STMicroelectronics N.V.

Ladies and gentlemen, welcome to the STMicroelectronics second quarter 2025 earnings release conference call and live webcast. I am Moira, the chorus call operator. I would like to remind you that all participants will be in listen-only mode and the conference has been recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. the conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jérôme Ramel, EVP Corporate Development and Integrated External Communications. Please go ahead.

Thank you, Maria. Thank you, everyone, for joining our second quarter 2025 Financial Results Call. Hosting the call today is Jean-Marc Chéry, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO, and Marco Cassis, President, Analog Power and Discrete, MEMS and Sensor Group, and Head of STMicroelectronics Strategy, System Research and Application and Innovation Office. These live webcasts and presentation materials can be accessed on the STInvestorRelations website. A replay will be available shortly after the conclusion of this call. This goal will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory 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. Now I'd like to turn the call over to Jean Marchery, ST President and CEO.

Thank you, Géraud. Good morning, everyone, and thank you for joining ST for our Q2 2025 earnings conference call. I will start with an overview of the second quarter. including business dynamics. I will then hand over to Lorenzo for the detailed financial overview and will then comment on the outlook and conclude before answering your questions. So starting with Q2, we delivered revenues at $2.77 billion, $56 million above the midpoint of our business outlook range, with automotive slightly below our expectations, which was customer-specific, more than offset by higher revenues in personal electronics and industrial. Gross margin of 33.5% was in line with the midpoint of our business outlook range. Let's now discuss our business dynamics during Q2. In automotive, during the quarter, we grew revenues about 14% sequentially, driven in particular by Asia Pacific, excluding China, and the Americas. Our book-to-bill came back below parity, driven by some specific customer dynamics. While the current situation on trade and tariffs is creating uncertainty on the level of car production, we confirm that Q1 was a low point for automotive revenues. We expect sequential growth in the third quarter versus the second quarter. During the quarter, we continue to execute our strategy for car electrification. We had wins with both silicon carbide and silicon devices and modules for multiple new DC-DC converters and on-board chargers designs, as well as with our smart power and smart fuse solutions for electric vehicle power systems. In a continuing challenging automotive market environment, we remain focused on building our pipeline of business and solid execution of our roadmaps in power and discrete for car electrification. In car digitalization, we saw further traction with our portfolio of automotive microcontrollers. We are making good progress in executing our roadmap with many new products set to launch in 2025 and 2026 across our Herm-based Stellar and STL32A product families. We are also continuing to see strong design-in momentum globally with both large-scale OEMs and tier 1 suppliers. One significant win in Q2 was for a one-box braking system by a leading electric vehicle maker in China. Moving to legacy applications. where we have a broad portfolio of application-specific products based on our smart power technologies and leading position in multiple domains, such as airbags, door zones, and raking solutions. A notable win here was a high-volume airbag solution with a world leader in automotive electronics safety systems, the third generation of a long-term partnership. with our automotive grade sensors we continue to see strong designing momentum and opportunities wins in the quarter included name sensors for edas airbag control and infotainment systems as well as an imaging sensor for in-cabin monitoring There are also a growing number of opportunities for sensors to improve the driving experience with applications such as road noise cancellation, occupancy monitoring, and seat position sensors. In industrial, Q2 revenues were above expectations with strong sequential growth and continued year-over-year improvements. confirming that Q1 was the bottom. I would also like to highlight that, specifically for general purpose microcontrollers, we are back to year-on-year growth. In terms of months of inventory and distribution overall, we are now back to a normal situation in China, close to normalization in other ASEAN countries, and improving, but still above normal in other geographies. In Q2, our B2B ratio remained above 1 and bookings continued to increase sequentially, supporting our expectation of further sequential growth in the third quarter compared to the second quarter. During the quarter, we made strong progress with our designing activity for our Power and Unlock portfolio across a range of applications. These included power systems, industrial fans and drives, motor control, white goods, solar inverters, air conditioning, metering, and power for data servers. For data servers, we announced that we are working closely with NVIDIA on a new high power density DC-DC architecture for AI data centers that will operate at 800 volts DC. This will enable higher power density, more compact designs, and a lot less cabling and metal ports. To deliver the needed solution, ST is putting together a combination of its most advanced technologies enabled by silicon material, silicon carbide, and gallium nitride as well as smart power processes like BCD using galvanic isolation. Our portfolio of industrial sensors also gained momentum in applications like container tracking, white goods and livestock monitoring. Moving to embedded processing, our STM32 microcontrollers have continued to gain traction with the broad developer community. Use of our software ecosystem continues to grow strongly and we are now close to 1.5 million unique users on a 12 months running basis versus the 1.3 million unique users for 2024. As mentioned earlier, in Q2 we were back to year-over-year growth for our general purpose microcontrollers with both sequential and year-over-year growth in the ITs. This confirms the strength of our product portfolio and our global ecosystem. In personal electronics and to a lesser extent in communication equipment and computer peripherals, Q2 revenues were above our expectations. We continue to be excited by growth opportunities in our engaged customer programs driven by both increased content in personal electronics and the expanding low Earth orbit satellite market. In terms of corporate development activities, at the end of May, we held our annual general meeting of shareholders. All proposed resolutions were approved by the shareholders. For sustainability, we have received two notable recognitions for our public commitments, reporting and environmental and social performance ST has been recognized in the time world's most sustainable companies list for the second consecutive year we have been ranked 25th most sustainable company globally and first in the electronics hardware and equipment category we have also been recognized for leadership on climate and water security by the Global Environmental Non-Profit CDP with a place on its A list for tracking climate change and a rating of A- for water security. Now over to Lorenzo who will present our key financial figures.

Thank you Jean-Marc and good morning everyone. Let's start with a detailed review of the second quarter, starting with the revenues on a year-over-year basis. By reportable segment, analog product MEMS and SENSO was down 15.2%, mainly due to a decrease in analog, to lesser extent a decrease in imaging, while MEMS grew double-digit. Power and discrete product decreased 22.2%. Embedded processing revenues declined 6.5%, mainly due to custom processing. RF and optical communication declined 17.9%. Buy and market. Automotive declined by about 24%. by about 8%, while personal electronic communication equipment and computer peripherals each declined by about 5%. Year-over-year sales to OEMs decreased 15.3% and 12% to distribution. On a sequential basis, all segments contributed to the growth. Embedded processing, power and discrete and RF and optical communication reported double digit growth, respectively 14.1%, 12.9% and 10.1%. Analog products, MEMS and sensor also grew by 5.9%. All our end markets grew, led by industry, up by about 15%, followed by automotive, up by about 14%, with communication equipment, computer peripherals and personal electronics up respectively about 6% and 3%. Turning now to profitability. Gross profit in the second quarter was 926 million dollars. decreasing 28.5% on a year-over-year basis. Gross margin was 33.5%, decreasing 660 basis points year-over-year, mainly due to unfavorable product mix, lower manufacturing efficiency, and to a lesser extent, higher unused capacity charges. Total net operating expenses, excluding restructuring, amounted to $869 million in the second quarter, in line with our expectations and declining 6% on a year-over-year basis. For the third quarter of 2025, we expect net OPEX to stand at about $860 million, slightly decreasing quarter-on-quarter despite the negative currency effect, reflecting our ongoing cost discipline and the first benefits of the resizing of our global cost base. As a reminder, these amounts are net of other income and expenses and exclude restructuring. In the second quarter, we reported a $133 million operating loss. which included $190 million for impairment, restructuring charges, and other related phase-out costs, reflecting impairment of assets and restructuring charges predominantly associated with the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding this non-recurrent item, which is mostly non-cache, Q2 non-US GAAP operating margin was 2.1% positive, with analog MEMS and sensor at 7.5%, power indiscrete minus 12.5%, Embedded Processing 13.5% and RF Optical Communication 17.9%. Q2 2025 net income was a negative $97 million compared to a positive $353 million in the year-ago quarter. Diluted earnings per share were a negative $0.11 compared to a positive of $0.38. Excluding the previously mentioned non-recurring items, non-US GAAP net income and diluted earnings per share were respectively a positive $57 million and a positive $0.06. Net cash from operating activities decreased 49.6% in Q2 to $354 million on a year-over-year basis. Second quarter net capex was $465 million compared to the $528 million in Q2 24. Free cash flow. was a negative $152 million in the second quarter compared to a positive $159 million in the year-ago quarter. Inventory at the end of this quarter was $3.27 billion compared to $2.81 billion in Q2 2024. Day sales of inventory at quarter end was 166 days and slightly above our expectation, mainly due to currency impact. Compared to the 167 days for the previous quarter and to 130 days in the year-ago quarter, we expect days of inventory to significantly decrease in the third quarter compared with the second quarter. Cash dividends paid to stockholders in Q2 2025 totaled $81 million. In addition, ST executed a share buybacks of $92 million. ST maintained its financial strength with a net financial position that remains solid at 2.67 billion as of June 28, 2025, reflecting total liquidity of 5.63 billion dollars and a total financial debt of 2.96 billion dollars. Now back to Jean-Marc, who will comment on our outlook.

Thank you, Lorenzo. Let's move to our business outlook. for Q3 2025. So we are expecting Q3 2025 revenues at $3.17 billion, plus minus 350 basis points. At the midpoint, our Q3 net revenues will increase 14.6% sequentially and decrease by 2.5% year over year. With all end markets, but automotive, back to year-on-year growth. We expect our growth margin to be about 33.5% plus-minus 200 basis points, including about 340 basis points of unused capacity charges. Compared to the second quarter, growth margin is also impacted by about 140 basis points of negative sea control impact, resulting mainly from currency effects and from the start of the non-recurring costs related to our manufacturing reshaping program. This business outlook does not include any impact for potential further changes to global trade tariffs compared to the current situation. For the full year 2025, we plan to maintain our net capex plan between $2 and $2.3 billion, mainly to execute the reshaping of our manufacturing footprint. To conclude, we expect Q3 revenues to show solid sequential growth driven by a cyclical recovery and our engaged customer programs. This will enable a continued year-over-year improvement. Our priorities remain supporting our customers to design in our products, accelerating new product introduction, and executing our company-wide program to reshape our manufacturing footprint and resize our global cost base. Finally, I confirm we are executing our plan to deliver annual cost savings in the high triple million dollar range exiting 2027. Thank you and we are now ready to answer your questions.

We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and 1 on their touch-tone telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question only. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Jeannard d'Armenon from Jefferies. Please go ahead.

Hi, thanks for taking the question. Yeah, my question is mainly on gross margin. Could you just pull out the one-off effect from your manufacturing reshaping program in your Q3 gross margin guidance. And then I was wondering whether you could comment on how you expect gross margin to evolve into subsequent quarters. I mean, sales are growing and utilization levels are growing. So how would you expect, what would be the various puts and takes that you would expect in gross margin evolution beyond Q3? Thank you.

I take the question. Thank you for the question, Jonathan. But in terms of the gross margin of Q3, first of all, I want to clarify the gross margin, but pricing are not collapsing. Let's say pricing are in line with what was our expectation. So at the midpoint of our sequential basis gross margin, is negatively impacted, as we said, by this 140 basis point that is resulting mainly from currency effect and to a lesser extent from the start of no recurring cost related to our manufacturing reshaping program. You asked me more or less to size, I would say that in this 140 basis point, around 20% of this 140 is related to the reshaping of the manufacturing, let's say, program. This negative impact is offset by the lower weight of unused capacity charges in Q2 was 370 basis point impact, in Q3 is more in the range of 340 basis point, and some improving manufacturing efficiency, even if we have to remind you that in Q3 this efficiency is still suboptimal. We have some basis point that is have not yet, let's say, at the best our efficiency. The combination of price and mix, I would say that is pretty neutral to the gross margin on a sequential basis, let's say. So these are the main drivers, I would say, that are impacting our gross margin in the third quarter. But in respect to what is the expectation moving forward, directionally Based on the current level of euro-dollar that we say is bought in the range of 1.17, that in Q4 should bring us in an effective rate that is in the range of 1.15 for euro-dollar, we should see a nice improvement in respect to Q3, driven by less unused capacity charges, enhanced manufacturing efficiency, partially, of course, upset by weaker US dollar. Clearly, in Q4, gross margin will depend ultimately on the level of revenues and where it will be positioned, let's say, the euro dollars. At this stage, it's a little bit more difficult to be more specific than that.

So, do you have any visibility on Q4? Would you, at this stage, expect that your revenue will further improve in Q4, or is it too early to call that?

Well, we expect our revenue in Q4 to grow sequentially.

Thank you.

Thank you, Jonathan. Next question, please.

The next question comes from Joshua Buchalter from TD Cohen. Please go ahead.

Hey, guys. Thank you for taking my question. There's obviously a lot of uncertainty out there given the geopolitical environment. I was wondering if you could maybe speak to any potential changes in your customers' order patterns or the prospect of any potential customers who could have been pulling in parts. Have you seen any changes downstream? Thank you.

When we see our dynamic from the beginning of the year, basically the good news in Q3 all our, let's say, verticals will grow sequentially and year over year, except the automotive, specific to one customer. And I would have been delighted that Q3 would have been the turning point, but we are about minus 2% year over year, which is 80 million US dollars. Be aware that 90% of this 80 million US dollars gap versus a turning point is in fact intangible. It is a capacity fee reservation from carmaker that has decreased by $70 million. So from product perspective, customer demand, we are basically at the turning point, which is very positive. Now about our customer-engaged programs and our market. In personal electronics, in computer equipment, communication equipment, computer peripheral, basically, okay, we have no surprise, no change. In industrial, you know that it's more fragmented. It is distribution. Clearly, now we are in the up cycle. The speed of the turning point will depend on the macroeconomy. For automotive, what is the situation we have to manage and acknowledge? We know that basically in front of us, we have a market of 90 million vehicles, out of which 30 million vehicles are battery electrical vehicles and hybrid electrical vehicles. The challenge we have managed altogether is that the competition landscape, the mix inside the automotive market, is much, much less stable than two, three years ago. Why? Because there is a strong dynamic between Chinese competition, European changing mind about electrical car, America as well, and so on. So we are not protected time to time, quarter to quarter, to have one customer-specific change. And this is what happened clearly in Q2 and is confirmed in Q3. So this is only this automotive market we have to pay attention to. What makes us confident moving forward is the strength of our product portfolio, clearly our large customer base. And I repeat, in automotive, in Q3, we grow sequentially, not yet year over year, but in Q4, we will grow again sequentially.

Okay, but you did not observe any pull-ins in the June quarter? No. Okay, thank you. And then for my follow-up, I got a few inbounds from investors regarding the Mobileye founder relationship with TSMC when that came out earlier in the month. Could you maybe speak to, you know, which parts you're still providing and maybe, I realize the IQ5 and 6 are on 7 nanometer, how we should expect that customer to trend over the next few years and maybe speak to the engagement there? Thank you.

It is well known we use the technology of TSMC starting IQ5 generation. But IQ5, IQ6 and IQ7, ST did the design and all, let's say, the enablement and the support, the engineering support. So from this announcement, we don't expect any surprise from our revenue for the next three, five years at least.

Got it. Thank you. Appreciate the call.

Thanks, Josh. Next question, please.

The next question comes from the line of Francois Bouvigny from UBS. Please go ahead.

Thank you very much. So my question would be, Jean-Marc, early June, I believe you said that you would reach at least the midpoint of the guidance in Q2. And I guess when you said that you had in mind to do better than just roughly in line like you did today. And then you said you would maybe without tariff grow year over year. And now you're getting for minus 2.5% year over year. So what happened since early June? I mean, it seems that things deteriorated. And if I understand correctly, is it only a customer program? Just trying to understand what happened since June for because it seems a bit short of what maybe you would have hoped. I just want to understand the moving part. Thank you.

Well, thank you for your question. I anticipated it a little bit in my former answer. Look at facts. What is the dynamic on your growth for ST? So Q1 was minus 27%, Q2 minus 40%. and we land close to 0, so minus 2% basically in Q3 at the midpoint of our guidance. So it's $80 million gap. I repeat, this $80 million for your consideration, because what is important is customer demand, product, volume, so the flow of product. 90% of this gap is related to intangible. Yes, intangible is revenue, but it is not flow of product. It is not measuring the capability of ST to address its addressable market. So this is a positive point. I would have expected to compensate this 90% of intangible by a stronger dynamic on automotive. Unfortunately, we have one customer specific change in the forecast on Q3 that prevents us to move to this position. But on automotive, again, the sequential growth in Q3 will be pretty solid because we expect, let's say, a high single digit growth in automotive in Q3 and we will grow again in Q4. So yes, there is one customer specific, but nothing related to the overall market dynamic. I repeat what I said a few minutes ago. Now we have to acknowledge that for a while, we will have in front of us an automotive market moving forward, growing. Again, 90 million vehicles, at least one third is related to a mix of battery-based electrical and hybrid electrical, but with competition landscape changing in a very dynamic way. We have to manage, and we are not protected time to time to have one customer specific, and yes, not at the level of our expectation. This we can manage, but this is a situation we have to face that is completely different than a few years ago. So I, of course, regret to not be on the turning point of Q3. But again, I repeat, 90% of the gap is intangible. The rest is really customer specific. The good news is industrial, personal electronics, Computer peripheral and communication equipment grow significantly over the year. Automotive grow significantly on a sequential basis. And we grow again in Q4.

That's very helpful. Thank you, Jean-Marc. And just to clarify, this customer change, is it a market share shift? I mean, is it structural or is it just an order or inventory or forecast adjustments? Is it... Temporary or longer term?

It is absolutely not a market share loss. It is specific to the customer. I cannot comment, but I am pretty sure that long term this customer will recover.

Got it. Thank you very much.

Next question, please.

The next question comes from the line of Sandeep Deshpande from JP Morgan. Please go ahead.

Yeah, hi, thanks for letting me on. My question is regarding Q4. You mentioned, Jean-Marc, that you will grow sequentially in Q4, but will you, based on what you see today, will you be able to grow year on year in Q4 across the board at the company? uh you know excluding some of these issues you've had in q3 uh based on what you see today and i mean following up on your earlier response um do you see an impact uh in this guidance from the the new u.s rules on evs etc which which could have an impact on silicon carbide or any of your other businesses thank you uh thank you uh somebody for the for the question uh

The fact we have in our hand is that the backlog that is positioned on Q4 today, if we compare exactly at the same date the quarter of Q3, it is showing significant sequential growth. So if the booking on Q3, because I repeat, we are also facing market situations that are turning up from a cyclical point of view, but also the visibility is pretty short. It is clear that if we have a booking dynamic in Q3 on a similar path of what we have seen in Q2 and in Q1, we should expect in Q4 to grow sequentially, And then to be at the turning point or very close to the turning point. But again, this is the mechanics we are following. So yes, we expect to grow sequentially in Q4, taking into account the portfolio. And under the assumption, we will see a booking dynamic similar of what we have seen in Q1 and Q2. Finally, we should be in position to grow year over year in Q4. But again, we will not be protected against something specific a customer that decide to decrease inventory because he wants to prefer to protect 2026. So we are not protected this singularity with some customer. Overall, it means what? It means the trend is positive. The dynamic is positive. STs come back on a gross trajectory, but the overall environment, and specifically the market of automotive, is not strong enough to generate a buffer of backlog in order to absorb all the variation. So all together, of course, we have to communicate very carefully and accurately to monitor this dynamic. So this is the point. The other point of the question was...

What was the second part?

The other part of the question was on whether any of the dynamics you're seeing in Q3 and then beyond are to do with the new US tax bill which has implications on EVs.

No, it is nothing significant specific to this point. Again, what we are acknowledging and reviewing our mid-plan on silicon carbide and electrical vehicle is a dynamic. Well, I guess everybody has acknowledged and understand that compared to three years ago in 25, the volume of electrical car is basically 5 million car less that was forecasted five years ago. So what is important is to look the trend. That's a second trend is a mix between battery based and hybrid vehicle. So we have to understand, okay, with all the set of regulation constraints that worldwide are implemented, and then the competition of the Chinese carmaker, all this trajectory of growth will move. And this is what's matter for us in order to design our manufacturing capacity. What I can say in silicon carbide, the main important for us now is to close the six inch as fast as we can. start the 8-inch, adjust the capacity to the market demand, and we confirm that we strongly believe that we can keep 30% market share on this market. Different path two, three years ago, for sure, but, okay, we're adapting ourselves, and SQL Carbide mid-term, okay, will be a growth driver of the company.

Thank you. Do you have any follow-up, Sandeep? Yes, no, I'm fine. Thank you. Thank you. Next question, please.

The next question comes from the line of Stefan Uri from OdoBHF. Please go ahead.

Yes. Good morning, everyone. I have two questions. First one is about the comments you made earlier about the growth margin. I think you used the term nice growth margin improvement to be expected in Q4. And I just wanted maybe to come back on the reasons for that and also the impact of the Forex if the dollar stays at this level. And I have a follow-up. Thank you.

I take this question. Thank you for this question. Clearly, let's say what are the drivers that we do expect in Q4 to substantially, let's say, help a sequential increase in our gross margin. On one side, clearly we expected that our unused capacity charges will decline in respect to what we have in Q3. This is expected. Q3, I have to say that if you compute the unused capacity charge in million dollars, let's say you see that in Q3 are at the end similar to the one that we had in Q2. This is due to the fact that in Q3 we will, let's say, put strong control on our inventory. We do expect to achieve something with the range in terms of days for our inventory, 140 days. So it means that at the end, unloading charges still are significant in during this quarter will decrease in the next quarter in q4 the other the other element that you have to take in mind is that q3 is still impacted by a negative efficiency yes from our manufacturing yes is improving when we look let's say the sequential dynamic moving from Q2 to Q3, but still is not at the optimal level. We will continue to improve in Q4. So this means that this is another driver that will help, let's say, the improvement of our gross margin in the next quarter. This is assuming that the exchange rate will stay substantially similar to the one that we have today. Clearly, there will be some negative impact because the impact of our hedging policy will be a little bit lower than what we have in the current quarter. But at the end, let's say most of the negative impact of the exchange rate has been already reflected in the Q3 gross margin. So this will not be, unless there is still another big movement in the euro dollar, it should not be, let's say, another element, assuming, I repeat, that we stay more or less at the level of the spot that we have today. So these are the dynamics that we see moving from Q3 to Q4 for our gross margin. So some improvement related to these impacts.

Thank you very much. And the follow-up is about the industrial market because we talked a lot this morning about the weakness of automotive revenues compared to the expectations. But I just wanted to understand what is the driver for the recovery in industrials. Is it inventory replenishment, pull-in, or real demand behind that? And if you can give some color, that would be helpful. Thank you.

Well, first of all, you know that a significant part of the industrial market for us is done through the distribution. So what is positive is POS, so the sales of our distributor, increase in Q2, both sequentially and year-on-year. And our POP were below the POS. So we are seeing a dynamic where the revenue recognition we have the POP is below the POS, the POS is growing both sequentially and year-over-year. So inventory and distribution are going to normalization, I have to say, in Asia-Pacific, excluding China, back totally to normal in China, and still a bit higher than normal in India and America. But the dynamic is again industrial distribution, POS growing both sequentially and year over year. POP, as I described, below the POS. So it is not inventory replenishment. It is real demand. Then after from other OEM pretty fragmented, clearly the growth is driven by a more smart industrial for us and in a lesser extent for power and energy. We don't see, I repeat, also this is the opportunity I said that, any effect of pulling on industrial, especially from China for ST. So there is zero pulling in China from Chinese customer or distributor for ST. So we are immune against that. And as far as products are related, one of the main drivers, which is very encouraging news, is a general purpose. the general purpose microcontroller, again, went back to both sequential growth and year-over-year. So showing the strength of our portfolio and ecosystem. Today, it is not the same case on general purpose analog. Why? Because on general purpose analog, we have still some other inventory that we are controlling with our POP, and PowerDiscrete a little bit similar. So this is basically the key driver of the industrial market. Distribution, because of POS and demand. Then the smart industrial, lesser extent power energy. From product, it is a general purpose microcontroller. And in a less extent, for sure, general purpose analog and power and discrete, because still some other inventory that we are controlling. So we control our POP.

Thank you very much. Thank you, Stefan. Next question, please.

The next question comes from the line of Gianmarco Bonaccina from Banca Acros. Please go ahead.

Good morning. A couple of questions. The first one is on gross margin again. I think early June, Gianmarco, you said that When the company will reach again 3.6 to 3.8 billion, that could be about 600 basis point improvement, I guess, over the level of Q2 or Q1, I'm not sure. So given the Eurodollar now is approaching 120, can we expect this level of improvement maybe going into next year or the year after could be a little bit lower, so maybe 400 to 500 basis points?

Thank you for your question, so I pass to Lorenzo to answer.

Clearly, when we were modeling our gross margin, if you remember, and we will say that the level of our, let's say, model, intermediate model, $18 billion, we were modeling with an exchange rate in the range of 1.09, let's say. Clearly, when we are at this level, there is an impact that you see when we move from this 1.09 that substantially was the one of last quarter. Now we are moving to 1.15. we said 140 basis points, including also some small adjustment. Clearly, let's say, moving an exchange rate, the spot rate, this will worsen. Anyway, let's say you have to consider that, yes, there is the negative impact of the FX, but still we have, let's say, some leverage, let's say, in terms of gross margin. because today we are still impacted by significant amount of annual charges and when we will be at that level of revenues, this will substantially disappear. So we are talking about 340 basis points in Q3. Then you have also to consider that there is a negative impact related to the manufacturing efficiency that is not yet at the optimal, let's say, level. Then there is another impact that we needed to consider that is somehow, let's say, impacting negatively our gross margin, that we are not still in an optimized mix. Means that, let's say, for instance, our, let's say, level of overall industrial that is at the end, let's say the one that is more creative to our gross margin. still stay at the level that is not the one that we should be in our let's say portfolio revenues that is now more closer to 20 21 percent and then the 25 26 percent that we do expect let's say in a in a in a more normal situation for our company so all these elements we do expect that we will improve our gross margin Clearly, let's say it remains that the model was, let's say, done on FX that was 1.09. So we need also to see where the exchange rate.

Thank you. Just a quick follow-up, more strategically on China, because we read At the end of June, an article in DigiTime said that Chinese automakers are moving to align with government directives by planning to use domestically developed and manufactured automotive chips. And the article mentioned that in case there was a choice between a fully China chip and one designed by a foreign firm but fabricated in China, many automakers will opt for the former. So can you remind us roughly how much is your exposure in terms of sales to Chinese OEM and Tier 1? And we know that you have a strategy China for China. So do you see these as... let's say, enough to, let's say, offset this potential headwind that this article was mentioning. Thank you.

Waiting to deliver the exact numbers. Yes, I confirm that we built our strategy China for China that, I repeat, is encompassing not only manufacturing localised, but also design, application labs, customer support, competence center, in order to be seen as a Chinese player, I have to say. This strategy is, let's say, very active on power, so silicon carbide and microcontroller, and we do believe that will be a strategy enabling ST to compete against local players and to be perceived by official authorities as a local player. We are not proven that some specific company owned by the state, in fact, will apply strictly this kind of rules. But overall, our Chinese customers, as all, are pragmatic. If we offer them a supply chain, local, application support, design, quality labs, reliability labs, they will manage us as local players. So we do believe our strategy will mitigate a lot. This effect, yes, again, if there is some specific company honored by the state, it will be difficult to prevent this kind of dynamic.

And then about the exposure, our revenues are 2%. Chinese customer at quarter in China is in the range of, depends on the quarter, of course, but it depends, let's say, but it's in the range between 13, 14% of our total revenues. What do we sell to the, to the, uh, at quarter Chinese customer.

Okay. Just in for, for automotive, right?

Ah, no, this is the total. But for automotive, it's very similar. I would say that at the end, let's say when you take automotive... Okay, 13% over 40x%.

Okay. Thank you.

Thank you. Next question, please.

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

Hi, Lee.

Can you hear me?

We can hear you now.

Okay. Morning, everyone. So I just wanted to ask about general purpose microcontrollers and the pricing there. I did look from our channel checks as though things were very strong in April, stable in May, but somewhat erratic going through June. So I just wanted to get a sense for how you thought the pattern was for pricing on general purpose microcontrollers. into the second half, and if indeed this might vary by region. And then the second question I had was really on the timing of readiness for the 800-volt DC-DC supply for the PSU. We are hearing that it's quite difficult to meet that spec as delivered by NVIDIA, and whether or not you had confidence that you could hit the full 800-volt supply. Thanks.

Thank you for your question. So Lorenzo will comment on the price and I will let Marco to comment on the NVIDIA opportunity.

Well, Sebastian, on the pricing in general purpose microcontroller, what I can tell you is that we see really, let's say, low single digit pricing part. We have not detected any strange behavior, I have to say. But clearly, let's say maybe region by region, the dynamic is a little bit different. But at the end, I can confirm that, let's say, on the general purpose, this is what we see today. Nothing particularly, let's say, strange in term of behavior and yes you may have some socket in which maybe there is a competition a little bit more aggressive and so on but but at the end i would say we are with a price in the range of low single digit that is water we have seen since since the beginning of the year nothing particularly different so marco yes on the 800 volt yes you're right surely

is challenging in terms of specification, as you know, at least our proof of concept, which is in the hands of NVIDIA and on which we are working very closely with them. It's a combination of different components. So you have the GAN, you have the SICK, you have galvanic isolation drivers to drive the board overall. I'm confident it's Some of the components are more mature than others, so the wide band gap material are fine. We're still working to develop drivers galvanic isolated to make sure that the overall performance will be there. It's a work in progress. So far so good. We have things to fix, but I think that I do not see a real roadblock to this. Of course, it's a work in progress.

Just on that point, as a work in progress, it does seem to suggest this is maybe second half 26, early 27 as a sales impact rather than anything sooner?

This is too early to say. It's a big change in terms of architecture. We will do everything we can to be as soon as possible ready to support. We are confident that we can be part of the early adopters, but too early to say. Very clear. Thank you.

Thank you, Lee. We have time for a very quick question, for the last one.

The last question for today is from Sebastian Stavrovic from Kepler-Schwerter. Please go ahead.

Yeah, hello everyone and thanks for taking my question. Coming back to the inventories in the distribution channel, could you please quantify the level of inventories in the channel today? You were mentioning last quarter a bit less than two months of excess of inventory. I would be, I would say close to know where we are today. The second one is linked to pricing environment in China, and specifically on silicon carbide, we are seeing some price war raging between the EVOM there. Who do you see prices for silicon carbide building there? And do you have any kind of feasibility on your design that are expected to ramp in China on silicon carbide from 2026? Or is it too early to know what will be the pace of ramp of those designs? Thank you.

thank you lorenzo will take the question on the channel inventory and marco will will comment on the silicon carbide in china yeah in respect to the inventory i would say that during q3 our inventory distribution has progressed in the right direction uh is true that when we were met meeting let's say in uh in q2 after our running release of the of the of the q1 quarter let's say our inventory in average was with an excess in the range of two months. Now I have to say that has declined at least by one month in average. So we are in average, let's say, still with some excess of inventory. It's not across the board in the sense that now we see some families like, for instance, general purpose that are normalized in terms of inventory. especially in some regions that we are really at the normal level, even slightly before. Maybe there is some difference region by region. Other families are suffering still a little bit more in terms of normalization of the inventories, likely in some product line in analog. But I would say that now the situation in distribution is getting in the right direction. We see now, let's say, the inventory moving down, let's say, and being more in line with our target expectations. Still some excess, but moving in the right direction in terms of reduction.

On silicon carbide for China, yes, you're right, the price pressure in China on silicon carbide is a strong price pressure, but we are counteracting this, first of all, with a Generation 4 is introduced. We are working for the Generation 5. Let's not forget that we have also a manufacturing footprint that is going to make us competitive also for that market, which means we are moving, as Jean-Marc was saying, from 6 to 8 inches. And specifically in China, we are going to have our manufacturing salon that we start at the end of this year and beginning of next year. We are addressing also, we are expanding, addressing not only the automotive, but much more now also the industrial market. So all these components together should materialize in a growth on the Chinese market. Clearly the dynamics are strong, but I think we are pretty well equipped to counteract the dynamics that we see in the market. China, for us, will be an important engine of growth in the years to come. I hope this answers your question.

We anticipate 2026 to be again after the point of 25, a year of growth for Silicon Carbon.

Okay, thank you. Thank you. Thank you, Sébastien. Thanks, everyone. This concludes our call for today. If you have any further questions, please reach out to the investor relationship. Thank you very much.

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