STMicroelectronics N.V.

Good morning. Thank you, everyone, for joining our first quarter 2023 Financial Resource Conference Call. Hosting the call today is Jean-Marc Chéry, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Purchasing, ERM, and Resilience, and Chief Financial Officer, and Marco Cassis, President of Analog Mems and Centers Group, and head of STMicroelectronics Strategy, System Research and Applications, Innovation Office. These live webcasts 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 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 result this morning, and also in SC'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, SC's president and CEO.

So, thank you, Céline. Good morning, everyone, and thank you for joining ST for our Q1 2023 earnings conference call. So let me begin with some opening comments, starting with Q1. So first quarter, net revenues of $4.25 billion came in better than expected in automotive and industrial. partially offset by lower revenues in personal electronics. Growth margin of 49.7% came in 170 basis points above the midpoint of our guidance, mainly due to product mix in a price environment that remains favorable. Looking at our year-over-year performance, Net revenues increased 19.8%. Gross margin at 49.7% was up from 46.7%. Operating margin increased to 28.3% from 24.7%. And net income grew 39.8% to $1.04 billion. On a sequential basis, net revenues decreased 4%. On Q2 2023, at the midpoint, our second quarter business outlook is for net revenues of about $4.28 billion, representing a year-over-year increase of 11.5%, and a sequential increase of 0.8%. Gross margin is expected to be about 49%. For the full year 2023, we will now drive ST based on a plan for full year 2023 net revenues in the range of $17 billion to $17.8 billion, representing a year-over-year gross range of about 5% to 10%. Now, let's move to a detailed review of the first quarter. Net revenues increased 19.8% year-over-year, driven mainly by ADG and MDG, while AMS revenues decreased slightly. Year-over-year sales increased 17.5% to OEMs and 24% to distributions. On a sequential basis, Q1 net revenues came in 110 basis points above the midpoint to our outlook. This performance was driven by better than expected results in ADG on continued strength in automotive, and in MDG with general purpose microcontrollers remaining strong in Q1. Overall, Q1 net revenues decreased 4% on a sequential basis, with ADG up 6.5%, MDG lower by 1.1%, and AMS decreasing 20.3%, reflecting lower than expected revenues in personal electronics on top of seasonality. Gross profit was $2.11 billion, increasing 27.5% year-over-year. Gross margin increased to 49.7% compared to 46.7% in the same quarter last year. The 300 basis point expansion was driven by improved product mix, favorable pricing, and positive currency effects, net of hedging, partially offset by higher manufacturing costs. Q1 operating margin was 28.3%, up from 24.7% in the Eurogroup area, with ADG and MDG contributing to the 360 basis point growth in operating margin. On the year-over-year basis, net income increased 39.8% to $1.04 billion from the $747 million, And diluted earnings per share increased 39.2% to $1.10 from $0.79. Looking at our year-over-year sales performance by product group, ADG revenues increased 43.9% on a double-digit growth in both automotive and power discrete. AMS revenues decreased 0.9%, with lower revenues in analog and MEMS, offsetting an increase in imaging. MDG revenues increased 13.2%, with growth in both microcontrollers and RF communications. In terms of operating margin, two of three product groups delivered year-on-year expansion. ADG operating margin increased to 32% from 18.7%. MDG operating margin increased to 36.2% from 33.7%. And AMS operating margin decreased to 20.4% from 22.9%. Net cash from operating activities increased to 39.7% to $1.32 billion in Q1, compared to $945 million in the year-ago quarter. First quarter capex was $1.09 billion versus $840 million in Q1 2022. Thanks to the strong growth in net cash from operating activities, free cash flow grew to $206 million in Q1 2023 versus $82 million in Q1 2022. Cash dividends paid to stockholders in Q1 2023 totaled $54 million. In addition, ST executed share buybacks of $87 million as part of our current repurchase program. FT's net financial position of $1.86 billion as of April 1, 2023, reflected total liquidity of $4.52 billion and total financial debt of $2.66 billion. But let's now discuss the business dynamics. During the first quarter, demand in the automotive market and in the power and energy portion of the industrial market remain strong, driven by continued semiconductor provision and the ongoing structural transformation. Factory automation, robotics, and building control grew revenues in line with our strong backlog, while new orders normalized. Even in consumer industrial, communication infrastructure and networking, including data centers and servers, soft net, and demand for personal electronics and computer peripheral, further weakness. Our backlog is now about six quarters at the midpoint of our full year 2023 indication, still above a normal situation, but with different coverage consistent with the various end market dynamics. In automotive and industrial, we are still well above the capacity we can serve on some technologies and packages. In the other end markets we serve, we are back to a more normal level of coverage. Moving now to a Q1 review by the market. In automotive, the first quarter remains strong. Against this backdrop, we continue to execute our strategy for car electrification, in particular in silicon carbide. The number of ongoing silicon carbide programs increased again during Q1. Between the automotive and the industrial markets, we now have 130 projects spread over 85 customers. About 60% of these projects are for automotive customers. We now expect to generate about $1.2 billion of silicon carbide revenues in 2023, broadly spread among many different customers. We had design wins in Q1 with both silicon and silicon carbide power discrets in automotive applications. This included an AcePack power module and silicon carbide mosfets for traction investors as well as projects with silicon mosfets in battery management systems. In mid-April, we announced that we signed a multi-year supply agreement with ZF for silicon carbide devices. Under this agreement, we will supply a volume of double-digit millions of devices that will be integrated in ZF, New Modular Inverter Architecture, going into production in 2025. Speaking more broadly about our automotive portfolio serving car electrification, we won designs for multiple electrical vehicle makers, including our Stellar Automotive MCU, for an onboard charging application. In car digitalization, we had a number of design wins in key areas. In next-generation car architectures, our e-fuse products for a zonal controller solution gain traction. In driver monitoring systems, we were successful with our global shutter automotive image sensor. Legacy automotive remains dynamic, and silicon pervasion continues to increase. Here, we had several wins for our SPC5 microcontrollers for vehicle body control. as well as our latest products for a secure door zone platform. In our automotive sensor business, we want several new designs for vehicle dynamics, airbags, and anti-theft applications. Moving now to industrial. Across the industrial market, we see two main trends driving a structural transformation in the market and accelerating the increase in the semiconductor content. digitalization of devices and systems, and energy management and power efficiency improvement. During the quarter, demand remains strong overall in both OEMs and distribution, with different dynamics across the areas we serve. In B2B industrial, we continue to see strong demand in power energy, factory automation and robotics Building control grew revenues in line with our strong backlog, but while new orders normalized. Consumer industrial, such as battery-operated tools and home appliances, softened. During Q1, we continue to see an expansion of design wins across three areas of the industrial market we focus on. B2B, consumer, and specialized. Our broad offering enables us to support our customer with full solutions, combining power, analog, sensor, and embedded processing products, leveraging ST unique positions. We include system solutions comprised of power district, power management, and STM32MCUs in renewable energy applications. and multi-product solutions for smart meters and smart grid applications. We also want sockets with intelligent power switches, motor drivers, industrial sensors, and secure solutions in applications such as industrial automation, asset tracking, and several power supplies. In the quarter, we made a number of announcements related to our STM32 product portfolio and ecosystem. This included a new highly affordable MCU series to replace 8-bit MCUs, a new high-performance MCU series with health security features, a new wireless MCU, and a new MPU product. We also continued to build the best developer ecosystem with two industry firsts. We introduced a certified MCU security platform that combines hardware and software to simplify development of secure-embedded applications. And we launched the world's first MCU Edge AI Developer Cloud that includes an online benchmarking service for Edge AI models on MCM32 boards. Moving to personal electronics. During the quarter, our products were selected for flagship smartphones, watches, and other wearable devices. This includes NFC controllers and secure element solution, wireless charging products, main sensors, and time-of-flight ranging sensors. In communication equipment and computer peripherals, new wins here included products for EDO satellites, a number of products for computer peripherals, including secure solutions, time-of-life sensors and MCUs, and ASICs for communication infrastructure based on our proprietary technologies. Now, I would like to mention that we issued our annual sustainability report last week. A couple of key points. We are on track with our program to be carbon neutral by 2027, and we further increase our global sourcing of electricity from renewable energy, going to 62% in 2022, from 51% in 2021. We were recognized by environmental nonprofit CDP, so Carbon Disclosure Project, as a global leader in corporate transparency and performance on water security. being one of the few companies to secure a place on its annual A list. Now, let's move to our second quarter 2023 financial outlook and our plan for the full year 2023. For Q2, we expect net revenues to be about $4.28 billion at the midpoint, representing a year-over-year growth of about 11.5%, and a sequential increase of about 0.8%. Both driven by solid growth in automotive and industrial, partially offset by the decline in personal electronics. Growth margin is expected to be about 49% at the midpoint. For 2023, we confirm our plan to invest about $4 billion in CapEx, with about 80% of this amount mainly related to increase of our 300-millimeter wafer and silicon carbide manufacturing capacity, including for silicon carbide, our substrate initiative. The remaining 20% is for R&D, laboratories, manufacturing maintenance efficiency, and our corporate sustainability initiatives. Based on our visibility, we will now drive the company based on the plan for full year 2023 revenues in the range of about $17 billion to $17.8 billion, representing a growth over 2022 of about 5% to 10%. Automotive and industrial will be the key growth drivers of our revenues in 2023. To conclude, as we have discussed, we are operating in an environment with significantly different dynamics, depending on the head markets we serve. But based on our leadership position, strategic approach, and current visibility, we anticipate 2020-2023, another year of revenue growth and profitability improvement. toward our $20 billion-plus ambition and related financial model. Thank you, and we are now ready to answer your questions.

The first question comes from the line of Didier Chiamama with Bank of America. Please go ahead.

Good morning. Thank you so much for taking my question. Jean-Marc, I've got maybe a first question looking at the second half and sort of changing dynamics that you highlighted. There's been a number of sort of conflicting reports when it comes to the automotive market during Q1 earnings season. So can you just give us a sense of what your orders look like for the second half of 23 and perhaps the visibility you're having to 2024? And then a question for Lorenzo. I think you mentioned previously that gross margins would be broadly flat for calendar year 23. Obviously, your first half is running uh quite a lot above uh that guidance so any any reason to change the full year guide on gross margin to raise that or do you have any any other additional headwind that you want to flag in the second half thank you so i will i will answer about the about the revenue for the year and h2 versus h1 and uh and lorenzo will speak about gross margin but uh

Let's say in H2, at the midpoint of the indication we provided, we anticipate a growth of 4% H2 versus H1. And again, it's important that in H2, as I warned you during our Q4 earnings announcement in January, we will have a specific midchange in important, okay, customer program in personal electronics. And this big change is material. Here I am spoken H2 year-over-year in personal electronics of an impact of . And despite this impact, the company will grow in H2, driven by automotive and industrial market, 4% H2 versus H1. And we grew year over year, H2 2023 versus H2 2022. So this is, okay, the demonstration that, okay, we are really resilient in front of the personal electronic market. Well, about the backlog, it is clear that the backlog coverage is following exactly the market dynamics. We are fully covered in backlog for automotive and basically industrial power and energy-related, and B2B automation, robotics, and let's say building controls. But where, okay, we are still to hunter order for the second part of the year is more on consumer industrial, is more, let's say, on servers, and definitively on consumer-related, like personal electronics and computer peripherals. So that's the reason why our confidence level to have raised the low end of our indication from $16.8 to $17 million is very good. We have not raised the orange because on power, energy, and automotive, we are still facing some capacity limitation. In the key technology cluster, that 40 nanometer, silicon carbide, IGBT, all, okay, which are really driven our goals. So this is H2 versus H1 dynamic and the complexity, let's say, of the environment we are facing. Now about gross margin, okay, Lorenzo.

I take the question. Good morning, everybody. About the gross margin, for the gross margin at midpoint of our revenue indication for the year, We do expect to have a gross margin ranging between 47% and 48%. In the year, of course, the positive product mix, we have manufacturing productivity improvement. Substantially, we will see an overall price stability. This will be offset by increasing food costs in our manufacturing. And then we have not to forget that in the second part of the year, we will have the impact of the ramp-up of the 300 millimeter in Agrate that will not be their optimal capacity, and this will impact our COCS in the second half. This is the dynamic, let's say, when we look at the current year with last year. If we go a little bit more in specific to compare, let's say, the first half with the second half of this year, Of course, in H1, gross margin has benefited from a sequential positive price effect. We had also a strong positive impact on the product mix. While in the first half of the year, our gross margin has not yet been significantly impacted by the increase of the input manufacturing cost. On the contrary, we expected to be impacted by some increase in sales price pressure, even if in the year this will be, let's say, substantially neutral. But in the second part of the year, we will see negative price pressure when looking sequentially. Manufacturing input cost will increase. Then there will be also some less optimized production leveling in some specific FAPs, the one that are more exposed to consumer or personal electronic. And as I was saying before, in the second part of the year, there is the impact of our 300 millimeter that we need today is in the startup, In the second part of the year, we'll enter in our cost of goods order. So at the end, let's say the visibility, I repeat, the visibility for the year will be, we have a gross margin that will be ranging between 47% and 48%. Got it.

I just wanted to clarify, Jean-Marc, did you say the headwind from your sort of marquee customer and personal electronics in half a billion dollars year over year in the second half? Is that what you said?

Yes.

Okay, got it. And then maybe a quick follow-up. I just wondered if you could discuss a little bit the pricing environment in the second half. In microcontrollers, there's a number of sort of reports out there in Asia that pricing is getting weaker, especially in the consumer and PC peripherals, et cetera, market. First of all, maybe remind us where you play in those markets and whether you are tempted to follow this price action or prefer to dedicate your capacity to automotive and industrial market controllers to protect pricing.

My first comment is you cannot speak about price generically across the board. As we described, we are really facing a complexity with really... significant different market dynamic. And of course, okay, you have to manage your price, let's say being selective. It is clear when you face, let's say, competition on pure consumer connected device is absolutely not the same when you are competing in a power box where you are managing the power solution. So we cannot speak about the price across the board. Yes, we do believe that in H2, in the field of consumer, where you will have, let's say, lead time of production supply coming back to normal, and potentially here and there in some specific location, some capacity flexibility to see price pressure. And ST, we will manage it selectively. Overall, okay, it will end on what described Lorenzo. So across the board, across the year, we should see a price, okay, basically stability. Substantially neutral with respect to last year. And in H2, yes, okay, we will see some minus.

Okay, thank you so much.

The next question comes from the line of Matt Ramsey from TD Cohen. Please go ahead.

Thank you very much, everybody. Good morning. Guys, my first question I wanted to ask, the silicon carbide target, you guys had talked for a while about a billion dollars in 2023, and then I think in January you had said greater than a billion, and now you're talking about 1.2 billion, which is great. I think all of us saw the announcement with ZF and what that could potentially mean. I guess my question on that is for the industry ramping material supply, we get a lot of conflicting reports, some bumps with your primary material supplier, some news of potentially ramping supply at other sources. So, John Mark, maybe you could talk a little bit about your near-term plans for getting silicon carbide material supply to support that revenue ramp. And if there's any update, I think you mentioned in the script increasing investments on your internal substrates. If you could give us an update on the timelines there where you guys can start to supplement your supply with internal supply, that would be helpful. Thank you.

Well, okay, I will not comment, okay, the other competitor and supplier, clearly. I really confirmed the $1.2 billion. We know that according to some number we received in 2022, we have about 40% of market share. And with this $1.2 billion, looking like, according to market data we have, that we will increase our market share. But thanks to our capability to deliver wafer out and module and package out according customer expectation, and thanks, okay, to the multiple source we have in raw material. Saying that, we are really on track to be in position starting 2024 to produce raw material for our own needs And going forward, okay, to achieve 40%. This will be first in 6-inch, definitively. We are preparing the 8-inch conversion. So we have already produced one 8-inch ingot from our former Norsetel, okay, let's say facilities. And we are qualifying the 8-inch device according our qualification protocol. So we anticipate that we will start eight-inch activities, let's say, in the second half of 2024. Well, then after we have, let's say, another opportunity for silicon carbide, first to qualify also the SmartSIG technology, which will be very, very instrumental for cost decrease, but for eight-inch wafer size conversion. We will qualify in the second half of 2023 our generation four of silicon carbide that we will start to ramp up in 2024. So this is what I can confirm to you. Then looking at the market evolution and the number of programs and the number of customers we have, we are very confident to deliver about $2 billion in 2025, 2026. And then, okay, to have a target, okay, long-term, well above $5 billion when the market will reach $15 billion. So this is really the roadmap. We execute, I don't say clock watch, but we execute every quarter and every year fully consistently what we said in the beginning.

Thank you, Jean-Marc, for the detail. I realize the sensitivity on some of the near-term stuff there. As my follow-up, Lorenzo, you had talked about some of the potential gross margin impacts in the second half of the ramp of 300-millimeter capacity, so I wanted to ask about that a little bit, maybe just to kind of follow on to Didier's question. There's certainly some angst in the system around pricing and margins, so I guess the first one is to Could you maybe quantify, if you could, the gross margin impact just from the 300-millimeter ramp in the second half of the calendar year? And then, I mean, really strong margins up to 49% in the guidance. I think folks are wondering if that's – is that a peak? Is that a new normal? How would you consider that? And maybe if there's some price pressure – When do you feel like the 300-millimeter capacity will be at a scale to be a positive driver of margins rather than a near-term ramp-up headwind? Thank you.

Clearly, in the second part of the year, when the 300-millimeter FEB in Agrate will exit from the ramp-up accounting that today is bringing let's say, the equivalent of the unsaturation cost or the excess cost in the line of other income and expenses, we will see, let's say, this impact coming directly in our COPs. How much this will impact? Of course, this is temporary because it's due to the fact that the 300 millimeter is not at at a reasonable, let's say, level that will reach in order to be substantially neutral and start to contribute positively to our gross margin in the course of 2024. In 2023, for sure, this will not happen. We need to reach, in 2023, our capacity will be still, let's say, at the level of below 1,000 wafer per week, let's say significantly below. So at the end, this is a size for a 300-millimeter that is definitely not a creative for the gross margin. There will be an increase in the cost. Looking overall at, let's say, the second part of the year, as I was saying before, there are three components that are impacting our cross margin. On one side, there is the impact of the 300 millimeter. On the other side, there will be the impact, let's say, of the fact that we will start to see materially the increased cost in our manufacturing. that today is partially, let's say, suspended in our inventory, but then it will come down in our P&L starting already partially in this quarter, in Q2, but definitely with much higher level of impact during Q3 and Q4. And the other side, there will be also, let's say, some impact related to the price pressure that we were discussing before and the mix. How this will account when we compare the first half and the second half of our gross margin? I would say that one-third, one-third, one-third, more or less. Let's say we can see that this is the impact of these three main elements that on one side are the impact on pricing in our top line. On the other side is the impact of the increased cost in our manufacturing cost. On the other side is the 300 millimeters. And I repeat, just to clarify, this is a temporary impact, let's say. And then, of course, in the second part of the year, as I was saying before, there are some of our FAPs that are not working at optimized production level. Why? Because, of course, we are also keeping under control our inventory. And as you see, we have some of these PEPs, the ones that are more exposed to consumer or personal electronic, let's say, we needed to be sure that we are not inflating our inventory. So, this is another impact that is fully taken into consideration in our indication of gross margin of the year between 47 to 48 percent, but will contribute in any case on our gross margin in the second part of the year as a detractor.

Thanks, Lorenzo. Appreciate it.

The next question comes from the line of Stefano Huppi from OdoBHS. Please go ahead.

Yes, good morning. Thank you very much for taking my question. Actually, I wanted to come back on the prices dynamic, notably in the automotive segment, because in the past you have explained that the relationships with the automotive industry had changed a bit and that you were not expecting prices to collapse but maybe come back to a more normal trend. So is that what you're seeing at the moment or not yet? And the question linked to that is with the temporary impact that you're talking about for the growth margin in the second half, are you still comfortable with your target to get back to or to go to 50% growth margin within the timeframe of your plan? Thank you very much.

Yes, definitely. But of course, Lorenzo will further comment. Again, we repeat what are the key drivers for gross margin improvements. I think Lorenzo elaborated that we have a temporary impact of a graté ramp-up, definitely, which is absolutely not a surprise. It is mitigated by the ramp-up of crawl at the same time. And each time we are increasing crawl ramp-up, according to the plan of record we have with the Liberty Project, okay, for sure we mitigate also Agrate. When Agrate will reach the adequate scale, Agrate will contribute to the gross margin of ST. So the 300 millimeter is one of the main elements. I repeat, the second element is the silicon carbide. Moving forward to 200 millimeter, and thanks to the SmartSeq technology, which is really key to make the 200 millimeter successful, okay, we will have important leverage to decrease our cost, and of course, okay, to contribute to the gross margin improvement. It is clearly the two important, let's say, contributor. Well, then after the loading of our FAB, temporarily in H2, some FAB, okay, will face, let's say, not fully optimized loading, but it is mainly related to personal electronics. Just to give you an order of magnitude, okay, in 2023, at the midpoint, Personal electronics, okay, will decrease 25%. And half of the decrease is not silicon impact because it is an optical module product exchange with no impact on the loading, but half has an impact on the loading. So, of course, okay, in H2, we have this temporary non-loading that we will compensate moving forward because the demand on advanced BCD technology, advanced power technology for automotive industrial is more and more increasing. So, then, okay, we will come back to a full loading of our fab starting 2024, definitely. So, this is the reason why we confirm to you that the $20 billion investment plus ambition, we will deliver the 50% gross margin. Well, about the pricing on automotive, now, okay, we position this business and the demand of the customer on technology cluster that radically changed compared to years ago. Now, okay, we are at 40 nanometer technology, 28, Maybe tomorrow we will be at 18 technology, silicon carbide, GAN, IGBT, modules. So it's a complete different mix compared to the past. And on this technology, there is no excess of capacity. And the investments are cautious. There are no excess of investment worldwide on all these kind of technology, let's say, clusters. Because first, it is either on 300 millimeter or it is on wide band gap. And this is calling for CAPEX that companies are spending cautiously. And you know that in this field of activity, the foundry business is quite tight. There is no excess of foundry competition competing in the field of automotive. So that's the reason why, yes, we will go back normalized price discussion with the customers. More and more, we will have straight discussion with the card makers, clearly. It is a trend we are seeing. So the model, okay, moving forward, okay, is not the model we had five years ago or ten years ago. Well, saying that, okay, Lorenzo, you can come in.

Yes, maybe just a clarification. When we were talking about the impact of pricing on In the second part of this year, it's not actually an automotive. Automotive has been rediscussed. The pricing, as I was saying, is increasing. Indeed, there is some declining price on a sequential basis on different areas than automotive. It's the one that are most exposed to the difficulties of the market. We are talking here about a big consumer portion of the industry. And indeed, at the end, between automotive increasing price and maintaining pricing and, let's say, some other areas in which there is a normal dynamic of price decline, at the end, the price will be substantially flattish in the year. In respect to the gross margin, I just confirmed what Jean-Marc said. And, of course, also, let's say we need to consider that reaching our target, let's say, of the 50% gross margin of $20 billion plus, It's not linear. It means that we may have some quarter, like you have seen, in which we are very close already to the target, like in Q1, some other in which we will be a little bit, let's say, down. One of the reasons were discussed before, now, let's say, when we introduce our 300 millimeter, not yet at the full size. So, but at the end, the trend will be that one, the one that will bring the company to a gross margin at 50% when the size of our top line will be in the range of the $20 billion.

Okay. Thank you very much.

Next question, please.

The next question comes from the line of Andrew Gardiner from CT. Please go ahead.

Good morning, guys. Thank you for taking the question. Two follow-ups to questions that have been asked, if I could. First, Lorenzo, you mentioned inventories and making sure that you were continuing to manage inventories pretty tightly given the end market dynamics that you're seeing. Inventories rose quite a bit on your books in the quarter. Yet, of course, it doesn't seem as though you weren't short of demand per se in the quarter at a group level. Clearly, you beat your guidance. and you didn't need to pump the brakes on the FABs in the first quarter at a high level. You're still delivering gross margins well in excess of your guidance. So can you just sort of describe what was driving the inventory increase in first quarter? Did that come as a bit of a surprise perhaps towards the end of the quarter, or is it really there in preparation for what you're seeing across the different end markets in the second half? And then I have a follow-up on silicon carbide.

Yes, for sure I take this question. You know, our Q1 came better than expected in terms of revenues. Let's say mainly impacted by two elements. The first one was a better mix in respect to what was expected. And on the other side, let's say a better price environment. means that at the end, let's say, we were modeling pricing already started to decline in some area, while instead this did not happen. This has a positive impact on the two sides, I would say, on one side on the revenues, on the other side, of course, on the gross margin. Anyway, our Q1, let's say, inventory, as you rightly said, came above the expectation in theory or higher because we are at 122 days compared to the starting point at the end of Q4 that was in the range of 100 days. This level is mainly associated to excess of inventory that has been done in personal electronic and in consumer, where the market where weaker than what we were expecting. So we were, let's say, producing, you know, the revenues came a little bit in a different way, let's say, with better mix, better pricing, but lower quantities in some product lines. And these, of course, bring an increase in our inventory that was not forecasted, let's say, at the beginning of the quarter. We will correct during the year such excess. Where we will land, let's say, at the end of the year. Also considering that we will enter, let's say, the agrarian 300 millimeter, the WIP that we will have in agrarian 300 millimeter, at the end, we do think that at the end of the year, let's say, the number of days of our inventory, let's say, will be slightly above the number of days that we had, let's say, at the end of 2022. So it will be something the range of 105, 105, 110 days of inventory at the end of 2023. Thank you. And then just quickly on silicon carbide.

Jean-Marc, to the comments you made in your prepared opening, now at $1.2 billion for 2023, that's a nearly 20% uplift relative to what you were explaining to us in the second half of last year. It's a 60% to 70% year-on-year growth rate relative to 2022, and that's coming at a time when some of your peers seem to be struggling in terms of their silicon carbide ramp. where are you able to get this extra capacity out? You also mentioned during your prepared comments that SICK remains pretty constrained, although maybe that was a higher level comment. Where are you able to e-cab an extra 20% of wafer or module supply in silicon carbide? Thank you.

First of all, internally, now we have really our four manufacturing locations So two for FABs, so Singapore and Catania, and two for assembly, so Shenzhen and Bouskoura in Morocco, running all together full mass production. And thanks to the CAPEX we spent in H2 2022 to increase the capacity But then we have diversified our raw material source because also we anticipated some difficulties of one vendor in the second half of last year. So we secure ourselves in terms of sources. And last, okay, I think it's important I mention that Now the demand we have is really well diversified. Our main customer is representing below 65% of the total revenue we expect. And we have the program we want during the past two, three years that are starting to generate significant revenue for ST. So all in all, I would like simply to confirm that we invested last year and we have executed the capacity implementation properly. Now we have four locations running full speed. We have our demand well diversified and new program ramping up on top of the main customer we have. And we are secure worldwide with different sources located in different places in the world to secure our ramp up, waiting for our internal source to be ready and to sustain our mission to grow above 2 billion and towards 5 billion. Thanks very much.

Thank you. Next question, please.

The next question comes from the line of Shtaparvich Sebastian with Catholic Sugar. Please go ahead.

Hello, and thanks for taking my question. On silicon carbide, could you please make an update on your technology roadmap there And you mentioned that the Gen 4 is like to ramp, if I'm right, by H2 this year. Could you provide a little bit of timing for the ramp of Gen 4, but also Gen 5? And what kind of improvement are you expecting from Gen 4 and Gen 5 versus your third generation of silicon carbide technology? And the follow-up is on the inventory level on your two main markets, automotive and industrials. Where are the inventories standing versus the normative level? Thank you.

So the Generation 4 will be maturity, what we classify, maturity-matched production in the second half of 2023, and ready for production in 2024. And the timing will be, let's say, consistent with the qualification time we need to do on the automotive, let's say, market. So we will ramp up smoothly in 2024, okay, according to the timing of qualification. But internally, this technology will be qualified by the second half of this year. The Generation 5 will follow basically 18 months later. Generation 4 and Generation 5 are still planar technology where we significantly improve the performances and with absolutely, okay, no gap versus the best-in-class technology we can assess. Well, then we will move to Generation 6, okay, where we will make a description, but, okay, I will comment in due time. So, again, generation four and five, let's say, will improve the performance of the device that is enabled by the technology. In parallel, do not forget that we will implement two important, let's say, process change. that is not a piece of cake for silicon carbide. I don't want to be technical, but it is not a piece of cake. You have many mechanical effects, which are not so easy to control when you increase the water size of silicon carbide, is point number one. And for ST, the point number two, we will implement the SmartSeq technology, which will be really an important add-on that will enable better performance on the device, lower cost of the solution at substrate level, and will make easier the conversion to the 200 millimeter. So two technology in the next three years implementation, and two major professions, 200 millimeter and SmartSeq introduction. And then, okay, later on we will introduce the generation which will be a disruption in terms of architecture of the transistor.

And on the inventory question on the autos in the fuel, where are we standing right now?

Inventory, you mean in the channel, I suppose?

Yeah, definitely in the channel. Thank you.

Wow. You know that we monitor pretty well the inventory of the distribution channel. But here, okay, it's clearly following the market dynamic, okay? When you are, through distribution, addressing mainly, okay, for us, the industry or the market, we are coming back now to a normal coverage in terms of inventory. So it means we have our inventory term between term of three to four, whatever are the devices, microcontrollers, analog, power overall. Of course, we have some inventory which are, let's say, at the upper limit that we accept generally, like MEMS. Why? Because they have been impacted by the personal electronic market dynamics. So that's the reason why, okay, we will control in our, let's say, revenue target, okay, the inventory at distribution level. Again, except the inventory in front of consumer market, we do not detect any excess of inventory. Inventory or distribution are just at the level for distributor to manage, turn business to manage a situation which is a normalized situation. Well, then about our tier one and let's say the supply chain, supplying the card maker. At this stage, okay, especially of course on all the technology driven by smart mobility and electrification, digitalization, we do not detect absolutely any inventory in excess. On legacy automotive, it's difficult to say, because for us, we are supplying 14 nanometers. We are supplying BCD9, BCD8, and the demand is still very, very strong. So we do believe that on this kind of technology cluster, there are no inventory in excess across the supply chain.

Thank you.

Thank you. Next question, please.

The next question comes from the line of Lee Simpson with Morgan Stanley. Please go ahead.

Thanks so much for taking my question. Just trying to sort of tease out a little bit more the pricing headwinds you're talking about going into second half of the year. So I think as others have suggested, we are seeing some signs of slowing demand in MOSFETs, you know, lack of tightness being seen in various areas and power semis. And at the same time, the foundries are talking about slowing order book for autos. I'm just trying to understand which side of the fence or if both perhaps are impacting in the second half and what that means for order book momentum, particularly Q3 of this year. And maybe if I could just come back to the overall backlog. I mean, you've been very good in previous quarters to talk about their relative size of the backlog to the outgoing business in the next few quarters. Could you maybe just update us and give us a relative size of backlog? Thanks.

Well, so I will start with the backlog. So today, the total backlog we have in our hand requested by customers represents about six quarters of revenue. I would like to say that it is pretty unbalanced versus the end market we have. Again, on automotive overall, on power energy and professional B2B industry, the backlog coverage we have are well above the six quarters. And the order entry we are seeing now are loading smoothly year 2024. Why? Because the lead time we can provide to this customer are still well above one year. So moving forward quarter after quarter, they are loading our backlog consistently with the handyman, which is very strong, and the lead time we can offer. Then you have another dynamic where the demand is solid, growing with existing backlog, but where clearly we are reducing our lead time. And clearly when you are reducing our lead time, the customer order, they take into account. So they are temporarily reducing their order in order to have a backlog coverage which is consistent with your lead time. Any year, the coverage, okay, will be between three to four quarter total backlog. And on consumer, industrial, on servers, on this kind of activity, we are going in this direction. Then you have some market where clearly there is a weak end demand. There is clearly inventory correction. And then, okay, the backlog we have is reducing, and the order we have are low. It is typically the computer peripheral, computer related, and the personnel electronic. And here, we are going back to a normal situation where we have, for some customer, which are, let's say, well in control with their supply chain, they give us a rolling two years visibility. And there is some customers that are giving a usual three to four-quarter visibility. So I have to say, if I would like to classify overall our backlog, we are six-quarters. We do believe we will finish the year 2023 with a coverage will be between four to five-quarters, which is still above a normal situation. Normal situation is three to four-quarters. So this is a dynamic, okay, I can tell you, and this is totally consistent, okay, with the indication we have provided to the year to reach at the midpoint $17.4 billion, but still with the possibility to go to the upper range.

Does this answer your question, please?

Yeah, it is. I just wanted to circle back on perhaps the evidence or perhaps the product categories where you're seeing those pricing headwinds, and particularly as it relates to autos. I mean, are we vectoring more on power semis, or do we see this starting to happen as perhaps a peak pricing dynamic around control? Thanks.

To come back to your MOSFET point, You know, MOSFET is part of the power supply or power management of some application in the field of servers and computers. Of course, here, as this market is softening or is weakening, clearly, okay, the demand for this specific MOSFET is weakening. is very large, okay? You have high voltage, you have low voltage MOSFET, then you have IGBT, you have the silicon carbide. Again, and the MOSFETs are going everywhere, and are going everywhere in all the applications. And I can confirm to you that on MOSFET overall, addressing all the automotive applications, and importantly, energy storage, energy conversion, energy transportation, The demand is very strong, and the capacity are fully loaded. And we are still struggling to support our customer at the level of what they demand on IGBT, on C carbide, on VI power, vertical integrated power, on BCD9 for power switches, and on low voltage and high voltage MOSFET as well. Everywhere it is for power management for automotive and industrial applications. On computer, the demand is weak, but this is not a surprise.

Okay.

Thank you.

Thank you very much. And we have exceeded the time, so I apologize. It was the last question. Thank you very much. All of you will end our call session this time.