We made further progress and remain on track for our commitment to becoming carbon neutral by '27 on Scopes 1 and 2 and on product transportation, business travel and employee commuting for Scope 3. We also target the sourcing of 100% renewable electricity by 2027 and achieve 86% in 2025. Now over to Lorenzo, who will present our key financial figures.
Lorenzo Grandi: Thank you, Jean-Marc. Good morning, everyone. Let's start with a detailed review of the first quarter, starting with revenues on a year-over-year basis. By reportable segment. Analog products, MEMS and Sensors grew 23.2%, mainly due to Imaging and MEMS and to a lesser extent, Analog. Power and Discrete products decreased 1.8%. Embedded Processing revenues were up 31.3% due to general purpose MCU and to a lesser extent, custom processing and RF and optical communication grew 33.9%. By end market, Communication Equipment and Computer Peripherals grew 41%; Industrial 26%, Personal Electronic, 21% and Automotive 15%. Year-over-year, sales to OEMs and distribution increased 24.5% and 19.2%, respectively. On a sequential basis, Analog product, MEMS and Sensor decreased by 9.1%, Power and Discrete by 5.4%, Embedded Processing by 4% and RF & optical communication by 9%. by end market, on a sequential basis, Communication Equipment and Computer Peripheral was up 3%, while the other end markets declined. Industrial was down 1%, Automotive, 10%; and Personal Electronic, 14%. Turning now to profitability. Gross profit in the first quarter was $1.05 billion, increasing 24.3% on a year-over-year basis. Gross margin was 33.8%, increasing 40 basis points year-over-year, mainly due to lower unused capacity charges and better product mix. On a sequential basis, gross margin decreased by 140 basis points. Gross profit included $11 million purchase price allocation PPA effects from our acquisition of NXP's MEMS sensor business. Non-U.S. GAAP gross margin, excluding this item, was 34.1%, excluding the impact of NXP's MEMS sensor business and related PPA effects, gross margin stood at 33.9%, 20 basis points better than the midpoint of ST guidance, which did not include any impact related to our acquisition of NXP's MEMS sensor business. Q1 gross margin included about 50 basis points of negative impact resulting from a nonrecurring cost related to our manufacturing reshaping programs. The negative impact on gross margin from the just mentioned nonrecurring cost is expected to remain at similar level over the rest of the year. Total net operating expenses, excluding restructuring, amounted to $904 million in the first quarter. Excluding the purchase price allocation PPA effects from our acquisition of NXP's MEMS sensor business, non-U.S. GAAP OpEx stood at $885 million. Non-U.S. GAAP net OpEx included OpEx related to the acquired NXP MEMS sensor business and a one-off impact related to a settlement with a supplier. Excluding these 2 items, non-U.S. GAAP net OpEx was broadly in line with the expectations given in January, which did not include any impact related to our acquisition. For the second quarter of 2026, we expect non-U.S. GAAP net OpEx to stand between $950 million and $960 million. The sequential increase is mainly due to calendar base effect, start-up costs and 1 incremental month of OpEx related to the acquired NXP's MEMS sensor business. Excluding these items, Q2 '26 non-U.S. GAAP net OpEx would slightly decrease sequentially. In light of our acquisition of NXP's MEMS sensor business and the new AI revenues opportunity, let me give you some more color on the 2026 OpEx. For full year 2026, we now expect like-for-like net OpEx to be up mid- to high single digit year-over-year versus our previous expectation for a low single-digit increase as we are accelerating our investment in new business opportunities, including NXP's MEMS sensor business acquisition and the exchange rate impact, net OpEx should be up low double digit year-over-year. In the first quarter, we reported $70 million of operating income, which includes $71 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. Q1 operating income also included $30 million purchase price allocation effects from our acquisition of NXP's MEMS sensor business. Excluding these items, Q1 non-U.S. GAAP operating income stood at $171 million and non-U.S. GAAP operating margin was 5.5% with Analog product, MEMS and Sensors at 12.2%, Power and Discrete negative 21.5%, Embedded Processing at 16.9% and RF & Optical Communication at 14.9%. First quarter 2026 net income was $37 million compared to a net income of $56 million in the year ago quarter. Diluted earnings per share were $0.04 compared to $0.06 1 year ago. Non-U.S. GAAP net income stood at $122 million and non-U.S. GAAP diluted earnings per share stood at $0.13. Net cash from operating activities totaled $534 million in the first quarter compared to $574 million in the year ago quarter. Net CapEx was $362 million in the first quarter compared to $530 million in the year ago quarter. Free cash flow was negative at $723 million in the first quarter compared to a positive $30 million in Q1 2025. Q1 '26 free cash flow includes $895 million cash out related to the payment for the acquisition of NXT's MEMS sensor business. Inventory at the end of this quarter was $3.17 billion compared to $3.14 billion in Q4 2025 and $3.01 billion in Q1 2025. Days sales of inventory at quarter end were 140 days, in line with our expectation compared to 130 days of the previous quarter and 167 days in the year ago quarter. Cash dividend paid to stakeholders in the first quarter of 2026 totaled $71 million. ST maintained its financial strength with a net financial position that remained solid at $2 billion as of March 28, 2026, reflecting total liquidity of $4.57 billion and total financial debt of $2.57 billion. Now back to Jean-Marc, who will comment on our outlook.
Jean-Marc Chery: Thank you, Lorenzo. Now let's move to our business outlook for Q2 2026. We are expecting Q2 2026 revenues at $3.45 billion, plus/minus 350 basis points. At the midpoint, our Q2 2026 net revenues will increase 11.6% sequentially and by 24.9% year-over-year. We expect our gross margin to be about 34.8%, plus/minus 200 basis points, including about 100 basis points of unused capacity charges. Non-U.S. GAAP gross margin is expected to be about 35.2%. This business outlook does not include any impact for potential further change to global trade tariffs compared to the current situation. To conclude, in the first quarter, despite the macroeconomic uncertainty, we saw improving demand with strong booking and normalized inventory in distribution. In the second quarter, we expect revenues well above average seasonality as well as an increased gross margin. We have a clear path to improve gross margin while staying at the forefront of innovation. We expect 2026 revenues to show double-digit growth beyond our addressable market dynamics and our already engaged customer programs. This growth will be driven by new AI programs for which we leverage our specialized technologies to enable the evolving AI infrastructure. Before handing over to Jerome, I am pleased to announce that as we did in March for Cloud AI and intelligent sensing, on May 4, we will host a dedicated call on ST's low-earth-orbit satellites, explaining how we are going to achieve our ambition of well above $3 billion cumulative revenues over the period '26 to '28 for this opportunity. You will receive the invitation today. Thank you, and we are now ready to answer your questions.
Operator: [Operator Instructions] The first question comes from the line of Joshua Buchalter from TD Securities.
Joshua Buchalter: Congrats on the very solid results. So you have a lot of idiosyncratic growth drivers hitting this year across data center, silicon photonics, LEO satellite and then your largest customers, normal seasonal ramp. Can you sort of help us with the shape of the year and how we should expect them to layer into the model? Like should we expect 3Q and 4Q this year to also be above seasonal because of these company-specific growth drivers?
Jean-Marc Chery: I am taking the question. Well, of course, I will not guide on '26, but maybe we can share a few elements. First of all, okay, the strong booking of Q1 has shown absolutely no pull-in order. It is, let's say, a well-balanced loading of the 2026 quarter-to-quarter. So the billable on '26 from the booking we received in Q1 represent approximately 85% to 90% of the booking we received. So this is positive to make us confident that in H2, we could achieve the usual seasonality H2 versus H1. Then what will be again positive on the year 2026, looking at the current dynamic in terms of growth. In automotive, we confirm that '26 will be a growth for ADAS for sensor, of course, and also with the boost of the acquisition of MEMS from NXP and for silicon carbide. In Industrial, we will see a solid and strong growth on general purpose microcontroller. In Personal Electronics, okay, as we have already seen in Q1, our engaged customer programs in Sensor and Analog will be, let's say, a contributor of the growth but not a big one in H2 because a change of profile in the introduction of the new device. Well, in data center, it is clear that here we are seeing a really strong growth in terms of demand, acceleration, including cloud optical interconnect, both for our PIC100 for our BiCMOS but I repeat for our general purpose microcontroller and analog and power discrete as well. So we confirm the revenue nicely well above USD 500 million. But the only negative aspect of the revenue in '26 is capacity reservation fees that will decrease, okay, $140 million compared last year. So this is how we see the year 2026. So I repeat, backlog now well loaded, great confidence level to have H2 versus H1 at the usual seasonality on top of ADAS, SiC, sensor, general purpose micro, clearly, AI infrastructure and low-earth-orbit satellite will be very strong contributor to the performance of ST in 2026.
Joshua Buchalter: Really appreciate it. I was hoping you could comment on the pricing backdrop. I mean, one of your large competitors last night said it was coming in a little bit better than they originally planned and now expect flat pricing. Have you seen changes in the pricing environment over the last 3 months? And sort of what are your expectations on pricing for the year?
Jean-Marc Chery: So, here, I'll let Lorenzo comment.
Lorenzo Grandi: Yes. Thank you for the question. If you remember last quarter, we were talking about pricing decline on low to mid-single-digit expectation. But clearly, there is some evolution in respect to this expectation. I would say that in Q1, our price decline was as expected, low single digit. What today we see, we see an environment in which actually there is some selected price increase that also we expect. So at this point, I would say that in terms of pricing, our expectation is to have a very low single-digit, let's say, price decline. So it means that actually, in terms of pricing, we see a better situation in respect to what was a few months ago.
Operator: The next question comes from Francois Bouvignies from UBS.
Francois-Xavier Bouvignies: Maybe just a follow-up on the pricing. I mean we have seen some announcements that you will increase your pricing in April and you are not the only one. So can you just give us an idea of how much of your revenues would be impacted by the margins? And also, Lorenzo, what about the gross margin with this pricing increase? I mean, should we -- I would imagine it takes a bit of time to fuel into your P&L. So when should we expect some gross margin impact from this gross margin increase that we see in the press? That's my first question on pricing, gross margin.
Lorenzo Grandi: No. Clearly, let's say, when we look at the price environment, I would say that at this stage, yes, there is some selective price increase. It's not a price increase for what concern us across all, let's say, customer and products. Anyway, what I can say is that when we look at the dynamic, of course, of the -- dynamic of our gross margin moving from Q1 to Q2, and we may say that pricing is quite neutral in respect, let's say, to this dynamic, means that at the end, it's not a boost but it's not even a detractor. It will remain substantially flattish when we look at the evolution of the gross margin. That is not what is the normal trend when we look, let's say, the seasonality between these 2 quarters. For sure, as a positive when we look at our gross margin, there is the mix. Mix is continuing to be, let's say, positive on our gross margin evolution. But clearly, there is also lower unused capacity charges. Our fabs that are better loaded capacity charges is declining moving from Q1 to Q2. But there are still some negative. The negative is mainly related to our manufacturing efficiency. Why? Because there is some temporary suboptimal efficiency in the context of our reshaping plan. We are moving technologies, products from 200-millimeter fab to 300-millimeter from the 150-millimeter of silicon carbide to 200-millimeter. And we are really in the middle of this kind of programs that, for sure, let's say, are somehow impairing a little bit the efficiency of our fabs. And this, I would say, is the main detractor when we look at the evolution over the -- on a sequential basis of our gross margin. Pricing, as I said, is really neutral at this stage.
Francois-Xavier Bouvignies: Maybe one for Jean-Marc. I mean, if we look at your customer programs, if I exclude the Personal Electronics, so if I take silicon carbide, photonics and satellites, so your big programs. Should we expect your revenues to grow quarter-on-quarter from here, like the fundamental that is increasing gradually. So no seasonality, I would imagine. So you should be able to see a growth across the board here quarter-on-quarter for the year. Is that the right assumption excluding Personal Electronics?
Jean-Marc Chery: Of course, excluding Personal Electronics, this is what we expect.
Operator: Next question comes from Janardan Menon from Jefferies.
Janardan Menon: Just a follow-up on gross margin, Lorenzo. Looking into the second half, what would you see as the various puts and takes on that gross margin evolution? Your top line is growing perhaps much faster than what we had thought a few months ago. So would it be that, that utilization and underloading charges will get used up faster? And what is -- there's normally a lag between the revenue trend and the gross margin. So just if you could give us any commentary on how -- not in terms of actual numbers but just the puts and takes perhaps of the second half? And how do you feel about your sort of your model of getting to 45% given the kind of strength that you're seeing in end markets and the favorable product mix that you're seeing right now?
Lorenzo Grandi: No. What I can say about the gross margin is definitely that the gross margin, let's say, this year will improve in respect to what has been in last year, definitely and will improve sequentially when we look Q1, Q2, Q3 and Q4. This is something that definitely we expect. This is what we expect to continue to see a sequential increase and sequential improvement over Q3 and Q4. What are, let's say, the driver we expect? Clearly, as you said, the unused capacity charges will improve, thanks to the fact that we will have higher revenues, even if I confirm that will not completely disappear. We will still have some areas in which especially related to the legacy technology that we will still have a little bit of unused capacity charge but much lower than what we saw, let's say, last year definitely. There will be progressively some manufacturing efficiency improvement. Even if I repeat what I said before, we are not yet optimized because, let's say, we are in this transition. We will start to see this benefit of the transition mainly in 2027 more and then in 2026. But for sure, there will be some improvement moving forward from Q2. Mix will be another positive impact. We will continue positive impact on mix. But clearly, we know that capacity reservation fees now are out. There will not be, I mean, much lower, let's say, there will not be a significant variation moving from Q2, Q3 and Q4, but are much lower in respect to what it was, let's say, last year. As I said, there is this cost related to this transformation of our manufacturing infrastructure. Maybe what we will have, let's say, in the second half is a little bit higher input cost for our manufacturing considering, let's say, the overall situation. But definitely, I confirm that starting from our, let's say, 35.2% Gross margin in the second quarter, we will continue to see progressively improvement in Q3 and Q4.
Janardan Menon: And maybe just a quick follow-up. On your Q2 outlook of 11.6%, is there already a very significant contribution from the optical connectivity on the data center, which is driving that upside? Or is the Q2 more driven by a pickup in industrial, general purpose microcontrollers, et cetera, and the optical kicks in more meaningfully into the second half of the year?
Jean-Marc Chery: The optical are starting to contribute. In fact, since Q1 is mainly through the high-performance microcontroller. But the main part of the optical overall with photonics by BiCMOS will be in H2 but microcontroller are already participating to the growth.
Operator: The next question comes from Gianmarco Bonacina from Banca Akros.
Gianmarco Bonacina: I have a question more for the midterm. You gave some figures for your, say, AI revenues for next year, above $1 billion. I just wanted to understand in terms of the commercial activity, we read -- we commented the big contract with AWS. So are you working on a commercial basis just to get potentially the revenues with other hyperscaler? And how confident you are that, let's say, the opportunity you realized with AWS can be also generated with other hyperscaler maybe, I mean, in the midterm, not just in the near term?
Jean-Marc Chery: If we speak about midterm, our strategy on hyperscaler are the following. Basically, if you break down this, let's say, infrastructure in 3 main application domain. What we call the network flow. This is where we have spoken about, let's say, the optical cable and near technology, let's say, evolution with packaged co optic or near-packaged optics clearly here, one of the main driver will be AWS but clearly, ST is positioned to provide -- to be a provider of product and solution for optical cable far beyond, only AWS. This is the point number one. And then the second big domain is clearly well known is what we call the power flow. So it means the capability for electronics to enable the supply of the processor from 20,000 volt to 0.8 volt. And here, ST is engaged now with a large product portfolio from, let's say, SPS, low-voltage MOSFET, microcontroller, driver, sensing and so on and so forth. And this will come far beyond AWS. Of course, AWS okay, will use this component but we will provide and we will compete far beyond AWS. Then last but not the least is all the infrastructure around the thermal cooling of this infrastructure, and we are already there with our power solution, microcontroller and analog. So clearly, AWS will be a fantastic driver for ST for the growth of the revenue during the next 3, 5 years. But our ambition is well above, thanks to our product portfolio. And I repeat ST is a unique company capable to provide on this infrastructure from photonic solution, MEMS solution that will come pretty soon, microcontroller definitively, power switches, power drivers, controllers and including other sensor. So this unique position, clearly position ST in the future, to be an important contributor in terms of supply to this business line.
Gianmarco Bonacina: Okay. Just a quick follow-up for Lorenzo, if I can. The change in the guidance in the OpEx, just to understand correctly. So you are talking about your clean OpEx excluding PPA and restructuring.
Lorenzo Grandi: Yes. Yes. Of course, we exclude PPA and restructuring. And as I was saying before, at the end, yes, apart of the fact that we have the addition of NXP that when we were talking previously was not taken into consideration. But I have to say that thanks to the fact that we see significant, let's say, opportunity in terms of revenues, we have some programs accelerating in terms of, let's say, development and bringing a little bit more level of expenses. I have to say that in any case, when we look at our net OpEx, the expense to sales ratio 2025 compared to 2026, let's say, in 2026, the expense to sales ratio will materially decline with respect to the previous year.
Operator: The next question comes from Andrew Gardiner from Citi.
Andrew Gardiner: Just a couple of, I suppose, follow-ups to some of the topics that have already been discussed. First, on the AI side, Jean-Marc, you've -- I think it's a reiteration of what you were saying last month in terms of the "nicely above $500 million of revenue for this year" and "well above $1 billion for next year." Just things are moving very quickly in this part of the market to put it mildly. What is the potential for upside there? And I suppose, more importantly, for you, where are you seeing capacity constraints at the moment that may indeed limit the level of upside relative to the demand that you're seeing? And then a quick one for you, Lorenzo, just again on the OpEx. You said a low double-digit gain '26 on '25 on one of the items that you were looking at. Could you just provide us the baseline of that? I missed that when you were saying it in the prepared comments.
Jean-Marc Chery: Never mind. It is clear that we are on some part of the technology and components that are enabling the solution we provide to customers, we are in ramp-up mode. Clearly on photonics and associated technology, we are in a ramp-up mode. Overall, what I can confirm today that the unconstrained demand we have today for '26 and '27 is well above the nicely above $500 million and well above $1 billion. And our ambition is to fulfill this unconstrained demand but the company first has to ramp up, okay, the capacity already installed in the second half of the year to implement additional capacity. And our ambition is to fulfill as much as we can the unconstrained demand of customers. I will provide more color in July, clearly during our next meeting. But I really confirm that '26 will show a significant breakthrough in our revenue linked to AI data center.
Lorenzo Grandi: For what concern OpEx, I confirm that net OpEx sales ratio will decrease in 2026 compared to 2025. What we expect, now we expect when we say OpEx like-for-like means, let's say, the same FX and same perimeter means not including the NXP acquisition to be up mid- to single digit, let's say, in 2026 compared to 2025. You have to consider that half of this increase is related to the start-up cost that we have, let's say, in the fab 300-millimeter and, let's say, 200-millimeter for silicon carbide that is, let's say, related to our transfer from 200 to 300, 150 to 200 for silicon carbide. So it means that this is something that is not structural is coming this year but will not stay forever. If we include the NXP MEMS business acquisition, and also include the impact of the exchange rate, excluding the restructuring, we should be up low double digit versus 2025. This is assuming an exchange rate effective in the range of [ 1.15, 1.16 ] and is, of course, including, let's say, the operation of NXP MEMS business that we can estimate in the range of $50 million additional expenses for us in this year.
Operator: The next question comes from Sebastien Sztabowicz from Kepler Cheuvreux.
Sébastien Sztabowicz: On the transformation program, where are you standing right now in terms of capacity build and so on? And when do you expect to have the full synergies benefit? Is it for '27 or more for 2028? And the second question is on silicon carbide and your JV with Sanan in China. Where are you in the ramp-up mode with the JV? And when do you expect the first volume to start to ramp up meaningfully in China?
Jean-Marc Chery: For the transformation program, clearly now we are in the middle of the execution. Clearly, we have to respect the customer qualification time, when for analog technology, we move from 200-millimeter to 300-millimeter. This is -- they have a good incentive to do it because clearly, our capacity potential increase is related to Agrate in 300-millimeter. We expect that the benefits of Agrate at full speed will be more in the end of '27 and entering in '28, not related to the fact that we don't go at the right speed in terms of qualification internal, but more related to the customer normal constraint they have to qualify their own application. On silicon carbide, it's a bit similar, in fact, okay, because here, we are moving from 6-inch to 8-inch, and this is mandatory to do it here is the same. We are not limited by our own capability, both in Catania and in Sanan in Chongqing. The limitation is more related to the qualification time of our customer. And you know that we are engaged in a very, very famous platform with an important player in Europe, which currently has a great success for this new platform in electrical car. And here, of course, we cannot take any risk and it takes time before to move to 8-inch. So for sure, are the same. The benefits will be more end of '27 and entering in '28, and in Sanan, we expect to start the production and to load this nice infrastructure starting the end of 2026.
Operator: The next question comes from Sandeep Deshpande from JPMorgan.
Sandeep Deshpande: My question is regarding the acquisition of the NXP sensors business. How -- I mean, how did that business grow in the past? And how will that contribute to growth in the current year? And then my follow-up question is regarding the gross margin of the company. You've said that your underutilization charges do not fully go away this year. But should we assume that in '27, the underutilization charges go away and with the mix shifting more to the AI products as well as some of the satellite products, et cetera, that there could be a much bigger move in the gross margin in full year '27?
Jean-Marc Chery: Thank you, Sandeep. So Marco Cassis will take the first question on NXP -- former NXP MEMS. And Lorenzo, of course, the second question.
Marco Cassis: Yes. On NXP, the combination of the capabilities of the 2 companies is translating in acceleration, of course, related to a market, which is automotive and clearly is moving at the speed of the automotive but it's an acceleration of opportunities of design-in and design win because we are putting together the best of the 2 worlds, which is a very strong positioning of NXP MEMS in accelerometers, where they do use -- sorry for a little bit of technical but monosilicon crystal, which are extremely good in terms of temperature performance for automotive and our capabilities on the 6-axis. So we do see that we are going to grow with NXP at faster speed than what is typically the market growth in safety application. So it's going to be a contribution of the growth of the overall MEMS business. I hope I'm answering to your question, Sandeep.
Sandeep Deshpande: So how much was the growth in the past couple of years in that business?
Marco Cassis: Well, it was in the range around low single-digit growth, which is the typical growth of safety application in automotive.
Sandeep Deshpande: And you expect that to accelerate is what you're saying?
Marco Cassis: I am expecting this one to accelerate, yes.
Sandeep Deshpande: Understood.
Lorenzo Grandi: Okay. Maybe I take the one of the gross margin, let's say, confirm what I was saying before, the gross margin will improve starting from our 35.2% this quarter of Q2 after, let's say, quarter after quarter this year driven by the seasonality of the revenues, the continued reduction of the unused capacity. As I said before, let's say, still there will be some but reducing over the second part of the year and then the continued improvement of the mix. Clearly, let's say, this is our trend to the path above 40%. We said that when the company, let's say, will be with revenues above $4 billion quarterly revenues, let's say, we expect to have our gross margin at 40%. After that, our reshaping plan will be completed. So this is going in this direction, let's say. So what I can say today is that clearly, let's say, in our gross margin, there is still some negative impact on this reshaping plan, temporary negative impact due to the activity that we are doing that we will progressively go down and transform, let's say, positive impact when we will start to have, let's say, the benefit of these programs. So yes, I confirm that at the end, let's say, there will be -- you will see a progressive improvement in our gross margin moving in Q3 and Q4 and then, of course, in 2027.
Jerome Ramel: Thank you, Sandeep. We have time for a very last question.
Operator: The last question for today is from Lee Simpson from Morgan Stanley.
Lee Simpson: Great. Maybe just a couple of questions, if I could, around data center power and then on the photonics side. Just on the data center power, it did look as though you were saying you've seen some design wins. It looked as though with silicon, silicon carbide, most all of it first stage. I just wondered if you could give us a sense for the engagements you're seeing around gallium nitride, where regionally that may emerge? And then maybe just on the voltage regulation side on the second stage, anything really happening there, certainly as we look out to '27?
Jean-Marc Chery: So Marco will answer the detail. Interestingly, for all of you, guys, maybe what I can tell you that the nicely above USD 500 million in '26 will be spread approximately between 40% related to analog and power and 60% related to microcontroller and radio frequency optical cable. Just for you to have the span of our revenue for 2026. And I'll let Marco to answer the detail.
Marco Cassis: Yes. For what is related to power compared to our positioning 1 year ago, we put a major effort in expanding the portfolio to be sure that we can cover basically from grid up to driving the GPUs. And this goes through the full portfolio of ST, which is silicon-based, silicon carbide with different voltages and new packages that we are introducing where we are not present. And of course, the GaN, which is an important for the 800 volt where we are in sockets that I think will come to life during this year and next year. So the position overall in terms of portfolio is now much stronger than it was, and this will translate in revenues during '26 but mainly during '27. And this goes across the different ecosystem of suppliers, which means power supply makers based in many cases in Taiwan and of course, the ecosystem that we have in U.S. So overall, the trend is going through the full portfolio of ST, again, with a portfolio that has been expanded and now is rich and covering all the stages of the power conversion.
Lee Simpson: That's very clear. Maybe if I sort of move it on to the photonics side. It always seems ST is extremely good at getting a big lead customer, pipe cleaning a new market opportunity and creating advantages, if you like, in technology, leveraging some of the IP in-house. But that transition to a standard product in the market for us always feels like the real ROI where margins can be accretive. Are we seeing when we look at the PIC and some of the engagements you have in the market, the possibility that this PIC100 becomes a standard product in the market?
Jean-Marc Chery: Standard product, okay, I will not classify it as a standard product, okay? Maybe application standard specific, maybe yes. But one thing, I prefer to share with you again to show how ST is and will be a reference on silicon photonics. First of all, we are the unique company capable to provide silicon photonics technology on 12-inch. So we have the capability to increase our capacity in both in Crolles and possibly later on in Agrate. So for sure, ST, will compete on this market, largely to become a pure standard, you will have many innovation coming in the optical cable and optical solution. Again, the near-packaged optic, the co-package optics, all this will come maybe faster than expected. And silicon photon is a key enabler of all these technologies.
Jerome Ramel: Okay. Thank you. Thank you, everyone. This is the end of this call. So thank you for joining us today, and we remain at your disposal if you have any follow-up questions. So sorry for the one who we couldn't squeeze into the question. So thank you very much. Have a good day.
Lorenzo Grandi: Thank you.
Jean-Marc Chery: Thank you. Bye-bye.
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.