STMicroelectronics N.V.

Ladies and gentlemen, welcome to the STMicroelectronics Q3 2023 Earnings Results Conference Call-in Live webcast. I'm Andre, the Chorus Call Operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to endow it to Céline Berthier, Head of Investor Relations. Please go ahead, Madam.

Thank you, André. Good morning, and thank you, everyone, for joining our Top Forcer 2023 Financial Results Conference Call. Hosting the call today is Jean Marchéry, Estes President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our Chief Financial Officer, and Marco Pessis, President of Analog, MEMS and Census Group, and Head of Estimia for Electronic Strategies, System Research and Application Innovation Office. This lightweight test and presentation materials can be accessed on ESPY'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 possess these 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 its most recent regulatory filing for a full description of these risk factors. Also, to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. I'd now like to turn the call over to Jean-Marc Esty's president and CEO.

Thank you, Céline. Good morning, everyone, and thank you for joining Esty for our Q3 2023 earnings conference call. Let me begin with some opening comments, starting with Q3. So third quarter net revenues of $4.43 billion came in above the midpoint of our business outlook range. And Q3 gross margin of 47.6% was 10 basis points above guidance. Q3 net revenues increased 2.5% year over year. As expected, the revenue performance was driven mainly by continued growth in automotive. partially offset by lower revenues in personal electronics. Looking at our year-over-year performance, gross margin remained stable at 47.6%, while, as expected, operating margin decreased to 28% from 29.4%, and net income was stable at $1.09 billion. For the nine-month period, Net revenues increased 11.1% year-over-year to 13 billion dollars, driven by growth in the ADG and MDG product groups, and partially offset by a decline of the AMS product groups. We reported growth margin of 48.7%, operating margin of 27.6%, and net income of 3.14 billion dollars. On Q4 2023, our fourth quarter business outlook is for net revenues of about $4.3 billion at the midpoint, declining year-over-year and sequentially by about 3%. Gross margin is expected to be about 46%. For the full year 2023, the midpoint of our Q4 guidance translates into revenue growth of about 7.3% to $7.3 billion, with a gross margin of 48.1%. Now, I will move to a detailed review of the third quarter. Net revenues increased 2.5% year-over-year. This performance was driven mainly by ADG and TOTIU's strength in automotive. and to a lesser extent by MDG. As expected, AMX revenue decreased mainly reflecting lower revenue in personal electronics. This includes the impact of the change in product mix in an engaged customer program in personal electronics that I first mentioned in January. Year-over-year, sales increased 2.1% to OEMF and 3.4% to distribution. On the sequential basis, net revenues increased 2.4%, with ADG up 3.6%, AMS up 5.3%, and MDG down 1%. Net revenues came in 130 basis points above the big point of our outlook, mainly reflecting higher sales than expected in personnel electronics. Gross profit was $2.11 billion, increasing 2.4% year-over-year. Gross margin of 47.6% was stable year-over-year, as improved product mix was offset by higher manufacturing costs and unused capacity charges. Third quarter operating income decreased 2.4% to $1.24 billion. Operating margin was 28%, decreasing by 140 basis points versus 29.4% in the year-ago quarter. This was due to a higher OPEX to sales ratio as we continue to invest in innovation and in the digital transformation of the company. On a year-over-year basis, both net income and earnings per diluted share in the quarter were stable at $1.09 million and $1.16 respectively. Looking at the year-over-year sales performance by product group, ADG revenues increased 29.6% on a double-digit growth in both the automotive and power discrete subgroups. AMS revenues decreased 28.3%, with lower revenues in the three subgroups. MDG revenues increased 2.8%, revenues grew in RF communication, and were substantially flat in the microcontrollers subgroups. In terms of operating margin by product group on a year-over-year basis, ADG operating margin increased to 31.5% from 25.9%. IMS operating margin decreased to 18.8% from 27.2%, while ADG operating margin decreased to 35.1% from 36.7%. Net cash from operating activities increased to $1.88 billion in Q3 versus $1.65 billion in the year-ago quarter. Net capex in the third quarter was $1.15 billion compared to $955 billion in the year-ago quarter. Inventory at the end of the third quarter was $2.87 billion, compared to $2.38 billion in the year-ago quarter. Days sales of inventory at quarter end was 140 days, compared to 126 days in the previous quarter and 96 days in the year-ago quarter. Pre-cash flow was $707 million compared to $676 million in the year-ago quarter. During the third quarter, FT paid $58 million of cash dividends to stockholders, and we executed an $87 million share buyback under our current share repurchase program. ST, net financial position of $2.46 billion as of September 30, 2023, reflected total liquidity of $5.05 billion and total financial debt of $2.59 billion. I will now go through a short update on some of our strategic focus areas in Q3. First, wideband gap semiconductors. We began volume production of gallium nitride transistors, which simplifies the design of high-efficiency power conversion systems. We support the development of safe and reliable wideband gap-based power systems for high-power applications, with industry-leading galvanicary isolated drivers. In the quarter, we introduced a new STGAP product, specifically designed for power gap transistors, based on ST Unique IP and advanced BCD technology. In silicon carbide, we continue to increase the number of engagements. We are now working with 94 customers and 150 projects. up from 90 customers and 140 last quarter. Wins here range from electrical vehicle applications, such as onboard chargers to power modules in solar power systems. We confirm our revenues for silicon carbide products will reach about $1.2 billion this year. In car digitalization, we saw continued design win momentum with our latest generation of automotive microcontrollers, called STELLA, across key applications. These include design wins in zonal modules for software-defined vehicle architectures and in next-generation battery management systems in partnership with major carmakers. In HEDAS, the iQ6 project with Mobila is progressing to plan with early volume ramp-up this year. We have also seen a strong market interest in ST high-precision GNSS solution, Tezeo 5, adapted for HEDAS system. At the end of September, we held our Annual Industrial Summit event in China. It drew over 1,300 customers in person and over 50,000 participating online. The theme of this year's event was Powering Your Sustainable Innovation and was focused on helping customers address climate-related challenges. We showcase 150 demos in three market segments, automation, power energy, and motor control, where ST has created dedicated competence centers located close to our customers. The registration of new designs in distribution we are receiving for our flagship STM32 family is increasing year over year on all our products, including mature ones. This is a really positive indication of the market structural appetite for our products. Moreover, We released the first FT cellular narrowband IoT ultra-compact and low-power modules combining cellular IoT connectivity and geolocalization capabilities for wide-ranging IoT, smart metering, and industrial applications. We further enlarged the reach of applications and new scales for industrial customers by introducing new products such as time-of-flight, and thermal mode infrared sensors, as well as the third generation of inertial sensors. To support our strategic focus areas in embedded processing, we announced new ecosystem tools for our SCM32 family. We also continue to expand our engagements with customers to deploy HAI for a growing range of use cases. This is based both on our extensive toolset allowing porting of AI algorithms to our existing MCU portfolio, as well as the alpha customer engagement for our latest neural processor-enabled MCU. To conclude this review, in our radio frequency communication business, we are continuously expanding our strategic collaboration on SpaceX Starlink, which provides high-speed internet connectivity to a growing customer base in more than 60 countries around the world. Their ramping helps their next-generation products, which leverage our BISEMOS 9 processes, as well as innovative and highly differentiated packaging technology. Let's move to our fourth quarter 2023 financial outlook and our plans for the full year 2023. For the fourth quarter, we expect net revenues at the midpoint to be about $4.3 billion, representing a year-over-year and sequential decline of about 3%. Q4 gross margin is expected to be about 46% at the midpoint, including about 130 basis points of unused capacity charges. For 2023, our Q4 guidance at the midpoint translates into 2023 net revenues of about $7.3 billion. This represents growth of about 7.3% year-over-year, with a growth margin of about 48.1%. The $7.3 billion is consistent with the indicated range we provided late July. The $100 billion difference at the midpoint relates mainly to the industrial end market in Asia, where the level of orders materializing toward the end of Q3 to load our Q4 backlog has been below our expectations. We confirm our 2023 net capex plan of about $4 billion. To conclude, in September, the supervisory board asked me to be available for reappointment as a sole member of the managing board and president and CEO. I was very honored and pleased to accept the proposal. This will be proposed for shareholder approval at ST2024 Annual General Meeting of Shareholders. Thank you for your attention and we are now ready to answer your questions.