STMicroelectronics N.V. (STM) Q1 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the STMicroelectronics First Quarter 2021 Earnings Release Conference Call and live webcast. I am Moira, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference has been 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 Celine Berthier, Group Vice President, Investor Relations. Please go ahead, madam.

Thank you, Moira. Good morning and thank you everyone for joining our first quarter 2021 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 filings for 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. I'd now like to turn the call over to Jean-Marc, ST’s President and CEO.

So, thank you Celine. Good morning and thank you for joining ST for our Q1 2021 earnings conference call. Let me begin with some opening comments, starting with Q1. So, year-over year, net revenues grew 35.2% to $3.02 billion. All product groups contributed to this growth, on continued acceleration of demand globally. Our operating margin increased to 14.6% and our net income rose 89.6% to $364 million. On a sequential basis, net revenues decreased 6.8%, 270 basis points above the mid-point of our outlook. Our gross margin was 39%, 50 basis points above the mid-point of our outlook. Our free cash flow during the first quarter was $261 million, after net capital expenditure payments of $405 million. We exited the first quarter with a net cash position at $1.19 billion. On Q2 2021, at the mid-point of our outlook, we expect net revenues in the second quarter to be about $2.9 billion, a year-over-year increase of about 39%. Gross margin is expected to be about 39.5%. For the full year 2021, we plan for solid revenue growth, outperforming the markets we serve. We will drive the Company based on a plan for full year 2021 revenues of about $12.1 billion, plus or minus $150 million, a year-over-year increase of 18.4% at the mid-point. This growth is expected to be driven by strong dynamics in all end markets we address and our engaged customer programs. We now plan to invest about $2.0 billion in CapEx to support the strong market demand and our strategic initiatives. This level of investment is at the high end of the range we communicated in January. Now, let’s move to a detailed review of the first quarter. Net revenues increased 35.2% year-over-year, with higher sales in all product groups except, as expected, the Radio Frequency Communications sub-group. Year-over-year, sales to OEMs increased 21.4% and to Distribution rose 76.2%. On a sequential basis, net revenues decreased 6.8%, 270 basis points better than the mid-point of our outlook. Automotive and Power Discrete products and Microcontrollers increased sequentially, partially offset by a decrease in Personal Electronics products. Gross profit was $1.18 billion, growing 38.9% on a year-over-year basis. The gross margin increased 110 basis points year-over-year to 39%, mainly due to lower unloading charges, manufacturing efficiencies and improved product mix, partially offset by negative currency effects, net of hedging. Our first quarter gross margin was 50 basis points above the mid-point of our guidance, mainly thanks to better product mix. First quarter operating margin was 14.6%, a year-over-year increase of 420 basis points, with improvements in ADG and MDG and a decrease for AMS. Net operating expenses were $735 million. Net income increased 89.6% to $364 million on a year-over-year basis and our diluted earnings per share were $0.39. Looking at the product group year-over-year performance, all three product groups had double-digit growth. ADG revenues increased 38.4%, on growth in both Automotive and in Power Discrete. AMS revenues increased 27.1%, on higher Analog, MEMS and Imaging product sales. MDG revenues increased 42.2%, on growth in Microcontrollers, partially offset by the expected decline in Radio Frequency Communications. By product group on a year-over-year basis, ADG operating margin increased to 8.2% from 3.0%; AMS operating margin decreased to 17.2% from 20.8%; and MDG operating margin increased to 19.4% from 11.5%. Net cash from operating activities increased 70.9% to $682 million in Q1, compared to $399 million in the year-ago quarter. Free cash flow increased to $261 million compared to $113 million in the year-ago quarter with CapEx of $405 million versus $260 million in the year-ago quarter. During the first quarter, we paid $38 million of cash dividends to shareholders and we executed a $156 million share buy-back as part of our existing repurchase program. Our net financial position was $1.19 billion at April 3, 2021, compared to $1.10 billion at December 31, 2020. It reflected total liquidity of $4.16 billion and total financial debt of $2.97 billion. Let’s now discuss the market and business dynamics. During the first quarter, global demand continued to accelerate, following the already faster and stronger than expected restart of demand which began in Q3 2020. In Automotive, the rebound from Q4 2020 was much faster than anticipated, and it has caused supply chain constraints across the entire semiconductor industry. This rebound was, and remains, broad-based, across all customers, including distribution, and geographies, and is driven by three main factors; first, the number of cars produced; second, the replenishment of inventories across the automotive supply chain; and third, semiconductor content increase related to digitalization and electrification, as well as higher content in traditional cars driven by accessories. During Q1, automotive demand remained strong, with our bookings well above our current and planned manufacturing capacity. Booking visibility is now extending to about 18 months. Our customer activity related to electrification and digitalization, the long-term trends driving automotive semiconductor content increase and continued to accelerate in Q1. In car electrification, we added to our list of design wins for Silicon Carbide devices in applications such as traction inverters and onboard chargers. We also won a number of designs with complementary technologies such as our high voltage MOSFETs for an on-board charger and an electrical vehicles auxiliary power supply, Vertical Intelligent Power products for a battery management system, and with our 32-bit automotive microcontrollers for a traction inverter and for a battery management system. We are also winning sockets in these electric vehicle designs with our legacy automotive products for domains such as body and convenience and infotainment. In car digitalization, we are focused on technologies and solutions for driver assistance and autonomous driving, V2X communications, and embedded processing solutions supporting new domain controller or zone server car architectures. For example, we had additional awards for our 28 nanometer FD-SOI Phase Change Memory microcontrollers called Stellar. We won a number of designs, in addition to what I mentioned before for electric vehicles, with our 32-bit automotive MCU embedded processing solutions. All these products are designed on our own proprietary technologies and manufactured in our internal 300 millimeter wafer fab. Overall in ADAS, we continue to see an acceleration trend on Level 2 and Level 2+. To conclude this automotive overview, we also expanded our sensor business with automotive-grade motion sensors for global positioning modules and navigation units and we ramped a global shutter image sensor for a well-known electric vehicle car maker, the latest example of our diversification strategy in optical sensing solutions. Moving now to Industrial. During the quarter, we saw very strong demand, both in high-end and consumer industrial. Factory automation was one of the main demand drivers, but we also saw a similar trend for power tools, home appliances, motion control, and power-related applications, including renewable energy. Demand was strong both with Distribution as well as OEMs, in line with our approach to be broad in the highly fragmented industrial market. Inventories of our products at distributors are currently lean across all product families, with high inventory turns. Point-of-sales remained strong in the first quarter across all products and geographies. We address the industrial end market with our general purpose and secure MCUs, analog and sensors, power and energy management solutions. Our first strategic objective in Industrial is leadership in embedded processing solutions. I am glad to say that preliminary rankings for 2020 indicate that ST was number one for combined General purpose and Secure MCU revenues. To continue to lead, we are strengthening our embedded processing offer around the STM32 family in terms of wireless connectivity, security, and artificial intelligence. During the quarter, we announced a number of products and solutions supporting this strategy. We launched a new extreme low-power STM32 series, with advanced performance and cybersecurity features. The new devices have already won designs at major Industrial OEMs and in metering applications. We also announced new STM32 Bluetooth Low Energy devices and the first STM32 Wireless Microcontroller Module. And we introduced a new Artificial Intelligence firmware and camera-module bundle to help developers building computer-vision applications. Our second objective in industrial is expansion in power and energy management. Here we captured many wins with our power discrete products; for example, with Silicon Carbide and high voltage silicon MOSFETs, as well as IGBT in applications such as industrial power-supply, electrical vehicle chargers, battery-test systems, air-conditioners, home appliances and lighting. Overall, our Silicon Carbide engagements increased again during the quarter, now with 68 customers, equally split between Industrial and Automotive, in 77 ongoing programs. A third strategic objective is to accelerate our growth in analog and sensors for industrial. In the first quarter, we had many new designs with our analog products for industrial applications. We received awards in metering, motion control, factory automation and home appliances. We also continued to expand our business in sensors in industrial applications with design wins for motion sensors and time of flight solutions in applications like cleaning robots. Moving now to the Personal Electronics market. Today more than ever, smartphones are an essential source of social connection and streaming services for entertainment, fitness, gaming, and music. 5G adoption remains the main driver for smartphones growth moving forward. There is also strong demand, as we continued to see during Q1, for other connected devices including wearables, tablets, hearables, True Wireless Stereo headsets and game consoles. In Personal Electronics, we are progressing on our two strategic objectives; first, to lead in selected high-volume smartphone applications with differentiated products or custom solutions. Here we continued to win sockets in flagship devices with motion sensors, multi-zone time-of-flight ranging sensors, wireless charging products, touch display controllers, and secure solutions such as embedded SIM and secure elements with Near Field Communication. Our second objective is to leverage our broad portfolio to address high-volume applications such as True Wireless Stereo headsets, smart watches, bracelets and smart shoes. Here we had wins for standard and specialized motion and pressure sensors, analog and power products as well as for microcontrollers. We also progressed with our solutions for Augmented Reality based on Laser Scanning. The LaSAR Alliance we announced last year is now open to accept new members. We signed an agreement with a technology specialist to jointly develop ultra-compact, low-power laser-beam scanners and we demonstrated augmented reality glasses based on ST components at Mobile World Congress Shanghai. In Communications Equipment and Computer Peripherals, during Q1, we saw continued adoption of 5G-related products as well as a sustained demand for PCs and especially notebooks and Chromebooks, as they continue the move from being shared household devices to individual ownership. Our approach to this end market has three objectives. One is to address selected applications in cellular and satellite communication infrastructure. In this area we captured multiple radio frequency CMOS ASICs awards for telecommunication infrastructure from a new customer. Our other objectives are to address selected high-volume applications with differentiated products or custom solutions, and to leverage our broad portfolio. Our wins here include time-of-flight and motion sensors for laptops and Chromebooks. Now, let’s move to a discussion of the second quarter 2021 outlook and some comments on the full year 2021. The unexpected magnitude and speed of the upturn in semiconductor demand have put the whole supply chain under strain. Manufacturing capacity worldwide, including at foundries, is currently saturated and well below the global level of customer demand at least for the next six months and, most likely, for the full year 2021. ST reacted fast, fully saturating our existing manufacturing capacity with the right product mix; and, by working to increase capacity faster and above our initial operating plan in our wafer fabs, particularly for Digital/mixed signal CMOS-based and Advanced Smart Power and Silicon Carbide technologies to serve Automotive, Power and Microcontrollers. Our current and planned 2021 manufacturing capacity is fully loaded with the confirmed backlog. We are now planning for 2022. We are working closely with our customers and partners across all end-markets and channels to adapt to this unprecedented situation. For the second quarter, we expect net revenues to be about $2.9 billion, increasing year-over-year by about 39% at the mid-point, with, again, growth across all product groups. On a sequential basis, this translates into a sales decrease of 3.8%, at the midpoint, due to the usual seasonality in Personal Electronics. We expect the gross margin to be about 39.5%, representing a year-over-year increase of 450 basis points, mainly due to higher loading and improved efficiencies in our plants. Sequentially, this represents an increase of about 50 basis points at the mid-point. For the full year, we will drive the company based on a plan for full year 2021 revenues of about $12.1 billion, plus or minus $150 million. With this plan, which translates into year-over-year growth of 18.4% at the mid-point, we expect to outperform the markets we serve. This growth is expected to be driven by strong dynamics in all end markets we address and our engaged customer programs. We now plan to invest about $2.0 billion in CapEx to support the strong market demand this year 2021 but next year 2022 as well and our strategic initiatives. To conclude; on Q1, ST showed its ability to adjust to the strong and sudden upswings in semiconductor demand which started in Q3 last year and accelerated in Q4 and Q1. We did that working alongside our customers and partners and pursuing our objectives with the diversified and balanced approach across end markets that is at the heart of our strategy. We continued to focus on customers, adapting our investments to increase our manufacturing capacity to support the higher level of global semiconductor demand and our engaged customers programs. We maintained our financial strength, as demonstrated by our operating profitability and cash flow generation. For 2021, we will drive the company based on a plan for FY21 revenues of $12.1 billion, plus or minus $150 million. We also plan to invest about $2.0 billion in CapEx, not only to increase our manufacturing capacity to support the strong global market demand, including engaged customers programs. As an example, for this year, we are preparing another expansion of Crolles to prepare next year of 2022, but, also, to continue to run our manufacturing strategic initiatives in order to enable our future growth. As an expectation, we will deliver production wafer for Agrate 300 by end of next year. On this accelerated revenue growth path, we will continue to make ST stronger, determined to achieve our strategic objectives by leveraging our balanced markets position, our focus on high growth applications and our solid product/IP Technology portfolio. All these are well supported by ST’s unique internal manufacturing infrastructure, with our teams executing with discipline and flexibility, now more important than ever under these market dynamics.

Thank you, Lorenzo. Before we open the floor to questions, let me add few words on our upcoming Annual General Meeting. So our 2021 AGM will be on May 27. As usual, all related materials are available on investor relations part of the ST corporate website. As part of the resolution submitted for the approval of shareholders, ST supervisory board is proposing a dividend of [indiscernible] per share, so back to the pre-COVID levels. If you'll recall, last year, taking into account the global, social and economic turmoil caused by the COVID-19 outbreak, the dividend was decreased to [indiscernible] per share. And as I submitted resolution, I am happy to highlight is the reappointment of Jean-Marc Chery as third member of the managing board and CEO for another three-year term. With this, we are happy to take your questions.

We will now begin the question and answer session. [Operator Instructions] The first question is from Alexander Peterc from Societe Generale. Please go ahead.

Good morning, and thanks for taking my question. Can I just explore a little bit the upside and downside on your current year revenue forecast of 12.1 billion. So we see shortages propagating from auto into smartphones and other industries, as you've pointed out. Do you see any risk that if production is held back at your key clients, that that could have a negative impact on your overall outlook for the year? And then on the upside, you would have obviously books for the year. Are there any disabilities for you to exceed this forecast? Can you increase or accelerate any CapEx plans at all or are we basically really pretty much at capacity? And then just as a point of maintenance and could you give us an outlook for your CMD? What kind of format will we have in the calendar for this year, and second, mainly on OpEx where do you see it in the second quarter? Thanks a lot.

So three questions, so we will start with the plus one [ph].

Can you rephrase a bit?

So the first one is a $12.1 million up and down which is range we worked, there could be some down driven by some change in the profile of the model. I reiterate, Alex, and tell me if I'm wrong, and also if there is any flexibility during the year or two? Is there any up and down to historical $1 billion?

I assume the case, the plus or minus $150 million is basically the usual and standard uncertainty when you provide a such plan related to random event in the operation. But I guess everybody who are aware about what happened in Texas with snowstorm and what happened, okay, in Japanese competitor and fire, in fact. So, okay, with this kind of random event, okay, you have to resize it. Okay. So, the range of plus minus 150 million are only related to random event on the operation, absolutely not related to demand, which again is well, well above a our manufacturing plant capacity.

So second question was if we have any plan for our Capital Market Day next year or if we do anything there?

For this year?

Yes.

For this year, we have not yet planned. We will be planning to during the course of the year.

Okay. And OpEx?

And on OpEx?

No, I don’t.

Maybe I take a question about OpEx. Good morning to everybody. If I well understand the question was on OpEx in Q2, how to model the OpEx in Q2. In Q2, we see our expenses has slightly declined compared to the one of Q1. Actually, the expenses in Q1 came a little bit higher than expected; while in Q2, we substantially, let’s say, think the effects will stay similar to the one of Q1, slightly maybe down but not significantly where we have a more favorable calendar and maybe a little bit more favorable effects. But these will be substantially offset by increase in activities. And don't forget that in the second quarter, we have, let’s say, the salary policies, so increase in terms of cost of labor.

Thank you very much.

Thank you, Alex. Next question, please, Moira.

The next question is from Dominik Olszewski from Morgan Stanley. Please go ahead.

Hi, good morning. Thanks for taking the question. First one's really just to follow up on the previous question. So does that imply that your sort of view on upside potential in the second part of the year because you're fully booked is more limited or what are the puts and takes on sort of that view on the second half? And then the second question is or the follow up is just around the mix of revenues that you're expecting for 2021? Thank you

No, for the full year, again --

Yes by division.

By division?

[indiscernible]. The first one was on H2 limited by capacity. And the second question is what is the mix of revenue for the year?

Okay, so he let Lorenzo to answer on the mix.

Well, let's say when we look at the growth in respected 2020 by group, definitely we see that that in our expectation of the $12.1 million midpoint that all groups are contributing. For sure the groups that are contributing more is ADG with a significant growth. Also, based on the fact that last year, let's say, especially in the first part of the ADG was impacted by not a particularly stronger marketing in automotive. This year is the opposite. So definitely ADG will be the driver of the growth followed by MDG. MDG for sure is impacted by the fact that in industrial there is a stronger rebound in the market and our distribution, as you have already seen in Q1, is much stronger, let's say, than it was last year. So the second driver will be, definitely MDG. And when we look at AMS, AMS last year had a stronger year, definitely will increase, will continue on the path of growth, let's say, at the less pace, lower pace, in compared to the other two groups. I will say all of these three groups will contribute. First one, ADG, strong growth; MDG will be significant growth; and also AMS will continue to grow significantly, let's say, a contributing to the overall growth of the company.

Yeah and for the second half and the full year, we can be at the upper range of what we mentioned. Assuming, okay, we execute 100% effectively of all the operation we have set up okay. I already said but I would like to record again that our population are working 24 hour a day, seven day a week, all the live location, so we have absolutely no holding in our supply chain. And if we deliver it up to the last minute of 2021, we could be at the range of 12.1 plus or minus whenever 150 means [indiscernible].

Thank you.

Thank you very much. Next question please Moira.

The next question is from Stephane Houri from ODDO. Please go ahead.

Yes. Hello. Good morning everyone. So, the first question and I have a follow up is can you -- now that you gave some visibility for the rest of the year, your vision of your relationship with your largest customers or customer, not customers, in the second half? And can you clarify in terms of content and if you see sales growing with this customer and as I said, I have a follow up after. Thank you

Well, okay, so, this is an interesting question, okay. But what I would like to speak about, let’s say, personal electronics okay. Clearly now, about ST, we are okay in all the platform of the main players in personal electronics because okay we are executing our strategic objective, okay. What I would like to recall, okay, with custom solution, we addressed selectively some, let's say, high volume application out of the core digital of smart devices. And on another line, okay, we leveraged our general purpose portfolio to capture, let's say, accessories, okay, inside the smart device, high volume application as well. And I take this opportunity to note, okay, that with our broad range portfolio, clearly we play in multitude device everywhere with major player. And this has enabled us to engage in many important customer programs around the world and which for us, again is essential to remain a key supplier in this space, personal electronics segment. Now, more specifically, our custom products that address selectively complex applications in the personal electronics segment played to our strength. If we look at the typical design cycle time for this complex application, I can confirm that we have a clear visibility on where ST products will remain a part of such application for the current three years and will contribute to our revenue growth.

Okay. So just to clarify, you can confirm for the current year or years?

Three years.

Three years, okay. Okay, and then the follow up piece is, now that you have reached the 12 billion in 2021, while you postponed that target from 2022 to 2023. So I understand the end demand has been much stronger than expected but can you clarify if the 15 billion aspiration, I would say, that you talked about in the recent past can become your next target. Thank you.

No, I will like to come to the 12 billion. Basically, we share altogether two important change versus, let's say, last December or November. Last point, now the SAM we are facing, so our specific addressable market, in absolute value is a one which was supposed to be in 2023 a few months ago. So, first of all, the absolute value of the SAM, we are facing now, either one was supposed to be in 2022, okay, and the company has demonstrated its capability to fast react in order to address it. Then, what is important to take note is that the mix inside the SAM is totally different than the one which was a few months ago because few months ago, our SAM was very strongly in a, let's say, digital consumer path and clearly we were impacted by Huawei and it was weaker in automotive and industrial. And the main change between now and few months ago is acceleration, the strong acceleration of the automotive and industrial part, that is where I see it is typically both the supplier and the leader. So that is the reason why important [ph] change in terms of overall size of the market, we have been, let's say, capable to deliver and we will deliver the $12 billion. So for me it is totally consistent. Now then for the next future, but we are convinced that with our product portfolio, our technology, our manufacturing supply chain, because again, as I said, I expect next year, Agrate to start to deliver production wafer for revenue. We really expect that we have all the ingredient including the visibility of our engaged customer program to continue to outperform the market we serve and definitively when we will have the adequate confidence level above all the market we will evolve, plus the visibility we have on the engaged program to communicate on the next step. But let me – this quarter, as we are doing as usual, first of all but to give you the guidance of Q2 to provide this year indication at $12 billion and believe me to deliver of $12.1 billion growing our internal manufacturing by 20%, not totally supported as the level we expected from foundry because they will increase only by 10% is already very challenging but the company is able to do it and we will be able to deliver it.

Okay, thank you very much. Very clear.

Thank you, Stephane. Next question please Moira.

The next question is from Matt Ramsay from Cowen. Please go ahead.

Thank you very much. Good morning, everybody. I guess for my first question, Lorenzo, it looks like obviously you're producing as much as you can in your factory network and the gross margin is up looks like 450 basis points in the guidance for the June quarter. Maybe you could talk a little bit about what the margin profile is. Going forward from there, are we looking at in the 40s as you remain fully booked, or are there other variables that we should think about in terms of mix of divisions or mix of products in the coming quarters on gross margin. And then I have a follow up. Thanks.

The line was a little bit disturbed by what I captured is it's a question about the evolution of the gross margin along the year. This is my understanding. You see that in the first half, the gross margin will be slightly above 39% and now we are guiding 39.5 on Q2, is 39 Q1, so slightly above. What is the expectation moving forward from here? Of course moving forward, in the second part of the year, the contribution that we will have for manufacturing efficiency, improvement of manufacturing efficiency, will be there but will not be, let's say, very strong. Now we are running our fabs at full capacity, at the best that we can do. For sure, I'd say in Q1, we were at 91%. The more than that is impossible, you know. Q2 will be similar and Q3 and Q4 will be the same, so without any kind of unloading charges. In respect to that we realize small improvement in terms of manufacturing efficiency. There will be some contribution from the mix, you have also to consider that the environment in pricing is, yes, favorable for our pricing, but on the other side that we have also the supply chain, and the price overall, and let's say are increasing partially offsetting what we can really share with our customer. So my expectation is to ever surmise the improvement in our gross margin, assuming there is no worsening in the currency environment, because also as you know we are sensitive on that. Assuming that more or less, we will stay where we are today in terms of currency, we do expect a some mild increase in the second part of the year in term of gross margin. Where we will end but you know, the math is simple, let me say that we will be between 39% and 40% gross margin for the year.

Got it. Thank you and sorry about the breaking in the line.

No problem.

The phone [indiscernible] as well. I guess the my follow up question, Jean-Marc, I know that Huawei has been a challenge for lots of companies in the ecosystem as a headwind, but for your company, in particular, given some custom products that you were doing for them. It seems like now there may be a path forward for their smartphone business under the Honor brand that may do some fairly decent volumes going forward. I wonder if you might talk about some of the products that you might have targeted for the Huawei smartphone brand that many of us are modeling sort of at zero going forward if those might be applicable to the Honor brand if they get any volume in their smartphone business. Thank you.

Yes or no, we are addressing this customer, let’s say, in the frame of the order book in China, but we felt okay with our capability to confirm to them, although they asked us, so yes, we will deliver, let’s say, about $100 million to Honor in 2021. But total of this amount [ph] has the magnitude compared to what we were supposed to have with Huawei. But therefore the remaining Huawei we are, let's say, again, we have been protected on all the license related to 5G and radio frequency, let's say, devices, and we have only a few standard product licensed and for us, it would be really marginal revenue in 2021.

Thanks, guys.

Thank you very much. Next question please.

The next question is from Alexander Duval from Goldman Sachs. Please go ahead.

Yes, good morning, everyone. A couple of quick questions. Firstly, obviously, the issues around tightness in supply of components in the auto industry are very well publicized. One is, if you have a bit of an update, on which quarter you think those kinds of constraints could ease and whether that might mean that there's a bit more sustainability of auto revenues into next year if they're capped a little bit this year. Secondly, you referenced digitalization as a driver of automotive. In the last few days it's been reported that the UK government is looking at facilitating level three automated driving on highways and we're seeing increasing moves by premium OEMs into the level two plus autopilot arena. I wondered if you could share your view on how ST is positioned in some of these areas of semies required to facilitate those kind of developments and how you feel about the prospects of the ADAS market for semies as we move to those higher levels of automation. Many thanks.

So, thank you for your question. So, I will address to Marco.

Good morning. So, first of all, yes, correct as you say that the rebound that we had in the automotive starting extremely strong from the late part of the Q4 2020 was much faster than was anticipated. And as you correctly say, these has driven at the end, some supply chain constraints across all the semiconductor industries, and we are working at this stage very close with our customers to support them. This is driven by all customers, including the distribution and by all the geographies. Why this is happening, because first of all the number of cars has been produced is increasing. There is clearly the need to replenish the inventories across all the automotive supply. And let's not forget that the semiconductor content inside the cars driven by electrification and digitalization is going up, but also is driven by an increase of requirement of accessories inside the car. So, all these together has brought the situation a very, very tight situation. And we saw that during Q1 these demands stayed extremely strong. We all -- the bookings that we have are in this stage above our current and planned manufacturing capacity and the booking visibility we have now is extended to 18 months. So, what we are doing now is we’ve already started with our customer about what is going to be the demand for fiscal year 2022. If you move now, to the others, yes, so the position what we see in the market is that basically level two and level two plus is where the market is moving and these are accelerating. And as you know, we are working here with the leader in the marketing this kind of application. And we keep working with them to support the very strong demand that we do see as in this portion of the market. I hope that this answer the question.

That’s great. Many thanks.

And we prepare for [indiscernible].

Absolutely.

Thank you very much Alex. So next question, please.

The next question is from Jerome Ramel from Exane BNP Paribas. Please go ahead.

Yeah, good morning. One question, Jean-Marc, you say you're fully utilized right now, but in Q4, you were capable of making $3.2 billion of revenues. So, is the mix difference that you are only, if I may say, actually [indiscernible] on the current run right or is it the access to the foundry that’s made the difference? And the follow up question will be, with all the capacity, with the CapEx you are putting in place in Crolles and Agrate and so on, could you quantify, what kind of capacity expansion you are implementing in terms of wafer per month, so should give us a hint of what kind of capacity by exiting the year you will be versus end of last year. Thank you.

So, thank you. For the first question also, I have to mention very transparently that in Q4, we also store inventory decrease. So we fulfill the demand which was, let's say, not at this level with the inventory we have on the shelf to support. So, it is also -- the reason why it is difficult to compare apples to apples, Q1 versus Q2, but clearly, let's say, in Q1, yes, there is also a mix effect definitively because, if I comment, as an example, the revenue by verticals, more generally speaking we come on the revenue by product group but here I can give some color on vertical. In Q1, year-over-year, we grew automotive by 31%, industrial 65%, personal electronics 26% and communication equipment and infrastructure 20%. And sequentially, Q1 versus Q4 we grew automotive by 5%, industrial by 12%, we decreased personal electronics, let’s say, as usual by 27% and we grew the communication equipment infrastructure by 10%. So, yeah, so, there is an effect in terms of mix. About capacity, where we are increasing capacity? More clearly, let's say, the main three domains, say, the four domain we are increasing capacity are, first of all Crolles 300 because Crolles 300 you know is a fab supporting strongly our personal electronic on engaged customer program. Our microcontroller, both for a secure general purpose and automotive and then we have, let's say, mixing all technology addressing everything. So, here we are going up to the limit of the current full build up, let's say, capability of this but we have decided in December to make another expansion because we have a specific design in Crolles to extend by modules. And this extension will be ready, let's say, by another year to support additional growth, both on customer engaged programs, microcontroller, automotive, general purpose, secure and diversify specialized mixing of technology to address everything. So, this is the first domain and by the way our mid-term expectation with Crolles is to be capable to run close to 10k wafer per week. Then the second area we are increasing a lot is in the Agrate 200 millimeter for advanced smartphone technology because here the demand is quite strong on the most advanced, what we call, the BCD9. And as a kind of [indiscernible] Singapore, you know, that we acquired three years ago the ex-fab of micron, which is, let's say, up to date 200 millimeter fab and we are saturating this fab to support BCD9 again to support microcontroller as well -- and also vertical integrated power. While the third domain is a silicon carbide, I have to say that the part of the $12.1 billion we have increased our revenue perspective on silicon carbide. If you remember our very well, I mentioned in January something in the range of 450, 500, now it will be well about 550. So, we are increasing -- we are accelerating a silicon carbide both in Catania but in Singapore as well. So now we are on the way to qualify Singapore silicon carbide. Well, the rest is in Catania to support IGBT and high-voltage MOSFET to support the automotive market. So this is basically the three domains -- the four domains, sorry, where we are increasing our OpEx dedicated for capacity for this year, starting to preparing 2022 and then important to share with you that we target to run the first equipment in Agrate 300 millimeter late this year and in Q1 next year and I have strong confidence levels that the structural value extracted from Agrate 300 will happen by end of 2020.

Thank you very much.

Thank you very much Jerome. We have now time to take two -- I think two more questions. So, next question please, Moira.

The next question is Didier Scemama from Bank of America. Please go ahead.

Good morning. Thanks for squeezing me in. I just wanted to ask you questions Jean-Marc on the longer term sort of consequences of the current shortages, especially in automotive. I wondered if you could maybe talk a little bit about the nature of your conversations with tier ones, whether even automotive OEMs are now talking to you to secure your long-term inventory levels and whether you think that the behaviors in terms of purchasing are going to change. In particular, as we move into the electrification of the powertrain where power semiconductor companies become, together with battery vendors, the most critical suppliers to automotive customers. Any views on inventories and how things are going to be managed going forward would be very interesting. And I've got a quick follow up. Thank you.

I think today our view and position is as following. Well, today, you have, let's say, basically two kind of business model. So, you have a business model, anyhow I would like to mention carmaker Tesla, which is a mix where basically Tesla is developing its own embedded electronic system and that really spoken about its own embedded electronic system, [indiscernible]. And here with them, we have business as usual, supply chain ownership achieved in terms of planning inventory policy and so on. But I have to mention that inside the business model, at any moment we are putting Tesla in difficulties then there is also a business model which is the – we are not okay and here there is also a business model. There is also business model which is a classic one, so automotive tier one making its embedded electronics and tier one addressing those. But in the future, if a car maker wants to develop its own embedded electronic system on an hybrid mode, so some will remain with tier one, some it want to do by itself, yes, we will be ready to discuss with them and to interact our business with them. But if the rule is they want to skip the tier one and discuss with us to secure inventory, but continuing the current business model with tier one, this is something we will not consider because at a certain moment, we have to be consistent. Again, today what is happening is not the problem of shortage of semiconductor, today what is happening is a pure lack of participation of planning and submission, it is not a question of business model. So, our conviction that in the future we will have an also accelerated by the transformation of the powertrain, as you said, electrification that we will have an hybrid mode. So, some car maker we will have the whole numbers of electronics and in such a case they will discuss with semiconductor, and we will have the usual intimacy we have in R&D, in supply chain, in engineering and so on so forth. And they will continue for another part of the electronics to use the tier one and in such a case, our customers are the tier one. And I hope it clarifies.

No, it is very helpful. I'd like to have two quick follow ups, if I may. First of all on the pricing environments, that's a question that a lot of investors are asking, how can ST capitalize on the current shortages? I mean are they levered to maybe potential price increases? So I wondered if you could maybe talk a little bit about that and if you could also talk a bit about your lead times maybe with the commodity products, whether they could help you maybe break above the 40% gross margin that has been quite elusive, in fact, for the companies for quite some time. And my second questions, Jean-Marc, sorry to put you on the spot, but it's my job. So you told us at the CMD that you will do 12 billion in 2023 at the latest, now you're going to do that in 2021. And you also flagged that a $15 billion target return. I just wondered whether you could give us your level of confidence, maybe for 2022 whether you could outperform your total addressable market, if you think you've got the sort of visibility and confidence to do that. Thank you.

Well, first of all, on price, Marco will answer because he's managing the sales and marketing.

Yes, correctly as you say we are in an environment where the price increase is something that we are discussing and we're implementing with our customers. This was already discussed during January and this is ongoing but as we say there, we are applying these not in an opportunistic way, it's a way also to react to what is increase in cost in the supply chain, so materials, your hubs, everything. So, this is an ongoing activity, clearly, due to the situation but again, we will not apply these in pure opportunistic way.

Well, so I’ll comment again on the 12 and the future. Again, the first question, we'll do the same. Now knowing what is happening today, a few months ago, to say that 12 billion will occur only by 2023. My answer is yes. Why? Because the data point we have in our hand, so market we address by verticals. Data point on the light vehicle to be producing ’21 to ’23, smartphone, the Huawei loss, all the data point we are at this period of time was pushing us to say now with the visibility and on top of that as a potential implication of the trade war between the US and China to put us in a situation to say, to drive the company, we do believe that we will be capable to achieve the 12 by 2023. But simply between, let's say, November December and Q1, if my memory is well, we simply booked close to $8 billion in five months of bookings and then okay also customer have come to us and say now, my transformation is accelerating, number of car increasing, industrial market driven by topline sustainability, want to have more automation, more system with lower power consumption and so on. So, all the planets aligned in a very faster path and we reacted because our capacity, first, were not planned, well, in the certain extent not fully saturated, which was good, so we have reacted very fast. We moved many technology in there, and we increased our capacity and we will deliver the 12 now because again the market we are facing now is the one which was supposed to be in 2023. Well, now, again, I repeat, we have clear visibility on one part of engaged customer problem with some custom design product or differentiated product addressing complex embedded processing system and we know that this basically architecture of systems in terms of design lead time are more or less minimum two, three years. And so, we know exactly like for the next two, three years that we will have to deliver this system and this customer. Well, then after, there is all what is related in terms of market condition. So if the market condition, as said by WSTS, will continue for ’22, ’23 and ’24 to be the compound average growth rate of 4%, 5%, the company will outperform this market based on our product portfolio, our supply chain, our capability to support and our engaged customer program. But then we will size it when we feel that the time is adequate in order to give us a target in terms of revenue in our midterm strategic plan that we will work in the next few months.

Okay. That’s brilliant. Thank you so much, everyone and thank you Jean-Marc in particular.

Thank you, Didier, and I think we will take the very last question now.

Today's last question is from Achal Sultania from Credit Suisse. Please go ahead.

Hi, morning. Thanks for taking the question. Just Jean-Marc, if I'm just trying to understand the seasonality for second half based on your full year guidance, it seems that the analog and sensor business is likely to see very small growth in the second half of the year, year-on-year terms. So just trying to understand that see clearly the demand from smartphones and access accessories has been increasing. So what's causing you to be slightly more cautious it seems on the AMS business in the second half? Is it predominantly related to the China customer that you had or is it something else as well built into that guidance? Thank you.

No, there is no senior specific customers. Again this year is unprecedented one. We are limited by capacity. Believe me, the pressure we receive from carmakers is incredible. I guess everybody is not ignorant that some government has put pressure on some foundries to decommit product for consumer to allocate to automotive. So, this is a very complex. So, this year, okay, there is a basically infinite demand, I can testify it and an all the industry is working closely with customers, with partners in order to allocate according to short-term priorities without building any inventories but to be sure that all the components are making all the plans of the customer running and you see it is very difficult but not absolutely related to one specific application or one customer. So, for sure, we will have this year very strong growth of automotive and industrial market within the $12 billion and more soft growth on personal electronics and on communication infrastructure versus last year, first of all because there is no more Huawei and there is only a marginal order and also because capacity has been allocated to support the automotive industry. So this is the reason why we will have this difference of growth between the various product group and the various verticals.

Thank you. And maybe one quick follow up. If I look at the SAM, you've been significantly outgrowing your overall SAM for the last couple of years, maybe three years. Do you think that that outperformance continues into 2021 and 2022, is that the visibility that you have?

2021, the public visibility we have from WSTS is our SAM to grow a 14.6%.

14.3.

14.3, sorry for the mistake and us, we forecast to grow 18.4. So, let's say, 1.3 times basically the market we address. Then for 2022, I would like to repeat what I said a few minutes ago. Well, first of all, we are preparing ourselves to grow with our manufacturing infrastructure and in the various plans I shared a few minutes ago, so I repeat Crolles, the Singapore 8-inch, Agrate 200, Agrate 300 and Catania silicon carbide. And then for sure, thanks to our own engaged customer program, we have the visibility, we have the certainty, we plus market condition which are supposed to be at confirmed average growth rate of 5% and our portfolio. So general purpose, STM32, power, our general purpose analog plus all our applications specific standard product. Yes, I confirm that our ambition and one capability is to continue to overperform the market we address.

Okay. Thanks a lot, Jean-Marc.

Thank you very much. Thank you Achal and thank you to all of you. This will now conclude our for this quarter. As usual, thank you very much for your attention.

Bye, bye. Thank you very much.

Thank you. Thank you. Bye.

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