Q3 2026 STMicroelectronics NV Earnings Call

Speaker #2: Ladies and gentlemen, welcome to the STMicroelectronics Q3 2026 earnings release conference call and live webcast. I am Sandra, the course call operator. I would like to remind you that all participants have been listen-only mode and the conference is being recorded.

Speaker #2: The presentation will be followed by a Q&A session. You can register for questions at any time by pressing "Start" and "1" on your telephone.

Speaker #2: For operator assistance, please press "Start" and "0". The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jérôme Ramel, EVP Corporate Development and Integrated External Communications.

Operator: The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jérôme Ramel, EVP Corporate Development and Integrated External Communications. Please go ahead, sir.

Speaker #2: Please go ahead, sir.

Jérôme Ramel: Thanks, Sandra, and thank you everyone for joining our Q3 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, and Rémy El-Ouazzane, President, Microcontroller, Digital IC, and RF Product Group. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could 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 most recent regulatory filing for a full description of these risk factors.

Speaker #3: Thanks, Sandra. And thank you, everyone, for joining our Q3 2026 financial results call. Hosting the call today is Jean-Marc Chéri, ST President and Chief Executive Officer.

Speaker #3: Joining Jean-Marc on the call are Lorenzo Grandi, President and CFO, and Rémi Elouazan, President of Microcontroller Digital ICs and RF Product Group. This live webcast and presentation material can be accessed on stinvestorrelations.com website.

Speaker #3: 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.

Speaker #3: 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 Most recent regulatory filing for a full description of these risk factors.

Jérôme Ramel: To ensure that 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.

Speaker #3: 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 would like to turn the call over to Jean-Marc Chéri, ST President and CEO.

Jean-Marc Chery: Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q3 2026 earnings conference call. I will start with an overview of the third quarter, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your question. Starting with Q3. Our Q3 net revenues of $3.76 billion came in above the midpoint of our business outlook range, mainly due to higher revenue in communication equipment and computer peripherals, driven by AI data center and low-earth orbit satellite revenues, communication, and personal electronics. Gross margin was 37.3%, above the midpoint of our business outlook range. Non-U.S. GAAP diluted earnings per share was $0.37. During the Q3, inventory in our balance sheet increased slightly to support the expected increase in Q4 revenues.

Speaker #4: Thank you, Jérôme. Good morning, everyone. And thank you for joining ST for our Q3 2026 earnings conference call. I will start with an overview of the Q3.

Speaker #4: Including business dynamics, I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions.

Speaker #4: So, starting with Q3, our Q3 net revenues of 3.76 billion dollars came in above the midpoint of our business outlook range. Mainly due to higher revenue in communication equipment and computer peripherals, driven by AI data centers and low-heart orbit satellite revenues communication and personal electronics.

Speaker #4: Gross margin was 37.3%, above the midpoint of our business outlook range. Non-US GAAP diluted earnings per share was $0.37. During Q3, inventory in our balance sheet increased slightly to support the expected increase in Q4 revenues. In-distribution inventory decreased and continued to track below our standard target. We generated positive free cash flow of $351 million.

Jean-Marc Chery: In distribution, inventory decreased and continued to track below our standard target. We generated positive free cash flow of $351 million. Let's now discuss our business dynamics during Q3. During the quarter, the ongoing recovery and secular growth across the end markets we serve continued to gain momentum. Demand strengthened further in Q3, with bookings increasing sequentially and book-to-bill remaining well above 2 overall. Book-to-bill was well above 1 in all end markets and significantly above 2 in communication equipment and computer peripherals and industrial. Visibility improved. Inventory distribution continued to track below our standard target, and demand continued to outpace supply across multiple product categories. Automotive revenues were stable sequentially and increased 5% year-over-year. Our solid position in automotive continued to be driven by application-specific ICs and sensors for core application, electrical powertrain, and ADAS.

Speaker #4: Let's now discuss our business dynamics during Q3. During the Q3, the ongoing recovery and circular growth across the end markets we serve continued to gain momentum.

Speaker #4: Demand strengthened further in Q3, with bookings increasing sequentially and book-to-bill remaining well above 2 overall. Book-to-bill was well above 1 in all end markets, and significantly above 2 in communication equipment, computer peripherals, and industrial.

Speaker #4: Visibility improved, inventory distribution continued to track below our standard target, and demand continued to outpace supply across multiple product categories. Automotive revenues were stable sequentially and increased 5% year over year.

Speaker #4: Our solid position in automotive continued to be driven by application-specific ICs and sensors for core applications, electrical powertrains, and ADAS. We maintained our automotive design win momentum with OEMs and Tier 1 suppliers across the portfolio of ST product families, including microcontrollers and power and discretes.

Jean-Marc Chery: We maintain our automotive design win momentum with OEMs and Tier 1 suppliers across a portfolio of ST product families, including microcontrollers and Power and discrete. These wins cover hybrid, electric, and internal combustion engine vehicles in areas including onboard charging, powertrain, and active suspension, as well as a first award for 48-volt electromechanical braking. We made progress with our automotive MEMS business, supported by the successful integration of NXP's MEMS sensors, achieving several key customer awards in telematics, cockpit control, and tire pressure monitoring. We had another important design win with our in-cabin monitoring solutions, and we introduced a new automotive image sensor for infrared in-cabin sensing, designed to extend driver and occupant monitoring across more vehicle models. Industrial revenues improved 12% sequentially and 40% year-over-year. This solid growth was mainly driven by our general-purpose microcontrollers, analog, and power conversion products.

Speaker #4: These wins covered hybrid, electric, and internal combustion engine vehicles, in areas including onboard charging, powertrain, and active suspension, as well as a first-award for 48-volt electromechanical braking.

Speaker #4: We made progress with our automotive MEMS business, supported by the successful integration of NXP's MEMS sensors achieving several key customer awards in telematics, cockpit control, and tire pressure monitoring.

Speaker #4: We had another important design win with our in-cabin monitoring solutions, and we introduced a new automotive image sensor for infrared in-cabin sensing, designed to extend driver and occupant monitoring across more vehicle models.

Speaker #4: Industrial revenues improved 12% sequentially and 40% year over year, this solid growth was mainly driven by our general-purpose microcontrollers analog and power conversion products.

Jean-Marc Chery: During Q3, the broad-based recovery in industrial continued, and inventory and distribution declined further, remaining below our standard target. We had design wins across industrial automation, robotics, power systems, building automation, power tools, and home appliances. Our portfolio combines intelligent sensing, real-time control, and efficient power management to support the transformation of factory automation, robotics, and power energy infrastructures, and the growing physical AI market. At the embedded world North America event, we had a demonstration together with NVIDIA illustrating our broad cooperation on robotics. We showed an integrated robotics development path from digital twin to deployed application based on our inertial sensors, microcontrollers, and imaging solutions. We are continuing to strengthen these capabilities with new products. Our latest launch is a miniature six-axis motion sensor with a machine learning core designed to improve accident alerts, robot teaching, drone stabilization, and structural monitoring.

Speaker #4: During Q3, the broad-based recovery in industrial continued, and inventory in distribution declined further, remaining below our standard target. We had design wins across industrial automation, robotics, power systems, building automation, power tools, and home appliances.

Speaker #4: Our portfolio combines intelligent sensing, real-time control, and efficient power management to support the transformation of factory automation, robotics, and power energy infrastructures, as well as the growing physical AI markets.

Speaker #4: At the Embedded World's North America event, we had a demonstration together with NVIDIA, illustrating our broad cooperation on robotics. We showed an integrated robotics development path from digital twin to deployed application, based on our inertial sensors, microcontrollers, and imaging solutions.

Speaker #4: We are continuing to strengthen these capabilities with new products. Our latest launch is a miniature 6-axis motion sensor with a machine learning core designed to improve accident alerts, robot teaching, drone stabilization, and structural monitoring.

Jean-Marc Chery: By bringing AI processing into the sensor, systems can reduce energy use and save resources. In our embedded processing, we continue to expand our STM32 offering with a strong pipeline of new products and software innovations. You will hear more about this at our STM32 Summit on 3 November, followed by the dedicated STM32 analyst call on 18 November. For personal electronics, Q3 revenues came in better than expected, up 12% sequentially and down 4% year-over-year. During the quarter, we had design wins with secure solutions, MEMS, and imaging sensors and microcontrollers across a variety of devices, including smartphones, gaming headsets, earbuds, and smart TVs. For communication equipment and computer peripherals, Q3 revenues were above expectation, increasing 14% sequentially, and 64% year-over-year.

Speaker #4: By bringing AI processing into the sensor, systems can reduce energy use and save resources. In embedded processing, we continue to expand our STM32 offering with a strong pipeline of new products and software innovations.

Speaker #4: You will hear more about this at our STM32 Summit on November 3, followed by a dedicated STM32 analyst call on November 18. For personal electronics, Q3 revenues came in better than expected—up 12% sequentially and down 4% year over year.

Speaker #4: During the Q3, we had design wins with secure solutions, MEMS, and imaging sensors and microcontrollers, across a variety of devices, including smartphones, gaming headsets, earbuds, and smart screens.

Speaker #4: For communication equipment and computer peripherals, Q3 revenues were above expectation, increasing 14% sequentially and 64% year over year. This strong growth mainly reflected the contribution of our company-specific growth drivers in AI data center, and low Earth-ormite satellite communications.

Jean-Marc Chery: This strong growth mainly reflected the contribution of our company's specific growth drivers in AI data center and low-earth orbit satellite communications. For AI data centers, we continue to see strong demand driven mainly by our silicon photonics ICs, electronic ICs, and microcontrollers, as well as power solutions. This supports our revenue expectation for 2026 of about $1.3 billion. Assuming the current dynamic continues, and with the current engagements we have, our revenue ambition of well above $2 billion in 2027 and further growth beyond. Now over to Lorenzo, who will present our key financial figures.

Speaker #4: For AI data centers, we continue to see strong demand-driven mainly by our silicon photonic ICs, electronic ICs, and microcontrollers. As well as power solutions.

Speaker #4: This supports our revenue expectation for 2026 of about $1.3 billion, and assuming the current dynamic continues, and with the current engagements we have, our revenue ambition of well above $2 billion in 2027, and further growth beyond.

Speaker #4: Now, over to Lorenzo who will present our key financial figures.

Lorenzo Grandi: Thank you, Jean-Marc. Good morning, everyone. Let's start with a detailed review of Q3, starting with revenues on a year-over-year basis by reportable segment. Analog products, MEMS and Sensors grew 8.8%, mainly due to MEMS, and to a lesser extent, analog and imaging. Power and discrete products increased 11.3%. Embedded processing revenues were up 24.1%, mainly due to general purpose microcontroller. RF Optical Communications grew 46.2%. By end market, communication equipment and computer peripheral grew 64%, industrial 40%, and automotive 5%, while personal electronics decreased 4%. Year-over-year sales to OEMs and distribution increased 10.2% and 38.8% respectively. On a sequential basis, by reportable segment, Analog products, MEMS and Sensors increased by 9.4%, Power and discrete by 2.8%, embedded processing by 5.7%, and RF Optical Communications by 13.4%.

Speaker #5: Thank you, Jean-Marc. Good morning, everyone. Let's start with a detailed review of Q3, beginning with revenues on a year-over-year basis. By reportable segment, Analog, Product, MEMS, and Sensor grew 8.8%, mainly due to MEMS and, to a lesser extent, Analog and Imaging.

Speaker #5: Power and discrete products increased 11.3%. Embedded processing revenues were up 24.1%, mainly due to general-purpose microcontrol. And RF optical communication grew 46.2%. By end of market, communication equipment and computer peripheral grew 64%.

Speaker #5: Industrial 40%, and automotive 5%, while personal electronics decreased 4%. Year over year, sales to OEMs and distribution increased 10.2% and 38.8%, respectively. On a sequential basis, by reportable segment, analog product MEMS and sensor increased by 9.4%, power and discrete by 2.8%, embedded processing by 5.7%, and RF optical communication by 13.4%.

Lorenzo Grandi: By end market, on a sequential basis, communication equipment and computer and peripheral grew 14%, industrial 12%, personal electronics 12%, while automotive was flat. Turning now to profitability. Gross profit in Q3 was $1.40 billion, increasing 32.2% on a year-over-year basis. Gross margin was 37.3%, increasing 410 basis points year-over-year, mainly due to our lower unused capacity charges and better product mix. On a sequential basis, gross margin increased by 250 basis points. Q3 gross margin included about 60 basis points of unused capacity charges, and about 40 basis points of negative impact resulting from non-recurring costs related to our manufacturing reshaping program. Looking beyond these near-term effects, improving our gross margin remains a key priority. We remain committed to achieving the 44% to 46% gross margin of our intermediate financial model once our manufacturing reshaping plan is completed.

Speaker #5: By end market, on a sequential basis, Communication Equipment and Computer & Peripheral grew 14%, Industrial 12%, Personal Electronic 12%, while Automotive was flat. Turning now to profitability.

Speaker #5: Gross profit in Q3 was $1.40 billion, increasing 32.2% on a year-over-year basis. Gross margin was 37.3%, increasing 410 basis points year over year.

Speaker #5: Mainly due to lower renews capacity charges and a better product mix. On a sequential basis, gross margin increased by 250 basis points. Q3 gross margin included about 60 basis points of renews capacity charges.

Speaker #5: And about 40 basis points of negative impact resulting from non-recurring costs related to our manufacturing reshaping program. Looking beyond this near-term effects, improving our gross margin remains a key priority.

Speaker #5: We remain committed to achieving the 44% to the 46% gross margin of our intermediate financial model. Once our manufacturing reshaping plan is completed, starting from the approximately 39% gross margin expected for Q4 26, we see a clear path to margin expansion.

Lorenzo Grandi: Starting from the approximately 39% gross margin expected for Q4 2026, we see a clear path to margin expansion. First, Q4 2026 temporary headwinds, including approximately 40 basis points from unused capacity charges and approximately 30 basis points from non-recurring costs associated with our manufacturing reshaping program, are expected to largely disappear during H2 2027. Second, we continue to expect more than 400 basis points of structural gross margin improvement from the reshaping of our manufacturing footprint. This benefit is expected to materialize as a step function, either toward the end of 2027 or in early 2028, subject to the shutdown of legacy fabs and customers' qualification timing. Finally, we expect better mix and price to contribute to margin expansion over time. While input cost increase is expected to be a headwind, the timing and the magnitude of these effects remain more difficult to assess.

Speaker #5: First, Q4 26 temporary wins including approximately 40 basis points from renews capacity charges and approximately 30 basis points from non-recurring costs associated with our manufacturing reshaping program, are expected to largely disappear during the second half of 2027.

Speaker #5: Second, we continue to expect more than 400 basis points of structural gross margin improvement from the reshaping of our manufacturing footprint. This benefit is expected to materialize as a step function, either toward the end of 2027 or in early 2028, subject to the shutdown of legacy fabs and customers’ qualification timing.

Speaker #5: Finally, we expect better mix and price to contribute to margin expansion over time. While input costs increase is expected to be a headwind, the timing and the magnitude of these effects remain more difficult to assess.

Lorenzo Grandi: Moving now to total net operating expense. In the third quarter, this amounted to $979 million, excluding restructuring. Non-U.S. GAAP OpEx stood at $972 million, better than the indication we gave in July, reflecting continuing cost discipline. For Q4 2026, we expect non-U.S. GAAP net OpEx to stand at about $1.035 billion. The sequential increase is mainly due to the calendar days effect net of vacations. This would lead the full year 2026 non-U.S. GAAP net OpEx slightly above $3.8 billion, in line with our expectation. In the third quarter, we reported operating income of $367 million, which included $55 million for impairment, restructuring charges, and other related results costs. These charges are related to the execution of our company-wide program to reshape our manufacturing footprint and to resize our global cost base.

Speaker #5: Moving now to total net operating expenses: in Q3, these amounted to $979 million, excluding restructuring. Non-US GAAP OPEX stood at $972 million, better than the indication we gave in July, reflecting continuing cost discipline.

Speaker #5: For the Q4 of 2026, we expect non-US gap net OPEX to stand at about $1.035 billion, the sequential increase mainly due to the calendar days effect, net vacation.

Speaker #5: This would lead the full-year 2026 non-US GAP net OPEX slightly above $3.8 billion, in line with our expectation. In Q3, we reported operating income of $367 million, which included $55 million for impairment, restructuring charges, and other related phase-out costs.

Speaker #5: These charges are related to the execution of our company-wide program to reshape our manufacturing footprint and resize our global cost base. Q3 operating income also included $7 million in purchase price allocation effects from our acquisition of NXT's MEMS sensor business.

Lorenzo Grandi: Q3 operating income also included 7 million in purchase price allocation effects from our acquisition of NXP's MEMS sensor business. Excluding these items, Q3 non-U.S. GAAP operating income stood at $429 million, and non-U.S. GAAP operating margin was 11.4%, with Analog products, MEMS and Sensors at 14.1%, Power and discrete at -17.1%, embedded processing at 23.1%, and RF Optical Communications at 26.2%. Third quarter 2026 net income was $291 million compared to $237 million in the year-ago quarter. Diluted earnings per share were $0.31 compared to $0.26. Non-U.S. GAAP net income stood at $344 million, and non-U.S. GAAP diluted earning per share stood at $0.37. Net cash from operating activities totaled $1.02 billion in the third quarter, compared to the $549 million in the year-ago quarter. Net CapEx was $643 million in the third quarter compared to the $401 million in the year-ago quarter.

Speaker #5: Excluding these items, Q3 non-US GAAP operating income stood at $429 million, and non-US GAAP operating margin was 11.4%. Analog products, MEMS and sensors were at 14.1%, power and discrete at negative 17.1%, embedded processing at 23.1%, and RF optical communications at 26.2%.

Speaker #5: Q3 2026 net income was $291 million, compared to $237 million in the year ago quarter. Diluted earnings per share were $0.31, compared to $0.26.

Speaker #5: Non-U.S. GAAP net income stood at $344 million, and non-U.S. GAAP diluted earnings per share stood at $0.37. Net cash from operating activities totaled $1.02 billion in Q3, compared to $549 million in the year-ago quarter.

Speaker #5: Net capex was $643 million, in the Q3, compared to the $401 million in the year ago quarter. Free cash flow was positive at $351 million, in the Q3, compared to the positive $130 million in Q3 2025.

Lorenzo Grandi: Free cash flow was positive at $351 million in the third quarter, compared to the positive $130 million in Q3 2025. Inventory at the end of the quarter was $3.25 billion, compared to $3.19 billion in Q2 2026, and $3.17 billion in Q3 2025. Day sales of inventory at quarter end were 126 days, better than our expectation, unchanged from the previous quarter and compared to the 135 days in the year-ago quarter. Cash dividends paid to stockholders in the third quarter of 2026 totaled $83 million. In addition, ST executed a share buyback of $91 million. ST maintained its financial strength with a net financial position that remains solid at $2.11 billion as of 26 September 2026, reflecting total liquidity of $5.31 billion and total financial debt of $3.21 billion.

Speaker #5: Inventory at the end of the quarter was $3.25 billion, compared to $3.19 billion in Q2 '26, and $3.17 billion in Q3 '25. Days sales of inventory at Q4 end were 126 days, better than our expectation, unchanged from the previous quarter, and compared to 135 days in the year-ago quarter.

Speaker #5: Cash dividends paid to stockholders in the Q3 of 2026 totaled $83 million. In addition, ST execute share buyback of $91 million. ST maintained its financial strength with a net financial position that remains solid at $2.11 billion as of September 26, 2026, reflecting total liquidity of $5.31 billion.

Speaker #5: And total financial debt of $3.21 billion. Following the exercise of the call option for the early redemption of ST's convertible debt due in 2027, bondholders exercised their conversion rights on the total $750 million convertible bonds.

Lorenzo Grandi: Following the exercise of the call option for the early redemption of ST's convertible debt due in 2027, bondholders exercised their conversion rights on the total $750 million convertible bonds. ST settled the bonds on a net share basis, delivering $750 million in cash and about 4.2 million share from treasury stock. Finally, while we are not providing a quarterly indication for 2027, for modeling purposes, please note that 2027 will have 86 calendar days in Q1, 91 in Q2, 91 in Q3, and 97 in Q4. Now back to Jean-Marc, who will comment on our outlook.

Speaker #5: ST settled the bonds on a net share basis delivering $750 million in cash and about $4.2 million share from Treasury stock. Finally, while we are not providing quarterly indication for 2027, for modeling purposes, please note that 2027 will have 86 calendar days in Q1, 91 in Q2, 91 in Q3, and 97 in Q4, now back to Jean-Marc, who will comment on our outlook.

Jean-Marc Chery: Thank you, Lorenzo. Now, let's move to our business outlook for Q4 2026. We are expecting Q4 revenues of $4.15 billion, plus or minus 350 basis points at the midpoint. Our Q4 2026 net revenues will increase 10.5% sequentially and 24.7% year-over-year. We expect our gross margin to be at about 39%, plus or minus 200 basis points, including about 40 basis points of unused capacity charges. This business outlook does not include any impact of potential further changes to global trade tariffs compared to the current situation. For 2026, the midpoint of this outlook translates into full year 2026 revenues of about $14.5 billion, representing a 22.8% year-over-year increase. Beyond the cyclical recovery across our end markets, the year-over-year growth is supported by ST's company specific growth drivers, including AI data centers and low-earth orbit satellite communications. Gross margin is expected to be about 36.4%.

Speaker #1: Thank you, Lorenzo. Now let's move to our business outlook for Q4 2026. We are expecting Q4 revenues of $4.15 billion, plus or minus 350 basis points.

Speaker #1: At the midpoint, our Q4 '26 net revenues will increase 10.5% sequentially, and 24.7% year over year. We expect our gross margin to be at about 39%, plus or minus 200 basis points, including about 40 basis points of unused capacity charges.

Speaker #1: This business outlook does not include any impact of potential further changes to global trade tariffs, compared to the current situation. For 2026, the midpoint of this outlook translates into full year 2026 revenues of about $14.5 billion, representing a 22.8% year over year increase.

Speaker #1: Beyond the cycle call recovery across our end markets, the year-over-year growth is supported by ST's company-specific growth drivers, including AI data centers and low Earth orbit satellite communications.

Speaker #1: Gross margin is expected to be about $36.4%. Non-US gap gross margin is expected to be about $36.6%, representing an improvement of 270 basis points versus the fiscal year 2025.

Jean-Marc Chery: Non-U.S. GAAP gross margin is expected to be about 36.6%, representing an improvement of 270 basis points versus the fiscal year 2025. To conclude, we continue to see a very strong demand for our AI data centers and low-earth orbit satellite communications products and technologies, alongside an ongoing cyclical recovery in automotive and industrial. With demand across many of the markets we serve exceeding available supply, we are expanding capacity in line with ST's strategic roadmap and growth opportunities. At the same time, improving profitability remains a key priority as we progress toward our intermediate financial model. As mentioned earlier by Lorenzo, this is supported by our company specific growth drivers, combined with the execution of our company-wide program to reshape our manufacturing footprint and resize our global cost base. Before handing over to Jérôme, I would like to mention a few corporate developments.

Speaker #1: To conclude, we continue to see a very strong demand for our AI data centers and low Earth orbit satellite communications products and technologies. Alongside an ongoing cyclical recovery in automotive and industrial.

Speaker #1: With demand across many of the markets, we serve exceeding available supply, we are expanding capacity in line with ST strategic roadmap and growth opportunities.

Speaker #1: At the same time, improving profitability remains a key priority as we progress toward our intermediate financial model. As mentioned earlier by Lorenzo, this is supported by our company-specific growth drivers, combined with the execution of our company-wide program to reshape our manufacturing footprint and resize our global cost base.

Speaker #1: Before ending over to Jerome, I would like to mention a few corporate developments. Earlier this month, the supportary board asked me to be reappointed in my current role for an additional year, I was honored and pleased to accept the proposal, by reappointment as chairman of the managing board and ST's president and CEO will be proposed for shareholder approval at ST's 2027 annual general meeting of shareholders.

Jean-Marc Chery: Earlier this month, the Supervisory Board asked me to be reappointed in my current role for an additional year. I was honored and pleased to accept the proposal. My reappointment as Chairman of the Managing Board and ST President and CEO will be proposed for shareholder approval at ST's 2027 Annual General Meeting of Shareholders. Finally, earlier today, we announced updates to ST's organization aimed at better aligning our vision and business objectives with evolving market dynamics. This will strengthen the coordination between our strategy, technology, and product roadmaps, accelerate innovation and time to market, ultimately supporting our long-term growth opportunities. Rémy El-Ouazzane is confirmed as President, member of the Executive Committee, and Head of Microcontrollers, Digital ICs, RF, and Optical Communications products. He will also take on leadership of the Imaging Sensor group and be appointed ST Chief Technology Officer.

Speaker #1: Finally, earlier today we announced updates to ST organization M, aimed at better aligning our vision and business objectives with evolving market dynamics. This will strengthen the coordination between our strategy, technology, and product roadmaps, accelerate innovation and time to market, ultimately supporting our long-term growth opportunities.

Speaker #1: Rémy Alouazan, his confirm as president member of the executive committee and head of microcontrollers, digitalizes RF and optical communication products. He will also take on leadership of the imaging sensor group and be appointed ST chief technology officer.

Jean-Marc Chery: Marco Cassis is confirmed as President, member of the Executive Committee, and Head of Analog, Power & Discrete, and MEMS products. He will also take on leadership of R&D for Analog, Power & Discrete, and MEMS technologies and be appointed ST Chief Strategic Officer. The new organization and the related adjustment to our reportable segments will take effect on 1 January 2027, with implementation of the changes to be completed by the end of March 2027. Thank you, and we are now ready to answer your questions.

Speaker #1: Marco Cassis is confirmed as President, member of the Executive Committee, and Head of Analog, Power, and Discrete and MEMS Product. He will also take on leadership of R&D for Analog, Power, and Discrete and MEMS technologies, and be appointed ST Chief Strategic Officer.

Speaker #1: The new organization and the related adjustment to our reportable segments will take effect on January 1, 2027, with the implementation of the changes to be completed by the end of March 2027.

Speaker #1: Thank you, and we are now ready to answer your question.

Operator: 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 the telephone. You will hear a tone to confirm that you have entered a queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only hands-free when asking a question. In the interest of time, please limit yourself to one question only. Anyone with a question may press star and one at this time. Our first question comes from Joshua Buchalter from TD Cowen. Please go ahead.

Speaker #2: We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star-one on the telephone.

Speaker #2: 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.

Speaker #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 may press star and one at this time.

Speaker #2: Our first question comes from Joshua Buchalter from TD Cowen. Please go ahead.

Joshua Buchalter: Hey, guys. Thank you for taking my question, and congrats on the results. I guess to start, I wanted to ask about some of the comments you made on gross margins. I believe you said after the manufacturing transition headwinds abate, there would be a step function increase of 400 basis points to gross margin. Is that sort of going to hit all at once? Because I think you previously said we should not expect gross margins to get to 40% until sort of H2 2027 or H1 2028. So I guess is the expectation that it very quickly goes from 40% to 44%? Thank you.

Speaker #3: Hey guys, thank you for taking my question and congrats on the results. I guess to start, I wanted to ask about some of the comments you made on gross margins.

Speaker #3: So, I believe you said that after the manufacturing transition headwinds abate, there would be a step-function increase of 400 basis points to gross margin.

Speaker #3: Is that sort of going to hit all at once? Because I think you previously said we shouldn't expect gross margins to get to 40% until sort of the second half of 2027 or the first half of 2028.

Speaker #3: So, I guess the expectation is that it very quickly goes from 40 to 44? Thank you.

Jean-Marc Chery: Lorenzo, you take it.

Lorenzo Grandi: Maybe I take this question. Clearly, in term of gross margin, what we said is that the impact of our reshaping plan in manufacturing, it will factor in in our gross margin once we will close our fabs. You know that there are four fabs, the legacy fab that we intend, let's say, to close. And these, let's say clearly, the positive impact will be visible when we will, let's say, be able to close them. This will happen in the second part of next year, let's say. So means that will happen toward the end of 2027, and let's say at the beginning of 2028. Clearly here, it depends on the acceptance of the customer for three of these fabs. Substantially, let's say we believe that we have all in our hands. Let's say it is still some discussion for one of those.

Speaker #1: Maybe I'll take this question. Clearly, in terms of gross margin, what we said is that the impact of our reshaping plan in manufacturing will factor into our gross margin once we close our fabs.

Speaker #1: You know that there are four fabs—the legacy fab that we intend, let's say, to close. And these, let's say, clearly the impact, the positive impact, will be visible when we will, let's say, be able to close them.

Speaker #1: This will happen in the second part of next year, let's say. So, this means that it will happen toward the end of 2027 and, let's say, at the beginning of 2028.

Speaker #1: Clearly, here it depends on the acceptance of the customer for three of these fabs. Substantially, let's say, we believe that we have all in our hands. Let's say, it's still some discussion for one of those.

Lorenzo Grandi: In this respect, I would say that in any case, we will continue to see improvement of our gross margin moving forward, along with the report, also due to the fact that we have a positive impact of the mix improvement in term of manufacturing variance. As I was saying, progressively reducing of our underloading charges and reducing also the temporary impact of negative costs due to the activity to transfer product from the legacy fabs to the new fab 300 millimeter, or in case of silicon carbide, to the 200 millimeter.

Speaker #1: In this respect, I would say that, in any case, we will continue to see improvement of our gross margin moving forward, along the various quarters, also due to the fact that we have a positive impact from the mix and improvement in terms of manufacturing variance. And as I was saying, we are progressively, let's say, reducing our unloading charges and also reducing the temporary impact of negative costs due to the activity to transfer product from the legacy fab to the new fab—300 millimeter—or in the case of silicon carbide, to the 200 millimeter.

Joshua Buchalter: Okay. Thank you for all the color there, Lorenzo. For a follow-up, any help you can give us with either context or any sort of tighter range on the data center contribution for next year of well greater than $2 billion, and any help you can give us on how much you expect to be MCUs versus electronic ICs and PICs and power? Thank you.

Speaker #3: Okay, thank you for all the color there, Lorenzo. For our follow-up, any help you can give us with either context or any sort of tighter range on the data center contribution for next year of well greater than $2 billion, and any help you can give us on how much you expect to be MCUs versus electronic ICs and PICs and power?

Speaker #3: Thank you.

Jean-Marc Chery: On the revenues, I assume.

Speaker #1: On the revenues, I assume.

Lorenzo Grandi: Josh, your question was on revenues?

Speaker #4: Josh, your question was on revenues?

Joshua Buchalter: Yes. Thank you. Revenue contribution from data center.

Speaker #3: Yes, thank you. Our revenue contribution from data center.

Jean-Marc Chery: Well, I will give the overall picture and Rémy will comment the detail. Well, as I said during my speech, this year we will generate about $1.3 billion revenue for data center, more 85% coming from MDRF. Mainly microcontroller, silicon photonics, and electronic ICs on BiCMOS. Next year, I will not give in detail. We will be well above the doubling this number, and we will communicate in January, of course, a number for 2027 and an indication for 2028. Maybe, Rémy you can comment some more detail.

Speaker #1: Okay, so I will give the overall picture and Rémy will comment the detail. Well, as I said, during my speech, this year we will generate about 1.3 billion dollar revenue for data center, more 85% coming from AMD RF, so mainly microcontrollers silicon photonics and electronic ICs on micromods.

Speaker #1: Next year, I will not give in detail. Okay, we will be well above doubling this number, and we will communicate in January, of course, a number for 2027 and an indication for 2028.

Speaker #1: Or maybe—okay, maybe you can comment with some more details.

Rémy El-Ouazzane: Sure. Microcontrollers in data centers will see a steep growth year on year, to grow 2X in revenue size. I won't give you the exact number. The contribution of silicon photonics next year will start to go and become very relevant. I would say that it will be in tens of percent of the complete revenue consideration. We will not share the exact details. As to BiCMOS, I think the bulk of the effect we will see is from 2028 onwards because we won a lot of sockets over the past quarter. I think that you will see the effects mainly in 2028, even though it will be non-negligible in 2027, but I guess from a contribution standpoint, it will be very visible in 2028.

Speaker #4: Sure. Microcontrollers in data centers will see a steep growth year on year. It will grow 2x in revenue size, I won't give you the exact number.

Speaker #4: The contribution of silicon photonics next year will start to go and become very relevant. I would say that actually it will be in tens of percent of the complete revenue consideration we will not share the exact details.

Speaker #4: As to buying CMOS, I think the bulk of the effect we will see is from 2028 onwards, because we've won a lot of pockets over the past quarter.

Speaker #4: And I think that you'll see the effects mainly in 2028, even though actually it will be non-negligible in 2027. But I guess from a contribution standpoint, it will be very, very visible in 2028.

Jean-Marc Chery: Thank you, Rémy. About $1.3 billion this year, well above doubling next year, and we continue to grow 2028, and we will communicate more detail in January.

Speaker #1: Thank you, Rémy. So about 1.3 billion this year, well above doubling next year and we continue to grow 2028 and we will communicate more detail in January.

Joshua Buchalter: Thank you all. I appreciate it.

Speaker #3: Thank you all, I appreciate it.

Jérôme Ramel: Thank you, Josh. Next question, please.

Speaker #4: Thank you, Josh. Next question, please.

Operator: The next question comes from François Bouvignies from UBS. Please go ahead.

Speaker #2: The next question comes from François Bouvigny from UBS. Please go ahead.

François-Xavier Bouvignies: Thank you very much. I had just a question on the gross margin as well. I mean, a bit more short-term here about Q1. I was looking at the history, and it is a bit all over the place, the gross margin direction in Q1, and it seems to be that in up cycle it is up quarter-on-quarter. In the down cycle, it is down quarter-on-quarter. The average is down 70 bps, but it is very diverse. I was wondering if you could help us on the direction of the gross margin, given all the moving parts right now for Q1, please.

Speaker #5: Thank you very much. I had just a question on the gross margin as well. I mean, a bit more short-term here about the Q1.

Speaker #5: I was looking at the history, and it's a bit all over the place—the gross margin direction in Q1. It seems to be that in an upcycle, it's up quarter on quarter; in a downcycle, it's down quarter on quarter. The average is down 70 basis points.

Speaker #5: But it's very diverse. So I was wondering if you could help us on the direction of the gross margin given all the moving parts right now for the Q1, please.

Lorenzo Grandi: For Q1, we see gross margin. Clearly, we do not give indication of the gross margin of the following quarter. What I can say is that we see gross margin at least at the current consensus for Q1. I would not say more at this stage.

Speaker #1: For Q1, we see gross margin clearly we don't give indication of the gross margin of the following quarter, but what I can say is that we see gross margin at least at the current consensus for Q1, let's say.

Speaker #1: Well, more than that, I would not say more at this stage.

François-Xavier Bouvignies: Okay. Thank you, Lorenzo. Maybe one on the satellites. Could you update on, you mentioned data center, but what about LEO into next year? How is it shaping? You kept your guidance for a long time. It is a broad guidance of above $3 billion, but I was wondering if you could give more color on this year and next year as you get more visibility.

Speaker #5: Okay, thank you, Lorenzo. And maybe one on the satellite. Could you maybe update on you mentioned data center, but what about LEO into next year?

Speaker #5: How is it shaping? I mean, you kept your guidance for a long time. It's a broad guidance of above $3 billion, but I was wondering if you could give more color on this year and next year as you get more visibility, please.

Jean-Marc Chery: I pass the question directly to Rémy.

Speaker #1: I pass the question directly to Rémy.

Rémy El-Ouazzane: Yeah. We see a lot of momentum across the board, not only in SpaceX but other programs that are going to be ramping. I would expect actually next year to be as good, if not better than this year in terms of revenue contribution. As a matter of fact, I do believe that we are right now working hard to go and find more capacity to enable even more revenue. That is the momentum we are into. It is very consistent with what you are hearing from one of our customers earning calls in terms of the momentum they are getting.

Speaker #4: Yeah. We see a lot of momentum. Across the board, not only in SpaceX, but other programs that are going to be ramping. I would expect actually next year to be as good, if not better, than this year.

Speaker #4: In terms of revenue contribution, the matter of fact is, I do believe that we are right now working hard to go and find more capacity to enable even more revenue.

Speaker #4: So that's the momentum we're into, kind of very consistent with what you're hearing from one of our customers' earnings calls in terms of the momentum they're getting.

François-Xavier Bouvignies: Sorry, Rémy, you mean revenue contribution as percentage of revenues or just growing on absolute? Just to clarify this point.

Speaker #5: Sorry, Rémy, you mean that revenue contribution as percentage of revenues or just growing on absolute? Just clarify this point.

Jean-Marc Chery: My comment was the latter. Revenue

Speaker #4: My comment was the latter. Revenue will not be larger than this year.

François-Xavier Bouvignies: Okay.

Jean-Marc Chery: will be not larger than this year.

François-Xavier Bouvignies: Okay, thank you.

Speaker #5: Okay, thank you.

Jérôme Ramel: Thank you, François-Xavier. Next question, please.

Speaker #4: Thank you, François Xavier. Next question, please.

Operator: The next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Please go ahead.

Speaker #2: The next question comes from Sébastien Szabovic from Kepler Chevreux. Please go ahead.

Sébastien Sztabowicz: Yeah. Hi, everyone, and thanks for taking my question. On a global basis, what kind of visibility you have for the coming quarters and where the backlog is standing at the end of Q3? Attached to that, on the revenue side, how do you see the seasonality building up for 2027? Should we expect a better than usual seasonality? Thank you.

Speaker #5: Yeah, hi everyone and thanks for taking my question. On a global basis, what kind of visibility do you have for the coming quarters and where the backlog is standing at the end of Q3?

Speaker #5: And attached to that, on the revenue side, how do you see the seasonality building up for 2027? Should we expect better than usual seasonality?

Speaker #5: Thank you.

Jérôme Ramel: Sebastian, your line was breaking up. Can you restate the question? Was it the seasonality for Q1 you were asking?

Speaker #4: Sébastien, your line was breaking up. Can you rephrase the question? What is the seasonality for Q1? You were asking.

Sébastien Sztabowicz: No, seasonality for 2027. Do you expect better than usual or normal seasonality being it 2027?

Speaker #5: No, seasonality for 2027. Do you expect better than usual or normal seasonality moving into 2027?

Jean-Marc Chery: Okay. No, the seasonality will be different. Why? Because as I explained a few minutes ago, we are on the dynamic where we are basically rebalancing, okay, the spread of ST across the various verticals. As an example, okay, at the midpoint of the guidance we provide, the automotive vertical's weight of total revenue ST will be about 35%. Then, okay, industrial will be, let's say, between 22% and 24%. CCP, so means the digital infrastructure, so data center, low-earth orbit satellite, and some legacy will be slightly above 20%, and personal electronics, 22%. For 2027, okay, we expect to see CCP continuing to grow. So you see the balance between the verticals will be significantly different. So of course it will impact the seasonality. So this is some indication we will give, okay, clearly in January.

Speaker #1: Okay. No, the seasonality will be different. Why? Because as I explained a few minutes ago, we are on a dynamic where we are basically rebalancing the spread of ST across the various verticals.

Speaker #1: As an example, at the midpoint of the guidance we provide, the automotive verticals weight of total revenue ST will be about 35%. And then industrial will be let's say between 22, 24.

Speaker #1: CCP, so that means digital infrastructure. So, data center, low earth orbit satellite, and some legacy will be slightly above 20%. And personal electronics, 22%.

Speaker #1: For 2027, we expect to see CCP continuing to grow. So you see the balance between the verticals will be significantly different. So of course it will impact the seasonality.

Speaker #1: So this is some indication we will give clearly in January, and the first. What was it?

Sébastien Sztabowicz: For the, yeah.

Jean-Marc Chery: What?

Sébastien Sztabowicz: The first question was on the backlog level today.

Speaker #5: The first question was on a backlog level today. And what kind of visibility do you have for the coming quarters based on your backlog right now?

Jean-Marc Chery: Oh, yeah.

Sébastien Sztabowicz: What kind of visibility do you have for the coming quarters based on your backlog right now?

Jean-Marc Chery: You see, okay, with the book-to-bill that was well above 2, okay, and the revenue of $3.75 billion. Our backlog is well above $20 billion. So it is representing, compare Q4 midpoint of the guidance, about five quarters of revenue, which start to be appropriate visibility to drive our operation. We are still far the peak of 2023 and 2022.

Speaker #1: You see, okay, with a book to build that was well above two, okay, and a revenue of 3.75 billion dollars, now our backlog is well above 20 billion dollars.

Speaker #1: So, it represents comparing Q4 midpoint of the guidance, now about five quarters of revenue, which starts to be appropriate visibility to drive our operation.

Speaker #1: We are still far from the peak of 2023 and 2022.

Jérôme Ramel: Thank you, Sébastien.

Speaker #4: Thank you, Sébastien.

Sébastien Sztabowicz: Thank you.

Speaker #5: Thank you.

Jérôme Ramel: Next question, please.

Speaker #4: Next question, please.

Operator: The next question comes from Menon Yonardan from Jefferies. Please go ahead.

Speaker #2: The next question comes from Menon. Jonathan from Jefferies, please go ahead.

Menon Yonardan: Hi, thanks for taking my question. I will just start with a sort of clarification, then I have a question after that, but both on gross margin. You had said that you do not expect Q1 gross margin to be at least in line with current consensus. I am just looking at it both Visible Alpha and Bloomberg, it is about 38%. Are you suggesting that gross margin could decline slightly quarter-on-quarter given that you are guiding at 39% in Q4? The question also is on gross margin. Your medium-term target model is 44% to 46%. If you take more than 400 basis points from the fab conversion, that means you are sort of saying before that comes through, it is about 41%-ish.

Speaker #5: Hi, thanks for taking my question. I'll just start with a sort of clarification, then I have a question after that, but both on gross margin.

Speaker #5: You had said that you don't expect Q1 gross margin to be at least in line with current consensus. I'm just looking at it both visible alpha and Bloomberg.

Speaker #5: It's about 38%. So, are you suggesting that gross margin could decline slightly quarter-on-quarter given that you are guiding at 39% in Q4?

Speaker #5: And then the question also is on gross margin. So your target model medium-term target model is 44 to 46. If you take more than 400 basis points, from the FAB conversion, that means you're sort of saying before that comes through, it's about 41 percent-ish.

Menon Yonardan: So it should be assumed that between Q4 this year at 39% and let's say Q3 2027, your gross margin will essentially go up by, give or take, around 200 basis points, and then as you go beyond that, you will get the full effect of 400, 450 basis points. When you gave that target model, you did not have so much of visibility on the AI side, where you have said that your margin is above the target model on areas like silicon photonics. Given that that is so strong, is there a chance that your gross margin in this cycle with the help of that as well as pricing, could actually end up above that target model. Thanks.

Speaker #5: So, it should be assumed that between Q4 this year, at 39%, and, let's say, Q3 2027, your gross margin will essentially go up by, give or take, around 200 basis points.

Speaker #5: And then, as you go beyond that, you will get the full effect of 400, 450 basis points. And when you gave that target model, you did not have so much visibility on the AI side, where you've said that your margin is above the target model in areas like silicon photonics.

Speaker #5: So given that that is so strong, is there a chance that your gross margin in this cycle with the help of that, as well as pricing, could actually end up above that target model?

Speaker #5: Thanks.

Speaker #1: Another question.

Jean-Marc Chery: Janardan, you want to know the gross margin in Q1 and for 2027, right? I will let Lorenzo answer, but you know the guys saw the gross margin going forward. But Lorenzo.

Speaker #4: So basically, Jonathan, you want to know the gross margin in Q1 and for 2027, right? I will let you answer, but I'm going to guide for the gross margin going forward.

Speaker #4: But Lorenzo, please.

Lorenzo Grandi: Yeah. No, at the end, clearly in the past, and as we said also before, clearly one of our focus is to increase our profitability, increase the gross margin. One of the key elements on the gross margin definitely will be our reshaping plan. As we said, our reshaping plan, let's say, will factor in our gross margin toward the end of next year and in 2028, let's say substantially. This is one of the important elements. The other important element is that the growth that we are in AI and the growth in the AI infrastructure and the growth that we have, let's say now in the industrial, that is very significant as you have seen, is accretive for our gross margin. This, we do expect continuing, let's say progressively also in 2027, so bringing a positive impact on the gross margin.

Speaker #3: No, at the end, clearly the past and as we said also before, clearly one of our focus is to increase our profitability, increase the gross margin.

Speaker #3: One of the key elements on the gross margin definitely will be our reshaping plan. As we said, our reshaping plan, let's say, will factor in in our gross margin toward the end of next year and in 2028, let's say, substantially.

Speaker #3: And this is one of the important elements. The other important element is that the growth that we are in AI and the growth in the AI infrastructure and the growth that we have, let's say, now in the industrial that is very significant, as you have seen is a creative for our gross margin.

Speaker #3: And this we do expect continuing let's say progressively both in 2027. So bringing a positive impact on the gross margin. As I said about the gross margin of the Q1 quarter, at this stage for me, I don't want to guide, but what I said is that will be at least at the level of the current consensus.

Lorenzo Grandi: As I said about the gross margin of the Q1 quarter, at this stage for me, I don't want to guide, but what I said is that we will be at least at the level of the current consensus. What's to say more than that? Clearly, let's say there are other elements that we need to consider, and one of the elements that you have to keep in mind is that we are also in an inflationary, let's say, environment for which there is cost increase in our input costs. This will, let's say, have some impact, but on the other side, there are other positive that are, as I said, the impact of the improvement manufacturing efficiency, the mix that will enter, and also some continued price increase on our top line.

Speaker #3: And what's to say more than that? Clearly, let's say there are other elements that we need to consider and one of the elements that you have to keep in mind is that we are also in an inflationary let's say environment for which there is cost increase in our input cost.

Speaker #3: This will, let's say, have some impact, but on the other side, there are other positive that are, as I said, the impact of the improvement manufacturing efficiency, the mix that will enter, and also some continue price increase on our top lines.

Menon Yonardan: Understood. Just on the first answer, you are suggested, I understand it, that because of the strong AI growth, you could end up above the target model. Is that the way I should understand your answer?

Speaker #5: Understood. Just on the first answer, so you are suggested I understand it that because of the strong AI growth, you could end up above the target model.

Speaker #5: Is that the way I should understand your answer?

Jean-Marc Chery: Can you repeat the question?

Speaker #4: Can you get a question?

Lorenzo Grandi: The question is if we can end up above our target model. The point is that, for the time being, we target to be at our target model. But then, of course, as I said, there are many components. One could be the mix. We will see. We will update you moving forward, in January and during the next year.

Speaker #3: The question is if we can end up above our target model. Let's say the point is that for the time being we target to be at our target model, let's say, then of course, as I said, there are many components, one could be the mix, let's say, we see.

Speaker #3: But we will, let's say, update you moving forward, let's say, in January and during the next year.

Menon Yonardan: Understood. Thank you.

Speaker #5: Understood. Thank you.

Jérôme Ramel: Thank you, Janardan. Next question, please.

Speaker #4: Thank you, Jonathan. Next question, please.

Operator: The next question comes from Gianmarco Bonacina from Banca Akros. Please go ahead.

Speaker #2: The next question comes from Gianmarco Bonaccina from Banca Akros. Please go ahead.

Gianmarco Bonacina: Yes, good morning. Just a follow-up on your book-to-bill, if you can provide a little bit more color for the different verticals. Also, you talked about seasonality for the year. If you can give some indication given that you indicated you have good visibility in terms of Q1, also with the comment you made on the calendar days. We know that normally Q1 is down about 10% sequentially. If you can indicate if directionally, this time given seasonality and visibility, maybe the performance will be different. Thank you.

Speaker #6: Hi, good morning. Just a follow-up on your book to bill, if you can provide a little bit more color for the different verticals and also you talked about seasonality for the year.

Speaker #6: If you can give us also some indication, given that you indicate you have good visibility also in terms of Q1, along with the comment you made on the calendar days. We know that normally Q1 is down about 10% sequentially.

Speaker #6: So if you can indicate if actually, this time, given seasonality and visibility, maybe the performance will be different. Thank you.

Jean-Marc Chery: About the book-to-bill, that is significantly above 2 for ST overall. It is above 1 for each of our end markets for the group and region. Specifically, it is well above 2 for communication equipment and computer peripheral and industrial. When I say well above 2, I have to say well above 3.

Speaker #4: So about the book to bill, that is a significantly above two for ST overall. It's above one for each of our end markets for the group and region.

Speaker #4: And specifically, it is well, well above two for communication equipment and computer peripheral and industrial. When I say well, well above two, I have to say well above three.

Gianmarco Bonacina: Okay.

Speaker #6: Okay.

Jean-Marc Chery: About the seasonality. Again, what we can say, similarly, Lorenzo commented that we feel comfortable to deliver the gross margin, at least at the consensus for Q1. We feel comfortable to deliver at least the revenue consensus for Q1, on the calendar we have indicated.

Speaker #4: About the seasonality. Again, what we can say, similarly, Lorenzo, commented that we feel comfortable to deliver the gross margin at least at the consensus for Q1.

Speaker #4: We feel comfortable delivering at least the revenue consensus for Q1. On the calendar, we have indicated.

Gianmarco Bonacina: Thank you.

Speaker #6: Thank you.

Jean-Marc Chery: Despite having only 86 days in Q1.

Speaker #4: Despite having only 86 days in Q1. Thank you. Next question, please.

Gianmarco Bonacina: Thank you.

Jean-Marc Chery: Thank you. Next question, please.

Operator: The next question comes from Didier Scemama from Bank of America. Please go ahead.

Speaker #2: The next question comes from Didier Chemama from Bank of America. Please go ahead.

Didier Scemama: Yeah. Thank you. Good morning, gentlemen. Two questions. One, can you give us a sense on the early indications of your pricing negotiations with your Tier 1 customers, if you want to share anything about that? I have a follow-up. Thank you.

Speaker #5: Yeah, thank you. Good morning, gentlemen. Two questions. One, can you give us a sense on the early indications of your pricing negotiations with your tier one customers, if that you want to share anything about that?

Speaker #5: And I've got a follow-up. Thank you.

Lorenzo Grandi: Let's say that what we can say is that, in term of pricing, we confirm that in this context and all that is higher input cost and increase in lead time, we are increasing pricing on some selected products. This, of course, is an ongoing process. When we look at, let's say, about pricing assuming that this gap between supply and demand remains. I think this is what we see today when we look at the evolution of our backlog and when we look at the billing, as I say. The fact that next year we may have, in term of pricing, stability or slight increase, but this is not out of reach. We think that is something that we may see.

Speaker #3: Let's say that what we can say is that in terms of pricing, we confirm that in this context and all that is higher input cost and increasing lead time, we are increasing pricing on some selected product.

Speaker #3: This, of course, is an ongoing process. When we look let's say about pricing, assuming that this gap between supply and demand remains, not having and this is what we see today when we look at the evolution of our backlog and when we look at the billing, let's say, the fact that next year we may have in term of pricing stability or slightly increase but this is not out of reach.

Speaker #3: We think that is something that we may see. Anyway, this is at this stage is a little bit early to comment more in general, because as you can understand, the discussion for next year, let's say, have not yet been completed.

Lorenzo Grandi: Anyway, at this stage, it is a little bit early to comment more in general because as you can understand, the discussion for next year has not yet been completed. We are in discussions with our customers.

Speaker #3: So we are in discussion with our customers.

Didier Scemama: Yeah, no, very clear. Sorry, I just want to understand better what you are trying to say for Q1 because you just said a number of things which are, in my understanding, contradictory to what you said before. I just wanted to make clear. The number of calendar days in Q1 implies a decline of about 10.6% sequentially, and then you have the multi of down 10. Let us say call it -21. Consensus is like -5, -6. You just said you think you will be in line with consensus on revenues adjusted for the calendar number of days. Sorry, I am not sure what to understand from all of that. If you could help me, that would be great. Related to this, the seasonality in Q1 normally is strongly influenced by your personal electronics business and by the price cuts that you give to your Tier 1s.

Speaker #5: Yeah, no, very clear. Sorry, I just want to understand better what you're trying to say for Q1, because you just said a number of things which are in my understanding contradictory to what you said before.

Speaker #5: So just wanted to make clear. The number of calendar days in Q1 implies a decline of about 10.6% sequentially. And then you've got normal seasonality of down 10.

Speaker #5: So let's say call it minus 21. Consensus is like minus 5, minus 6. And you just said you think you'll be in line with consensus on revenues adjusted for the calendar number of days.

Speaker #5: So sorry, I'm not sure what to understand from all of that. If you could help me, that would be great. And related to this, the seasonality in Q1 is normally strongly influenced by your Personal Electronics business and by the price cuts that you give to your tier one.

Didier Scemama: You have answered the second part. On the personal electronics side, it looks like your Q3 was a lot better than expected. Is there a risk of a pull-in or is it genuine end demand and therefore no risk that Q1 is worse than seasonal, let us say?

Speaker #5: So you've answered the second part. On the personal electronic side, it looks like your Q3 was a lot better than expected. Is there a risk of a pull in or is it genuine end demand and therefore no risk that Q1 is worse than seasonal, let's say?

Jean-Marc Chery: No, I will try to be much more clear. With the visibility we have, with a quarter of 86 days, we are comfortable to deliver the consensus of Q1.

Speaker #4: No, we try to be much more clear. Okay, with the visibility we have, with the quarter of 86 days, we are comfortable to deliver the consensus of Q1.

Didier Scemama: Very clear. Thank you. On the personal electronics, Q3 strength, was that a pull-in or do you think that was just end demand being better than expected? You guys been very cautiously for Q3 in terms.

Speaker #5: Very clear. Thank you. And on the personal electronics—I mean, Q3 strengths—was that a pull-in, or do you think that was just end demand being better than expected?

Speaker #5: I mean, you guided very cautiously for Q3 in fairness.

Jean-Marc Chery: No, there is no specific pull-in. We just deliver the demand of the customer. No, we do not see a specific pull-in.

Speaker #4: No, no, no. There is no specific pull-in. We just deliver according to the demand of the customer. And no, we don't see a specific pull-in.

Didier Scemama: All right. Very clear. Thank you so much.

Speaker #5: All right. Very clear. Thank you so much.

Jérôme Ramel: Thank you, Didier. Next question, please.

Speaker #4: Thank you, Didier. Next question, please.

Operator: The next question comes from Jakob Bluestone from BNP Paribas. Please go ahead.

Speaker #2: The next question comes from Jacob Bluestone from BNP Paribas. Please go ahead.

Jakob Bluestone: Hi. Thanks for taking the question. I just had a question on your silicon photonics ramp. Just wondering if you can give a little bit of an update on how that is progressing, in terms of yields and maybe if you can also update us a little bit on your expansion of your production capacity there.

Speaker #5: Hi, thanks for taking the question. I'd set a question on your silicon photonics ramp. Just wondering if you can give a little bit of an update on how that is progressing in terms of yields and maybe if you can also update us a little bit on your expansion of your production capacity there.

Jean-Marc Chery: Thank you. I pass the question to Rémy.

Speaker #4: Thank you. I pass the question to Remy. Hey, hi, Jacob. We going as per plan. The electro-optical yield or customers are getting at this stage are setting a new bar for the industry.

Rémy El-Ouazzane: Hey. Hi, Jakob. We going as per plan. The electro-optical yield of customers at this stage are setting a new bar for the industry. Keep in mind that we are probably the only at scale 12-inch SiPho player shipping right now, and I think it speaks volume for the value of 12-inch in critical dimension and yield entitlement. So, I can say with high confidence that our customers are very happy with the yield that our technology platform is providing. Clearly, this year the contribution is not marginal, but it is not at all to the tune of what it will be next year. We expect a steep growth, which is itself is backed up by the fact that we have communicated that we have increased capacity by 4x year on year. Actually, it will be a little bit more than 4x when you look specifically at the number.

Speaker #4: Keep in mind that we are truly the only at scale 12-inch siphon player shipping right now. And I think it's peaks volume for the value of 12-inch in critical dimension and yield entitlement.

Speaker #4: So I can say with high confidence that our customers are very, very, very happy with the yield. That our technology platform is providing. Clearly, this year the contribution is not marginal, but it's not at all to the tune of what it would be next year.

Speaker #4: There will be we expect a steep growth, which is itself is backed up by the fact that we've communicated that would increase capacity by 4X year on year.

Speaker #4: Actually, it would be a little bit more than 4X. When you look specifically at the number. So things silicon photonics in SD is going to be a long growth story.

Rémy El-Ouazzane: I think silicon photonics, in a sense, is going to be a long growth story for which we happen to have actually a long-term visibility.

Speaker #4: For which we happen to have actually long-term visibility.

Jakob Bluestone: Great.

Speaker #5: Okay. Do you have a follow-up, Jacob?

Jérôme Ramel: You have a follow-up, Jakob?

Jakob Bluestone: A quick one, maybe, I do not know if you can comment at this point, but just in terms of the, you obviously had lower OpEx this quarter, obviously flagging a little bit of a step up for Q4. If you could maybe just give us an update on the outlook for your OpEx beyond here. Do you think it could be sort of flattish next year or given some of the cost inflationary pressures you flagged, could it be up next year?

Speaker #6: Hey, quick one, maybe. I don't know if you can comment at this point, but just in terms of the you obviously had lower opex this quarter, obviously flagging a little bit of a step up for Q4.

Speaker #6: Just sort of if you can maybe just give us an update on the outlook for your opex beyond here. Do you think it could be sort of flattish next year or given some of the cost inflationary pressures you flagged, could it be up next year?

Lorenzo Grandi: On the OpEx of next year, directionally, I would say that they will go up. At this stage it is a little bit too early to comment. But keep in mind that during 2027, we will keep on continuing our cost savings programs, which should bring, let us say, something in the range of $100, $120 million benefit. We should have also, especially in the second part of the year, some decline in our startup cost. This means that are impacting our other income and expenses in negative way. Conversely, on the other side, we are accelerating some of our investment in new business opportunities as you can imagine. On the other side, there will be also, let us say, some

Speaker #3: On the opex of next year, directionally, I would say that they will go up. At this stage, it's a little bit too early to comment.

Speaker #3: But keep in mind that during 2027, we will keep on continuing our cost savings programs. Which should bring let's say something in the range of 100, 120 million dollar benefit.

Speaker #3: We should have also, especially in the second part of the year, some decline in our startup cost. This means that they are impacting our other income and expenses in a negative way.

Speaker #3: Conversely, on the other side, we are accelerating some of our investment in new business opportunities that you can imagine. And then on the other side, there will be also let's say some impact related to the normal wage salary inflation this kind of things.

Lorenzo Grandi: Impact related to the normal wage salary inflation and these kind of things. There will be some increase next year well below, let's say, with any way, an improvement in our expense to sales ratio.

Speaker #3: So there will be some increase next year well below let's say with anyway an improvement in our sales expense to sales ratio.

Jakob Bluestone: Very clear. Thank you.

Speaker #6: Very clear. Thank you.

Jérôme Ramel: Thanks, Jakob. Next question, please.

Speaker #4: Thanks, Jacob. Next question, please.

Operator: The next question comes from Stéphane Houri from Oddo BHF. Please go ahead.

Speaker #2: The next question comes from Stefan Uri from Adobe HF. Please go ahead.

Stéphane Houri: Yes, hello. Thank you very much. First question is a clarification on what has been said about the satellite opportunity for next year. You are saying you are not sure you will grow, but you are working hard to do so. Can you maybe elaborate and separate a little bit what is the end demand at the moment and how many customers you have beside your main customer and what is also linked to the capacity ramp issues? Thank you.

Speaker #7: Yes, hello. Thank you very much. First question is a clarification on what has been said about the satellite opportunity for next year. Because basically you're saying you're not sure you will grow, but you're working hard to do so.

Speaker #7: Can you maybe elaborate and separate a little bit what is the hand demand at the moment and how many customers you have besides your main customer and what is also linked to the capacity ramp issues?

Speaker #7: Thank you.

Rémy El-Ouazzane: I will repeat what I said, Stéphane. I said that actually, I expect next year revenue to be same or better than this year revenue. That is the first thing I said. This year revenue was a record year for that business due to the fast growth of a major customer. Next year, that growth continues unabated and comes with additional customers piling on top. We are actually working hard to release pocket of capacity to be able to capture the entire demand they have. I can say with confidence that at this stage, when we look at front-end module technology and of BiCMOS technology, there is nothing coming close to it.

Speaker #4: So I'll repeat what I said, Stefan. I said that actually I expect next year revenue to be same or better than this year revenue.

Speaker #4: That's the first thing I've said. This year revenue was a record year for that business. Due to the fast growth of major customers. Next year, that growth continues unabated and comes with additional customers piling on top.

Speaker #4: And we are actually working hard to release pocket of capacity to be able to capture the entire demand they have because I can say with confidence that at this stage, when we look at front-end module technology, and of by CMOS technology, there is nothing coming close to it.

Rémy El-Ouazzane: Keep in mind that actually the technology matter in that case because the noise figure that you can actually get out of the technology will translate into the efficiency of a spectrum which itself translates into the efficiency of a deployment. We truly have a first-row seat position in those accounts. Right now, I would say that next year we are most likely going to be capacity gated than demand gated. We are working to go and, as usual, to find ways to go and release more and more capacity over time. That is the summary of what I said.

Speaker #4: And keep in mind that actually a technology matter in that case because the noise figures that you can actually get out of the technology will translate into the efficiency of a spectrum which itself translates into the efficiency of the deployment.

Speaker #4: So we truly have a first row seat position in those accounts. And right now, I would say that next year, we are most likely going to be capacity-gated and demand-gated.

Speaker #4: And we are working to go and as usual to find ways to go and release more and more capacity over time. That's the summary of what I said.

Stéphane Houri: Okay. Thank you very much for repeating that then. The second question to follow up is about automotive. We did not speak a lot about automotive today, and there is a sense that the book-to-bill seems to be above one, so improving. At the same time, the situation among the automotive customer does not seem to improve. What is your view on what is going to happen in 2027? If you can maybe elaborate a bit about the electromobility opportunity and the software-defined vehicle opportunity at the same time. Thank you.

Speaker #7: Okay. Thank you very much for repeating that then. And the second question, the follow-up is about automotive. We didn't speak a lot about automotive today.

Speaker #7: And there is a sense that the book-to-bill seems to be above one. So improving at the same time, the situation among the automotive customers doesn't seem to improve.

Speaker #7: So what is your view on what's going to happen in 2027 and if you can maybe elaborate a bit about the electromobility opportunity and the software-defined vehicle opportunity at the same time.

Speaker #7: Thank you.

Rémy El-Ouazzane: Automotive, first of all, the visibility we have from our European Tier 1 is really stable since more than 6 months now, which is really positive compared to the previous year. In 2026, we expect to grow for the full year 2026 on automotive, let's say slightly above 10% for us. That is basically consistent with the market. It is pretty well spread with our main product group. Except, of course, radio frequency and optical cables. We are not yet putting optical cable in cars. Between AM&S and Power and discrete and let's say the digital signal processing solution, the growth will be pretty similar. Then, yes, we are seeing an acceleration of our Power and discrete in Q4 and the year-over-year growth of Power and discrete overall in Q4 will be well above 20% to 25%. This is driven by the European market of electromobility.

Speaker #4: Well, automotive first of all, the visibility we have from our European tier one is really stable since more than six months now. Which is really positive compared to the previous year.

Speaker #4: In 26, okay, we expect to grow for the full year 26 on automotive let's say slightly above 10% for us. That is basically consistent with the market.

Speaker #4: It is pretty well spread with our main product group, except of course radio frequency and optical cables. We are not yet putting optical cable in cars.

Speaker #4: But between IMS and power and discrete and let's say the digital processing solution, the growth will be pretty similar. But then yes, we are seeing an acceleration of our power discrete in Q4.

Speaker #4: And the year growth of power discrete overall in Q4 will be well, well above 20%, 25%. So this is driven by the European market of electromobility.

Rémy El-Ouazzane: We expect next year, the automotive verticals to contribute to the growth of the company, most likely pretty well the average. I repeat, next year, the growth driver of the company will remain the AI data center, will remain the infrastructure in industrial, will remain the B2B industrial business. For factory automation, robotics, this kind of stuff. Consumer overall, we believe will remain soft or weak. But good confidence level to continue to grow in automotive driven by European electromobility and also the many socket wins we have in the internal combustion engine cars and hybrid.

Speaker #4: So we expect next year, okay, the automotive verticals, okay, to contribute to the growth of the company. Most likely, pretty well the average, because, okay, I repeat, next year, okay, the growth driver of the company will remain the AI data center.

Speaker #4: Will remain the infrastructure in industrial. Will remain the B2B industrial business. So for factory automation, robotics, this kind of stuff. For consumer overall, we believe will remain soft or weak.

Speaker #4: Well, good confidence level to continue to grow in automotive driven by European electromobility. And also, okay, the many socket widths we have in the thermal combustion engine cars.

Speaker #4: And hybrid.

Stéphane Houri: Okay. Just one follow-up, a view on silicon carbide for 2027?

Speaker #7: Okay. And just one follow-up: a view on silicon carbide for 2027?

Marco Cassis: Silicon carbide, first of all, this year, we will grow about 20%, which is a positive news. Clearly the main growth driver is European, let's say electrical car, and this will continue next year. Importantly, for us on silicon carbide, and also part of our, let's say, turnaround of the profitability of this group is diversification we have engaged, first of all, for the power supply of data center, but also for power application, requesting high power conversion in the industrial market. So next year will be another year of growth, of significant growth for our silicon carbide. And, we expect to have the benefits of the wafer size conversion to 8 inch, both from Catania and Chongqing.

Speaker #4: Well, silicon carbide, e, but first of all, this year, okay, we will grow about 20%. Which is a positive news. So clearly the main growth driver is the European let's say electrical car.

Speaker #4: And this will continue next year. Importantly, okay, for us on silicon carbide, okay, and also part of our let's say turnaround of the profitability of this group is diversification.

Speaker #4: We have engaged first of all for the power supply of data center. But also for power application, requesting high power conversion in the industrial market.

Speaker #4: So next year will be another year of growth of significant growth for our silicon carbide. And okay, we expect to have the benefits of the wafer size conversion to 8 inch both from Catania and Shanxi.

Jérôme Ramel: Thank you, Stéphane. We have time for one more question.

Speaker #7: Thank you. We have time for one more question.

Operator: The last question comes from Sandeep Deshpande, from JP Morgan. Please go ahead.

Speaker #8: The last question comes from Sandeep Deshpande from JP Morgan. Please, go ahead.

Sandeep Deshpande: Yeah. Hi. Thanks for letting me on. Just quickly coming back to the gross margin question. You have got this 400 basis points of gross margin improvement once the reshaping program is over. How much of that is coming from, today you are running both the 200 and 300 millimeter fabs, and so what percentage of your gross margin uplift is from that, versus how much of it could you remind us is coming from, because you would have lower costs on the wafer, et cetera, so an upward shift associated with the shift to 300 millimeters? My second question is that despite your revenue growth, which was quite considerable in both the Analog products, MEMS and Sensors business and in your Power and discrete business, your margin actually declined year-on-year in both those business units. Why was that?

Speaker #5: Yeah, hi. Thanks for letting me on. Just quickly coming back to the growth margin question. You've got this 400 bips of gross margin improvement once the reshaping program is over.

Speaker #5: How much of that is coming from today you're running both the 200 and 300 millimeter fabs. And so what percentage of your gross margin uplift is from that versus how much of it could you remind us is coming from because you're going to have lower costs on the wafer, etc.

Speaker #5: So, associated with the shift to 300 millimeters. And my second question is that, despite your revenue growth—which was quite considerable in both the Analog MEMS and Sensors business and in your Power Industry business—your margin actually declined year-on-year in both those business units.

Speaker #5: Why was that?

Lorenzo Grandi: Okay. In term of, let's say, clearly improvement of above 400 basis points is a combination of different elements. Clearly the size of the wafer, the fact that we move from fabs that are poorly automatized and so mixed with a significant cost of labor on, let's say fabs that are much more automatized. Now to split, let's say the various contributors is a little bit complex to be done. When we look, let's say the profitability of AM&S, let's say overall going down on a year-over-year basis, clearly here is the group where is mainly measured impact, where there is a measured impact of the legacy fab that we are now, let's say, on which we are now transferring the products.

Speaker #4: Okay. In terms of let's say clearly improvement of above 400 basis points is a combination of our different elements. Clearly the size of the wafer, the fact that we move from fabs that are poorly automatized and so with significant cost of labor on let's say fabs that are much more automatized.

Speaker #4: Now to split let's say the various contributors is a little bit complex to be done. When we look let's say the profitability of AMS let's say overall going down on a year over year basis, clearly here is the group where is mainly measured impact where there is the measured impact of the legacy fabs that we are now let's say on which we are now transferring the products.

Lorenzo Grandi: Clearly here there is an impact related to the fact that in this moment there are some extra costs, as I was explaining overall for the company. But there is also, let's say, an impact on the efficiency of this fab on which we are transferring the cost. So here when we look at this segment, clearly here is now suffering about this transition phase. It is also true that there will be one of the groups that will, let's say, enjoy more when we will finally move to the new fab, to the most advanced fab here, especially for the 300 millimeter, and at the same time, the Power and discrete where Power and discrete will enjoy the move from the 150 to the 200 millimeter.

Speaker #4: Clearly here there is an impact related to the fact that in this moment there are some extra costs as I was explaining overall for the company.

Speaker #4: But there is also let's say an impact on the efficiency of this fab on which we are transferring the cost. So yeah, when we look at this segment, clearly here is now suffering about this transition phase.

Speaker #4: It's also true that there will be one of the groups that will let's say enjoy more. When we will finally move to the new fab, to the most advanced fab here, especially for the 300 millimeter.

Speaker #4: And at the same time, the Power and Discrete, where Power and Discrete will enjoy the move from the 150 to the 200 millimeter.

Sandeep Deshpande: Just a quick question on this. When you talk about the guidance of 39% gross margin in Q4, you have highlighted how much underloading is involved, but how much of this 39% gross margin has negative impact from this double counting of costs, et cetera?

Speaker #5: Just a question, quick question on this when you talk about the guidance of 39% gross margin in the fourth quarter, you've highlighted how much of that is under how much underloading is involved.

Speaker #5: But how much of this 39% gross margin is impacted by the negative effects from the double counting of costs, etc.?

Lorenzo Grandi: For what concern, let's say the underloading, yes, it is 40 basis point. The extra cost, let's say, related to the new mask transfer of the process trials and so on, we estimate in the range of 30 basis point. It is more difficult to say, let's say the overall inefficiency created by this activity in the fab. It is something that we do not quote because it is a little bit more difficult to really say what is this impact. But this is an impact that of course will disappear when we will move, let's say to the new fab. Anyway, it is 40 basis point, let's say the unused and 30 basis point, the extra cost. This is what we report to you for each quarter. As accurate as possible.

Speaker #4: So, for what concerns, let's say, the underloading—yes, it's 40 basis points. The extra cost, let's say, related to the new mask transfer of the process trials and so on, we estimate that in the range of 30 basis points. It is more difficult to say, let's say, the overall inefficiency created by this activity in the fab.

Speaker #4: It's something that we don't quote because it's a little bit more difficult to really say what is this impact. But this is an impact that of course will disappear when we will move let's say to the new fab.

Speaker #4: Anyway, it's 40 basis point let's say the unused and 30 basis point the extra cost. This is what we report usually each quarter.

Speaker #7: Thank you. Thank you, Sandeep. And thank you, everyone. I think that concludes our call. So, thanks everyone for joining us, and feel free to reach out to the IR team if you have further questions.

Jérôme Ramel: Thank you. Thank you, Sandeep, and thank you everyone. I think that conclude our call. Thanks everyone for joining us and feel free to reach out if you have further question the IR team.

Operator: Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call and thank you for participating in the conference. You may now disconnect your lines. Goodbye.

Speaker #8: Ladies and gentlemen, the conference is now over. Thank you for choosing Coruscal and thank you for participating in the conference. You may now disconnect your lines.

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