STMicroelectronics N.V. (NYSE:STM) Q3 2023 Earnings Call Transcript

STMicroelectronics N.V. (NYSE:STM) Q3 2023 Earnings Call Transcript October 26, 2023

STMicroelectronics N.V. beats earnings expectations. Reported EPS is $1.16, expectations were $1.08.

Operator: Ladies and gentlemen, welcome to the STMicroelectronics Q3 2023 Earnings Results Conference Call and Live Webcast. I’m Andre, the Chorus Call operator. I would like to remind you that all participants will be in a listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] At this time, it’s my pleasure to hand over to, Celine Berthier, Head of Investor Relations. Please go ahead, madam.

Celine Berthier: Thank you, Andre. Good morning and thank you, everyone, for joining our third quarter 2023 financial results conference call. Hosting the call today is Jean-Marc Chery, ST’s President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our Chief Financial Officer; and Marco Cassis, President of Analog, MEMS and Sensors Group and Head of STMicroelectronics’ Strategy, System Research and Applications, Innovation Office. The live webcast and presentation materials can be accessed on ST’s Investor Relations website. The 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’s results to differ materially from management’s expectations and plans.

An automated manufacturing production line of semiconductor components on an assembly line.

We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST’s most recent regulatory filings or a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. And now, I’d like to turn the call over to Jean-Marc, ST’s President and CEO.

Jean-Marc Chery: Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q3 2023 earnings conference call. Let me begin with some opening comments, starting with Q3. For third quarter net revenues of $4.43 billion came in above the midpoint of our business outlook range, and Q3 gross margin of 47.6% was 10 basis points above guidance. Q3 net revenues increased 2.5% year-over-year. As expected, the revenue performance was driven mainly by continued growth in automotive, partially offset by lower revenues in Personal Electronics. Looking at our year-over-year performance, gross margin remained stable at 47.6%, while as expected, operating margin decreased to 28% from 29.4%. And net income was stable at $1.09 billion.

For the nine months period, net revenues increased 11.1% year-over-year to $13 billion, driven by growth in the ADG and MDG Product Groups and partially offset by a decline of the AMS Product Group. We reported gross margin of 48.7%, operating margin of 27.6% and net income of $3.14 billion. On Q4 2023, our fourth quarter business outlook is for net revenues of about $4.3 billion at the midpoint, declining year-over-year and sequentially by about 3%. Gross margin is expected to be about 46%. For the full year 2023, the midpoint of our Q4 guidance translates into revenue growth of about 7.3% to $7.3 billion with a gross margin of 48.1%. Now, I will move to a detailed review of the third quarter. Net revenues increased 2.5% year-over-year. This performance was driven mainly by ADG on total strength in automotive and to a lesser extent by FDG.

As expected, AMS revenue decreased mainly reflecting lower revenue in Personnel Electronics. This includes the impact of the change in product mix in an engaged customer program in Personnel Electronics that I first mentioned in January. Year-over-year, sales increased 2.1% to OEM and 3.4% to distribution. On a sequential basis, net revenues increased 2.4% with ADG up 3.6%, IMS up 5.3% and MDG down 1%. Net revenues came in 130 basis points above the midpoint of our outlook, mainly reflecting higher sales than expected in Personnel Electronics. Gross profit was $2.11 billion increasing 2.4% year-over-year. Gross margin of 47.6% was stable year-over-year, as improved product mix was offset by higher manufacturing costs and unused capacity charges.

Year-over-year, third quarter operating income decreased 2.4% to $1.24 billion. Operating margin was 28%, decreasing by 140 basis points versus 29.4% in the year ago quarter. This was due to a higher OpEx to sales ratio, as we continue to invest in innovation and in the digital transformation of the Company. On a year-over-year basis, both net income and earnings per diluted share in the quarter was stable at $1.09 billion and $1.16 respectively. Looking at the year-over-year sales performance by product group, ADG revenues increased 29.6% on a double-digit growth in both the automotive and power discrete subgroups. IMS revenues decreased 28.3% with lower revenues in the three subgroups. MDG revenues increased 2.8%. Revenues grew in an RF communication and were substantially flat in the Microcontrollers subgroup.

In terms of operating margin by product group on a year-over-year basis, ADG operating margin increased to 31.5% from 25.9%. IMS operating margin decreased to 18.8% from 27.2%, while MDG operating margin decreased to 35.1% from 36.7%. Net cash from operating activities increased to $1.88 billion in Q3 versus $1.65 billion in the year ago quarter. Net CapEx in the third quarter was $1.15 billion, compared to $955 million in the year ago quarter. Inventory at the end of the first quarter was $2.87 billion, compared to $2.38 billion in the year ago quarter. Days sales of inventory at quarter end was 114 days, compared to 126 days in the previous quarter and 96 days in the year ago quarter. Free cash flow was $707 million compared to $676 million in the year ago quarter.

During the third quarter, ST paid a $58 million of cash dividend to stockholders, and we executed an $87 million of share buyback under our current share repurchase program. ST net financial position of $2.46 billion as of September 30, 2023, reflected total liquidity of $5.05 billion and total financial debt of $2.59 billion. I will now go through a short update on some of our strategic focus areas in Q3. First, wide bandgap semiconductors, we began volume production of gallium nitride transistors, which simplifies the design of high-efficiency power commercial systems. We support the development of safe and valuable wide bandgap-based power systems for high-power application with industry-leading galvanically-isolated drivers. In the quarter, we introduced new STGAAP products, specifically designed for power GaN transistor based on ST’s unique IP and advanced BCD technology.

In silicon carbide, we continue to increase the number of engagements, we are now working with 94 customers and 150 projects up from 90 customers and 140 last quarter, wins here ranged from electrical vehicle applications, such as on board chargers to power module in solar power system. We confirm our revenues for silicon carbine products will reached about $1.2 billion this year. In car digitalization, we saw continued design win momentum with our later generation of automotive microcontrollers, called Stellar across key applications. This includes design wins in zonal modules for software defined vehicle architectures and in next generation battery management systems, in partnership with major carmakers. In ADAS, the EyeQ6 project with Mobileye is progressing to plan with early volume ramp up this year.

We have also seen strong market interest in ST high precision GNSS solution TESEO V adapted to our ADAS system. At the end of September, we add our annual Industrial Summit event in China. It drew over 1,300 customers in person another 50,000 participating online. The theme of this year’s event was Powering Your Sustainable Innovation and was focused on helping customers address climate-related challenges. We showcased 150 demos in three market segments: Automation, Power & Energy, and Motor Control where ST has created dedicated Competence Centers located close to customers. The registration of new designs in distribution we are receiving for our flagship STM32 family is increasing year-over-year on all our products, including mature ones.

This is a positive indication of the market structural appetite for our product. Moreover, we released the first ST cellular Narrow-Band IoT ultra compact and low power modules, combining cellular IoT connectivity and geolocation capabilities for wide-ranging IoT, smart metering and industrial applications. We further enlarged the reach of applications and use cases for Industrial customers by introducing new products such as Time-of-Flight and Thermal MOS infrared sensors, as well as the third generation of inertial sensors. To support our strategic focus areas in embedded processing we announced new ecosystem tools for our STM32 family. We also continued to expand our engagements with customers to deploy edge AI for a growing range of use cases.

This is based both on our extensive toolset allowing porting of AI algorithms to our existing MCU portfolio as well as the customer engagements for our latest neural processor enabled MCU. To conclude this review, in our RF communications business we are continuously expanding our strategic collaboration on SpaceX’s Starlink, which provides high-speed internet connectivity to a growing customer base in more than 60 countries around the world. They are ramping up their next generation products, which leverage our BiCMOS9 processes as well as innovative and highly differentiated packaging technology. Now, let’s move to our fourth quarter 2023 financial outlook and our plans for the full year 2023. For the fourth quarter, we expect net revenues at the mid-point to be about $4.3 billion, representing a year-over-year and sequential decline of about 3%.

Q4 gross margin is expected to be about 46% at the mid-point, including about 130 basis points of unused capacity charges. For 2023, our Q4 guidance at the midpoint translates into 2023 net revenues of about $7.3 billion. This represents growth of about 7.3% year-over-year with a gross margin of about 48.1%. The $7.3 billion is consistent with the indicated range we provided late July, the $100 million sales at the midpoint relates mainly to the industrial end market in Asia, where the level of orders materializing toward the end of Q3 to load our Q4 backlog has been below our expectation. We confirm our 2023 net CapEx plan of about $4 billion. To conclude, in September, the Supervisory Board asked me to be available for a reappointment as a sole member of the Managing Board and President and CEO.

I was very honored and pleased to accept the proposal. This will be proposed for shareholder approval at ST’s 2024 Annual Meeting of Shareholders. Thank you for your attention, and we are now ready to answer your questions.

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Q&A Session

Operator: [Operator Instructions] The first question comes from the line of Didier Scemama with Bank of America. Please go ahead.

Didier Scemama: Maybe just a couple of questions Jean-Marc, if I may, on Q4, if you could give us a sense of the various end markets we’re hearing, obviously, weakening demand in industrial, I think in a conference earlier this year, you mentioned that were fully booked for autos for 2024? So, I wondered whether you could maybe talk also about the rest of the business next year, any sort of early indication on revenue growth and also gross margins?

Jean-Marc Chery: Well, for Q4, I repeat, clearly, we have seen on industrial market, especially in China, as you have China that the order booking entering is the lead time window, where we are not materializing at our expectation. And it has mainly impact the general purpose microcontroller. This is for Q4, but now we have to acknowledge altogether that, we went back to normal in term of lead time and capacity utilization for this kind of device, and for semiconductor industry except very few product lines like a silicon carbide as well. About 2024, so clearly, we have a very good visibility 2024 for automotive. And for whole, I have to say the engaged customer program with our global strategic key account, everywhere we have, let’s say, custom design product or where we have proliferated our product.

Moving forward, let’s say, industrial market, both mass market distribution and OEM, but now the visibility is limited. And for sure, customer, let’s say, wait a little bit to put order, when they are in the lead time window. So, we have to monitor very carefully the [indiscernible] entry in Q4. More to understand, all will be, next year for mass market industrial, both for OEM and distribution. If you want to classify next year, very, very simply, we are convinced that automotive will grow definitively because we have the visibility. And again, the demand will be driven by the mobility, by the digitalization, by the provision of electronic in legacy application. But it is based on the production volume that will remain around the 85 million, 90 million vehicles.

We do believe that for personal electronic, we touched on some bottom in Q4, and next year, like-for-like, because again we have to remove the optical module still present in ’23. Like-for-like, we will slightly grow. But then again, on industrial, mass market and distribution, it is a bit early. So, we have to monitor carefully what is happening in Q4, in term of our order entry. But it is clear that, discussing with some customer, they are assessing their end demand, they are assessing their inventory level and this could also trigger some inventory correction, both in Q4 and maybe early next year.

Didier Scemama: And on the under loading of the fabs in Q4, is that what do you think your inventories will end up at the end of this year? And do you expect the under loading of fabs to carry on into the first half?

Jean-Marc Chery: I will handle to Lorenzo to answer.

Lorenzo Grandi: Good morning, everybody. In respect to this quarter, we do expect, at the end of the year, to be substantially in term of inventory in the range of between 100, 110 days, midpoint 105 or something like that. So, there will be a further decline in our inventory during this quarter. This of course is triggering as it’s been done already done in Q3, some unloading charges. These unloading charges in this quarter will impact, of course, our gross margin are fully embedded in our guidance. But as I said that for sure, let’s say for the gross margin of the evolution of the loading in respect that with the next year, a lot will depend from what Jean-Marc said about the evolution of the market or the reentry for the industrial market, but we expect still some unloading charges continuing at least for the first half of next year.

Operator: The next question comes from the line of Andrew Gardiner with Citi. Please go ahead.

Andrew Gardiner: Just following on the cost side of things, Lorenzo, obviously, you’ve given us some clarity in terms of unloading and how you expect gross margin to track. But given how the end market is shaping up at the moment, what are your plans in terms of OpEx? I suppose specifically for fourth quarter, can you help us there in terms of the breakdown? And then perhaps just more generally into 2024, again, I understand you don’t want to quantify things too much, but just your initial thoughts in terms of OpEx trends into next year would be helpful as well?

Lorenzo Grandi: About this quarter, the OpEx, let’s say, last quarter in Q3 OpEx came quite low in respect also to our expectation. But this is mainly driven by the seasonality of Q3, you know that in Q3 we are impacted positively impacted in term of caused by the vacation period especially in Europe. Now looking at the current quarter, our expectation in this quarter to have OpEx ranging between 950, 960. This is including, I remind you always the other income and expenses, so let’s call it net of tax. This is increasing compared to the previous quarter compared to the Q3. There is a lower level of grants, R&D grants. I remind you that the level of grants in Q3 was quite high also because there was a catch up over the previous quarter for grants that were possible to be recognized during Q3.

And then for sure Q4, let’s say unfavorable seasonality in respect to the previous quarter. But this means that for this year, our average quarterly net OpEx will be something between $925 million and $930 million, when we look at the full year. For next year, of course, our OpEx will be in line respect to the business evolution. We will maintain control on our operating expenses. For sure, we will continue to protect our R&D, and we will continue to protect our digital transformation programs.

Andrew Gardiner: If I could also just follow-up on the comment you’ve made in terms of seeing weakness start in industrial space, particularly in China, and that it’s affecting general purpose microcontrollers. Clearly, I think that brings some flashbacks to September of 2018, where that was a part of the market that started to face troubles as we hit that particular down cycle. Things are a bit different this time around, but I’m just wondering how you’re handling things, what you might be able to do a little bit differently this time around given that you’re starting to see some of the same signs?

Marco Cassis: Marco, compared to, yes, I remember very well, 2018 and 2019. Well, first of all, okay, the overall economy situation and world is rather different. Here, I can only say fact. Okay, again, the dynamic in Q3 of order when customer acknowledged the fact that they are entering the entire window well below our expectation. This is a fact number one. Fact number two, yes, we discussed with our customer, OEM and distributor, and especially in China, but, this is also, overall, a bit of global dynamic. We see our customers that are really reassessing their end demand. They are revisiting their sales and operating plan. And of course, okay, as we supported well from supply chain point of view, since Q4 2022, of course, they will certainly they readjust their inventory.

Well, then again, from the other side, for the industrial market, clearly, that’s the reason why I mentioned, the registration on STM32. The demand will be clearly driven by all application related to renewable energy generation, energy storage, power conversion, charging infrastructure for in mobility, more factory automation and motor control, which are more related to CapEx. Well, this will be related to the overall economy. So, that’s the reason why we have to monitor it. Well, consumer applications for the time being are still weak and discussing with our customer, they don’t expect to have a strong recovery before Q2 next year. So, this is a situation that we have to monitor, and I know we know how to do it. We clearly monitor the other entry.