STMicroelectronics N.V. Q2 FY2026 earnings call

• Business Dynamics & Demand

  • Overall Q2 demand increased further, with strong bookings and a book-to-build ratio close to 2 overall, well above 1 across all end markets and significantly above 2 in communication equipment, computer and peripherals
  • Distribution channel inventory decreased further and is now below ST's standard target; end-of-quarter total inventory was flattish sequentially at $3.19 billion, with 126 days of sales inventory
  • Generated $75 million in positive free cash flow in Q2, up from negative $152 million in Q2 2025
  • Integration of the NXP MEMS sensor business acquired in February is progressing well, strengthening ST's automotive sensor portfolio with new design awards
  • All resolutions were approved at the 2026 Annual Shareholder Meeting, with new board leadership appointed

• Product & Strategic Milestones

  • Launched a new series of industrial MEMS sensors with embedded AI for condition monitoring, and a new compact 3D LiDAR module delivering AI-ready output for edge AI systems
  • Expanded collaboration with NVIDIA to accelerate physical AI for robotics and functional safety systems, bringing ST's microcontrollers, sensors, motor control and security solutions to the partnership
  • Introduced a quantum-ready secure chip for smartphones and personal electronics that combines post-quantum cryptography acceleration with NFC, secure elements, and eSIM functionality
  • Launched a new generation of ultra-low power global shutter image sensors for battery-powered devices, completing ST's full perception stack for edge AI applications
  • Secured multiple new design wins for silicon photonics ICs, electronic ICs, microcontrollers, and silicon and silicon carbide power solutions for data center optical connectivity
  • Joined a €115 million Series A financing for silicon quantum computing startup COBLY to accelerate commercialization of its products using ST's 300mm manufacturing capabilities

• Market Positioning

  • ST is positioned as a core semiconductor enabler for Low Earth Orbit (LEO) satellite communications, with an addressable market expected to reach $3 billion by 2030 (four times 2025 levels)

By reportable product segment (year-over-year change):

• Analog Products, MEMS, and Sensors: Revenue grew 26%, driven by imaging and MEMS products; sequential Q2 growth was 8.2%. Non-US GAAP operating margin for the segment was 10.1%.
• Power and Discrete Products: Revenue increased 3.7% year-over-year, with 19.2% sequential Q2 growth. Non-US GAAP operating margin for the segment was -21.4%.
• Embedded Processing: Revenue grew 35.5% year-over-year, driven by general-purpose microcontrollers; sequential Q2 growth was 17.7%. Non-US GAAP operating margin for the segment was 19.7%.
• RF and Optical Communication: Revenue grew 32% year-over-year, with 8.6% sequential Q2 growth. Non-US GAAP operating margin for the segment was 21.2%.

By end market (year-over-year/sequential Q2 change):

• Communication Equipment, Computer and Peripherals: +50% YoY / +13% QoQ
• Industrial: +34% YoY / +20% QoQ
• Personal Electronics: +20% YoY / +3% QoQ
• Automotive: +16% YoY / +14% QoQ

Overall Q2 2026 net revenues were $3.49 billion, gross profit was $1.22 billion (34.8% gross margin), and operating income was $187 million including restructuring charges.

• Q3 2026 net revenues are expected to be $3.7 billion ±350 basis points, representing 6.2% sequential growth and 16.2% year-over-year growth
• Q3 2026 gross margin is expected to be ~37% ±200 basis points, including ~70 basis points of unused capacity charges
• Q4 2026 revenues are expected to be above $4 billion, with sequential growth better than normal seasonality; H2 2026 revenue growth over H1 2026 is expected to exceed ST's normal 15% seasonality
• Non-US GAAP net operating expenses for Q3 2026 are expected to be ~$980 million; full year 2026 non-US GAAP net operating expenses are expected to be slightly above $3.8 billion, a low double-digit increase year-over-year
• 2026 net capex is expected to come in at the high end of the previously guided $2.2 billion range, reflecting accelerated investments in cloud optical interconnect and other growth drivers
• ST raised its data center revenue ambition: it now expects data center revenue above $1 billion in 2026, and well above $2 billion in 2027 if current demand dynamics hold
• ST confirms its long-term target of reaching $18 billion in annual revenue by 2028, with gross margin above 40% once the manufacturing reshaping program is completed (expected by end of 2027)
• Cumulative LEO satellite revenue for 2026-2028 is expected to be well above $3 billion
• Silicon carbide revenue is expected to grow double-digit year-over-year in 2026

• The ongoing manufacturing footprint reshaping program creates temporary extra costs related to technology transfer, product qualification, and unused capacity that weigh on gross margin in 2026 and early 2027
• Input cost increases for materials and contract services have partially offset pricing increases on selected products, with the two impacts roughly offsetting each other as of Q2 2026
• Legacy analog technology ramping was delayed in Q2, creating temporary capacity underutilization and limiting supply capability for legacy products in Q3
• General-purpose microcontrollers face current supply tightness from the combination of strong demand for industrial applications and high demand for MCUs used in optical connectivity
• LEO satellite deployment is launcher-dependent, and some secondary constellations have faced recent temporary delays that will be resolved in coming quarters
• Business outlook does not account for potential future changes to global trade tariffs, which could impact results
• Forward-looking statements are subject to inherent risks that could cause actual results to differ materially from management expectations

Q: What is the directional trend of gross margin for Q4 2026 and into 2027, given the expected larger sequential revenue increase in Q4? / A: Management confirms gross margin will improve sequentially from Q3's 37% guided level in Q4. However, the improvement will be partially limited by persisting unused capacity costs from new manufacturing facility ramp-up (specifically in China) and ongoing technology transfer costs from the manufacturing reshaping program, unlike the larger gross margin expansion seen between Q2 and Q3. The long-term model of 40%+ gross margin at $4 billion quarterly revenue remains in place, but will only be achieved after the manufacturing reshaping program is completed at the end of 2027.

Q: What is driving the upward revision to 2027 data center revenue expectations, is this growth driven by optics or power, and is the target achievable even with current capacity constraints? / A: The main driver of 2027 growth is strong traction in optical connectivity for data centers, with contributions from both power solutions and optical products. Growth is supported by accelerating adoption of 800G and 1.6T pluggable transceivers, where ST already holds large market share for control plane MCUs, growing share for electronic ICs, and will see rapid ramp-up of silicon photonics IC revenue starting in 2027. ST has sufficient existing capacity scalability to support this revenue level, and is not currently gated by capacity expansion to capture this demand. Data center growth is also accretive to ST's overall gross margin via improved product mix.

Q: What is the expected revenue growth profile across end markets for Q3 and Q4 2026? / A: Communication equipment, computer and peripherals will see ~60% year-over-year growth in Q3, accelerating to ~90% YoY growth in Q4. Industrial growth will accelerate from 32% YoY in Q2 to close to 40% YoY in Q4. Automotive will deliver consistent low double-digit YoY growth in line with market expectations. Personal electronics will see mid-single-digit YoY declines in both Q3 and Q4, resulting in full-year 2026 low-to-mid single-digit growth, impacted by low-end smartphone market weakness from memory pricing pressures. The delayed ramp of legacy analog technology creates temporary underutilization in Q3, which limits how much near-term growth can be pulled forward from Q4.

Q: What is ST's capacity outlook for the next 2-3 years to support accelerating AI and overall growth, and what is the current outlook for silicon carbide demand? / A: ST has sufficient capacity to support current AI data center growth targets, with crawl capacity reaching 15,000 wafers per week and further expansion available if needed. The only current supply tightness is for general-purpose microcontrollers, driven by combined strong demand from industrial recovery and optical connectivity; this will be eased by the upcoming full ramp of ST's Agrate 300mm fab and production from its qualified 14nm technology in China. Silicon carbide demand is improving, with Q2 revenue growing low double-digit year-over-year and 35% quarter-over-quarter, with a book-to-build ratio well above 1. ST confirms silicon carbide revenue will grow double-digit year-over-year in 2026, with positive dynamics driven by 800V EV platform adoption, even as the 6-inch to 8-inch manufacturing transition creates temporary supply tightness during product qualification.