STMicroelectronics NV Q3 FY2026 earnings call

• Strong Demand Dynamics: Book-to-bill remained well above 2.0 overall, significantly exceeding 2.0 in communication equipment, computer peripherals, and industrials. Inventory in distribution continued to track below standard targets, indicating healthy demand outpacing supply.
• AI Data Center Growth: Revenues are driven by silicon photonic ICs, electronic ICs, microcontrollers, and power solutions. The company expects $1.3 billion in data center revenue for 2026, with ambitions to exceed $2 billion in 2027.
• Low Earth Orbit (LEO) Satellites: LEO satellite communications contributed to strong sequential and annual growth in communication equipment. Momentum is high across multiple programs beyond SpaceX, with expectations for next year's revenue to be equal to or better than 2026.
• Automotive Stability: Revenues were stable sequentially and up 5% YoY. Design wins continue across hybrid, electric, and internal combustion vehicles, including a first award for 48V electromechanical braking. Progress was made in automotive MEMS following the NXP integration.
• Industrial Recovery: Industrial revenues improved 12% sequentially and 40% YoY, driven by general-purpose MCUs, analog, and power conversion. Design wins span industrial automation, robotics, and building automation.
• Manufacturing Reshaping: The company is executing a program to reshape its manufacturing footprint. This includes closing legacy Fabs and transitioning to more automated facilities. Non-US GAAP operating expenses were disciplined at $972 million, below previous indications.
• Organizational Changes: CEO Jean-Marc Chery was reappointed for another year. New leadership structures were announced effective January 1, 2027, with Rémi Elouazane becoming CTO and Marco Cassis becoming Chief Strategic Officer.

Net revenues for the third quarter totaled $3.76 billion, with year-over-year growth distributed across segments as follows: Analog Product, MEMS and Sensors grew 8.8%; Power and Discrete products increased 11.3%; Embedded Processing rose 24.1%, driven by general-purpose microcontrollers; and RF and Optical Communication surged 46.2%. By end-market, Communication Equipment and Computer Peripherals saw the strongest growth at 64% YoY, followed by Industrial at 40% YoY. Automotive revenues were stable sequentially, up 5% YoY, while Personal Electronics declined 4% YoY but grew 12% sequentially. Gross margin was 37.3%, an increase of 410 basis points year-over-year, primarily due to lower unused capacity charges and improved product mix.

• Q4 2026 Revenue: Expected to be approximately $4.15 billion (midpoint), representing a +/-$350 million range. This implies a 10.5% sequential increase and 24.7% year-over-year growth.
• Q4 2026 Gross Margin: Expected to be approximately 39% (+/- 200 basis points), including about 40 basis points of unused capacity charges.
• Full Year 2026 Revenue: Midpoint outlook is approximately $14.5 billion, reflecting a 22.8% year-over-year increase.
• Full Year 2026 Gross Margin: Expected to be around 36.4% (GAAP) and 36.6% (Non-US GAAP), an improvement of 270 basis points versus FY2025.
• Long-term Margin Target: Management reaffirms a commitment to achieving a 44%-46% gross margin target once the manufacturing reshaping plan is completed, expecting a step-function improvement of over 400 basis points toward the end of 2027 or early 2028.

• Manufacturing Transition Costs: Near-term gross margins include negative impacts from non-recurring costs related to manufacturing reshaping (approx. 40 basis points) and unused capacity charges (approx. 40 basis points in Q4). These inefficiencies are expected to persist until legacy fabs are closed.
• Input Cost Inflation: Rising input costs are identified as a headwind to gross margin expansion, though partially offset by pricing actions.
• Trade Tariffs: Current guidance does not include any impact from potential further changes to global trade tariffs.
• Supply Chain Constraints: While demand exceeds supply, the company notes it may become capacity-gated in specific areas like LEO satellites and silicon photonics, requiring active capacity release strategies.
• Personal Electronics Weakness: Consumer electronics remain a soft market segment, posing a risk to overall diversification if other sectors do not sustain growth.

Q: What is the detailed breakdown of the >$2 billion data center revenue ambition for 2027, specifically regarding MCU vs. PIC vs. eIC contributions?

A: Management did not provide exact numerical splits for 2027 but confirmed that data center revenue will more than double from the ~$1.3 billion expected in 2026. Microcontroller revenue in data centers is expected to grow 2x year-over-year. Silicon photonics contribution will become very relevant next year, accounting for tens of percent of total revenue consideration. However, the bulk of the BiCMOS effect is expected to materialize mainly from 2028 onwards, although it will be non-negligible in 2027.

Q: How does the new organizational structure and calendar day count in Q1 2027 affect seasonality and revenue visibility?

A: Seasonality for 2027 will differ from historical norms because ST is rebalancing its revenue mix across verticals. Automotive is expected to weigh ~35%, Industrial 22-24%, CCP (Digital Infrastructure) slightly above 20%, and Personal Electronics 22%. With a book-to-bill well above two, the backlog is now over $20 billion, providing approximately five quarters of visibility. Despite Q1 2027 having only 86 calendar days, management is comfortable delivering at least the consensus revenue estimate for that quarter.

Q: What are the drivers behind the expected 400 basis point gross margin step-function improvement, and when will it occur?

A: The 400+ bps improvement is driven by the completion of the manufacturing reshaping program, specifically the closure of four legacy Fabs and transition to more automated facilities. This benefit will materialize as a step function toward the end of 2027 or early 2028, contingent on customer qualification timing. Additionally, positive impacts from reduced unused capacity charges and better product mix (including AI infrastructure growth) will contribute progressively before the step change.

Q: Is there evidence of pull-in in Personal Electronics, and what is the pricing outlook for Tier 1 customers?

A: Management stated there is no specific pull-in in Personal Electronics; the Q3 strength reflects genuine end-demand being better than expected. Regarding pricing, ST is increasing prices on some selected products due to higher input costs and lead times. While discussions for next year are ongoing, management anticipates price stability or slight increases in 2027 if the gap between supply and demand persists, supported by strong backlog levels.

Q: Can you clarify the yield status and capacity expansion plans for Silicon Photonics?

A: Silicon photonics yields are setting new industry bars, with customers reporting high satisfaction due to the advantages of 12-inch processing. ST is the only player shipping at scale on 12-inch I4 technology. Capacity is expected to increase by more than 4x year-over-year. The business is viewed as a long-term growth story with strong visibility, and current production is sufficient to meet near-term demand while ramping continues.