STMicroelectronics N.V.

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You will hear a... Ladies and gentlemen,

Welcome to the STMicroelectronics second quarter 2026 earnings release conference call and live webcast. I am Moira, the conference 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 one 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 hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead.

Thank you, Maura, and thank you everyone for joining our second quarter 2026 financial result call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call are Lorenzo Grandi, President and CFO, Marco Cassis, President, Analog Power and Discrete, MEMS and Sensor Group, and Head of STMicroelectronics Strategy, System Research and Application and Innovation Office, and Rémy Elwazan, President, Microcontrollers, Digital IC and RF Product Groups. These live webcasts and presentation materials can be accessed on the STInvestor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory 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-Marc Chery, ST President and CEO.

Thank you Jerome. Good morning everyone and thank you for joining ST for our Q2 2026 earnings conference call. I will start with an overview of the second quarter, including business dynamics. And I will hand over to Lorenzo for the detailed financial overview. I will then comment on the hot look and conclude before answering your question. So, starting with Q2, our second quarter net revenues of $3.49 billion came in above the midpoint of our business outlook range, driven by higher revenues in communication equipment, computer and peripherals, and automotive. Gross margin was 34.8% and non-US GAAP gross margin was 35.2%. Both were in line with the midpoint of our business outlook range. Non-US GAAP diluted earnings per share was $0.31. During the second quarter, inventory in our balance sheet remained flattish In distribution, inventory further decreased and is now below our standard target. We generated a positive $75 million free cash flow. Let's now discuss our business dynamics during Q2. During the quarter demand increased further with strong bookings and book to build close to two overall. We were well above one in whole end markets and significantly above two in communication equipment, computer and peripheral, mostly driven by optical connectivity, including silicon photonics. We saw improved visibility and signs of tight supply in several product categories. In automotive, revenues came in better than expected, increasing 14% sequentially and 16% year-over-year. This growth was driven by our solid position on application-specific ICs and sensors for conventional applications, electrical powertrain, and HEDAs. Automotive design momentum continued to build across multiple OEM and Tier 1 ecosystems. We secured design wins across hybrid, electric, and conventional vehicles, including applications in onboard chargers, powertrain, and active suspensions. These wins were across our application-specific ICs and sensors. Specifically, our SmartPower ICs wins include custom devices for airbags, electronic stability control, and Suspension Applications based on our proprietary BCD technologies manufactured in our AGRAD 300mm wafer fan. We have progressed well with the integration of NXP MEMS sensor business acquired in February. As we anticipated, the complementary technology and product portfolio is strengthening our automotive sensor business with awards at key players for active safety application and tire pressure monitoring. Industriol improved 20% sequentially and 34% year-over-year. Importantly, inventory and distribution further decreased and is now below our standard target. This solid growth was driven by our general-purpose microcontrollers and by analog with their wide ecosystems, and by our application-specific analog products complemented by power conversion products. We are strongly positioned to support the ongoing transformation of factory automation, robotics, and power and energy infrastructure. Our portfolio is uniquely addressing the emerging needs of physical AI, where intelligent sensing, real-time control, and efficient power management are increasingly critical. During the quarter, we saw design wins across industrial automation, power systems, building automation, and appliances. We continue to introduce new advanced sensors for this application. We launch a new series of industrial MEMS sensors with embedded AI, tailored for the fast-growing industrial condition monitoring market. We also announce a new compact 3D LiDAR module delivering AI-ready output data for low compute edge AI systems running on microcontrollers and high-performance sensing in applications such as robotics, industrial automation, smart buildings, ER, VR, and healthcare. This is in line with our strategy to move beyond standalone sensors and deliver integrated sensing systems that support real-world HAI. Finally, we announced a further expansion of our collaboration with NVIDIA to accelerate physical AI. As a partner in NVIDIA Hellos for robotics and hand-to-hand functional safety systems for industrial and humanoid robots, ST is bringing its microcontrollers, sensors, motor control and security solutions to support LO3Dness across chips, evaluation kits, software and reference designs. For personal electronics, second quarter revenues were up 3% sequentially and 20% year-over-year. This growth was driven by increased content by device in our engaged customer programs and better than normal seasonality. During the quarter, we introduced a secure chip that helps smartphones and personal electronics manufacturers prepare for quantum-ready security requirements. It combines post-quantum cryptography acceleration with NFC, secure elements, and eSIM functions on a single DI for use cases such as digital identity, payments and digital card keys. We also introduced a new generation of ultra low power global shutter image sensors that deliver high quality, always on vision to compact devices operating on batteries or harvested energy. such as wearables, ERVR and XR headsets, smartphone appliances, and medical devices. They are engineered to deliver rich visual context and AI-ready data under tight constraints on power, size, and cost. With the depth sensing technologies I mentioned earlier and this device for AI vision, ST delivers a complete perception stack for LJI to customer. For communication equipment, computer and peripherals, second quarter's revenue were above expectations, showing increase of 13% sequentially and 50% year over year. This growth was driven by our engaged customer programs with our custom designed products, boosted by our microcontrollers for optical connectivity. Indeed, ST is a core enabler for the Cloud AI era. We see strong traction on optical connectivity driven by silicon photonics ICs, electronic ICs, microcontrollers. For the power stage of Cloud AI, we are already successful with our microcontrollers and high voltage power and analog products. and we are building a pipeline of design wins for low voltage power and analog products. Therefore, we are raising our revenue ambition for data centers. We now expect revenue above $1 billion in 2026 and assuming the current dynamics continues and with the current engagements we have, well above $2 billion in 2027. During the quarter, we secured multiple design wins across a range of products from optical connectivity driven by silicon photonics ICs, electronic ICs and microcontrollers to silicon and silicon carbide based power solutions. In addition, we see a growing numbers of non-traditional AI server companies, including players coming from industries such as solar power and battery storage. where we are leveraging strong relationships to support their expansion into this field. In May, we held a webcast on the Low Earth Orbit Satellite Communication and New Space Opportunity for ST, highlighting how ST is positioned as a core semiconductor enabler across this new industry. We see a significant opportunity here with our addressable market expected to reach around $3 billion by 2030 or about four times the 2025 level. ST expects to generate well above $3 billion in cumulative space revenue over the period 2026-2028, mainly with our BISEMOS, FDSOI, and panel-level packaging technologies. Finally, in June, ST joined the €115 million Series A financing of COBLY to accelerate the industrialization of its silicon-based quantum computers and bring its first commercial product to market by the end of 2026. For ST, the scale needed by high-performance computing customers can only be achieved if breakthrough quantum systems can be industrialized and integrated with semiconductor grade standards and backed by a robust ecosystem. We are leveraging years of shared expertise in FDSOI and deep technological collaboration to accelerate the commercialization of COBLYS products through our 300 millimeter silicon farm environment. In May, we held our 2026 ST Microelectronics Annual Shareholder Meeting, where all resolutions were approved. Following the AGM, ST Superderry Board appointed Mr. Armando Varricchio as the chairman and Mr. Nicolas Dufourcq as the vice-chairman of the Superderry Board. Now, over to Lorenzo, who will present our key financial figures. Thank you, Jean-Marc.

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 products, MEMS, and sensors grew 26%, mainly due to imaging and MEMS. and, to a lesser extent, Analog. Power and discrete products increased by 3.7%. Embedded processing revenues were up 35.5%, mainly due to general-purpose microcontroller and, to a lesser extent, custom processing and connected security. And RF and optical communication grew 32%. Buy and market. Communication equipment and computer peripherals grew 50%, industrial 34%, personal electronic 20%, and automotive 16%. Year over year, sales to OEMs and distribution increased 23.3% and 33.1% respectively. On a sequential basis, by reportable segment, analog product MEMS and sensor increased by 8.2%, power and discrete by 19.2%, embedded processing by 17.7%, and RF optical communication by 8.6%. Buy and market on a sequential basis, industrial grew 20%, automotive 14%, communication equipment, computer peripheral 13%, and personal electronics 3%. Turning now to profitability. Gross profit in the second quarter was $1.22 billion. Increasing 31.1% on a year-over-year basis. Gross margin was 34.8%, increasing 130 basis points a year-over-year, mainly due to lower unused capacity charges and better product mix. On a sequential basis, gross margin increased by 100 basis points. Non-US GAAP gross margin was 35.2%. Q2 gross margin included about 60 basis points of negative impact resulting from non-recurring cost related to our manufacturing reshaping program. The negative impact on gross margin, just mentioned, non-recurring cost, is expected to remain at similar level over the rest of the year. Total net operating expenses Excluding restructuring amounted to $970 million in the second quarter. Non-US GAAP OPEX stood at $960 million in line with the expectation given in April. For the third quarter of 2026, we expect non-US GAAP net OPEX to stand at about $980 million. The sequential increase is mainly due to startup cost and employee share award expenses that are more than offsetting the positive vacation seasonality effect. Excluding these two advents, Q3 26, a non-US GAAP net OPEX, would have been at about $920 million. For full year 2026, we now expect non-US GAAP net OPEX to be slightly above $3.8 billion, taking into account increased employee share award expenses and the temporary impact of the startup cost, reducing our other income and expensive positive lines. For full year 2026, non-US GAAP net OPEX are expected to increase low double-digit year-over-year. Excluding NXP MEMS business acquisition and the exchange rate impact, like-for-like net OPEX should be up high single-digit year-over-year. Our cost-saving plan is delivering its expected benefits. At the same time, we are accelerating our investment in new business opportunities. In the second quarter, we reported $187 million operating income, which included $58 million for impairment, restructuring charges, and other related phase-out costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Q2 operating income also included $24 million purchase price allocation effect from our acquisition of NXP's MEMS sensor business. Excluding these items, Q2 non-US GAAP operating income stood at $269 million, and non-US GAAP operating margin was 7.7%, with analog product MEMS and SENSO at 10.1%, power and discrete at minus 21.4%, embedded processing at 19.7%, and RF optical communication at 21.2%. Second quarter 2026, net income was $222 million, compared to a net loss of $97 million in the year-ago quarter. Diluted earnings per share were a positive $0.24, compared to a negative of $0.11 one year ago. Non-US GAAP net income stood at $291 million, and non-US GAAP diluted earnings per share stood at $0.31. Net cash from operating activities totaled $502 million in the second quarter, including $44 million outflow related to restructuring. compared to a net cash flow from operating activities of $354 million in the year-ago quarter. Net capex was $409 million in the second quarter compared to $465 million in the year-ago quarter. We now expect the 2026 net capex to be at the high end of our $2.2 billion range, reflecting accelerating investments in the selected growth drivers, including cloud optical interconnect. Free cash flow was positive at $75 million in the second quarter compared to a negative $152 million in Q2 2025. Inventory at the end of the quarter was $3.19 billion compared to $3.17 billion in Q1 26 and $3.27 billion in Q2 2035. Day sales of inventory at the quarter end were 126 days in line with our expectation, compared to 140 days for the previous quarter and 166 days in the year-ago quarter. Cash dividends paid to stakeholders in the second quarter of 2026 totaled 75 million dollars. ST maintain its financial strength with a net financial position that remains solid at $2.01 billion as of June 27, 2026, reflecting total liquidity of $6.03 billion and a total financial debt of $4.02 billion. During the quarter, ST issued A new $105 billion dual-trench Senior Unsecured Convertible Bond for $750 million each due to 2031 and 2033 and announced the early redemption of its $750 million convertible bond due in 2027. Now back to Jean-Marc who will comment on our outlook.

Thank you Lorenzo. Now let's move to our business outlook for Q3 2026. So we are expecting Q3 revenues of 3.7 billion dollars plus minus 350 basis points at the midpoint of our Q3 2026 net revenues will increase 6.2% sequentially and by 16.2% year over year. We expect our gross margin to be about 37% plus minus 200 basis points, including about 70 basis points of unused capacity charges. This business outlook does not include any impact for potential further change to global trade tariffs compared to the current situation. To conclude, in Q2, we saw demand further accelerating, strong bookings in all end markets and improved visibility. In Q3, revenues are expected to continue to grow sequentially and year over year, and gross margin to continue to improve. As previously anticipated, personal electronic seasonality this year is different compared to previous years. Revenue growth for personal electronics is expected to be below normal seasonality in Q3, moderating ST sequential growth in the third quarter. In Q4, we anticipate a revenue growth acceleration, mainly driven by our engaged customer programs in AI data centers and low Earth orbit satellite communication. We expect Q4 revenues to be above $4 billion, representing a sequential improvement better than normal seasonality. This translates into H2 versus H1 growth above our normal 15% seasonality. ST growth driver remains solid. We continue to see strong demand in high data centers. reflecting the success of our product and technology portfolio. We are raising our revenue ambition for data centers. We now expect revenues above $1 billion in 2026, and assuming the current dynamic continues, and with the current engagement we have, well above $2 billion in 2027. This confirms ST's strong position in the evolving AI data center. 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 one on their touchstone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. 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 Jean-Arnaud Menon from Jefferies. Please go ahead.

Hi. Good morning. Thanks for taking the question. I was just looking into your second half guidance and trying to get a feel for your gross margin trend into Q4. So I know you don't want to guide on Q4, but you are talking about a bigger increase in revenue quarter on quarter. And we don't know how much it is, I agree, because you just said more than $4 billion. But I was wondering directionally whether you can give us any qualitative comments on how your Q4 gross margin could proceed and how you see that evolving into 2027 as well. Thanks.

Okay, thank you for the question. I take the question, Jean-Marc, about the gross margin, the evolution. Clearly, let's say the midpoint of Q3 non-gap gross margin or gross margin for us in Q3 will be 37%. We have a guide at this level of gross margin that is increasing, let's say, about 180 basis points compared to the one of Q3. Clearly, starting from this Q3 gross margin at 37%, we do expect, let's say for Q4, a sequential improvement in our gross margin, considering that our revenue will increase significantly. But you have to keep in mind that there is some advance as well. One is that, let's say, our level of unloading charges will not change significantly in Q4 due to the fact that we are starting some fabric, particularly in China, let's say, in which we will still have some negative impact on our, let's say, level of unloading. and clearly there is also still let's say this cost related to the transfer of technology related to our shaping program in our manufacturing infrastructure that will be still there similar to the one that we have in the current quarter in Q3. So, yes, I confirm there will be improvement, but there will be also some, let's say, at-wins that are, let's say, impacting our cross-margin. Overall, anyway, I confirm that in Q4 there will be an improvement in our cross-margin, a sequential improvement compared to the 37 of the Q3.

Given that your revenue jump is going to be bigger, can we assume that your gross margin jump will also be bigger or is that speculation?

As I said, it will improve, let's say, compared to the 37, but still, let's say, it will be impacted by some ingredients that is related to this level of unloading that will not decrease, let's say, while when you look, let's say, the dynamic between Q2 and Q3, unloading was, let's say, decreasing. This will not be similar what will happen between Q3 and Q4. and as well as, don't forget, when we look at the dynamic of our gross margin moving from Q2 to Q3, we had also benefits from the effects, let's say, that was improving in respect while, let's say, in Q4 this effect will not be there, it will be neutral. So, yes, I repeat that there will be an increase in our gross margin, but you have to also consider in your modeling that there are some temporary add-ins, but there will be in Q4, let's say, that will be limiting somehow the improvement of our gross margin in Q4.

Understood. Thank you.

Thank you. Thank you, General Dan. Next question, please.

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

Joshua Buchalter Hey, guys. Thank you for taking my questions. I guess I wanted to start with the data center number. Can you provide some more granularity on what's driving the big increase in 2027 versus the prior expectations? Like how much of this is optics versus power? It did sound like there was some positivity on the power side. And I guess also is you mentioned you were capacity constrained before. Is that number greater than two billion dollars assuming you're still constrained as well? Thank you.

So before I pass the question to Rémi to go into further detail, it is clear that our growth in 2027 will be driven both by our specific engaged customer program on this field of activity, but clearly the overall success on optical cable connectivity. Clearly it will be the main driver of the significant growth we will do next year. Now I let Rémi comment on more in detail.

To complement what Jean-Marc said, we see clearly an acceleration in the adoption of 800 gig and 1.6 terabit per second pluggable optics. And those are actually generation and categories of transceivers where now we are seeing a triple effect. And this triple effect is a fairly large market share when it comes to the microcontroller. taking care of the control plane, a growing share when it comes to the electronic IC, driven by our BISIMOS technology. And starting from next year, but really accelerating next year, is actually a growing revenue in silicon photonics, supporting photonics IC that is being part of those plugable transceivers. Like we've explained, you know, we have a lot of scalability in terms of capacity on that technology because of the structure we have in our whole factory. So we are not right now gated by capacity expansion to go and capture revenue at this stage.

Thank you both for all the color there. Maybe to follow up on that also, I totally appreciate what, Lorenzo, you were highlighting from the manufacturing transitions and underloading charges, but on a like-for-like basis, should data center as it grows be accretive to gross margins? Thank you.

Yes, at the end, yes, this kind of, let's say, clearly, this has been already, let's say, moving from Q2 to Q3, and will be also contributing from Q3 to Q4. Product mix is contributing in a positive way to our gross margin. Yes, I confirm.

Thank you, Lorenzo.

Thank you, Josh. Next question, please.

The next question comes from the land of Jacob Bluestone from BNP Paribas. Please go ahead.

Thanks for taking the question. So I had a question and a follow-up. On the pricing, could you maybe just give us a bit of an update? What are you seeing in terms of pricing, tailwinds, and when do you think that might impact revenues this year?

Yes, in terms of pricing, I would say that, of course, it's twofold. On one side, it's true that we see, let's say, in our input cost, price increase. Clearly, let's say, there are different materials or maybe, let's say, contractual activity that are increasing prices. On the other side, I would say that there is the other side that we confirm that in this context, let's say, of higher input cost, Yes, we increase the prices on selected products. Clearly, let's say this is an ongoing process that is expanding in terms of price increase. And I would say that at the end, what we see in our input cost It's more than offset of what we do, let's say, on our top line. So I would say that at the end, at this stage, let's say the two impacts are more or less offsetting each other.

And if I can just ask a quick clarification, on your data center revenue guidance hike, was that increase driven by increased demand outlook or by a faster expansion of your capacity and supply?

It's both. It's both. Because clearly, above $1 billion, 2026 revenue, the demand is well, well above. but thanks our capability to grow in crawl and with the various assembly and test manufacturing. So that's the reason why we have increased our indication for this data center business. and next year is the same. Next year, okay, clearly we will be closing the gap between the demand and our capability to supply, but it is really driven first by demand, then it is covered by engagement. Backlog for this year, 100% coverage, and next year, okay, engagement are covering our expectation. and definitively our capability to grow on this advanced 300 millimeter technology is a very important competitive factor for us.

Thank you. Thank you, Jacob. Next question, please.

The next question comes from the line of Sandeep Nishpande from J.P. Morgan. Please go ahead.

Yeah, hi. Thanks for letting me on. Could you talk about the revenue growth guidance into Q3 and then potentially into Q4 by your segments? Because you said earlier in the call that personal electronics was weaker in the third quarter, but can we look at how the growth was in the other segments and based on what you're indicating for the fourth quarter at the moment of greater than $4 billion, at least directionally how to see the different Are there any segments in terms of your end markets into the fourth quarter based on your order book today?

I will take the question. Clearly, I am starting by the key growth driver is clearly our verticals, communication equipment, computer and peripheral. I can say that In Q3, on a year-over-year growth, this segment will grow very similarly what we have achieved in Q2, so means close to 60% growth. And definitively, we will have in Q4 a very strong acceleration, means we will be about 90% growth. The second really positive growth verticals, is industrial. Industrial in Q2, we grew 32%. And step after step, Q3 and Q4, we will go close to 40% growth year over year in Q4. Clearly, automotive is performing above what we expect and what the market is expecting. You know that for semiconductor industries, the automotive is expecting to grow about 13%, 14% year over year. This is what we will achieve on this segment. PE is definitely a different profile, let's say, in the year-over-year growth because it will be slightly negative, let's say, mid-single digit during Q3 and Q4, as we anticipated in our previous call, that will put this segment at the end of the year, for the full year, growing, let's say, from low to mid single digit that we already anticipated in the previous scope. So my takeaway is really very strong growth on computer and communication, moving from a 60% growth in Q2 to close 90% in Q4. On industrial, after a Q2 of 30% growth year over year, we will go close to 40% in Q4. automotive let's say low double digit as expected consistently with the market and this year okay different profile for PE We will be on year-over-year negative on H2 after having been positive in H1, but on the full year, it is low to mid-single digit, which is consistent with the market of a smartphone that is decreasing because on the low-end, let's say, device, there is an impact because of the memory price. So this is the profile of the revenue Q3-Q4.

Thank you.

Any follow-ups, Cindy?

The question would be that, you know, you've seen this significant strength in computer and peripherals associated with the AI market. Is there not any flexibility in filling your capacity in the third quarter itself? Why does this have to wait till the fourth quarter, given that you still remain underutilized in the third quarter?

On let's say all the advanced technology that are enabling our let's say growing industrial market and communication and computer, we are in a permanent growth and exactly at what we'd expect and here the only flexibility we could have is to continue to accelerate permanently which is already on the really competitive paths. Clearly, where we have still some, let's say, under-loading and even sometime in Q2 we face a slight delay in our capability to ramp up. It is on legacy, pure legacy analog technologies because if you remember Q1 we were totally underloaded so the Q2 ramp up was challenging so we delay a little bit this ramp up that in a certain extent has impacted also our capability on Q3 to fully fulfill the demand on legacy technology. So this is, let's say, pure temporary capability to ramp and some unloading charges specific to really legacy technology on analog that is, let's say, showing this figure.

Thank you so much.

Thank you, Sandeep. Next question, please.

The next question comes from the line of Domenico Ghilotti from Equita. Please go ahead.

Good morning. I have a follow-up on the gross margin. So in the past, you were guiding, you were suggesting that at $4 billion sales per quarter, so the profitability gross margin would have been at least in the 40% range. And now you are suggesting that you will probably not be at that point in Q4. So I'm trying to understand how these, first of all, if you are still confident to get to the level of profitability you were suggesting, and there are some specifics, a temporary effect on Q4 that we should take into account. And follow up on the AI data center demand and your customer engaged program, Can you give a sense of how concentrated is today the demand there and the Engage program supporting your $2 billion revenues for 2027?

Maybe I take the first question about the gross margin at $4 billion in respect to our model to be, let's say, above the 40% gross margin. Here I have to remind all of you that, yes, this is our model, but let's say we always said that there are the two conditions that we need to achieve in order, let's say, to be above 40% when the company will be at $4 billion. One is the revenue, of course, let's say that this is what is happening, but the other point is that we complete our reshaping manufacturing program. means that actually we have, let's say, done this transfer from the 200 millimeter to the 300 millimeter for the silicon, closing the two FEPs, and let's say from the 150 millimeter to the 200 millimeter for the silicon carbide. We are not yet there. We are, let's say, in the middle of this transformation. So clearly here, we are not in the condition to have our manufacturing infrastructure at the right level of efficiency. The other way around, I would say that in this moment, in these quarters, Q3 and Q4, we have some kind of extra cost that are related to this transfer, the qualification of the products, the redo of the Thank you very much. So, at the end, we confirm our model to be, let's say, above 40% when the company is there, but once we have done the, let's say, transformation, when we have completed our programs, that, as you know, it will be at the end of 2027, let's say, not before. So, this is the reason why, let's say, it's not enough to be a 4 billion to have a Gross margin, let's say, at the right level of the model.

The second question, maybe, Rémi, you can comment. Again, the key growth driver that will put us on a trajectory well above $2 billion next year.

We have discussed earlier about what we're doing on the optical front. and I insist on the fact that we are now at the intersection of three main vectors of growth, which is, you know, the oversized market share we have on 800 and 1.6 terabits per second in MCU, the growing adoption of our B55X by CMOS process for electronic IC and the steep ramp up we have on our photonics IC platform, our silicon photonics which has proven to be really, really well adopted across the board by all the major actors. And I think there was also a question related to the concentration of that revenue. And we see an evolution of our revenue that is pretty consistent with market share distribution between hyperscalers which makes us actually quite confident about the composition of our revenue. Thank you. Thank you, Domenico.

Next question, please.

The next question comes from the line of Didier Chemama from Bank of America. Please go ahead.

Good morning. Thanks for taking my questions. My first question is on the outlook. I think, Jean-Marc, in your prepared comments, you mentioned that your book to build was close to two, I think, overall and above two in certain segments, like optical interconnect in particular. I'm just wondering, does that imply that your first quarter seasonality might be a bit better than normal? And I've got a follow-up. Thank you.

Thank you. No, yes. With this book to be, what also is interesting is that out of the 100% of the booking we receive in Q2, well above 50% were for next year. So means the customer now they have understood that they have to provide us visibility. And the good news is that now our total backlog is representing about an average of 4.5 to 5 quarter of Q2 average revenue, which is clearly an improvement step. Coming back to standard of visibility. So clearly, yes, Q1 is today on a dynamic to be well loaded and clearly continuously boosted by our revenue related to AI data center.

Okay, great. Thank you. And as a follow-up, I just wanted to make sure I got the right end of the stick on the financial models. I think in the past, You were talking about 45% gross margin on 18 billion and then maybe 50% gross margin on 20 billion. Obviously, that's contingent on execution of the restructuring plan of manufacturing. Just wanted to make sure that this is still the case and whether you've got increased confidence that you can deliver these sort of numbers around 2028.

We confirm our confidence level To reach $18 billion in 2028, clearly announcing the dynamic and increasing our indication on data center, it is clearly one of the key growth drivers that will position our company on $18 billion by 2028. Well, then second, Lorenzo already commented that this business related to AI data center is a creative, our gross margin. So we will have this mixed effect. I confirm that assuming we complete on time our reshaping program on manufacturing and that the ethics will remain our model, we should be in position to reach the gross margin target consistently with our $18 billion model. About $20 billion, for the time being, let's reach together the $18 billion target, then we'll speak about the $20 billion.

All right, thanks very much.

Thank you, DJ. Next question, please.

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

Yes, good morning. So I would love to come back on maybe the satellite low Earth orbit opportunity and If you can tell us what is the dynamic currently, notably with your main customer and the ramp of your second customer, and if you confirm the target of 1 billion for this year and if you have a view for next year already. Thank you.

Thank you. I'll pass the question directly to Rémi.

Hello, Stéphane. The dynamic is quite healthy. Overall, like Jean-Marc explained at the beginning of the discussion, we stick to a well above $3 billion, over 26, 27, 28. You have noticed that, and we spoke about that in the past, that it's very much a launcher-dependent business in the context of deploying satellites. and then deliver the services in itself is a fuel behind user terminal consumption. Clearly, things are progressing in the right direction for space flights. Other constellations have faced a bit of a snag lately, which will be fixed in the coming quarters. But directionally, nothing has changed. We see actually a strong 26 and an even stronger 27.

Okay, and can you comment on the level of profitability on the gross margin on this business like you did for Data Center? Is it attractive?

But yeah, clearly, let's say, is a business a combination of different gross margin, because clearly there are different products, the one that are going in the satellite, the one that are going in the way, the one that are going, let's say, in the user terminal. Anyway, when we look, let's say, at the average of the gross margin of this business, yes, I confirm that also low-hard orbit satellite is and contributing, let's say, to the improvement of our gross margin.

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

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

Thank you very much. My first question was on the capacity front. I mean, we see an acceleration of growth from a cycle perspective, but also from AI data centers. And you are... Things of tightness, as you say in the release, also TI suggested as well some tightness. So I was wondering, how do you feel about your capacity in the next, let's say, two to three years? I mean, do you think you have enough capacity to deliver the different growth scenarios? Or are you evaluating maybe some brownfield or greenfield expansion down the line? So the capacity... Investing in the next two, three years will be helpful.

We have to see it under two angles. One angle is what is related now, our capability to support AI data center. At this stage, we believe that we can sustain it and support it. Of course, under the assumption we are well-assessed, the key success factor is crawl. And crawl will reach 15k wafer per week and will go above to support the dynamic of this business. Where clearly we see some tightness is clearly what is related to general purpose microcontroller. Why? Because first of all, we have two cumulated effects. There is first the enormous success of the microcontroller developed by Remy Thiem for optical cable and there is the solid recovery of the overall industrial market. and where, okay, I mentioned during my address that in distribution, the inventory are now well below our standard and the POS dynamic is very strong. It is here that we are facing at this moment some tension on the supply and increasingly tight. But here, basically, we are We have some key competitive advantages. First of all, we have our two 300mm fans, where clearly our microcontroller will be processed. The good news now is that the Agrat 300 certainly will reach the full build-out pretty soon, before 2020. Then the second important level is our China for China strategy that will start to pay back because if you remember we have qualified 14 nanometer technology in China with our main partner that will enable us to support the growth in China. That is very demanding both for industrial in distribution but industrial OEM and also optical cable. On the other, let's say, technologies and products, clearly the challenge for us is our transition phase between respectively 6-inch to 8-inch silicon carbide technology and 8-inch to 12-inch analog technology. But we have exactly in our hand our capability to grow. All the new technology driven by AI data center, we have the path to grow. Some other tightness related to our reshaping, but only temporary. Then after, we have some pocket of capacity limitation time to time with OSAT, but okay, we manage it.

Thank you, Jean-Marc. And maybe my follow-up would be on silicon carbide, actually. I mean, we see a lot of, you know, change in terms of silicon carbide demand, one driven by the Chinese EV car makers adopting 800 volts, supporting the silicon carbide growth. But also we see one of your main customers delivering, you know, strong deliveries. And on top of that, you have these 800 volts opportunities for silicon carbide so I was wondering if you saw an improvement on the silicon carbide front and if you could provide any maybe guidance on what to expect for that business that would be great.

Thank you. So I will pass the question to Marco, who is managing the product line. Yes, okay, all the positive dynamics you described, we see it, but Marco will comment.

Yeah, I confirm that we see the positive dynamics that you just highlighted. Actually, in Q2, we saw the revenue growth in the low teens here over here, so we are back to growth here over here. and mid-thirties in terms of quarter over quarter. This is also supported by a strong bookings with a book to build that is well above one, which is resulting in a growing backlog. So the dynamics are confirmed and are factual is what we see. So in this context, I can confirm that this year we should grow the serum carbide revenues double digit in 26 versus 25. based on already design one and backlog which is already visible. So the dynamics are positive. Of course, we are facing the transition between the six inches and the eight inches which are sometimes needed some tightness in terms of supply because the products need to be qualified by end customers. But I confirm that the dynamics are positive and are growing positive day by day. Thank you.

Thank you, Francois. This is ending our call for this quarter. So thank you very much, everyone, for joining us. And we remain at your disposal should you need any follow-up questions. Thank you. Thank you. Thank you.

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