STMicroelectronics N.V. (STM) Q2 2022 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the STMicroelectronics Q2 2022 Earnings Results Conference Call and Live Webcast. I’m Myra, the Chorus Call operator. I’d 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 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, Head of Investor Relations. Please go ahead, madam.

Thank you, Myra. Good morning. Thank you everyone for joining our second quarter 2022 financial results conference call. Hosting the call today is Jean-Marc Chery, ST’s President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our President and Chief Financial Officer; and Marco Cassis, President of Analog, MEMS and Sensors Group and in his global corporate role, Head of Strategy, System Research and Applications and Innovation Office. 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 statement contained in the press release that was issued with the result 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. And I’d now like to turn the call over to Jean-Marc, ST’s President and CEO.

Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q2 2022 earnings conference call. Let me begin with some opening comments starting with Q2. So Q2 net revenues of $3.84 billion and gross margin of 47.4% came in above the midpoint of our business outlook range driven by continued strong demand for our product portfolio. The year-over-year net revenue was grew 28.3%. This revenue growth was accompanied by improved profitability; gross margin at 47.4%, up from 40.5%; operating margin at 26.2%, up from 16.3%; and net income more than doubled to $867 million. On a sequential basis, net revenues increased 8.2%. On the first half of 2022, net revenues increased 22.9% year-over-year to $7.38 billion driven by growth in all product groups and sub-groups. H1 operating margin was 25.5% and net income was $1.61 billion. On Q3 2022, our third quarter business outlook as a midpoint is for net revenues of $4.24 billion increasing by 32.6% year-over-year and by 10.5% sequentially, with a gross margin of about 47%. For the full year 2022, we will now drive the company-based on the plan for full year 2022 revenues in the range of $15.9 billion to $16.2 billion above the high end of our previous expectation. We now anticipate gross margin to be about 47% for the full year. Now let’s move to a detailed review of the second quarter. Net revenues increased 28.3% year-over-year with higher sales in our 3 product groups and all sub-groups. The year-over-year sales OEMs increased 31.7% and 22.2% to distribution. On a sequential basis net revenues increased 8.2%, 240 basis points above the midpoint of our outlook. Gross profit was $1.82 billion increasing 50.2% on a year-over-year basis. Gross margin increased by 690 basis points year-over-year to 47.4% mainly driven by favorable pricing and improved product mix partially offset by inflation of manufacturing input costs. Our second quarter gross margin was 140 basis points above the midpoint of our guidance driven by similar pricing and product mix sector. Second quarter operating income doubled to $1 billion, operating margin was 26.2% increasing from 16.3% in Q2 2021 with improvements in all 3 product groups. Both net income and diluted earnings per share more than double year-over-year with net income reaching $867 million from $412 million, and diluted earnings per share increasing to $0.92, up from $0.44. Looking at the year-over-year sales performance by product groups. ADG revenues increased 35.1% on growth in both Automotive and in Power Discrete. AMS revenue was grew 11.3% on either Analog, MEMS and Imaging product sales. MDG revenues increased 39.5% on growth in both Microcontrollers and RF Communications. In terms of operating margin, all product groups demonstrated year-over-year expansion, with ADG operating margin of 24.7%, up for 9.5%; AMS operating margin of 23.8%, up from 18.6%; and MDG operating margin increasing to 34% from 22.9%. Net cash from operating activities increased to $1.06 billion in Q2 versus $602 million in the year ago quarter. On a trailing 12-month basis, net cash from operating activities totaled $3.78 billion, increasing 45.8% from $2.59 billion. CapEx in the second quarter was $809 million compared to $438 million in the year-ago quarter. After the strong investment in CapEx, free cash flow was $230 million compared to $125 million in the year ago quarter. During the second quarter, ST paid $54 million of cash dividends to stockholder. And we executed $87 million share buyback under our current share repurchase program. Our net financial position was $924 million at July 2, 2022 compared to $840 million at April 2, 2022. It reflected total liquidity of $3.44 billion and total financial debt of $2.52 billion. Let’s now discuss the market and business dynamics of the quarter. Overall demand for ST products continue to be strong. Let me share with you a few data points. Our backlog is existing Q2 covered 6 to 8 quarters of planned capacity depending on the product type. Book-to-bill is well above parity. Our manufacturing capacity is fully saturated. From an end market standpoint, demand both in automotive and in what we call the business-to-business part of the industrial market for factory automation, robotics and industrial infrastructure remains strong driven by semiconductor pervasion and structural transformation. In the consumer electronics and PC markets, there are some road signs of softening but demand for ST products remain strong in the selected areas, where we target in this market. Going now in more detail on the automotive market, we continue to see strong demand in Q2 still reflecting the combined effect of replenishment of inventories across the automotive supply chain and the ongoing electrification and digitalization transformation of the industry. Bookings remain strong across all customers and geographies. Backlog visibility is now above 18 months and well above our current and planned manufacturing capacity through 2023. The accelerated transformation of the automotive industry with electrification and digitalization, and semiconductor pervasion continued to drive wins from ST during Q2. For car electrification, we again increased the number of ongoing silicon carbide programs between the automotive and industrial market. We now have 102 projects, spread over 77 customers. These projects are roughly equally split between the two end markets and we are in line with our revenue target of $1 billion silicon carbide revenues in 2023. We had a number of new design wins in Q2 with the launch of silicon and silicon carbide power discrete. This include generation 3 silicon carbide MOSFET dice with a module maker, rectifiers, ultrafast and silicon carbide diodes and as well ACEPACK power modules for traction inverter, onboard charger and other electrical vehicle related application. We also won sockets for power-management ICs in on-board charger, DC-DC conversion and electronic parking brake application at multiple Tier 1s and carmakers. In car digitalization, we announced last week a new cooperation model with the Volkswagen Group for our next generation digital automotive solutions. This Stellar microcontroller family, this will include the direct usage of our high performance Stellar microcontroller family and the joint development with Volkswagen car yard for system-on-chip Stellar microprocessor. Both the MCU and the system-on-chip MPU will address multiple applications within the new zonal architecture platform of the Volkswagen Group, which is called Volkswagen Trinity project. In our Automotive sensor business, we had multiple wins for devices in our 6-axis Automotive sensor family, including our embedded Machine Learning Core sensors. We continued to gain traction for automotive global shutter product family with measure of OEM-program design-wins. Moving now to Industrial. Here we saw strong demand for the quarter in business-to-business industrial from both distribution and OEMs with distribution inventories of our products, remaining lean across all product families and high inventory items. Across the industrial market, we see two main trends accelerating the increase in semiconductor content. Digitalization of devices and systems, and energy management, and power efficiency improvements. These trends are driving a structural transformation in this market. We address the industrial end market focusing on three areas. The business-to-business industrial segment, the largest part, which includes automation, robotics, power energy, and transformation. Consumer industrial, which includes home appliances, smart buildings, and power tools. In a more specialized industrial addressing, for example, healthcare. Across these three areas, we are important wins with our broad portfolio. In business-to-business industrial, we have multiple design wins for products, such as intelligent power switches, industrial sensor, high and low voltage MOSFETs wireless charging solutions and our STM32 embedded processing solutions. Application includes programmable logic controllers, robotics, energy storage and wind turbine. In consumer industrial, we are design wins in applications such as major home appliances, power tools, cleaning robots, consumer power supply, point of sales terminals, and building air conditioner systems. And in the specialized path, I would like to highlight just one innovative example in healthcare, where we announced incorporation of an NFC tag into a connected syringe by NP Plastibell. Before closing of industrial, a few words on embedded processing, when we continue to build on our number one position in 32-bit MCUs, and where we announced enhancements to our security offer with Amazon Web Services, extension of our support from Microsoft Azure RTOS across the product launch, and addition to our NanoEdge Artificial Intelligence Studio. Moving now to Personal Electronics. Demand for our products in the selected areas we target into smartphone market was above expectations. In this market, we focus on selected high volume smartphone application, addressing them with differentiated our custom products, while leveraging our broad portfolio to address also high volume applications. During the quarter, we won sockets in these devices with motion and environmental sensors, time-of-flight ranging sensors, touch display controllers and secure solutions. We also made progress with our wireless charging solution with wins in flagship smartphones and smartwatches. In Communication Equipment and Computer Peripherals, we continue to see deployment of 5G infrastructure products, and of low earth orbit satellite programs, and services around the globe. Here we target selected and volume application again with differentiated products for custom solutions, while leveraging our broad portfolio. New wins here include pressure sensor for hard disks, time-of-flight sensor for laptops in the world, MasterGaN family for high-power-density charging adaptor. I would like to confirm our continued progress with key customer engagement in addressing selected applications in cellular and satellite communication infrastructure. Now, let’s move to our 2022 third quarter outlook and plan for the full year 2022. For the third quarter, at the mid-point, we expect net revenues to be about $4.24 billion representing year-over-year sequential growth of 32.6% and 10.5%, respectively. Gross margin is expected to be about 47% at the mid-point. Looking at the full year, we’ll now plan to drive the company based on 2022 net revenues in the range of $15.9 billion to $16.2 billion representing growth of about 25% to 27%. This plan includes a gross margin of about 47%. We can see on our 2022 CapEx investments range of $3.4 billion to $3.6 billion. Before concluding I want to highlight the recent announcement we made together with GlobalFoundries. We signed an MOU to create a new 300 millimeter semiconductor manufacturing facility adjacent to ST’s existing 300 millimeter facility in Crolles, France. This is a project multi-billion-euro collaborative investment that will include significant financial support from the state of France. The project is subject to the execution of definitive agreements and values regulatory approvals, including from the European Commission’s DG Competition. As you know, we’re transforming our manufacturing base with a significant expansion of our 300 millimeter capacity, a measure of enabler supporting ST’s $20 billion plus revenue ambition. We already have a unique position in our 300-millimeter wafer fab in Crolles, which will be further strengthened by this important initiative. We continue to invest into our new 300 millimeter wafer fab in Agrate, near Milan, Italy, ramping up in H1 2023 with an expected full saturation by the end of 2025 as well as in our vertically integrated silicon carbide and gallium nitride manufacturing. This new facility will enable us to support even more our European and global customers across all end markets, and to advance our leadership objectives in automotive and industrial as well as our focus activities in communication infrastructure. Importantly, we are targeting to make this new fab leader in sustainable semiconductor manufacturing. For example, it is designed to be 10 to 20 times less emissive in terms of greenhouse gases, that similar project in Europe and in the rest of the world. And, of course, working with GH will allow us to go faster, lower the restrictions, and ultimately reinforce the European FD-SOI ecosystem. To conclude, our Q2 financial results and plan for the full year 2022 align with our ST’s strategic focus on core business and targeted high growth areas. We continue to realize our early investments in smart mobility power and energy management, and IoT and connectivity. We are building on the unique strengths of our integrated device manufacturer model complemented by partnerships with foundries and suppliers, customer relationships, and our established end market and application strategy. These initiatives will support the $20 billion plus revenue ambition we outlined at the world Capital Markets Day. Thank you, and we are now ready to answer your question.

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

Good morning. Thank you for taking my question. The first question would be really on your full year guidance upgrade in the very strong traction in the third quarter, with supply constrained for the rest of the year. And although there may be some price hikes those already baked into the previous guidance, I suppose. So could you explain where this extra bit of revenues coming from in the improved foundry capacity access for better internal efficiency more internal capacity. Although your cap expands on changes in H1 was pretty much in line we’re a little bit below expectations if you just explain where what’s driving this additional revenue for the year? And my quick follow-up would be on OpEx, which actually came in a little bit below expectations for the second quarter so no sign of undue inflationary pressure there. How should we think about OpEx for the remainder of the year? Thanks a lot.

So thank you for your patience. So Lorenzo will answer on OpEx. About the second answer, let’s say, improvement with our, let’s say, indication for the year for basically there is two cumulative effect. One effect, of course, is moving through the year. It is clear that we are able to secure our supply chain. Most of the equipment I were set up which was supposed to add capacity in our own manufacturing. So now, okay, we have better visibility. So, it was forward to the opportunity to increase our manufacturing, as an example, okay. The production value of HD in Q3 will increase by 12.5% versus Q2. So this is the reason why, okay, we have this capability to increase our revenue target. We have better support from the partner, I have to say. Well, the second effect is pricing and mix. Clearly, we have still a favorable on the one month, and pricing and mix is also contributing to this €1 billion additional target revenue for the full year. And Lorenzo, you answer on OpEx?

Yes, good morning to everybody. In terms of OpEx, what we more than now for the current quarter for Q3 will be to have OpEx, net OpEx, including also other income and expenses similar to the one that we had in the previous quarter in Q2. So now we are, let’s say, in a range between $810 million and $815 million. Of course, we are benefiting most from the seasonality this quarter, because as you know, in Europe, there is expectation and these benefits for our expenses, as well as also for the exchange rate. For the year, I would say, that if I look for the total year and in the average, as you know, usually what I share with you is the quarterly average expenses in the year, I would say, that the level will stay more or less in this range are between $810 million and $815 million. This is where we see today, let’s say, landing our expenses for the full year. So this means that that will be an increase in Q4 as usual due to the seasonality back into the average and we do that.

Right. Thank you very much.

The next question is from Adithya Metuku from Credit Suisse. Please go ahead.

Yeah, good morning, guys. Congrats, firstly on the great guide. Just two questions. Firstly, can you give us some color on how you’re thinking of growth by division in the third quarter and for the rest of the year? And secondly, I just wondered, when I look at the seasonality for the fourth quarter at the midpoint of your guide, it looks like you’re assuming 4% sequential growth in the fourth quarter versus 5-year seasonality of 12%. So you’re assuming some kind of underlying demand slowdown? Or is that driven by your capacity increase planned? What is driving that seasonality that you’re assuming in the fourth quarter? Any color that would be helpful. Thank you.

Maybe I comment on the second half question by group and you comment on the seasonality?

Yeah.

No problem. I can comment. Overall, for H2, so, Q3 and H2 more clearly we continue to see a strong growth in ADG definitively both automotive and power discrete, and it is clearly sustained by our capability to increase our manufacturing supply chain. AMS will grow in H2, but you know that here, this is a usual attraction of our engaged customer program, which are let’s say increasing in Q3 and then in Q4. We will grow as well for Analog and MEMS, but clearly this field of products group here we are limited by our whole capacity. Microcontroller, we grow but similar to Analog and MEMS, we have also limitation in capacity. And we will go quite materially our RF Communication division related to customer engaged program. And Lorenzo, you comment on the seasonality.

I think you ever covered, but at the end if you want a little bit more color about Q3. For sure, Q3 there is our seasonality in Personal Electronics that is a strong driver for our growth. So at the end, the driver of the growth in the current quarter on a sequential basis, definitely would be AMS. AMS is enjoying, let’s say, is one of our group, it’s more exposure Personal Electronics, as you know, so at the end, it will be the driver of the growth. Anyway all the groups will contribute to the growth in the current quarter, we continue to see traction and strong traction in ADG that we will continue to grow, let’s say, as well as also in MDG. But on Q4 alone, the second half question [ph] was recovering, let’s say, evolution.

Got it. So essentially, AMS will be the main growth driver in the third quarter followed by ADG and then MDG.

All right. Let’s say, this is not a surprise now because at the end in the second half, and in particular in Q3 Personal Electronics for us is a strong driver. Anyway, I confirm that all the groups I will contribute, let’s say, ADG and MDG will be two groups contributing as well to this group.

Got it. Would you say that the growth in AMS would be abnormally strong this quarter?

I don’t know what means are abnormally strong. You mean sequentially or…

Sequentially strong.

Yeah. Is there any content growth that we need to think about when we’re modeling AMS revenues in the third quarter, any significant content growth?

Sorry? Maybe you said it…

Content growth.

The content growth about the content, you know that, now let’s say in AMS in Personal Electronic, we have a variety of products, let’s say that are contributing to the growth. I would say that this is really, I would say a matter of volume here, I would say the content is what it is. Now, we don’t see any abnormal signature in the profile of the revenue between H1 and H2, and related to the new device introduction. So absolutely, normal seasonality.

Got it. Thank you.

Thank you, Adi. Next question, please.

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

Good morning, guys. My congrats as well on the exceptionally strong execution. Jean-Marc talked about having visibility through 2023. I’m wondering if you can comment on your confidence level in maybe the percentage of orders that are non-cancelable or what percent you think could be at risk to be downshifted. And then when you look into 2023 on the gross margin side again 47% impressive for this year. Do you think based on mix, you can continue to grow gross margins into 2023?

So, Lorenzo will comment gross margin about the data points for 2023. Okay, I share with you the fact we are in our hands. So, I repeat that the backlog we have requested by our customer basically is covering and defending the product family between 18 to 24 months of the planned capacity not existing capacity, I have to say planned capacity which are related to our CapEx where we spend this year and a lot of the CapEx we intend to spend next year. So, first of all, okay, we have 2022 sold out and basically we have 2023 which is either sold out or particularly sold out, okay, depending of the product group on automotive, okay, the full capacity of 2023 is sold out. So there’s no reason why that when your question about when we do believe we’ll come back to, let’s say, normally time, okay, capability to replenish inventories. Okay, I always say is okay, of course, not before end of 2023 and then in 2024. So this is what we say then what are the data points I can share with you? So we have, let’s say, during H1 this year, exchange our policy of the confirmation of order. So now we really schedule the order up to 2023, so on 24 months rolling. And for us it was important, okay, to make this exercise, because we have detected potential double ordering. And I have to say that it was very, very marginal. So we are absolutely not seeing, let’s say, a double of the ring in the channel, okay, we are using. The inventory level at our distributor is lean inventory terms are below standard level – I’m sorry, very higher standard level to make business. So, there is still potential of inventory replenishment, but that we are not capable to do at this present time. And then, in the field of the tool end market, I have spoken about during my address the automotive and the industrial B2B. The pressure of customer or the demand is huge. We have, okay, multiple call every day, every week to find solution to supply them. Well, yes, we have seen some sign of softening, I confirm in Chromebook, Notebook, PC, middle and low end on the smartphone, not too much in accessories, and the famous customer, we sell, okay, in Q2 was above our expectation and we’ll be taking solid in H2. We know the youngest customer pulling on we are for 2023 new circuit we win cycle silicon carbide $1 billion revenue, at least in 2023. But this is all the data points we are and I can share with you. So about to gross margin, Lorenzo.

About the gross margin, for sure, at this stage, let’s say, a bit early to go and to discuss about 2023. What I can say is that definitely, let’s say, we will have some tailwinds that definitely will be the exchange rate will remain at this level for sure, it will help. The mix, the product mix will be in the right direction in this respect. For sure, what I can say is that, yes, we see in terms of inflationary costs, these inflationary costs that by the way are impacting already the second half of the year in 2022. What I can say is that, let’s say, 2023 will be another year and that is will put us in our project or it will be between 2025 and 2027, let’s say, in the range of 50% gross margin.

Great. Thanks for all the detail, guys. Very helpful.

Thank you, Tony. Next question please, Myra.

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

Hi, thank you for letting me ask the question and congratulations for really strong guidance. With regarding the guidance at quarter, your guidance in revenue growth is almost 33% year-on-year. How much of that year-on-year growth is coming from unit increase and how much from pricing increase, is pricing still increasing in terms of your product? And as the corollary to that, is pricing increases similar in all your end markets or in some particular end markets you’re seeing much higher pricing increases than in other end markets? Thank you.

Lorenzo will answer.

Yes. Thank you for the question, Sandeep. When we look at the dynamic in term of increasing of our revenue, so let’s say, for sure that are three components if you want on one side that there are yes, price increase, because price increase this year when we look at 2022 compare to the previous year is an important component as well as the volume and the mix, because the mix there was another ingredient. But I would say that we are talking here, let’s say, more or less the range of 40-60, let’s say, 40 for pricing and rest could explain for that 60%. When I look at the current guidance for the current quarter, actually, we do not have in mind that any significant price increase on a sequential basis, for sure, year-over-year is that the reason, because there’s been increased pricing during the first half, but on sequential basis, there is no significant. We do not expect any significant price increase. We will be more or less stable in respect to that. Well, yes, of course, there are differences in terms of pricing the dynamic in the different market. I would say that, for sure, when we look at mass market, when we look at distribution is where let’s say, we have the highest level of price increase, when we have a price increase also in the area of automotive that is material, mainly driven by the fact that, let’s say, there is a significant, let’s say, higher demand in respect to that what we were able to produce. While when we look at market like the Personal Electronic, I would say, that we have more stabilization of pricing, more than price increase. Yeah, we have some, of course, price acceleration, but overall I would say that in these markets that there is no significant price increase, while in respect to the past or maybe there is not strong price pressure. We will say more or less – so we can say that we are more or less stable.

And Sandeep, so the reason why I show is everybody’s number. In Q3, the production of ST will increase by 12.5% supporting this sequential growth of 10.5% of Q3 and preparing Q4.

Yes.

Does it answer your question, Sandeep. Sandeep?

Probably, yes.

Okay. Probably, yes. I hope so. Myra, next question, please.

The next question is from Sébastien Stabowitz from Kepler Cheuvreux. Please go ahead. Sébastien Stabowitz: Yeah. Hello, everyone, and thanks for taking the question. Regarding the 300-millimeter fab build up with GlobalFoundries, what kind of CapEx should we add to our model going forward for this specific fab? And the second one is returning to the question on sequential growth in your main division in Q3. Could you do provide a little bit of more granularity on the kind of growth we can expect sequentially by Q3? Thank you.

That’s about the CapEx, the project we intend to complete with GF is consistent simply with our $20 billion plus ambition. Of course, when we have prepared this plan, we assisted in many scenarios of manufacturing supplies to enable this $20 billion plus ambition. No, I have to say that scenario to build an adjacent fab to call with GlobalFoundries with significant support from the France is making the scenario competitive clearly. And then, okay, we will, let’s say, also give to both ST and GF on the scaling advantage. But the CapEx, okay, is will be simply consistent with a $20 billion plus ambition. Sébastien Stabowitz: And the sequential growth, maybe Lorenzo?

Sorry. Sorry. No, okay. As I said before, AMS is a group that is driving the sequential growth. But I think that this will not be a surprise if I say that these are our imaging products that are really, let’s say, driving inside the AMS growth. There will be contributions through for the Analog and also MEMS that will be, let’s say, lesser significance of the one of imaging. In the second half of the year, let’s say, our customer engage program that we have a Personal Electronic with our main, let’s say, customers is definitely one that is important for us. And definitely imaging is quite exposed on that. So at the end, let’s say, the growth comes from there in AMS. But I wanted to repeat that at the end there is not the only one AMS. We have still significant growth in ADG and the MDG as well. Let’s say, we will continue to see growing these groups.

Thank you, Sébastien. Next question, please, Myra.

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

Yeah, good morning. Just for me a clarification on the cooperation you recently announced with Volkswagen. It was not clear how broad it is within the Volkswagen Group, because I know you announced for example some time ago a very important cooperation with Renault. So just to understand, if it’s basically a broad collaboration with Volkswagen on the future platform or it’s just, let’s say, will have a minor impact. And then related to this, I think, you already mentioned that the Capital Market Day that you are changing the way you interact with automotive OEM. So, just wanted to know if you have continued in the last month to sign a new long-term contract with, let’s say, attractive pricing for you? Thank you.

First of all, okay, this is a public project called Trinity at Volkswagen aiming to develop the software-defined vehicle architecture and zonal. And here, and in this platform, okay, we’d be deployed across the board in all the Volkswagen Group, full. And here, basically ST will have, let’s say, participation today. Okay, I wanted into two critical components. The MCU, so the high performance Stellar MCU develop on 28 FD-SOI embedded PCM technology, which is a product developed, okay, in our technology, manufacturing in our technology. And then, okay, ST is participating to the development in the architectural of the complex system on chips embedded, let’s say, processor, but also real time processor, which are IP of ST called Stellar, which are also present in the MCU. And ST, okay, we love the ownership of, let’s say, the engineering, the manufacturing of this system-on-chip in cooperation with TSMC, which is exactly very similar model of what we have with Mobileye. So when we had at Volkswagen Group level full deployment, the capability, okay, to have like Mobileye. The ownership of the MPU system-on-chips in cooperation with Volkswagen car yard and TSMC plus or the MCU that we will manufacturing our self starting 2026 it will be material for ST.

Okay. Thank you. And with the other OEMs, you have continued to change, let’s say, the relationship on LTA that kind of contracts?

It’s clear that we see an evolution with the relation in the ecosystem between carmaker Tier 1 AMS and in ST. It is clear that our preferred, let’s say, model is either of the traditional carmaker of Tier 1 and us. Of course, okay, changing the way the value chain operate, okay, I guess no everybody has understood that the semiconductor are not a commodity with infinite capacity and very short lead time. So, I guess, everybody has understood that you have to plan investment, you have to plan capacity, you have to give visibility and when the value chain is car maker, Tier 1, and semiconductor, okay, it’s much better to keep it as it is. Then what we are seeing, we are seeing some evolution in some carmaker that for some part of the system of the car, clearly, there is an evolution where the carmaker on the IP start to design the architecture of the system and the device and will operate more in a model like the smartphone, where you will have the carmaker using an AMS, but okay with the speculation with us imposing the type of semiconductor that the EMS will have to use. And clearly, we see this trend, okay, increasing definitely. But this is basically the two models that we will see the future. But then, okay, if there is some specific agreement between car marker, ourselves, in any case must be done. Okay with the agreement of the Tier 1.

Thank you.

Thank you. We have time for one or two more questions, depending on the length. So next question please.

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

Hi, good morning, Jean-Marc. Good morning, Lorenzo. Thanks for taking the question. Just a clarification of your response, Lorenzo, to Sandeep earlier in terms of the pricing. I just want to make sure I heard it correctly, you’re saying of the year-on-year growth in revenue that we’re seeing in the second half of this year, 14% of that is coming from pricing is that right?

Yes. Broadly, yes, in the sense that when we look at the growth in terms of revenues, there is a component of pricing, there are three components I said. The one is price; one is mix; let’s say, and the other one is, for sure, volumes, let’s say, when we look overall the pricing component is in the range of 40% on a year-over-year.

Got it. okay.

Well, this quarter is increased. The reason when you look at year-over-year, why sequentially are substantially stable the pricing.

And in terms of your visibility into further price rises into next year given that you are essentially fully booked as you said and particularly for the OEM related business, where you’ve got these longer term contracts. I presume you’ve got visibility into further price rises into next year on a like-for-like basis?

Well, today, let’s say we have some contracts that of course are defining the evolution of the pricing, let’s say, in terms of mass market, I would say that probably will be a little bit more stable than this year the pricing. Then this is, what is our visibility today in terms of evolution of pricing.

Okay. And then just sort of final one in relation to the comments you’ve made about the rise in production capacity – internal production capacity in third quarter, the 12.5%, clearly, you’re continuing to invest in terms of CapEx later this year and into next year. But is there any reason that that’s not a good starting point for us to start thinking about the kind of capacity that you’re looking to build into 2023 volume growth based on that kind of capacity increase plus a pricing element those reasonable building blocks to start with 2022?

No, today, where we are, first of all, okay, it is clear feel that we know well, we want to position the company next year or for simple reason that our whole supply chain is, let’s say, providing some constraints in terms of the time more you know that for scanner, lead time basically is 24 months, okay, for, let’s say, thin film deposition, etcher or the – most of our process tool is basically 18 months and then for assembly and test over, and so on is above 12 months. So it’s clear that today we have a quick order all the orders, okay, to contribute and we have a clear visibility on the level of investment that potentially, okay, we will put on the table next year. Today, we are in the process to really secure, because this year okay we faced, okay, a poor reliability in the delivery of equipment maker. And now, okay, this system thing we are deep diving in, because they are also their own constraints. Don’t take it as a joke. But they are limiting by semicolon. In fact, and it is a hand to an exercise that which is quite complex, but it is mandatory to make it, because as I said, we change also a policy now, we are confirming the order to our customer on 24 months rolling. So it’s very important for us okay to have, let’s say, a secure and reliable forecast from the equipment maker. Well, this exercise is going on definitively. And we will provide as usual, the visibility of the CapEx spent and on the 2023. Also new indication, let’s say in January – end of January during Q4 earnings. But what is important is, again, in H2 2022, we will have benefits of the CapEx we spent, let’s say, Q4, Q3, Q4 last year and Q1 this year and beginning of Q2, we increase our capacity and volume by 12.5%. And H2, okay, we will deliver an overview of $8.7 billion. Thank you.

Thank you, guys. I appreciate it. I had to try and ask a bit more about next year.

Thank you. And we take a final question not to stay with it. So Myra, we take a very final question now, the last one.

The last question for today is from Didier Scemama from Bank of America. Please go ahead.

Oh, thank you for squeezing me. That’s lovely. Congratulations. Just one question for you, Jean-Marc. So clearly, imagining is going to be a big driver in the second half of this year. You’ve said previously that your engagement with that top customer was going to – was at least extended through calendar year 2023. So I just wanted to ask you a question, if you were to lose that contract in the later part of 2023. Given your current backlog and sort of book capacity, do you think that there would be much impact to the company in terms of top-line or margins in calendar year 2023? I’ve got a quick follow-up. Thank you.

This scenario is not existing.

So next question, I’m going to go back to Andrew’s question, you tried very cleverly. So I’m going to try a very clumsily. So if I take your Q4 add a bit of capacity, you’re effectively guiding at least everything being equal for revenues in probably $17 billion to $18 billion. And I’m probably being cautious there. Is that the right way to think about it? And then, Lorenzo said pricing sort of flattish next year, presumably your depreciation will go up. So do you think gross margin would be stable? Would you think gross margins would decline even on a big revenue growth next year?

Lorenzo, you want to take that one.

At this stage, I don’t know why we should decline. I mean, at the end, let’s say, for the time being that what I said there is that, let’s say, today what we see is that we will be some tailwinds that are the exchange rate, for sure, some improvements in our manufacturing efficiency. There are, let’s say, negative impacts related to the cost, inflationary costs, these kinds of things. Let’s say, this is where we see, as I said before, I think that next year will be another year moving assets to the path to the 50% gross margin in 2005, 2007 – 2022. $20 billion next year. Okay. Great.

Okay. Thanks very much.

Thank you.

I think if we conclude our call. Thank you very much everybody for the questions.