STMicroelectronics N.V.

Good morning. Thank you everyone for joining our first quarter 2022 financial results conference call. Hosting the call today is Jean-Marc Chery, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and Chief Financial Officer, Marco Cassis, President of Analog, MEMS and Census Group, and Head of ST's Strategy, System Research and Application and Innovation Office. These live webcasts and presentation materials can be accessed on ESSI'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 ESSI'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 this morning with the results. and also in ESSI'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. I'd now like to turn the call over to Jean-Marc, ESSI's President and CEO.

So, thank you, Celine. Good morning, everybody. and thank you for joining ST for our Q1 2022 earnings conference call. So let me begin with some opening comments. Starting with Q1. So Q1 net revenues of $3.55 billion and gross margin of 46.7% came in above the midpoint of our business outlook range. This revenue performance, driven by strong demand in microcontrollers, was partially offset by temporarily reduced operations at our Shenzhen, China, manufacturing facility due to the pandemic, which impacted specifically our KDG revenues. Looking at our year-over-year performance, net revenues grew 17.6%. Revenue growth was accompanied by improved profitability Gross margin at 46.7%, up from 39%, and operating margin of 24.7%, increasing from 14.6%. Net income more than doubled to $747 million. On a sequential basis, revenues were substantially flat. On Q2 2022, our second quarter business outlook at the midpoint is for net revenues of $3.75 billion, increasing year-over-year by 25.3% and sequentially by 5.8%. Growth margin is expected to be about 46%. For the full year 2022, Based on a strong customer demand and increased capacity, we will continue to drive the company based on a plan for full year 2022 revenues in the range of $14.8 billion to $15.3 billion. Now, let's move to a detailed review for the first quarter. Net revenues increased 17.6% year-over-year, with higher sales in our three product groups and whole subgroups, except, as expected, the imaging subgroup. Year-over-year, sales increased 14.4% to OEMs and 24% to distribution. On a sequential basis, net revenues decreased 0.3%, Coming in 130 basis points above the midpoint of our hot look, this performance was mainly driven by MDG, with revenues up 12.8% on better-than-expected manufacturing efficiencies for microcontrollers. ADG revenues increased 2.5%, impacted by the temporarily reduced operations at our Shenzhen, China manufacturing facility due to the pandemic. TMS revenues decreased 13.8% sequentially, substantially in line with our expectations. Gross profit was $1.65 billion, increasing 40.8% on a year-over-year basis. Gross margin increased year-over-year to 46.7% from 39%, largely driven by favorable pricing and improved product mix. Our first quarter growth margin was 170 basis points above the midpoint of our guidance, driven by similar pricing and product mix factors. First quarter operating margin was 24.7%, increasing from 14.6% in Q1 2021, while supported by improvements in all three protocols. Both net income and deducted earnings per share more than double year-over-year, respectively reaching $747 million and $0.79 from $364 million and $0.39 per share in Q1 2021. Looking at the year-over-year sales performance by product groups, ADG revenues increased 20.5% on double-digit growth in both automotive and in power districts. EMS revenue increased 0.4%, with growth in both analog and MEMS, while Imagine Products sales decreased as expected. MDG revenues increased 35.2% on strong growth in both microcontrollers and in RF communications. In terms of operating margin, all three product groups delivered year-over-year expansion. ADG operating margin increased to 18.7% from 8.2%. AMS operating margin increased to 22.6% from 17.2% and MDG operating margin increased to 34% from 19.4%. Net cash from operating activities increased 38.6% and many more. CapEx in the first quarter was $840 million compared to $405 million in the year-ago quarter. After the strong investment in CapEx, free cash flow was $82 million In Q1 2021, it was $261 million. During the first quarter, we paid $49 million of cash dividends to stockholders, and we executed an $86 million share buyback as part of our current share repurchase program. ST's net financial position, non-US gap. was $840 million at April 2nd, 2022 and reflected total liquidity of $3.4 billion and total financial debt of $2.6 billion. This includes a $107 million increase in total financial debt in connection with the adoption on January 1st, 2022 of the new US GAAP reporting guidance applicable to convertible debt. At December 31st, 2021, ST's net financial position was $977 million. Let's now discuss the market and business dynamics during the quarter. Overall, demand continue to be strong. Starting with the automotive market, we continue to see strong demand in Q1, with a lower number of vehicles produced worldwide compared with initial expectations. This strong demand reflected the combined effect of replenishment of inventories across the automotive supply chain and the ongoing electrification and digitalization transformation of the industry. Bookings remain strong across all customers and geographies. Backlog visibility is still about 18 months and well above our current and planned 2022 manufacturing capacity. The accelerated transformation of the vehicle industry towards more electrification and digitalization brought additional wins and opportunities for us during QA. Silicon carbide devices are a key component of car electrification. During the quarter, we again increased the number of ongoing silicon carbide programs for the automotive and industrial markets to 98, spread over 75 customers. These projects are mostly equally split between the two end markets, and we are in line with our revenue targets. We had a number of new design wins in Q1 with ST power modules as well as with a module maker using our generation 3 silicon carbide MOSFET technology for electrical vehicles, traction inverters applications. We also had success with complementary technologies in a range of electrical vehicle applications. This includes with electrical vehicle car makers and tier 1 for microcontrollers, silicon mosfets, battery management solutions, and ultrafast and silicon carbide based diodes. In car digitalization, during the quarter, we are doing across the key application we address. We designed our next-generation Stellar Automotive microcontroller into a new zonal architecture for software-defined vehicles. We signed a deal for a V2X chipset with a player in China in cooperation with Autotalks. And we had a design in for Mobileye IQ technology from an electrical vehicle maker for an helpful ADAS platform. In our automotive sensor business, we earned a first win for our six-axis sensor with Argodon Machine Learning Core in an advanced automotive anti-theft system, while continuing to secure wins for other automotive sensors. Moving now to industrials. In industrial, we saw strong demand throughout the quarter, especially in factory automation, power and energy applications, as well as building and home control. Demand was strong both with distribution as well as OEMs. Also in industrial, electrification and digitalization are the main trends, accelerating the increase we see Food Q1. Inventories of our products at distributors remain lean across all product families, with high inventory terms. Although, points of sales were strong across all products and geographies. We address the industrial and market with our general purpose and secure embedded processing solutions, power and energy management products, and our sensors and analog portfolios. In embedded processing, we are building on our market leadership in 32-bit MCUs. I am pleased to announce that in 2021, we were ranked Number one worldwide in general purpose microcontrollers. We continue to invest to further strengthen our STM32 family, offering an ecosystem with a particular focus on wireless connectivity, security, and artificial intelligence. In these three areas, we are accelerating our customer engagement, driving design wings with our latest product and solutions. We are also building momentum with our STM32 microprocessor offer, the natural evolution path for our customers needing higher performances and computing power. Here we want a number of sockets in applications such as lighting, programmable logic controllers, and smart grids. In power and energy management, we address industrial applications with a range of products, including silicon-carmide-based transistors and modules, as well as silicon-based transistors, IGBTs, diodes, and rectifiers. Here we have wins across a number of applications, including renewable energy and power-saving technologies. We also have many new designs with our industrial analog products with ours in applications where we are focused. These include motion control, power line communication, factory automation, and home appliances. Here, our industry-leading products for smart motor control, galvanic isolation, and power conversion are driving Design Week. We continue our momentum in sensors for industrial applications with wins for products like our industrial-grade pressure and waterproof sensors. We introduce our first intelligent sensor processing unit, launched together with the Generation 3 MEM sensors. Moving now to personal electronics. Demand during the quarter was in line with seasonality for this end market. The market for accessories continues to be strong, especially for connected devices, such as wearable, embedding health features, driving more semiconductor content. Tablets, earables, and true wireless stereo headsets. Our first strategic objective in Person Electronics is to lead in selected high-volume applications with differentiated products or custom solutions. During the quarter, we want sockets in new flagship smartphones with motion and environmental sensors, time of flight ranging sensors, wireless charging products, touch display controllers, and secure solutions. Our second strategic objective is to leverage our broad portfolio to address high-volume applications Here we had wins with a broad range of light, motion and environmental sensors, as well as with analog, power and microcontrollers in applications such as the smart watches and other wearables from leading players. In communications, equipment and computer peripherals, we continue to see adoption of 5G-related products and further deployment of low-Earth orbit satellite programs and services around the globe. The PC market continues to show signs of normalizing demand. We have several strategic objectives in our approach to this end market. First, we target selected high-volume applications with differentiated products or custom solutions while leveraging our broad portfolio. New wins here include secure trusted platform solutions and time-of-life sensors for laptops. General purpose MCU design-ins as well as further wins in our master GAN family for high power density smart charging adapters. I would also like to highlight our goal to address selected applications in cellular and satellite communication infrastructure. In this area, we continue to progress well with our key customer engagement program. Now, let's move to our 2022 second quarter outlook and our plans for the full year 2022. For the second quarter, we expect net revenues to be about $3.75 billion at the midpoint, representing a year-over-year growth of 25.3% and a sequential increase of 5.8%. Growth margin in Q2 is expected to be about 46% at the midpoint. Our guidance includes the impact of the temporary reduce operations in Krol, France caused by the power outage external to our site that occur at the beginning of April. For the full year 2022, we confirm our plan to invest about 3.4 to 3.6 billion dollars in CAPEX to further increase our production capacity and to support our strategic initiatives, which includes the first industrialization line of our new 300mm wafer slab in Agrate, Italy. Based on our strong customer demand and our planned investments to increase capacity, we continue to drive the company based on a plan for 2020-2022 revenues in the range of $14.8 billion to $15.3 billion, representing a growth of about 16% to 20%. To conclude, our first quarter results and plans for 2022 underscore our tight focus on accelerating the execution of our strategy and value proposition. We are on track with our 2022 plans, both in terms of revenues and capex investments, to sustain our short- and long-term growth objectives. Finally, we look forward to your participation, either in person in Paris or via our live webcast at our Capital Markets Day on next May 12th. Thank you very much, and we are now ready to answer your question.

The first question is from Didier Shimama from Bank of America. Please go ahead.

Good morning, everyone. Thanks for taking my question. Maybe before I ask my question, I just want to give you my congratulations for finishing the year number one in general purpose by good controllers. I think it's an amazing achievement for ST when you look back at the last 20-plus years that ST, the leader, in such an important franchise. With that, I just wanted to come back, Jean-Marc, maybe to your full year guide, because the nitpickers would say you've had a beat on Q1 and Q2, but you're not raising the full year. So I just wanted to unpack that a little bit, give us your sense, whether you introduced a degree of caution in your second half revenue guide. And associated with that, I think last year, last quarter, excuse me, you were kind enough to give us a full year gross margin guidance of 45%. Looks like your first half is running at about 46.3%. Do you intend to raise that full year gross margin guidance? Thank you.

Thank you. So Lorenzo will answer on the gross margin and I will answer on the revenue. First of all, at the midpoint of the revenue range we have indicated, we will grow close to 19%, which is substantially above the market we serve, because the latest data point we receive about the market we address is a growth of 15.8%. Point number one, we will grow well above the market we sell. Then point number two, this revenue range is absolutely not related to any conversatism or cautious on the demand. The backlog we have is basically well above 30 to 40% of our manufacturing capacity. and we have already backlog covering our plant capacity for next year. Okay, close to 100%. So it's absolutely not related to the overall demand. It's absolutely not related to any specific customers and engage customer for them. So I would like to insist that, okay, our revenue range indication is simply related to the fact that our supply chain is totally loaded. When you load our manufacturing supply chain at 90% and plus, when you have your supplier pretty loaded as well, the overall supply chain worldwide increasing complexity, the various lockdown we face in Q1 or event that maybe we are still facing in Q2, I guess it's a business as usual to give a range of uncertainty related to the execution, but absolutely not to the demand. So we will, as usual, update the indication of the year in July, as every year. This year, I guess you have well noted that we have anticipated one quarter, okay, the visibility. I think it has been well appreciated, but we will update it, okay, in July after the first half completion. So this is about, okay, the year indication. So as a takeaway, absolutely, okay, not issue or conservatism on the demand, which I again repeat, is 30 to 40% above our maximum capacity and already pre-loaded next year. Either any concern with any customer and engaged program, okay, only, okay, the normal cautious about, okay, the random event we can face during the execution because of the high level of loading of our manufacturing capacity. About gross margin, Lorenzo.

Good morning and thank you for the question about the gross margin. Yes, your math is definitely correct. Let's say that in H1, our gross margin at midpoint of the second quarter guidance, it will be slightly above 46%. At this stage, of course, we have a little bit more visibility in respect to entering Q1 about the dynamic in respect, let's say, the price increase in our COPs, in respect, let's say, to the mix, in respect to some elements. What I can say in respect to this level of gross margin, our view at this stage is that in the second half of the year, we will be impacted by... Thank you very much. Let's say close to 46% more than the first class. So we uplift a little bit our visibility at this point in respect to our ability to keep this level of gross margin along the year in the next quarters.

Fantastic. Maybe as a quick follow-up, I just wondered, Jean-Marc, if you could, I think you sort of touched on it, but I just want to make sure that we cross the T's and dot the I's. One of your peers in the U.S. last night sort of introduced a high level of caution with regards to the China lockdowns for the second quarter. It feels like it's a sort of broad brush cut. I think you said in your prepared remarks that the lockdowns in Shenzhen had affected your business. I wondered how much in Q2 of your revenue guide is baking in if you want some impact from the lockdowns.

Thank you. We are facing, let's say, the impact of lockdowns from Shanghai, already in Q1 on logistics mainly. It is clear that in Q2, we have also some implications related to the assembly and test subcontractor or some assembly material provider, but it is included in our guidance. So our $3.75 billion, so 5.8% sequentially increase, and 25.3% year-over-year is including all, let's say, the current headwinds we face, so Shanghai lockdown and the crawl event of early April.

No, I guess my question was how much would it be without the impact of the crawl and the Shanghai lockdown?

At the end, let's say that our estimate, based on the information that we have at this stage, let's say, is that The event will be a few tens of million dollars in our top line. This is more or less the sizing of these two events.

Perfect. Thanks very much.

Next question, please. The next question is from Matt Ramsey from Cohen. Please go ahead.

Yes, thank you very much. Good morning, guys, and congratulations on the progress. Just to follow up on Didier's question, I think your U.S. competitor last night gave – they characterized it as sort of a broad-based haircut to their revenue expectations by about 10 percent, and that's quite a bit more than, Lorenzo, you just articulated. I just wonder, their business is much more direct to customers versus your business, in certain cases, using distribution to a much greater extent. So as we look into the back half of your calendar year, how have you guys accounted for the lockdowns in China? Is that substantially what's leading you to not raise the full year despite beating the first half of the year? Are there other considerations that we can have? Thanks.

No, I repeat, okay, the various events we face in Q1 and still in Q2 basically are impacting H1. So more complex logistics in Q1 related to Shanghai lockdown. Again, OSAT, let's say, lockdown, some material provider lockdown, The impact of Shenzhen, the impact of Kroll, mainly are impacting H1. We never plan for a catastrophe. We are just putting in our full year, let's say, a range because, again, I repeat, our sales and operating plan show our capacity fully saturated above 90% across the full remaining year and it is valid as well for assembly and test. And we are facing on top of that our equipment supplier, our material supplier, our gas and chemical supplier facing, okay, complex logistics, okay, shortage by themselves. All the supply chain is under tension, so we do believe that when we provide your indication, we give this range because it's simply a good sense of planification of our business and manufacturing.

Understood, Jean-Marc. Thanks. Yeah, don't shoot the messenger. It's just the questions we're getting.

No, no, no.

It's totally right. Okay. And I simply answer because I think altogether there is two concerns. Either you put cautious on business. I repeat, no. Okay. Either, okay, I share simply with you that our manufacturing capacity and supply chain is really, really loaded. And it's normal that each single event has an impact. So it's normal when you provide an indication and you share with an investor and analyst, you give this launch. And you see in Q1, we perform slightly above the midpoint of our revenue. We have been impacted by Shenzhen. Shenzhen was basically an equivalent of two weeks of production losses. But thanks to our capability to reallocate to some other plants our dyes for microcontroller, we have overperformed in microcontroller. So you have always this kind of plus and minus. And that's the reason why we provide an operating range to you because, again, I think it is our duty.

Thank you for that. Just as a quick follow-up, Lorenzo, do you mind shedding some light on the guidance for June just by the different divisions? I think ADG obviously had some impact, as you called out, in the March quarter, but as you look forward into June, just some color on the growth by division would be helpful. Thanks, guys. I appreciate it.

Yes, about the evolution of the revenue in the second quarter. But in the second quarter, for sure, on a sequential basis, let's say the main driver of our growth will be ADG. ADG will be the driver of the growth in this second quarter of the growth, let's say. On water and air, we will have both growth in automotive and power discrete. When I look at AMS, AMS will slightly grow in the quarter, but will be substantially contributing, but a much lower pace in respect to MDG. And what concerns MDG, MDG this quarter will not contribute to the growth. It will be slightly down or substantially flat growth. And this is due to the fact that the group that is, let's say, more impacted by what was described before by Jean-Marc, by these events, let's say, the interruption to production that we had in Kroll, some impact due to the lockdown. So at the end, if you want, in this quarter, the driver, the real driver of the growth will come from ADG.

Thanks very much. See you guys in Paris in a couple of weeks.

You will come, Matt? Thank you very much. It will be with great pleasure. Thank you for the question, Matt. Next question, please.

The next question is from Andrew Gardner from Citi. Please go ahead.

Good morning, guys. Thanks for taking the question. Another sort of follow-up on the 2Q outlook. I just want to confirm that, you know, from your point of view, you're not seeing any change to customer activity as a result of the challenges around the lockdowns in China. And I suppose if I could ask it another way, if you are going to face some of these logistical or R&D facing them today, the logistical challenges in China, given the backlog, the level at which backlog exceeds your current demand, are you able to ship a lot of those parts elsewhere? And therefore, from a global standpoint, that's why you're not seeing such an impact?

No, no, we confirm that the dynamic in Q1, despite, and I say despite purposely, the various events, the dynamic is strong. Our booking in Q1, book to bid is well above 1.2%. We booked more than $4 billion in Q1 with all customers and geographies. Our point of sales is continuing increasing. All the inventory we monitor, as I confirmed during my speech, are lean and with high inventory terms. So we have not seen Any, let's say, sign from the KPI of the order booking and customer. Then after, it is clear that all, let's say, the supply chain and the value chain adapted itself to the complexity increasing related to Shanghai long term, both the airport and the airport. and we have the capability to adapt ourselves and to mitigate the effect of this lockdown.

Thank you, Jean-Marc. Just a quick follow-up, given you mentioned inventory then. I think in your comments specifically on automotive, you talked about some inventory replenishment through the supply chain. Can you shed any more light on what's happening within automotive in particular? That's clearly been a market where things have been incredibly stretched. So just be interested in what you're seeing there.

You know that magically now since five quarters, so Q4 2020, we are operating all together, carmaker, tier one and semiconductor company in a very complex supply chain because you know, Sometimes you have carmakers, PR1, EMS, EMS1, EMS2, distributors, semiconductors. And basically, this supply chain has been dry during H1 2021. And at a certain moment, it's not sustainable forever. Specifically, when you have an introduction of new products related to the electrification and digitalization, and it is normal. that the partners and the players, they try to operate at a normal level of inventory, which are capable to absorb the variability of the logistic time, because especially when the logistic is becoming, let's say, complex. So for sure, we are convinced that in the order we receive from the Tier 1 massively or EMS. There is a part of this order mainly for the mainstream business which is related to some inventory replenishment in order to operate in safer conditions and to stop to see all this announcement about plant shutdown because It's not easy for the carmaker, answer one, to shut down, and for the social effect, to shut down plant regularly. So, first of all, yes, it's clear that part of the mainstream business is related to the weakness to come back to a normal situation. And then after, there is another part, which is linked to the growth driver and booster of the growth, so increasing content in the car, which are either related to electrical car battery-based where we know that here from battery management system, power driver, power switches, the demand is very strong, especially for silicon carbide. And also we start to see the first effect of the digitalization. So change in architecture, different level of option. So we see the two effects and that's the reason why in Q1, Even if the data point we receive is a little bit decrease of the production vehicle forecast for 2022, moving from 86 million to 83 million, so there is, let's say, a decrease, the demand is still very strong for the two reasons I just shared with you.

Thank you very much, Jerome. I appreciate it.

Thank you very much, Andrew.

Next question, please. The next question is from Jerome Ramel from BNP Paribas Exxon. Please go ahead.

Yeah, good morning. Quick one question on the mixed impact on the growth market and the price increase. Could you quantify, I think last quarter you said that probably about 80% of demand this year are going to be from volumes and 20% from pricing. Is it still the same ratio we should think about for the full year, or have you seen a further price increase in the mix?

I take the question, Jean-Marc. Yes, it's true that we see a little bit better pricing evolution, and this is reflected also in the level of our markets. Gross margin in the first quarter. If you want, at the end, you see, in respect to the total year, we have a little bit upgrade our, let's say, indication, our expectation for the year. I would say that this is mainly coming as the volume at the end, as was explained before by Jean-Marc, is substantially linked to our capacity is mainly coming from an improvement between pricing, I would say, and something also related to the mix. So that is definitely something that will help in this respect.

Thank you. And maybe a quick follow-up, specifically on silicon carbide. Could you update us where you are on the qualification and maybe the ramp-up of your 200-millimeter wafer?

Ah, okay. I think Marco Monti at the Capital Market Day will deliver to you the detailed information. What I can share without anticipating too much is that we are really on track and it is clear that our current capabilities and milestone, technical milestone we go through successfully will be a key factor, key success factor for ST to accelerate our growth revenue on silicon carbide in the next two, three years. And you know that this year, okay, we will deliver Let's say $700 million of revenue from silicon carbide. You know that we have anticipated by one year our target of $1 billion by 2024. And clearly the dynamic is continuing to be very positive. And clearly our 200 millimeter capability we have demonstrated already in our, let's say, Sweden infrastructure. that we will then massively deploy in Catania will be a key success factor to accelerate the revenue path for silicon carbide in the next three years.

Okay. Thank you very much.

I'm looking forward to hearing more at the Capital Market Day. Thank you.

Thank you very much, Jerome.

Next question, please. The next question is from Jean-Marc Ramel from Jefferies. Please go ahead.

Hi, good morning and thanks for taking my question. First of all, congratulations on my side also, just echoing Didier's comments earlier on the fantastic achievement of becoming number one in general purpose microcontrollers, truly remarkable. My question is also a little bit on the general purpose microcontroller side. You've said that you saw the strength in Q1 there because the capacity was better than expected. Is that capacity improvement mainly from internal that you saw in Q1, or was that also from the foundry side? And when you talk about product mix having a positive impact on gross margin, at a top level, would I be right in assuming that The general purpose microcontroller side is your higher gross margin business, and so when that is strong, you get a good gross margin uplift. And would that explain why you are sort of guiding to 46% from 46.7% because you're saying that that division will be less strong in Q2 than the other divisions?

So I will answer the first question about the contributor to the growth of micro and Lorenzo will answer the second question. I would like to say that in the year 2022, both internal fab and foundry will contribute to the growth of microcontroller. Because you know that this product group is really The growth in 2022 will be equally related to, let's say, external foundry and internal fab. Well, unfortunately, not at the level we would expect, clearly, because thanks to all the design wins we have and the appetite of our STM32 and ecosystem, the demand is much, much higher than the capability we have.

About the dynamic of the gross margin and the contribution in terms of product mix, yes, of course, our product line of the microcontrollers is definitely a creative to our gross margin. So it's true that the ability to one, to sell more microcontroller than expected thanks to the fact that at the end we were able to run our operations in a more efficient way, also diverting, as was said by Jean-Marc, some of our advice in order to be assembled for microcontroller was one of the contributors of the overperforming our guidance in terms of the gross margins. In the second quarter, this element will be, yes, will not be any longer there as in our guidance at the end. Let's say for the second quarter, MDG, as I was saying, is not contributing to the growth. So we substantially remain flat, slightly declining. This is our expectation. So it's true that in terms of product mix, microcontroller is one of the product line that is creative for our profitability.

And can I have a quick follow-up on the imaging business? You had pulled out earlier that it would be down, but can you just remind me of the reasons for why it is down and how will you expect that to revert to growth over the course of the rest of the year and into 2023?

In 2022, we are coming back to a more, let's say, profile, revenue profile across the year than we usually face. It was not the case in 2021 because of the pandemic. The new phone introduction in the second half of 2020 has been delayed basically by one quarter. and where usually the revenue are strong Q3, Q4 in 2020, it was, okay, push out, Q4 20, Q1 21. So that's the reason why, okay, we have this unbalanced situation in 2022 when we compare the year-over-year growth. About the sequential growth, okay, again, it's a usual seasonality now, okay, Q1 versus Q4. We confirm again that imaging will contribute to H2 material growth of ST versus H1 this year and next year as well.

Understood. Thank you very much.

Thank you, Jonathan. We are now time for maybe two more questions, if they're not too long, hopefully. So next question, please, Moira.

The next question is from Sandeep Deshtande from JP Morgan. Please go ahead.

Yeah, hi.

Thanks for letting me on. My question is about your gross margin, very strong gross margin, clearly very strong utilization, as well as, I mean, your mix has been good. Maybe you can talk a little bit about the mix in the product. I mean, whether sales into the distributor channel is helping or is it pricing that is helping? So I have a quick question on gross margin. And then a follow-up question. I mean, clearly, ST has done incredibly well over the last few years, growing organically. Jean-Marc, I mean, any thoughts on, you know, whether ST wants to participate in the M&A, in the semiconductor industry, or whether their own path is the best path to go at this point?

Lorenzo, you want to start with the first part?

On the gross margin, the level of gross margin, for sure, the drivers... Both on a sequential basis and on a year-over-year basis are actually the component of pricing, let's say. As we said, the price is a favorable environment. The other component is mix. These are the two drivers that really we enjoy in product mix. These are the two drivers that we enjoy that were, let's say, mixed. Very creative and boosting our level of gross margin. For sure, in terms of manufacturing efficiency, the contribution so far has been, when we look sequentially, especially when we look sequentially, has not been significant. Still, there is some contribution in terms of productivity, but for sure it's not at the level that was a few, let's say, months ago. Because at this time, of course, we started to be impacted by the increased pricing, both for our OSAT and the foundry and materials. Moving forward, we think that, as I was saying before, these components will be substantially, let's say, offsetting each other. So it means that we will remain substantially in the second half of the year at the level of the first half of the year. So overall, I see a gross margin, as I was saying before, in the range of 46% for the full year 2022.

About your second question Sandeep, it is clear that we will detail a bit more during our capital market day this strategic question related to the company and various product groups and regions. I can confirm to you that we are convinced we can continue to drive the company on a growth trajectory. increasing continuously the fundamental value of the company. So I would like to say now, okay, we want to continue a strategy of organic growth, of course, with a bolt-on acquisition strategy because we are convinced it is good for the innovation in the company to bring new blood. It is good for sometimes for the portfolio of the company or IP portfolio of the company to bring this new blood. And we have, let's say, ongoing activities to scrutinize, okay, all the opportunities we have on the market. So this is what we will do. Organic growth and Bolton acquisition strategy. We do not intend to make major transformational deal in the swimming lane we are. So what we classify, diversified semiconductor company. Of course, As a CEO, it is always my duty to be aware and to be in discussion with peers and banks. Thank you.

Thank you very much. So the last question, please, Moira, for this call.

The last question is from Johannes Schaller from Deutsche Bank. Please go ahead.

Thanks for taking my question and also again congratulations on the market leadership and general purpose microcontrollers. Maybe touching on that point, going a little bit deeper here, can you maybe share a few numbers and a bit more detail on that, just what your market shares right now versus what it was last year based on the metrics you're looking at and What is driving that growth? I mean, SCM32 has been very successful on a broad basis, but can you point out any particular regions or applications and industries that have been driving this and how should we think about this going forward? Do you expect to continue to take market share here as strongly as you did in the last years? and maybe just a quick one for Lorenzo. Could you just maybe update us on the OPEX run rate for this year? Is that still unchanged from what you said with Q4 or has that in any way changed? Thank you.

Maybe I take the last questions about the expenses. That's an easy one. And then I let either Jean-Marc or Marco to answer about the... I'll share the first question. About the expenses... What we see for the second quarter, our net operating expenses is something ranging between $820-$830 million. These are SG&A plus R&D plus other income and expenses, as usual. Moving forward in the year, let's say, as you know, we are increasing our effort, especially in R&D, let's say. In order to innovate, to bring on the market products. So there will be some increase in terms of our expenses moving forward. Anyway, definitely our expense to sales ratio will decline compared to the one of last year. So the expense to sales ratio, our leverage on expenses will be one of the ingredients to the improvement of our profitability.

So about market share on microcontroller, I will give an indication because we don't know, we are not absolutely sure of the latest public number on media in 2021, but I can confirm to you we are well above 20% market share. about the application, general purpose microcontroller. Clearly, the two main markets that we address with this, let's say, microcontroller, for sure there is industrial. And industrial, you can build basically in three parts. First part, it is what we call Factory and infrastructure, and power infrastructure, energy infrastructure. Definitively everywhere you have robotics, automation, system controls, battery management system, you have microcontrollers, okay? And ranging, okay, from, let's say, with high power, computing power performances, or sometimes with, let's say, ultra-low power consumption performances. So it is clearly one part, and all these parts of the business, we massively address it either through OEMs, major OEMs, like Siemens, General Electric, Schneider, Okay, this kind of, let's say, important customers. But distribution as well. And also, okay, I have a Chinese customer like Innovance, okay, this kind of customers. Well, the other part of the industrial market is more what we sometimes classify consumer industrial, which are home appliances and all the power tools. because now, okay, you know that power tools, okay, it is what we call electrification of everything. After the internet of everything, you have the electrification of everything. So in all the power tools, whatever they are, professional or consumer, you are moving either for plug-in, let's say, tools or thermal combustion engine tools, you are moving to battery-based. And of course, definitively, in battery-based tools, you have microcontrollers everywhere to control the battery and motors. Clearly, because the optimization of the battery is related to the motors, which is basically valid for home appliances. After, the third block of the industrial market are health, medical, aerospace, and so on. Here, definitively, you have microcontrollers as well because system control, but in terms of volume, is more marginal. Then you have another big block where you have microcontrollers everywhere. It's personal electronics. And especially personal electronics, what we call the IoT, the connected device, you have microcontrollers everywhere. So smartwatches, smart devices, connected devices, airpods, smart booths. So micro everywhere. Generally speaking, there are ultra-power Performance Driven, definitely. So the integration is very important. So this kind of, let's say, product are driven now by megatrends of our industry, which are connected to electrification and digitalization. Digitalization because connectivity, artificial intelligence, Thank you very much. to use our portfolio, to scale our portfolio, to reuse our portfolio roadmap in order to improve continuously the performance of our device. So this is, okay, where we are with this STM32. And again, our strategy that will be widely developed by Remy during the Capital Market Day is based on a continuous improvement of the performance, both computing power and Low Power Consumption, but more and more wireless features and security features and with some critical enablers for some applications which are the artificial intelligence. So this is, okay, very simply, but definitely what Rémi will develop.

So Jean-Marc, I take from that that the market share gains are very broad-based and you definitely expect the share gains to continue from here for the foreseeable future. Okay, thank you.

Okay, thank you very much. I hope it answers all your questions. Thank you for your attention again during this call. As you have listened several times, the next appointment is at the Capital Market Day on May 12th. Thank you so much and have a very nice rest of the day.

Thank you. Bye-bye. See you soon.