STMicroelectronics N.V. (STM) Q4 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the STMicroelectronics Fourth Quarter and Full Year 2018 Earnings Results Conference Call and Live Webcast. I am Myra, the chorus call operator. I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Ms. Celine Berthier, Group Vice President, Investor Relations. Please go ahead, madam.

Thanks, Myra. And good morning, everyone. Thank you for joining our fourth quarter 2018 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, President of Finance, Infrastructure and Services, and Chief Financial Officer; Marco Cassis, President of Sales, Marketing, Communications and Strategy Development. This live webcast and presentation materials can be accessed on ST's 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's results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statements contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filing with the 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. I'd now like to turn the call over to Jean-Marc, ST President and CEO.

Thank you, Celine. Good morning, everybody, and thank you for joining ST on our year-end earnings call today. Before going through a detailed review, let me start with some opening remarks. First, on 2018. We had solid financial results in the fourth quarter for both revenues and profitability. For the full year, in line with our objective, we delivered significant revenue growth across our product groups, a strong expansion of our operating profitability, net income and free cash flow, while investing to drive growth opportunities and operating efficiency over the mid-term. Second, on 2019. Our first quarter outlook reflects the combined impact of increased unfavorable dynamics on top of first quarter seasonality in some of the end markets we serve, smartphone applications, computer hard-disk drives, and distribution in China and also in Europe On the other hand, we see Automotive and Power Discrete holding well, with significant growth year-over-year. As per, we plan to return to sequential growth in the second quarter, with an acceleration in the second half of the year. Our key objectives for this year are to continue outperforming our served market and to balance our end market and application focus, delivering sustainable profitability and returning value to shareholders. To support all of that and to execute on our strategic technology, R&D and manufacturing programs, we expect to invest in CAPEX. Part of this CAPEX is devoted to support three strategic initiatives that I will detail later. Let's now start with the detailed review. Our financial results in the fourth quarter for both revenues and profitability were solid. Net revenues increased 7.4% year-over-year on double-digit growth across our Automotive and Discrete Group, in imaging and in digital ICs. On a sequential basis, our revenue increased 5%, very close to our midpoint target of 5.7%. Sequential growth was driven by Imaging, Automotive and Power Discrete. Our gross profit totaled $1.06 billion, representing a year-over-year increase of 5.6%. Our gross margin was 40%, 20 basis points higher than the mid-point of our guidance. In comparison to the fourth quarter of 2017, our gross margin was 70 basis points lower. Our net operating expenses were $614 million. Operating income increased 7.9% year-over-year to $443 million. Our operating margin was 16.8%, 10 basis points higher than the year-ago quarter. Fourth quarter net income of $418 million and diluted earnings per share of $0.46 both increased about 35% year-over-year. Now, let's look at our fourth quarter results by product group on a year-over-year basis. ADG revenue increased 7.8% to $967 million, on double-digit revenue growth for both Automotive and Power Discrete ADG, I have to correct here, sorry, okay, it is 17.8%. Okay, as you guess, it is much better than 7.8%. Sorry for my mistake. Let's continue now. ADG operating margin expanded 220 basis points to 14.6% from 12.4%. For both the third and fourth quarters, ADG's operating margin were solidly inline or ahead of our low teens second half 2018 target. Moving to our Analog, MEMS and Sensors group, AMS revenues totaled $988 million, an increase of 9.5% with double-digit growth in Imaging, and single-digit growth in Analog and MEMS. AMS operating margin was 20.5%, stable with the year ago level of 20.8%. For AMS, we had initially anticipated second half 2018 operating margins to move into the mid-teens, and we exceeded that level in both the third and fourth quarters. Finishing our product discussion with the Microcontrollers and Digital ICs group, “MDG”, the inventory correction in Microcontrollers continued, as anticipated, during the fourth quarter, due to the mass market softening in China. In total, MDG revenues decreased 6.9% year-over-year to $689 million, with growth in Digital ICs offset by Microcontrollers and Memories. MDG operating margin was 17.7%, below the 19.7% in the year ago quarter. For MDG, we had initially anticipated second half 2018 operating margins to be about 20%, and we came in below that level in both the third and fourth quarters. This was mainly due to a lower than expected level of revenues, and less favorable mix between Microcontrollers and other products. Turning now to our full year results, as I said earlier, 2018 was an important year of achievement. 2018 net revenues were up by 15.8% compared to 2017, reaching $9.66 billion. So, in 2018, we achieved our objective to outpace the growth of the market we serve. Gross margin was 40% compared to 39.2% in the prior year. Operating margin expanded 250 basis points to reach 14.5% in 2018, on sales growth and operating efficiency leverage. Net Income and free cash flow were up 60% and 73%, respectively, compared to 2017, while CapEx was slightly lower at $1.26 billion from $1.3 billion in 2017. Also in 2018, revenues were balanced across product groups, customer types and regions of customer origin. ST has over 100,000 customers. By region of origin, 35% of our 2018 revenues were from the Americas, 34% from Asia Pacific and 31% from EMEA. Sales to OEMs represents 65% of total revenues and increased 14% in 2018, while Distribution representing 35% and growing 19% for the year. By product group, ST's total revenue growth of 15.8% was supported by all three product groups. ADG's revenues increased 16.2%, with double-digit growth for both Automotive and Power Discrete. Overall, looking at our products across ST in total addressing the automotive market, we finished the year with a growth of about 18%, above the 17% year-over-year growth expectation that we had shared with you previously. AMS revenues increased 19.9%, on sharply higher Imaging sales and double-digit growth in Analog. MDG revenues increased 11.1% in 2018 with double-digit growth of both Microcontrollers and Memories, and Digital ICs. In parallel, all three groups delivered operating income and operating margin growth. ADG operating income increased by 48% to $431 million and its operating margin increased to 12.1% from 9.5% in 2017. AMS operating income increased 34% to $480 [ph] million and its operating margin increased to 15.5% from 13.9% in 2017. And MDG operating income increased by 35% to $547 million and its operating margin increased to 18.6% from 15.3% in 2017. In 2018, our financial performance drove a 10% increase in net cash from operations for the year, reaching $1.85 billion. Our free cash flow increased 73% to $533 million, well covering our cash dividends of $216 million, as well as a $62.5 million share buyback, under the program launched during the fourth quarter. Finally, as anticipated, we exited 2018 with a higher net cash position compared to 2017 at $686 million compared to $489 million at December 31, 2017. Now, let's move to our guidance. Our first quarter outlook is for net revenues of about $2.1 billion at the mid-point. This would represent a year-over-year decrease of about 5.7% and a sequential decrease of about 20.7%. We anticipate a gross margin of about 39% at the mid-point. After Q1 2019, we plan to return to sequential revenue growth in the second quarter, with an acceleration in the second half of the year. This is in line with the objectives I stated at the beginning of my speech, continue outperforming our served market and balance our end market and application focus, delivering sustainable profitability and returning value to shareholders. In order to support all of that and to execute on our strategic technology, R&D and manufacturing programs, we expect to invest between $1.2 billion to $1.3 billion CapEx. Of course, this amount includes the maintenance of our infrastructure fab and plant and R&D required by our manufacturing operations and also capacity addition in some of our existing technologies. However, part of this CapEx is also devoted to support three strategic initiatives. First, a new 300 millimeter wafer fab in Agrate, our site near Milan. The construction work of the first stage to support R&D and first industrial deployment phase has already started, with the related building and facilities to be completed and ready to us some equipment for R&D in 2020. This new fab is designed to be expandable, of course according to demand, to start volume production starting from 2021. It will be focused on supporting our growth ambitions and leadership in BCD, IGBT and Power technologies. Second, the expansion of our installed capacity for Silicon Carbide and the start of production ramp-up for Gallium Nitride for RF devices. Here, our early investments in wideband gap compounds have already resulted in over $100 million of Silicon Carbide revenues in 2018, and we have over 30 active Silicon Carbide projects with many players around the globe, both in Automotive and Industrial applications. Also, earlier this month we announced a multi-year supply agreement with Cree, our partner. These investments support our goal to sustain an important share about 30%- of the Silicon Carbide market, which is estimated to be over $3 billion in 2025. Third, our investments in the next generation of imaging sensor technologies. These will enable us to continue our leadership in our focus technologies for personal electronics, and to address selected industrial and automotive applications in the future. These initiatives are part of our strategy to reinforce our leadership in our end markets, broad-based in Industrial and Automotive; and with a selective approach in Personal Electronics and in Communications Infrastructure. We will discuss in detail our end market and product strategy at the Mobile World Congress in Barcelona on February 26, and we will provide a more in-depth overview of our company when we meet at our annual Capital Markets Day in London on May 14. To conclude. In 2018 we met our objectives with 15.8% year-over-year revenue growth across our product groups, as well as a strong expansion of our profitability and cash flow from operations. In 2019, after Q1, we plan to return to sequential growth in the second quarter, with an acceleration in the second half of the year. Our objective for the year is to continue outperforming our served market, to balance our end market and application focus, delivering sustainable profitability and returning value to shareholders. We are now ready to answer your questions.

[Operator Instructions] The first question is from Janardan Menon from Liberum. Please go ahead.

Hi. Good morning. Thanks for taking my question. I have one question and a short follow-up. The first question, your markets is just to find out where you're getting your confidence on the sequential growth into Q2 and the acceleration into the second half. My point is, you have had headwinds in the China distribution channel. There are signs of - you know, there's been a slowdown in the Chinese car market, et cetera. Do you expect some of those issues to recede into Q2, therefore, giving you the upside? Or is it coming from signs from your major smartphone customers? And into the second half, where - can you maybe a little bit more specific on what are the drivers of that acceleration? My second question is on your inventory days, which came down quite a bit in the fourth quarter to 88 days from 95 days. Given your sort of a guidance into Q1, where do you see those inventory days? Will they be going down further from this 85 in Q1 and whether that bottom out? And do you think your distribution channel is also having the sort of a profile of inventory days where it is coming down? And it came down in Q4 and will come down or will - what will be the trend in Q1? Thank you. Thank you very much.

So thank you. I will answer the first - your first question and Lorenzo will take the second one. Clearly, the sequence for the year 2019, overall, we do believe that we will see a similar pattern of what we see in 2018. I guess, okay, everybody remember, okay, the pattern of 2018 for ST. Well, clearly with an acceleration in the second part. But why we plan this pattern of sequential growth again in Q2 and acceleration in the second half? Well, there is some which are really specific to ST and some are, let's say, more related to the market, and of course, we will closely monitor on the permanent time what is happening on the market. For today, first, we have no visibility that our market would decline on the full year, and instead the indication we have afford some growth overall. And certainly, the inventory correction we have seen started in Q3, continuing in Q4 and in Q1 will slightly continue in Q2, but should start to stop in Q2. On top, we have a growth driver allowing us to outperform. On automotive first, I recall to you that our silicon carbide is performing very well. We have new MCUs in production at the 40-nanometer, and we are performing very well on ADAS components In smartphone and personal electronics, we will see start of new programs in the second half of the year. And in industrial end market, we will introduce this year more than 10 new products to address this market with our general-purpose MCUs. That's the reason why linked to what is specific our company, we have a good confidence level to have a strong acceleration in H2 this year versus H1, and as we guide, a low Q1 guidance. So this - that's the reason why we are confident to see this pattern very similar of 2018, with an acceleration on the second half. So this is our plan. But definitively, it is our duty as management to closely monitor on the permanent basis all the business metrics related to the market, our customers and the end market we address. Now I let Lorenzo to elaborate about inventories, consistently with the plan I described.

Good morning, everybody. About inventory, as you rightly said, in the Q4 the inventory went down significantly. Our revenue grew, and the number of days of inventory went down. What did we lap it in Q1? In Q1, seasonally we have a shorter quarter. The production is that - today, we have our fab fully loaded. What we see is similarly to what did happen last year, to have an increase in term of inventory. Today, the inventory is below one quarter. At the end of Q1, it will be higher over in terms of days than one quarter. This is quite seasonally, and this is also plan in order to fulfill our growth ambition in the second quarter and for the second half of the year.

And any comment on the distribution channel inventory?

As Jean-Marc already highlighted, the distribution channel, we're expecting the inventory correction to be faster than what has been happening, and this is why we have an impact in Q1. The meaning is we had the POS that we're expecting to be flattish in Q4. Reality, they decline. So the inventory correction will take a little bit longer than expected, but we do not see these as an impact on our growth in Q2 and on the rest of the year.

Got it. Thank you very much.

The next question is from Sandeep Deshpande from JPMorgan. Please go ahead.

Hi. Thanks for letting me on. My first question is regarding your Imaging business and your CapEx. I mean, are you adding CapEx in this environment in the smartphones or in the Imaging business? And are there wins that you have going forward which is why you are adding CapEx there? And secondly, my question is on your gross margin. I mean despite your guidance of a 21% revenue decline in Q1, your gross margin has remained 39%. So I mean clearly, I mean some of these products are built in-house. How has the gross margins remained at that level given the extent that the revenue is impacted in Q1? Thank you.

So I will answer, Sandeep, to about CapEx and Imaging, and I will let Lorenzo to answer about the gross margin. As I said in my opening remark and speech, clearly, I confirm that the end market strategy and product portfolio is to be a broad range leader on automotive and industrial, and where we consider we have a portfolio which can put us in a position to be a leader or very close to the leader. And we want to be very selective on personal electronics, in sensor, in FinFET [ph] solution, power management, and RF and millimeter wafer devices. As you know, in Sensors overall, to address the personal electronics and smartphone business, and especially answering to your question on Imaging, we have important R&D effort to continuously improve the performance of our device, especially addressing the Time-of-Flight application and the 3D sensing. And we intend and we will invest in CapEx in order to support, first, our R&D effort to make our product more competitive, better for our customers with better differentiation. And of course, when you improve the efficiency of your device, time to time, you have to put additional, let's say, equipment in order to bring additional process step or to improve your process in order to maintain your capacity to address the need of your customer. So this is the reason why we are investing in imaging to personal electronics, not to grow at infinite capacity, but more to adapt our process, enabling much better device, competitive device and better than the competition.

About gross margin of Q1. About the gross margin of Q1, as you have seen, our guidance for Q1 is to have a gross margin in the range of 39%, 39% at midpoint. There are different dynamics on the gross margin. First of all, you have to remind that in Q4 we worked really at full speed with our manufacturing with all the fab fully saturated. These has brought a very good efficiency in term of manufacturing during Q4 that is reflecting in the gross margin of Q1. As you know, there is a delay due to the inventory of about almost one quarter between the performance of manufacturing and the impact of Q1. So we are enjoying positive impact of manufacturing. There will be, on the other side, in Q1, the impact of the renegotiation of pricing with our customers, and this is embedded in our guidance. And we do expect the Q1 not to have any impact of unloading, thanks to the fact that, some extent we have leverages on some flexibility in respect what we outsource outside. And also, on the fact that we will keep our fab loaded, with some increase in inventory to support the revenue growth that we expect in the second quarter and in the second part of the year.

Thank you.

Okay. Next question…

Next question please?

The next question is from Aleksander Peterc from Société Générale. Please go ahead.

Yes. Good morning and thank you for taking my question. The first one will be on Automotive. Can you confirm the growth patterns there are broadly unchanged? And could you share what kind of growth Automotive was at - for ST as a whole in the fourth quarter and whether we will stay in double-digit territory going into the beginning of 2019? And then, secondly, could you give us any targets for silicon carbide for 2019 now that you have reached the $100 million milestone in 2018? Thanks.

Do you want…

I take the first part of your question about the growth in Automotive. As Jean-Marc has said in his remark, initial remark, for the full year, we grew in Automotive slightly above 18%. This is the full automotive of the company, means that it is encompassing products in the different groups and not only in ADG. When I look at the growth in Automotive in Q4, it's closer to 20%. We grow around 20% sequentially in Automotive - sorry, we grow, let's say, sorry, not 20% sequentially, year-over-year, let's say, in Q4 in Automotive in respect to Q4 of the previous year. And just to give you an idea how much it was the sequential growth in respect to Q3, this was more in the range of 8%.

So about silicon carbide, what I can say that we prepare our self and we plan to support and fulfill readily our customers demand, whatever, in term of mass production for the car assembly and production, but also delivering all the engineering sample we need to deliver to all the project we won in 2018. What I would like to simply confirm you that our expected growth in 2019 is completely consistent with expected market growth of the silicon carbide application, which I repeat that, for the time being, people - they plan to have a US$3 billion in 2025, and if my memory is still very up, US$600 million in 2020. So our revenue grow will follow totally this pattern.

Okay. Thanks.

The next question is from Stéphane Houri from ODDO. Please go ahead. Stéphane Houri: Yes, hello. You recently talked about the ability of the group to protect the margins above the 10% line, talking about the operating margin. But you also said that you needed to check some of the parameters that should lead to that. So if I understand well, you're saying that you will be growing at the end of the year year-on-year? You have shown that you are able to protect your gross margin at the level of, let's say, 39%, and if we have growth maybe, it will get higher. So what does it mean in term of OpEx? Are you just cutting the OpEx to make sure that the margins will hold? Or are you doing nothing at the moment and you keep on moving that base?

Lorenzo will comment on the OpEx model.

Yes, sure. In term of OpEx, we discussed about in term of OpEx in our model. Now we said that the company substantially is equipped to sustain the growth. And we do not expect to have a significant growth moving from 2018 to 2019, apart, of course, the normal increase due to the salary, to the inflation rate. Actually, we do expect in Q1 to have expenses in the range of between 600 and 610. This does not come from, let's say, any cut or any action in. It is - you have to consider that Q1, there is some seasonality, that is a shorter quarter, so it's also in term of expenses. And also, you have to consider that in this number we embed also some, for example, thermal plants. When I look overall the expenses, the average expenses by quarter, during 2019, we do expect to have a net expenses include in other income and expenses in the range of $620 million and $630 million per quarter. This comes with, of course, some attention to our expenses, but without any plan to cut activity or to cut workforce. Stéphane Houri: Okay. And did I understand correctly that you said that you were expecting some growth for the year, but for the moment you were not seeing any decline? It means that in term of acceleration in maybe - probably in Q3, it means a double-digit acceleration sequentially? Where do you see - in which division do you see much of this acceleration, sorry?

This is Jean-Marc speaking. Exactly, I repeat what I say after the first question. There is element intrinsic to our company and element, okay, related to the market. Related to our company, clearly, again, automotive will accelerate in the second half, thanks to the acceleration of our growth on silicon carbide, so this is what I just said two minutes ago, Automotive and Discrete. Then acceleration related to introduction of MCUs on the 40-nanometer and acceleration on ADAS components. So this is the first dimension. Now then, definitively, we have also programs starting in the second half of the year related to smartphone and personal electronic, and this will support mainly IMS product group. Now clearly, again, I come back to Marco Cassis comments about distribution channel. As I told you and anticipated during, let's say, various communication, our initial plan was to see inventory correction on microcontroller mainly to China and a bit in Europe to end in Q1. Certainly, we'll continue a bit in Q2, because the point of sales which was flattening in Q3 and supposed to be still flat in Q4 showed some sign of a slightly decrease in Q4. So in this condition, we do believe that the inventory correction will be prolonged one quarter more. That's the reason why in the second part of the year and let's say starting in Q2, we will see an acceleration overall of microcontroller, here more related to the overall market. However, on microcontroller, I would like to insist, that we will introduce 10 new products this year in order to embed in our portfolio more security, more connectivity, and to embrace mainly the industrial market with high-performance hardware anchor and this, of course will contribute to the acceleration of our growth across the year. And you know, as usual, when we face such situation of market turning down, the growth is coming from new product. Stéphane Houri: Okay. Thank you very much.

The next question?

The next question is from David Mulholland from UBS. Please go ahead.

Hi. Thanks. Just to follow-up on a couple of comments you made on the gross margin for Q1 and kind of, hopefully, you could help us think about through the rest of the year. And can you maybe comment on what you're planning to do utilization rates through Q1? And obviously, with - to that end of having more of an impact on the gross margins as we head into Q2. Obviously, it depends on what snapback you see. But are utilization rates starting to come down a bit through Q1? It would be helpful if you could comment on that. And then just secondly as a follow-up, could you comment a little bit on what you're seeing in terms of the book-to-bill in the quarter, particularly hard bookings and trended through the period? And if you can comment at all on how that has started the year so far in January as well. That will be really helpful.

Okay. Lorenzo speaking. About - coming back to your point about the gross margin, about the utilization rate. As I said, in the Q4, the utilization rate, that was substantially with the full - all the fab pool. This is translating in utilization rate that is 90%. You know that for the fab cannot be higher than this level. This level is already stretched. When we move to Q1, the utilization rate will be slightly lower, but I would say that is in the range of 89, 88, 89. So it means that there is still a very high level of utilization rate of our fab. And this, of course, is one of the reason why we don't see any significant loading during the quarter. What is the expectation for the gross margin moving ahead? As you know, usually, we do not guide on the next quarter. What we said the last year is that, at this stage, considering that in our COGS, we have some headwinds that is in particularly the cost of silicon, that is still quite high. We have headwinds in the cost of material and in the power. That has increased significantly. On the other side, we do expect to have some positive from - still some improvement in our manufacturing. We do expect to have in the second quarter, based on the plan that we have today in term of revenues, our gross margin is similar to the one of Q1, and then move - thanks to increased revenue, back in the range of around 40%, that it is, let's say, what we were saying a few quarters ago. This is about the dynamic of the gross margin in our plan. What was the other question, sorry?

Just wondered if you could comment on what happened to bookings in Q4. And the book-to-bill level, I don't know if you can help at all, how that's been progressing so far this year?

Okay. Booking in Q4. Booking in Q4, as you can figure out from our guidance of revenue, was not particularly strong. The booking in Q4 declined in respect to the one of Q3. Our book-to-bill was below parity, was below parity than if in some areas, if you take, for instance, Automotive and Power and Discrete, the book-to-bill was close to parity, so we still - see still the market, the demand is still distorted. But overall, for the company, the book-to-bill was below parity during the quarter. And our expectation is that, in the course of Q1 we will see to revert with some booking to support our plan - growth plan for the next quarter.

That's great. Thank you.

The next question is from Achal Sultania from Credit Suisse. Please go ahead.

Hi, good morning. Just one clarification, Jean-Marc. I think you mentioned that when we think about second half of 2019, we should see a similar trend to what happened last year in the second half. Obviously, last year, you had a benefit with one of your large customers where you had a key design win ramping up materially. So I'm just trying to understand, like this year, when you talk about similar trend, are we talking about like, what gives you the confidence of a similar ramp? Is it content gain, or is it new a customer wins? Or is it new design wins with existing customers? Just trying to understand what exactly is underpinning that confidence in second half? Thank you

Thank you for your question. But the answer are inside your question. It is everything. It is, of course, some content increase, thanks to new programs start. It is order customer growth. Thanks to our, let's say, focus again on the personal electronics addressing the full market with console, secure solution, power management, car [ph] charger, wireless charger and RF and millimeter wave. So all in all, okay, so it is due to the three reason you mentioned in your question.

Okay, thank you. Thank you.

Next please?

The next question is from Johannes Schaller from Deutsche Bank. Please go ahead.

Yes. Good morning. Thanks for taking my question. I was wondering if we could talk a little bit about your 300-millimeter plans in Agrate. That now seems to go a bit beyond obviously the initial plans for just the pilot line here. Can you give us any kind of idea on how big you think that capacity will be here? And also, have you started qualifying any products yet for the 300-millimeter process and is this has been quite time-consuming for some of your competitors. Just wondering how you think about qualification and how big the production ramp will be in 2021? And then just as a quick follow-up. You mentioned also the pricing negotiations in Q1 and they are already in your guidance. How do you think about those? Were they in line with your expectations? Maybe a bit better, maybe a bit worse? If you can comment on pricing, that will be helpful? Thank you.

So about the planning and the timing of this 300-millimeter wafer fab. Again, the plan [indiscernible] is the following. We will start to receive R&D equipment in 2020 according to the, let's say, stronger lead time to make the groundbreaking, which is started already, the first facility set up and wafer fab, so let's say, standard planning to set up a search infrastructure. We will receive equipment in 2020. So to support R&D activities and first industrial deployment, I think it will be in the course of 2020 to, let's say, 2021. And then according the demand, we will anticipate that in 2021 if demand is there, okay, we will start to grow mass production in 2021. I confirm that we do not need it, let's say, additional capacity absolutely in 2021 to support our revenue linked to our 3-years plan. This is what I said, and I confirm that we don't need additional capacity related to this 300-millimeter fab before 2021. However, we prepare our self to grow beyond 2021 and to grow massively on BCD, advanced BCD technology, IGBT, because we are, let's say, winning longer term in IGBT, thanks to our silicon carbide penetration, silicon carbide power MOSFET and high-voltage power MOSFET. So this will be the mission of this fab for the next 10 year to support our mission to be a leader in power device. In order to anticipate the R&D activity of this, let's say, Agrate close to Milano wafer fab, our company has decided to prepare itself on some technology modules. We are already running in our fab of Crolles. So this is the main advantage of our company, which is perfectly controlling the 300-millimeter process of technology at 1,900-meter and beyond. And in order to win time-to-market, to accelerate our capability to make a very efficient learning curve in Agrate, we are preparing the job in fab of Crolles.

So basically, you have already qualified products for 300-millimeter power in Crolles already…

No, no. I repeat what I exactly said. We are preparing some technology module. And once this technology module will be qualified, okay, not to deliver production to customer, when we will start the R&D activities in Agrate, we will have all this technology module ready. Then we assemble this technology module to qualify a full technology, but it will be shorter than usual, because all the technology modules enabling the technology will be already done. So this is, in a certain extent, our capability to work in component [ph] engineering, thanks to the fact that we have already a very efficient 300-millimeter wafer fab.

That's very clear. Thanks, Jean-Marc.

Thank you.

There was asked a question about the pricing for Q1…

Yes, the pricing of Q1. So I can comment on that. In this moment, we are not seeing any price abnormality situation for Q1. So Q1 price negotiation power are according to a standard pattern.

Great. Thank you, Lorenzo.

It was Marco really.

Oh, sorry, Marco.

Same voice.

Next question please?

The next question is from Andrew Gardiner from Barclays. Please go ahead.

Good morning, gentlemen. Thanks for taking the question. As another one on the capital spending plan, in particular, the Imaging part of the budget you've outlined for 2019. When we last sort of spoke about a big increase in the budget for such a project back about 2 years ago, there was specific customer commitments for the product being designed and manufactured in that Imaging as part of that Imaging program. Can you confirm that for the current expansion and investment that, again, you have clear and firm customer commitment? Or is this more sort of ST developing technology and then looking to sell it into the customers beyond there?

No, I will not comment on customer commitment. And as okay, we are used to, because, okay, you understand we have to protect our customer secret. But however, I just want to simply confirm the strategy of ST. The strategy of ST is to be a leader on, let's say, global shorter technology. And I repeat it many time, okay, we have a technology roadmap. We have, let's say, improved efficiency master plan in this technology to offer the best global shutter of technology to our customer. And we do believe that this technology will enable ST to continue to sustain, okay, this market. But in personal electronics, but as well in other application, like industrial and automotive in the future. Then we have, let's say, complementary to this - let's say, emerging global shutter technologies and product, we want also to have a strong leadership on the Time-of-Flight based devices, ambient licensing, Time-of-Flight sensor, Time-of-Flight sensors for proximity sensing ranging, but also enabling virtual reality or augmented reality application. This require technology improvement. All in all, in order to support this format of ST and this, let's say, end market and product strategy, we need to put some add on in term of process step or modify some process step in order to enabling our product roadmap and technology roadmap. So again, in term of overall capacities volume, I think we have the right size. And we will have to, let's say, improve or increase this capacity timely and in a limited, let's say, increased number. But we have some effort in order to improve the content of our technology and our processes in order to enable better product, most competitive product and the best product to address all this applications.

Thanks so much. That's helpful. And just a quick follow-up on silicon carbide, if I could. The growth - the revenue growth you're calling for in 2019, is that still primarily driven by the sort of initial ramp with your lead partner there? Or you're starting to see the potential for other OEMs to come on - start to come on stream later in 2019?

Certainly, in 2019, we will have a better capability to support both. It means, okay, to support, of course, our initial partner and to continue to make the team successful, which is, of course, our first priority. And second, certainly, we will better support the other market, on power MOSFET, but also on diode, because okay, I would also like to recall that we have devised not only MOSFET but also diode. And again, we will start to deliver engineering sample, prototyping and first phase production to address for the customer.

Thanks very much.

Next question please?

The next question is from Anthony Stoss from Craig Hallum. Please go ahead.

Morning, gentlemen. I was hoping that maybe on the down sequential from March, if you can give us a breakout of ADG, AMS, MDG, what you think each will be down sequentially? Or more so, is it predominately just your Imaging customer and the rest are near seasonal? And then second as a follow-up, also on silicon carbide. I'm curious if you think you're winning the bulk of the industry wins for 2019 on the inverter side, and maybe any color you can give on competition? Thank you.

May I take maybe the revenue dynamic on a sequential basis. For sure, one of the detractor in respect to this drop in revenues is Imaging. There is reduction in term of revenues, a material reduction, and this is linked definitely to seasonality, for sure, but also weak demand from our customers. On the other side, we see in the ADG group substantially, the revenue holding. Of course, you have to remember that this quarter is shorter in term of calendar day, so - but this, let's say the revenue will decline less than the number of days of the quarter, so we see substantially flat to slightly increasing on the same number of day, the Automotive and Discrete Group, while we still see some weaker demand and still declining revenues on the microcontroller entering in Q1.

So about silicon carbide. On top of - I have already answered, let's add some additional color. Again, I repeat that when we met at our Capital Market Day in 2018 May, we mentioned 20 major programs won. But now we have 30, more than 30. And I have to say that in the course of Q4, we won 4 major award, okay, with the really rather important carmaker or Tier 1 associated to carmaker, which should make us, okay, really, really pleased about our success in power MOSFET. Now about competition, clearly, we acknowledge that the competition is working out. We have a lot of respect for our competitor. They prepare themselves to address this huge market. We - I am, and we are totally convinced that silicon carbide, power MOSFET and diode will grab important market share to traditional high-voltage power MOSFET or ICBT. And you know that the Q1 consensus from the industry and analysts are seeing a market, okay, close to above US$3 billion in 2025, and then beyond 2025, okay, can go well above US$10 billion. So clearly, the industry will need a multi-source, so the competition is preparing itself to address this market. But again, I confirm that our mission, our plan, our determination is to keep minimum 30% market share address in this market. Today, we have the unique, let's say, semiconductor bundle in mass production addressing automotive. So we are accumulating mass production huge volume with technologies addressing automotive mission profile, which is, let's say, an OTG, and of course it is providing to ST a unique competitive advantage in front of the other carmaker of Tier 1 which want to adapt this technology as early as possible because, okay, we will be able to offer same automotive profile quality. So again, what is important, ST is ambition to sustain minimum 30% market share addressing this market. We are preparing ourselves. Competition is preparing itself. We respect that a lot because we know they are good, but today, we are the leader.

Thank you for the color. I appreciate it.

Thank you. Next question please?

The next question is from Amit Harchandani from Citigroup. Please go ahead.

Good morning, all. Amit Harchandani from Citi. And thanks for taking my question. Maybe a clarification and a question from my side. Firstly, in terms of clarification, did I understand correctly that, at present, you see your serviceable addressable market still up year-on-year in 2019 and you outperforming it? Or did you simply imply that your own revenues would be up year-on-year in 2019? So that would be my clarification. And secondly, as a question. You've talked about some near term demand softness, a part of it, of course being also impacted by the ongoing trade wars between U.S. and China. I was just wondering, as you think about the trade wars dynamic, do you see any impact for yourself beyond the near term demand? For example, in terms of your own supply chain or in terms of your own operations in China? Any color on how you think about this playing out medium term as best as you can today would be helpful? Thank you.

Okay, thank you. I take your question about the market. About the market, our plan is to grow and is to grow outperforming the market. That means that our view today is that the market will be not negative during 2019. For sure, last year, the market grew very strongly. Now we await for the final number, but our market will be - the market that we sell between 10%, 11%, probably more 10% than 11%, but fine, what it will be will be. Next year, we'll be definitely be lower. But we still, let's say, a market that is growing. In respect to China, in respect to China, we comment many times. For sure, when we look at the problem of the tariffs, this kind of event, directly impacting in the accounts of the company is not huge. There are some impact there. I already disclosed that in term of gross margin the impact of the tariffs is in the range of 20 basis point. So on our gross margin, so is something that it is not huge, but it is there. And definitely, what is worse for us in this situation is that it's creating in term of macroeconomic some uncertainty, some uncertainty that were reflecting in a difficult situation that we have seen in the market, especially in China for our industrial product microcontroller in the mass market. These are the main consequences that we - that impact ST.

Thank you.

Next please?

The next question is from Adithya Metuku from Bank of America. Please go ahead.

Yeah. Good morning, guys. Most of my questions have been answered, but just a quick question, looking at the cost for silicon. You mentioned that is a factor in your gross margin as you go through the year. I just wanted to understand, there has been some talk recently around TSMC renegotiating contracts with the silicon wafer guys. Do you see any scope here that could potentially help your gross margins versus what you already planned? Any color here would be helpful. Thank you.

About, let's say, the pricing in foundry, I would say that when I was discussing about the silicon was mainly for our internal server, means the cost of silicon, they are always are increasing.

And then, of course, what I meant is the overall wafer prices, I think TSMC was talking about renegotiating raw wafer prices from their supplier...

For sure. For sure, yes. I got your point now. No for sure, yes, today, our supplying in wafer is based on a portion on long-term agreement. And on this long-term agreement, that we have a price negotiated and a portion that is based on negotiation. On the one that is based on negotiation, for sure, our effort is to try to get the best price for our company. On the long-term agreement, for sure, we needed to respect some agreement that we have done with our supplier. And then we will see, entering in the year, let's say, if there are maybe conditions to have some renegotiations. But for sure, these are agreement, and we needed to also have some kind of respect of our partner.

Understood. Thank you.

Next question please?

The next question is from Gianmarco Bonacina from EQUITA. Please go ahead.

Yes, good morning. I have a real question on the grants. Because we saw in December a new program in the European Union about €2 billion, mainly for France, Italy or so Germany, but I guess mainly was for France. And I guess if you can tell us, I mean what kind of impact that this new program could have for you in terms of grants for '19, '20 or just if you can comment a little bit? Thank you.

Yes, you're right. We are quite happy about these new initiatives that has been taken. And on which definitely, the administration of France, Italy, where we are more exposed on our activity, really work hard in order to pass in getting this support to our R&D activity, not only R&D activity, but also first in this industrialization. There will be some positive impact. I was mentioning talking about the expenses for Q1, some benefit, let's say, that is partially related to that. And going forward, we do expect that to have benefiting the grants coming from these initiatives that are supporting our R&D programs.

Okay. But is this also, for example, related to the new Agrate investments you are making, or it is more broader?

No, it is not specific. It's more broader. There are different activity inside it

Okay. Thank you.

Thank you very much. I think we will take the last question now.

Today's last question is from Jérôme Ramel from Exane BNP Paribas. Please go ahead. Jérôme Ramel: Yeah. Good morning. A question for Jean-Marc. Two question, when do you expect on the image to start filling your Time-of-Flight array, not the proximity sensor? And second question. If I look at all the investments you are making in silicon carbide, gallium nitride and this 300-millimeter fab for IGBT, what are you envision in power? And should I read that, is it a kind of strategic shift from STMicro to become a power company? Because if I look at the power division from STMicro, you have always been very striking, but you haven't participate in the M&A in that field and your market share are also a bit lower than your biggest competitors. So do you have any target in term of market share? What are the ambition of STMicro on their own in power? Thank you.

Well, thank you, Jérôme for your question. So about Imaging, as I already said, as the contribution of our media specification strategy in imaging, in - let's say, device like remote licensing and so on, we start more in the second half 2019 and more massively in 2020, and this year, okay, Imaging revenue will be more specific, okay, to an important customer. About power, no, I think, okay, what is more important is, again, I repeat that our strategy, end market, end product is to be both world leader, both in automotive and industrial. And in automotive, thanks to the electrification of the vehicle, and industrial, thanks to the ambition of industrial to reduce their, let's say, energy footprint to optimize - to reduce their cost in term of energy consumption. Power conversion, power MOSFET IGBT are really key enabler in order to address this market, and it is part of our product portfolio. Of course, in the past, mainly ST was positioned on the power MOSFET high-voltage, power-rectifier and Schottky, and now thanks, okay, to the important effort and the anticipation with the vision of our business and technology on silicon carbide, we are winning momentum and ST is positioning itself as a leader on power. We do not need clearly any M&A in this field. We have all the capability, both in the wafer fab, but also, in assembly and in test. And here, I have spoken about modules, clearly. And we will follow our product roadmap, our technology roadmap. We will invest consistently with our strategy based on the fact that we want to be a broad-range supplier and leader addressing automotive and industrial. Jérôme Ramel: Okay. Thank you very much.

I believe this will be the end of our call now. We want to thank you all of you for your interest. And now do you have any…

Thank you. Thank you very much, and looking forward to see you in Barcelona soon. And of course, okay, we are preparing activity also our Capital Market day in May. So thank you for your question. Thank you for your attention, and see you soon in Barcelona.

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