STMicroelectronics N.V. 2026 Q3 Earnings Call

Please go ahead, sir. Thanks, Sandra, and thank you everyone for joining our third quarter 2026 financial result call.

Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call are Lorenzo Grandi, President and CFO, and Rémy El-Ouazzane, President for Microcontrollers, Digital ICs, and RF Products 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's most recent regulatory filing for a full description of this risk factor.

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.

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 third quarter 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 peripheral, 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 third quarter, 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. 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 two overall. Book-to-bill was well above one in all end markets and significantly above two in communication equipment and computer peripheral 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.

We maintain our automotive design win momentum with OEMs and Tier 1 suppliers across the 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 vehicles 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.

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.

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. You will hear more about this at our STM32 Summit on November 3rd, followed by a dedicated STM32 analyst call on November 18th. For personal electronics, third-quarter 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, MAX, and imaging sensors and microcontrollers across a variety of devices, including smartphones, gaming headsets, earbuds, and smart pens. For communication equipment and computer peripherals, third-quarter 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 orbit satellite communications.

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. 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.

Thank you, Jean-Marc. Good morning, everyone. Let's start with a detailed review of the third quarter, 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 microcontrollers. RF Optical Communications grew 46.2%. By end market, Communication Equipment, Computer & Peripherals 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%.

By end market on a sequential basis, Communication Equipment, Computer & Peripherals grew 14%, industrial 12%, personal electronics 12%, while automotive was flat. Turning now to profitability. Gross profit in the third quarter was $1.40 billion, increasing 32.2% on a year-over-year basis. Gross margin was 37.3%, increasing 410 basis point year-over-year, mainly due to lower unused capacity charges and better product mix. On a sequential basis, gross margin increased by 250 basis point. Q3 gross margin included about 60 basis point 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%-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 2026, we see a clear path to margin expansion. First, Q4 2026 temporary headwinds, including approximately 40 basis point 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 the second half of 2027. Second, we continue to expect more than 400 basis point 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.

Moving now to total net operating expenses. In the third quarter, these 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 the fourth quarter of 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 vacation. 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 phase-out 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.