STMicroelectronics N.V. (STM) Q1 2023 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the STMicroelectronics' First Quarter 2023 Earnings Release Conference Call and Live Webcast. I'm Andre, 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. [Operator Instructions]. At this time, it's my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead.

Thank you, Andre. And good morning. Thank you, everyone, for joining our first quarter 2023 financial results conference call. Hosting the call today is Jean-Marc Chery, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President of Finance, Purchasing, ERM and Resilience and Chief Financial Officer; and Marco Cassis, President of Anal Velvement and Sensor Group and Head of STMicroelectronics Strategy, System Research and Applications Innovation Officer. This live webcast and presentation materials can be accessed on ST's Investor Relations website. The replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST's results to differ materially from management's expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings or a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, [Operator Instructions]. I'd now like to turn the call over to Jean-Marc, ST's President and CEO.

So thank you, Celine. And good morning, everyone. And thank you for joining ST for our Q1 2023 earnings conference call. So, let me begin with some opening comments starting with Q1. So first quarter, our net revenues of $4.25 billion came in better than expected in automotive and industrial partially offset by lower revenues in personal electronics. Gross margin of 49.7% came in 170 basis points above the midpoint of our guidance, mainly due to product mix in a price environment that remain favourable. Looking at our year-over-year performance. Net revenues increased 19.8%. Gross margin at 49.7% was up from 46.7%. Operating margin increased to 28.3% from 24.7%. And net income grew 39.8% to $1.04 billion. On a sequential basis, net revenues decreased 4%. On Q2 2023, at the midpoint, our second quarter business outlook is for net revenues of about $4.28 million representing a year-over-year increase of 11.5% and a sequential increase of 0.8%. Gross margin is expected to be about 49%. For the full year 2023, we will now drive ST based on a plan for full year 2023 net revenues in the range of $17 billion to $17.8 billion, representing a year-over-year growth range of about 5% to 10%. Now let's move to a detailed review of the first quarter. Net revenues increased 19.8% year-over-year, driven mainly by ADG and MDG, while AMS revenues decreased slightly. Year-over-year, sales increased 17.5% to OEMs and 24% to distribution. On a sequential basis, Q1 net revenues came in 110 basis points above the midpoint to our outlook. This performance was driven by better-than-expected results in ADG on continued strength in automotive. And in MDG with general purpose microcontrollers, remaining strong in Q1. Overall, Q1 net revenues decreased 4% on a sequential basis, with ADG up 6.5%, MDG lower by 1.1% and AMS decreasing 20.3%. A reflecting lower-than-expected revenues in personal electronics on top of seasonality. Gross profit was $2.11 billion increasing 27.5% year-over-year. Gross margin increased to 49.7% compared to 46.7% in the same quarter last year. The 300 basis point expansion was driven by improved product mix, favourable pricing and positive currency effect net of hedging. Partially offset by higher manufacturing costs. Q1 operating margin was 28.3%, up from 24.7% in the year-ago period. With ADG and MDG contributing to the 360 basis point growth in operating margin. On a year-on-year basis, net income increased 39.8% to $1.74 billion from the $747 million and diluted earnings per share increased 39.2% to $1.10 from $0.79. Looking at our year-over-year sales performance by product group. ADG revenues increased 43.9% on a double-digit growth in both automotive and borrower discrete. AMS revenues decreased 0.9% with lower revenues in Analog and MEMS offsetting an increase in imaging. MDG revenues increased 13.2% with growth in both microcontrollers and RF communications. In terms of operating margin, two of three product groups delivered year-on-year expansion. ADG operating margin increased to 32% from 18.7%. MDG operating margin increased to 36.2% from 33.7%. And AMS operating margin decreased to 20.4% from 22.9%. Net cash from operating activities increased to 39.7% to $1.32 in Q1 compared to $945 million in the year ago quarter. First quarter CapEx was $1.09 billion versus $840 million in Q1 2022. Thanks to the strong growth in net cash from operating activities, free cash flow grew to $206 million in Q1 2023 versus $82 million in Q1 2022. Cash dividends paid to stockholders in Q1 2023 totalled $54 million. In addition, ST executed share buybacks of $87 million as part of our current repurchase program. ST's net financial position of $1.86 billion as of April 1, 2023, reflect total liquidity of $4.52 billion and total financial debt of $2.66 billion. Now let's now discuss the business dynamics. During the first quarter, demand in the automotive market and in the power and energy fraction of the industrial market remains strong driven by continued semiconductor pervasion and the ongoing structural transformation. Factory automation, robotics and building control grew revenues in line with our strong backlog, while new orders normalized. Given in consumer industrial, communication infrastructure and networking, including data centers and servers, softness and demand for personal electronics and computer peripheral further weakness. Our backlog is now about six quarter at the midpoint of our full year 2023 indication, still above a normal situation, but with different coverage consistent with the values end market dynamics. In automotive and industrial, we are still well above the capacity we can sell on some technologies and packages. In the other end markets we sell, we are back to a more normal level of coverage. Moving now to our Q1 review by the market. In automotive, demand in the first quarter remains strong. Against this backdrop, we continue to execute our strategy for car electrification, in particular, in silicon carbide. The number of ongoing silicon carbide programs increased again during Q1. Between the automotive and the industrial markets, we now have 130 projects spread over 85 customers. About 60% of these projects are for automotive customers. We now expect to generate about $1.2 billion of silicon carbide revenues in 2023, broadly spread among mainly customers. We had design wins in Q1 with both silicon and silicon carbide power discretes in automotive applications. This included an AsPac power module and silicon carbide MOSFET for traction investors as well as projects with silicon MOSFET in battery management systems. In mid-April, we announced that we signed a multiyear supply agreement with ZF for silicon carbide devices. Under this agreement, we will supply a volume of double-digit millions of devices that will be integrated in ZF new modular investor architecture going into production in 2025. Speaking more broadly about our automotive portfolio serving car electrification. We won designs for multiple electrical vehicle makers, including our stellar automotive MCU for onboard charging application. In car digitalization, we have a number of design wins in key areas. In next-generation car architectures of our eFuse products for zonal controller solution gained traction. In driver monitoring system, we were successful with our global shutter automotive inventions. Legacy automotive remains dynamic and silicon pervasion continues to increase. Here, we had several wins for our SPC 5 microcontrollers for vehicle body control as well as our latest products for the secured or Zone platform. In our automotive center business, we won several new designs for vertical dynamics, airbags and anti-tested applications. Moving now to Industrial. Across the industrial market, we see two main trends driving a structural transformation in the market and accelerating the increase in the semiconductor content. Digitalization of devices and systems and energy management and power efficiency improvement. During the quarter, demand moment strong overall in both OEMs and distribution with different dynamics across the areas we sell. In B2B Industrial, we continue to see strong demand in power energy, factory automation and robotics, building control group revenues in line with our strong backlog but while new orders normalize. Consumer industrial touch as battery-operated tools and home appliances softness. During Q1, we continue to see an expansion of design wins across three areas of the industrial market we focus on, B2B, consumer and specialized. Our broad offering enables us to support our customers with full solutions, combining power, analog, sensor and onboarded processing products leveraging ST unique position. Which include system solutions comprised of power discrete power management and STM32 MCUs in renewable energy applications. And multiproduct solution for smart meters and smart win applications. We also won sockets with intelligent power switches, motor drivers, industry outsourcers and secure solution in applications such as industrial automation, asset tracking and several power supplies. In the quarter, we made a number of announcements related to our STM32 product portfolio and ecosystem. This included a new highly affordable MCU service to replace 8-bit MCUs. A new high-performance MCU service with health security features, a new IRS FCU and a new NPU products. We also continue to build the best developer ecosystem with two industry flips. We introduced a certified MCU security platform that combines hardware and software to simplify development of secure better application. And we launched the world's first MCU edge AI developer cloud that includes an online benchmarking service for edge AI models on STM32 boards. Moving to personal electronics. During the quarter, our products were selected for flagship smartphones, watches and other wearable devices. This includes NFC controllers and secure element solutions, wireless charging products, main sensors and time-of-flight ranging sensors. In communication equipment and computer peripheral, new wins here included products for Ilios satellites a number of products or computer peripherals, including secure solution, timer flies in MCUs and adding for communication infrastructure based on our populated technologies. Now I would like to mention that we issued our annual sustainability report last week, a couple of key points. We are on track with our program to be carbon neutral by 2027, and we further increased our global sourcing of electricity from renewable energy growing to 62% in 2022 from 51% in 2021. We were recognized by environmental non-profit CDP to carbon disclosure project, as a global leader in corporate transparency and performance on water security, being one of the few companies to secure a place on its NLA list. Now let's move to our second quarter 2023 financial outlook and our plan for the full year 2023. For Q2, we expect net revenues to be about $4.28 billion at the midpoint, representing a year-over-year growth of about 11.5% and a sequential increase of about 0.8%, both driven by solid growth in automotive and industrial, partially offset by the decline in personal electronics. Gross margin is expected to be about 49% at the midpoint. For 2023, we confirm our plan to invest about $4 billion in CapEx with about 80% of this amount, mainly related to increase of our 300-millimeter wafer and silicon carbide manufacturing capacity, including for silicon carbide, our substrate initiative. The remaining 20% is for R&D laboratories, manufacturing maintenance efficiency and our corporate sustainability initiatives. Based on our visibility, we will now drive the company based on the plan for full year 2023 revenues in the range of about $17 billion to $17.8 billion, representing a growth over 2022 of about 5% to 10%. Automotive and industrial will be the key growth drivers of our revenues in 2023. To conclude, as we have discussed, we are operating in an environment with significantly different dynamics depending on the end markets we sell. But based on our leadership position, strategic approach and current visibility, we anticipate 2023, another year of revenue growth and profitability improvement. So on our $20 billion plus ambition and related financial model. Thank you, and we are now ready to answer your questions.

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

Good morning. Thank you so much for taking my question. Jean-Marc, you've got maybe a first question, looking at the second half and the sort of changing dynamics that you highlighted. There's been a number of sort of conflicting reports when it comes to the automotive market during Q1 earnings season. So can you just give us a sense of what your orders look like for the second half of '23 and perhaps the visibility you have into 2024? And then a question for Lorenzo. I think you mentioned previously that gross margins would be broadly flat for calendar year '23. Obviously, your first half is running quite a lot above that guidance. So any reason to change the full year guide on gross margin to raise that? Or do you have any other additional headwinds that you want to flag in the second half?

So I will answer about the revenue for the year in H2 versus H1. And Lorenzo will speak about gross margin. Well, let's say, in H2, at the midpoint of the indication we provided, we anticipate a growth of 4% H2 versus H1. And again, it's important that in H2, as I – while knew during our Q4 earnings announcement in January, we will have a specific mix change an important customer program in personal electronics. And this mix change is material. Here, I have spoken H2 year-over-year in personal electronics of an impact of $0.5 billion. And despite this impact, the company will grow in H2, driven by automotive and industrial market, 4% H2 versus H1. And will grow year-over-year H2 2023 versus H2 2022. So this is okay. The demonstration that, okay, we are really resilient in front of the personal electronic market. Well, about the backlog, but it is clear that the backlog coverage is following exactly the market dynamics. We are fully covered in backlog for automotive and basically industrial power energy-related and B2B automation, robotics and, let's say, building controls. Where -- okay, we have still to enter order for the second part of the year is more on consumer industrial is more, let's say, on servers and definitive on pure consumer related, like personal electronics and computer peripheral. So that's the reason why our confidence level to have raised the low end of our indication from $16 million to $17 million is very good. We have not raised the range because on Power Energy and Automotive, we are still facing some capacity limitation. In the key technology cluster at 14-nanometer, silicon carbide, IGBT, all okay, which are really driven our goals. So this is H2 versus H1 dynamic. And the complexity, let's say, of the environment we are facing. Now about gross margin, okay, Lorenzo?

I take the question. Good morning, everybody. About the gross margin or the gross margin at midpoint of our revenue indication for the year, we do expect to have a gross margin ranging between 47% and 48%. In the year, of course, the positive product mix. We have manufacturing product improvement. Substantially, we will see an overall price stability. This will be offset by increase in food cost in our manufacturing. And then we have not to forget that in the second part of the year, we will have the impact of the ramp-up of the 300-millimeter in a graphic that there will not be their optimal capacity, and this will impact our COGS in the second half. This is the dynamic, let's say, when we look at the current year with the late last year. If we go a little bit more specific to compare, let's say, the first half with the second half of this year. Of course, in H1, gross margin has benefited from a sequential positive price effect. We had also a strong positive impact on the product mix. While in the first half of the year, our gross margin has not yet been significantly impacted by the increase of the input and manufacturing costs. In H2, on the contrary, we expect to be impacted by some increased sales price pressure, even if in the year, this will be, let's say, substantially neutral. But in the second part of the year, we will see negative price pressure when looking sequentially. Manufacturing input costs will increase, then there will be also some less optimized production level and in some specific at the ones that are more exposed to consumer or personal electronics. And as I was saying before, in the second part of the year, there is the impact of our 300-millimeter graph. That really today is in the start-up. But in the second part of the year, we'll enter in our cost of goods sold. So at the end -- let's say, the visibility -- I repeat that the visibility for the will be with a gross margin that will be ranging between 47% and 48%.

Got it. I just wanted to clarify, Jean-Marc, did you say the headwind from your sort of market customers and personal electronics in $0.5 billion year-over-year in the second half? Is that what you said?

Yes.

Okay. Got it. And then maybe a quick follow-up. I just wondered if you could discuss a little bit the pricing environment in the second half. In microcontrollers, there's a number of sort of reports out there in Asia that pricing is getting weaker, especially in the consumer and PC peripherals, et cetera, market. So First of maybe remind us where you play in those markets and whether you are tempted to follow this price action or refer to dedicate our capacity to automotive and industrial and controllers to protect pricing.

Yes. My first comment is we cannot speak about price generally across the board. As we described, okay, we are really facing complexity with really significant different market dynamics. And of course, okay, you have to manage your price. Let's say, being selective -- it is clear when you face, let's say, competition on pure consumer connected device is absolutely not the same when you are competing in a power box where you are managing the power solution. So we cannot speak about the price across the board. Yes, we do believe that in H2 in the field of consumer where you will have, let's say, lead time of production supply coming back to normal and potentially here and there in some specific locations, some capacity flexibility to see price pressure. And ST, we will manage it selectively. Overall, okay, it will land on what described Lorenzo. So across the year, we should see a price, okay, basically [multiple speakers]. And in H2, yes, okay, we will see some minus.

The next question comes from the line of Matt Ramsey from TD Cowen.

Thank you very much, everybody. Good morning. My first question, I wanted to ask the silicon carbide target. You guys had talked for a while about billion in 2023. And then I think in January, you had said greater than $1 billion, and now you're talking about $1.2 billion, which is great. I think all of us saw the announcement with ZF and what that could potentially mean. I guess my question on that is for the industry ramping material supply. We get a lot of conflicting reports, some bumps with your primary material supplier, some news of potentially ramping supply at other sources. So Jean-Marc, maybe you could talk a little bit about your near-term plans for getting silicon carbide material supply to support that revenue ramp. And if there's any update. I think you mentioned in the script, increasing investments on your internal substrates. If you could give us an update on the time lines there where you're getting bad can start to supplement supply with internal supply that would be helpful.

Well, okay, I will not comment -- okay, the other competitor and supplier. Clearly, I really confirm the $1.2 billion. We know that ST, okay, according some numbers, we see that in 2022, we have about 40% of market share. And with this $1.2 billion looking like according to the market data we have -- that we will increase our market share. But thanks to our capability to deliver one step out and module and package out according customer expectation. And same the multiple source we have in raw material. Saying that we are really on track to be in position starting 2024 to produce raw material for our own needs. And going forward, okay, to achieve 40%. Now this will be first in 6-inch definitively. We are preparing the 8-inch conversion. So we have already produced one 8-inch ingot from our former Nortel -- let's say, facilities. And we are qualifying the 8-inch device according our qualification protocol. So we anticipate that we will start 8-inch activities, let's say, in second half of 2024. Well, then after, we have, let's say, other opportunity for silicon carbide. First, to qualify also the Smart technology, which will be very, very instrumental for cost decrease, but for 8-inch wafer size conversion. We will qualify in the same branch of 2023, our generation for silicon carbide that we will start to ramp up in 2024. So this is what I can confirm to you. Well, then looking at the market evolution and the number of programs and the number of customers we have, we are very confident to deliver about $2 billion in 2025, 2026. And then, okay, to have a target, okay, long term, well above $5 billion when the market will reach $15 million. So this is really the road map we execute. I don't say, clock watch but we execute every quarter and every year fully consistently what we said since the beginning.

Thank you, Jean-Marc for the detail. I realized the sensitivity on some of the near-term stuff there. As my follow-up, Lorenzo, you had talked about some of the potential gross margin impacts in the second half of the ramp of 300-millimeter capacity. So I wanted to ask about that a little bit. Maybe just to kind of follow on to Didier's question. There's certainly some angst in the system around pricing and margins. So I guess the first one is, could you maybe quantify, if you could, the gross margin impact just from the 300-millimeter ramp in the second half of the calendar year? And then I mean, really strong margins up to 49% in the guidance. I think folks are wondering if that -- is that a peak? Is that a new normal? How would you consider that? And maybe if there's some price pressure, when do you feel like the 300-millimeter capacity will be at a scale to be a positive driver of margins rather than a near-term ramp-up headwind?

Clearly, in the second part of the year, when the 300-millimeter fab in grant will exit from the ramp-up accounting that today is bringing let's say, the equivalent of the saturation cost or the excess cost in the line other income and expenses, we will see, let's say, this impact coming directly in our COGS. How much this will impact -- of course, this is temporary because it's due to the fact that the 300-millimeter is not at a reasonable, let's say, level that will reach in order to be substantially neutral and start to contribute positively to our gross margin in the course of 2024. In 2023, for sure, this will not happen. We need to reach in 2023, our capacity will be still, let's say, at the level of below 1,000 wafer per week, and let's say, significantly below. So at the end, this is a size for a 300-millimeter that is definitely not accretive for the gross margin will be increasing the cost. Looking overall, let's say, the second part of the year, as I was saying before, there are three components that are impacting our gross margin. On one side, there is the impact of the 300-millimeter. On the other side, there will be the impact, let's say, of the fact that we will start to see materially the increased cost in our manufacturing that today is partially, let's say, suspended in our inventory. But then it will come down in our P&L starting already partially in this quarter in Q2, but definitely with much higher level of impact during Q3 and Q4 and the other side, there will be also, let's say, some impact related to the price pressure that we were discussing before and the mix. How this will account when we compare the first half and the second half of our gross margin. I would say that one-third, one-third, one-third, more or less, let's say, we can see that this is the impact of these 3 main elements that on one side are the impact on pricing in our top line, on the other side is the impact of the increased cost in our manufacturing costs on the other side is the 300-millimeter. And I repeat just to clarify. This is a temporary impact, let's say -- and then, of course, in the second part of the year, as I was saying before, there are some of our fabs that are not working at optimized production level. Because, of course, we are also keeping under control our inventory. And as you see, we have some of these steps, the ones that are more exposed to consumer or personal electronic, let's say, we needed to be sure that we are not inflating our inventory. So this is another impact that is fully taken into consideration in our indication of gross margin of the year between 47% to 48%, but will contribute in any case, to add on our gross margin in the second half of the year as a detractor.

The next question comes from the line of Stephane Houri from ODDO BHF. Please go ahead.

Yes, good morning. Thank you very much for taking my question. Actually, I wanted to come back on the price dynamic, notably in the automotive segment because in the past, you have explained that the relationships with automotive industry had changed a bit and that you were not expecting prices to collapse, but maybe come back to a more normal trend. Is that what you're seeing at the moment or not yet? And the question linked to that is with the temporary impact that you're talking about for the gross margin in the second half. Are you still comfortable with your target to get back to or to go to 50% gross margin within the time frame of your plan?

Yes. So definitively, so -- but of course, Lorenzo, with further comment. Again we repeat what are the key driver for gross margin improvement. I think Lorenzo elaborated that we have a temporary impact of ramp-up definitively, which is not absolutely not a surprise. It is mitigated by the ramp-up of coal at the same time. And each time we are increasing coal ramp-up according to the plan of record, we have with the order project, okay. For sure, we mitigate also Agrate. When Agrate will reach the adequate scale, Agrate will contribute to the gross margin of ST. So the 300-millimeter is one of the main elements. I repeat the second element is the silicon carbide moving forward to 200 millimetre. And thanks to the smart technology, which is really key to make the 200-millimeter successful. We will have important leverage to decrease our costs. And of course, okay, to contribute to the gross margin improvement. It is clearly the two important, let's say, contributor. Well -- then after the loading of our fab temporarily in H2 some fab, okay, will face, let's say, not fully optimize loading, but it is mainly related to personal electronics. Just to give you an order of magnitude, okay, in 2020, at the midpoint, personal electronics, okay, will decrease 25%. And half of the decrease is not silicon impact because it is an optical module product mix change with no impact on the loading, but has had an impact on the loading. So of course, okay, in H2, we have this temporary nonloading that we will compensate moving forward because the demand on advanced BCD technology, advanced lower technology for automotive, industrial is more and more increasing. So then, okay, we will come back to a full loading of our fab starting 2024 definitively. So is that the reason why we confirm to you that the $20 million plus ambition, we will deliver the 50% gross margin. About the pricing on automotive, now okay, we position this business and the demand of the customer and technology cluster that radically changed compared two years ago. Now okay, we are at 40-nanometer technology 28. Maybe tomorrow, we will be at 18 technology. Silicon carbide, GaN, IGBT modules. So it's a complete different mix compared to the past. And on this technology, there is no more excess of capacity. And the investments are cautious. There are no excess of investment worldwide on all this kind of technology, let's say, clusters because, first, it is either on 300-millimeter or which is on [indiscernible]. And this is calling for CapEx that companies are spending cautiously. And you know that in this field of activity, the foundry business is quite tight, okay? There is no -- let's say, excess of foundry competition in competing in the field of automotive. So that's the reason why, yes, we will go back a normalized price discussion with the customers. More and more, we will have straight discussion with the car makers. Clearly, it is a trend we are seeing. So the model, okay, moving forward, okay, it's not the model we had five years ago or 10 years ago. Well, saying that, okay, Lauren.

Yes, maybe just a clarification. When we were talking about the impact of pricing in the second half of this year is not actually an automotive we have been rediscussed the pricing, as I was saying, is increasing. Indeed, there is a strong decline in price on a sequential basis on different areas than automotive that are the ones that are most exposed to the difficulties of the market. We are talking here about a big consumer portion of the industry. And indeed, at the end between automotive, increasing pricing, maintaining pricing and, let's say, some other areas in which there is a normal dynamic price decline. At the end, the price will be substantially flat in the year. In respect to the gross margin, what I just confirm what Jean-Marc said. And of course -- also, let's say, we need to consider that reaching our target, let's say, of the 50% gross margin, a $20 billion-plus is not linear. It means that we may have some quarter like you have seen in which we are very close already to the target likely in Q1, some other in which we will be a little bit, let's say, down, one of the reasons were discussed before. Now let's say, when we introduce our 300-millimeter, not yet at the full size. So, but at the end, the trend will be that one when the one that will bring the company to gross margin at 50%, when the size of our top line will be in the range of the $20 billion.

Okay, thank you very much.

Next question, please.

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

Good morning, guys. Thank you for taking the question. Two follow-ups to questions that have been asked, if I could. First, Lorenzo, you mentioned inventories and making sure that you are sort of continuing to manage inventories pretty tightly given the end market dynamics that you're seeing. Inventories rose quite a bit on your books in the quarter. Yes, of course, it doesn't seem as though you weren't short of demand per se in the quarter at a group level. Clearly, you beat your guidance and you didn't pump the brakes on the farms in the first quarter at a high level still delivering gross margins well in excess of your guidance. So can you just sort of describe what was driving the inventory increase in first quarter? Did that come as a bit of a surprise perhaps towards the end of the quarter? Or is it -- it's really there in preparation for what you're seeing across the different end markets in the second half? And then I have a follow-up on silicon carbide.

Yes. For sure, I take this question. Our Q1 came better than expected in terms of revenues, let's say, mainly impacted by two elements. The first one was better mix in respect to what was expected. And on the other side, let's say, a better price environment means that at the end, let's say, we were modelling pricing already started to decline in some areas. While in state this did not happen. This positive impact on the two sides, and I would say, on one side, on the revenues. On the other side, of course, on the gross margin. Anyway, our Q1, let's say, inventory, as you rightly said, came above the expectation are higher because we were -- we are at 122 days compared the starting point at the end of Q4 that was in the range of 100 days. This level is mainly associated to excess of inventory that has been done in personal electronics and in consumer. Where the market were weaker than what we were expecting. So we were up, let's say, producing the revenues came a little bit in a different way, let's say, with better mix better pricing, but lower quantities in some product lines. And this, of course, brings an increase in our inventory that was not forecasted, let's say, at the beginning of the quarter. We will correct during the year, such excess. Where we will land, let's say, at the end of the year. Also considering that we will enter, let's say, the 300-millimeter the week that we will have in grafted 300-millimeter. At the end, we do think that at the end of the year, let's say, the number of days of our inventory, let's say, will be slightly above the number of days that we have, let's say, at the end of 2022. So it will be something in the range of 105, 110 days of inventory at the end of 2023.

Thank you. And then just quickly on silicon carbide. I mean Jean-Marc to the comments you made in your prepared opening now at $1.2 billion for 2023. Let's say, maybe 20% uplift relative to what you were explaining to us in the second half of last year. It's a 60% to 70% year-on-year growth rate relative to 2022, and that's coming at a time when some of your peers seem to be struggling in terms of their silicon carbide ramp. So where are you able to get this extra capacity out? You also mentioned during your prepared comments that SIC remains pretty constrained, although maybe that was a high-level comment. Where are you able to eke out an extra 20% of wafer or module supply in silicon carbide? Thank you.

First of all, internally, now we have really our four manufacturing location. So 2, 4 fabs, so Singapore and Catania and 2 for assembly, so Shenzhen and [indiscernible] in Morocco running altogether full mass production. And thanks to the CapEx we spent in H2 2022 to increase the capacity. Well then we have diversified our raw material source because also we anticipated some difficulties of one wonders in the some around for last year. So we secure ourselves in terms of capacity. Well, and last, okay -- I think it's important. I mentioned that, now the demand we have is really well diversified. Our main customer is representing below 65% of the total revenue we expect. And we have the program we won during the past 2, 3 years that are starting to generate significant revenue for ST. So all in all, I would like simply to confirm that we invested last year, and we have executed the capacity implementation properly. Now with four locations running full speed. We have our demand well diversified and new program ramping up on top of the main customer we have. And we have secured worldwide with different sources located in different places in the world to secure our ramp up, waiting for our internal stops to be ready and to sustain our ambition to grow above 2 billion to 1.5 billion.

The next question comes from the line of Sztabowicz Sebastien with Kepler Cheuvreux. Please go ahead.

Hello and thanks for taking my question. On silicon carbide, could you please make an update on your technology road map there? And you mentioned that the Gen 4 if I'm right, by H2 this year. Could you provide a little bit of timing for the ramp up of Gen4, but also Gen 5? And what kind of improvement are you expecting from Gen 4 and Gen 5 versus your third generation of silicon carbide technology. And the follow-up is on the inventory level on your two main markets, automotive industrials. Where are the inventory standing versus normative level?

So the generation 4 will be maturity, what we classify maturity a production in the second half of 2023. And ready for production in 2024. And the timing will be, let's say, consistent with the qualification time we need to do on the automotive, let's say, market. So we will ramp up smoothly in 2024. According to the timing of qualification. But internally, this technology will be qualified by the second half of this year. The generation 5 will follow basically 18 months later. Generation 4 and generation 5 are still planar technology where we significantly improved the performances. And with absolutely, okay, no gap versus the best-in-class technology we can assess. Well, then we will move to generation 6, okay, where we will make a disruption. But okay, I will comment in due time definitively. So again, generation 4 and 5 let's say, will improve the performance of the device that is enabled by the technology. In parallel, do not forget that we will implement two important let's say, process change. The 200-millimeter that is not a piece of cake for silicon carbide. I don't want to be technical, but it is not a piece of cake. You have many mechanical effects, which are not so easy to control when you increase the wafer size of silicon carbide is point number one. And for us, still the point number two, we will implement the Smart technology, which will be really an important add-on that will enable better performance on the device, lower cost of the solution at substrate level and will make easier the conversion to the 200 millimetre. So two technologies in the next three years’ implementation and two major process a 200-millimeter and smart seeking production. And then later on, we will introduce the generation 6, which will be a disruption in terms of architecture of the transistor.

And on the inventory question on auto industrial, where are we standing right now?

Inventory, you mean in the channel...

Yes. Definitely in the channel?

Well, you know that we monitor pretty well the inventory at the distribution channel. Well, here, okay, it's clearly following the market dynamic, okay. When you are through distribution addressing mainly -- okay, for us, the industry or market, we are coming back now to a normal coverage in terms of inventory. So it means we have inventory turn between term of 3 to 4, whatever are the devices, microcontrollers, analog power overall. Of course. And of course, we have some inventory which are, let's say, as an upper limit that we access generally like wise. Why? Because they have been impacted by the personal electronic market dynamics. So that's the reason why, okay, we will control in our, let's say, revenue target of inventory at distribution level. Again, except the inventory in front of consumer market, we do not detect any excess of inventory. Inventory, our distribution are just at the level for distributors to manage term business to manage the situation, which is a normalized situation. Well -- then about our Tier 1 and, let's say, the supply chain, supplying the carmaker at this stage, especially, of course, on all the technology driven by smart mobility and electrification, digitalization. We do not detect absolutely any inventory in excess. On legacy automotive is difficult to say because for us, we are supplying 14-nanometer. We are supplying the CD9, BCD8, and the demand is still very, very strong. So we do believe that on this kind of technology cluster, there are no inventory in excess across the supply chain.

Thank you.

The next question comes from the line of Lee Simpson with Morgan Stanley. Please go ahead.

Thanks so much for taking my question. Just trying to sort of tease out a little bit more the pricing headwinds you're talking about going into second half of the year. So I think as others have suggested, we are seeing some signs of slowing demand in MOSFET, lack of tightness being seen in various areas in power semis. But at the same time, the foundries are talking about slowing order book for autos. I'm just trying to understand which side of the fence or both perhaps are impacting in the second half? And what that means for order book momentum particularly Q3 of this year? And maybe if I could just come back to the overall backlog. I mean, you've been very good in previous quarters to talk about the relative size of the backlog to the outgoing business over the next few quarters. Could you maybe just update us and give us some relative size of backlog. Thanks.

Well -- so I will start with the backlog. So today, the total backlog we have in our hand, requested by customers represents about six quarters of revenue. I would like to say that it is pretty on balance versus the end market we address. Again, on automotive overall, on power energy and professional B2B industrial. The backlog coverage we have are well above these six quarters. And the order entry we are seeing now are loading smoothly in the year 2024. Why? Because the lead time we can provide to this customer are still well above one year. So moving forward, quarter after quarter, they are loading our backlog consistently with the end demand, which is very strong and the lead time we can offer. Then you have another dynamic where the demand is solid, growing with existing backlog, but where clearly, we are reducing our lead time. And clearly, when we are reducing our lead time, the customer order, they take into account. So they are temporarily reducing their order in order to have a backlog coverage, which is consistent with your lead time. And here, the coverage will be between three to four quarter total backlog. And on the consumer industrial on servers, okay, on this kind of activity, we are going in this direction. But then you have some markets where, clearly, there is a weak end demand. There is clearly inventory correction. And then, okay, the backlog we have is reducing and the order we have are low. It is typically the computer peripheral, computer-related and the personal electronics. And here, we are going back to a normal situation where we have, for some customers which are, let's say, well in control with their supply chain, they give us a rolling two years’ visibility. And there is some customers that are giving a usual three to four quarter visibility. So we -- I have to say if I would like to classify overall our backlog. We have six quarters. We do believe we will finish the year 2023, with the coverage will be between four to five quarters, which is still above a normal situation. Normal situation is three to four quarters. So this is dynamic, okay, I can tell you. And this is totally consistent, okay, with the indication we have provided to the year to reach at the midpoint, $17.4 billion but still with the possibility to go to the other one.

Does this answer your question?

Yes, just wanted to circle back on perhaps the evidence or perhaps the product categories where you're seeing those pricing headwinds, in particular, as it relates to autos, mean are we vectoring more on power semis? Or do we see this starting to happen as perhaps a peak pricing dynamic around control?

To come back to your MOSFET point. MOSFET is part of the power supply of power management of some application in the field of servers and computers. Of course, okay, here, as this market is softening or is weakening clearly, okay, the demand of this specific MOSFET is weakening. But MOSFET is very large. You have high voltage, you are low-voltage MOSFET then you have IGBT, you have the silicon carbide. Again, and these MOSFET are going everywhere. And are going everywhere in all the applications. And I can confirm to you that on MOSFET overall, as they're seeing all the automotive application and importantly, energy storage, energy transportation, the demand is very strong and the capacity are fully loaded. And we are still struggling to support our customers at the level of what the demand on IGBT on carbide, and VI power vertical integrated power on BCD9 for former switches and on low voltage and high voltage MOSFET as well everywhere it is for power management for automotive and industrial application. Yes, on computer, the demand is weak, but this is not a surprise.

Thank you very much. And we have exceeded the time. So I apologize, it was the last question. Thank you very much, all of you, it will end our call session this time.

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