STMicroelectronics N.V. (STM) Q2 2025 Earnings Report, Transcript and Summary

Ladies and gentlemen, welcome to the STMicroelectronics Second Quarter 2025 Earnings Release Conference Call and Live Webcast. I am Moira, the Chorus Call operator. [Operator Instructions] and the conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jerome Ramel, EVP, Corporate Development and Integrated External Communications. Please go ahead.

Thank you, Moira. Thank you, everyone, for joining our second quarter 2025 financial results call. Hosting the call today is Jean-Marc Chery, ST President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, President and CFO; and Marco Cassis, President, Analog, Power & Discrete, MEMS and Sensors Group and Head of STMicroelectronics Strategy, System Research and Application and Innovation Office. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's recent regulatory filings for a full description of these risk factors. [Operator Instructions] Now I'd like to turn the call over to Jean-Marc Chery, ST President and CEO.

Thank you, Jerome. Good morning, everyone, and thank you for joining ST for our Q2 2025 earnings conference call. I will start with an overview of the second quarter, including business dynamics. I will then hand over to Lorenzo for the detailed financial overview, and will then comment on the outlook and conclude before answering your questions. So starting with Q2. We delivered revenues at $2.77 billion, $56 million above the midpoint of our business outlook range, with Automotive slightly below our expectations, which was customer-specific, more than offset by higher revenues in Personal Electronics and Industrial. Gross margin of 33.5% was in line with the midpoint of our business outlook range. Let's now discuss our business dynamics during Q2. In Automotive, during the quarter, we grew revenues about 14% sequentially, driven in particular by Asia Pacific, excluding China and the Americas. Our book-to-bill came back below parity driven by some specific customer dynamics. While the current situation on trade and tariffs is creating uncertainty on the level of car production, we confirm that Q1 was a low point for Automotive revenues. We expect sequential growth in the third quarter versus the second quarter. During the quarter, we continued to execute our strategy for car electrification. We had wins with both silicon carbide and silicon devices and modules for multiple new DC-DC converter and onboard charger designs as well as with our smart power and smart fuse solutions for electric vehicle power systems. In a continuing challenging automotive market environment, we remain focused on building our pipeline of business and solid execution of our road maps in power and discrete for car electrification. In car digitalization, we saw further traction with our portfolio of automotive microcontrollers. We are making good progress in executing our road map with many new products set to launch in 2025 and 2026 across our Arm-based Stellar and STM32A product families. We are also continuing to see strong design-in momentum globally with both large-scale OEMs and Tier 1 suppliers. One significant win in Q2 was for a one-box braking system by a leading electric vehicle maker in China. Moving to legacy applications, where we have a broad portfolio of application-specific products based on our smart power technologies and leading position in multiple domains such as airbags, door zone and braking solutions. A notable win here was a high-volume airbag solution with a world leader in automotive electronics safety systems, the third generation of a long-term partnership. With our automotive-grade sensors, we continue to see strong design-in momentum and opportunities. Wins in the quarter included MEMS sensors for ADAS, airbag control and infotainment systems as well as an imaging sensor for in-cabin monitoring. There are also a growing number of opportunities for sensors to improve the driving experience with applications such as road noise constellation, occupancy monitoring, and seat position sensors. In Industrial, Q2 revenues were above expectations with strong sequential growth and continued year-over-year improvement, confirming that Q1 was the bottom. I would also like to highlight that specifically for general purpose microcontrollers, we are back to year-on-year growth. In terms of month of inventory distribution overall, we are now back to a normal situation in China, close to normalization in other ASEAN countries and improving but still above normal in other geographies. In Q2, our book-to-bill ratio remained above 1 and bookings continue to increase sequentially, supporting our expectation of further sequential growth in the third quarter compared to the second quarter. During the quarter, we made strong progress with our design-in activity for our power and analog portfolio across a range of applications. These included power systems, industrial fans and drives, motor control, white goods, solar inverters, air conditioning, metering and power for data servers. For data servers, we announced that we are working closely with NVIDIA on a new high-power density DC-DC architecture for AI data centers that will operate at 800-volt DC. This will enable higher power density, more compact designs and a lot less cabling and metal ports. To deliver the needed solution, ST is putting together a combination of its most advanced technologies enabled by silicon material, silicon carbide and gallium nitride as well as smart power processes like BCD using galvanic isolation. Our portfolio of industrial sensors also gained momentum in application like container tracking, white goods and livestock monitoring. Moving to embedded processing. Our STM32 microcontrollers have continued to gain traction with the broad developer community. Use of our software ecosystem continues to grow strongly, and we are now close to 1.5 million unique users on a 12- month rolling basis versus the 1.3 million unique users for 2024. As mentioned earlier, in Q2, we were back to year-over-year growth for our general purpose microcontrollers with both sequential and year-over-year growth in the high teens. This confirms the strength of our product portfolio and our global ecosystem. In Personal Electronics, and to a lesser extent, in Communication Equipment and Computer Peripherals, Q2 revenues were above our expectations. We continue to be excited by growth opportunities in our engaged customer programs, driven by both increased content in Personal Electronics and expanding low earth orbit satellite market. In terms of corporate development activities, at the end of May, we held our Annual General Meeting of Shareholders. All proposed resolutions were approved by the shareholders. For sustainability, we have received two notable recognitions for our public commitments reporting and environmental and social performance. ST has been recognized in the Time World's Most Sustainable Companies List for the second consecutive year. We have been ranked 25th most sustainable company globally and first in the electronics, hardware and equipment category. We have also been recognized for leadership on climate and water security by the global environmental nonprofit CDP with a place on its A list for tracking climate change and a rating of A- for water security. Now over to Lorenzo, who will present our key financial figures.

Thank you, Jean-Marc, and good morning, everyone. Let's start with a detailed review of the second quarter, starting with the revenues on a year-over-year basis. By reportable segment, Analog products, MEMS and Sensors was down 15.2%, mainly due to a decrease in analog, to a lesser extent, a decrease in imaging while MEMS grew double digit. Power and Discrete products decreased 22.2%. Embedded Processing revenues declined 6.5%, mainly due to custom processing. RF & Optical Communications declined 17.9%. By end market. Automotive declined by about 24%. Industrial by about 8%, while Personal Electronics and Communication Equipment and Computer Peripherals, each declined by about 5%. Year-over-year, sales to OEMs decreased 15.3% and 12% to distribution. On a sequential basis, all segments contributed to the growth. Embedded Processing, Power & Discrete and RF & Optical Communications reported double-digit growth, respectively, 14.1%, 12.9% and 10.1%. Analog products, MEMS and Sensors also grew by 5.9%. All our end markets grew, led by Industrial, up by about 15%, followed by Automotive, up by about 14%, with Communications Equipment, Computer Peripherals and Personal Electronics up, respectively, about 6% and 3%. Turning now to profitability. Gross profit in the second quarter was $926 million, decreasing 28.5% on a year-over-year basis. Gross margin was at 33.5%, decreasing 660 basis points year-over-year, mainly due to unfavorable product mix, lower manufacturing efficiency and, to a lesser extent, higher unused capacity charges. Total net operating expenses, excluding restructuring, amounted to $869 million in the second quarter, in line with our expectations and declining 6% on a year-over-year basis. For the third quarter of 2025, we expect net OpEx to stand at about $860 million, slightly decreasing quarter-on-quarter despite the negative currency effect, reflecting our ongoing cost discipline and the first benefits of the resizing of our global cost base. As a reminder, these amounts are net of other income and expenses and exclude restructuring. In the second quarter, we reported $133 million operating loss, which included $190 million for impairment, restructuring charges and other related phase out costs, reflecting impairment of assets and restructuring charges, predominantly associated with the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding this nonrecurring item, which is mostly noncash, Q2 non-U.S. GAAP operating margin was 2.1% positive with Analog, MEMS and Sensors at 7.5%, Power & Discrete minus 12.5%, Embedded Processing, 13.5% and RF Optical Communications at 17.9%. Q2 '25 net income was a negative $97 million compared to a positive $353 million in the year ago quarter. Diluted earnings per share were a negative $0.11 compared to a positive of $0.38. Excluding the previously mentioned nonrecurring items, non-U.S. GAAP net income and diluted earnings per share were respectively a positive $57 million and a positive $0.06. Net cash from operating activities decreased 49.6% in Q2 to $354 million on a year-over-year basis. Second quarter net CapEx was $465 million compared to the $528 million in Q2 '24. Free cash flow was a negative $152 million in the second quarter compared to a positive $159 million in the year ago quarter. Inventory at the end of this quarter was $3.27 billion compared to $2.81 billion in Q2 '24. Days sales of inventory at quarter end was 166 days and slightly above our expectation, mainly due to currency impact compared to the 167 days for the previous quarter and to 130 days in the year ago quarter. We expect days of inventory to significantly decrease in the third quarter compared with the second quarter. Cash dividends paid to stockholders in Q2 '25 totaled $81 million. In addition, ST executed share buybacks of $92 million. ST maintained its financial strength with a net financial position that remain solid at $2.67 billion as of June 28, 2025, reflecting total liquidity of $5.63 billion and a total financial debt of $2.96 billion. Now back to Jean-Marc, who will comment on our outlook.

Thank you, Lorenzo. Let's move to our business outlook for Q3 2025. So we are expecting Q3 '25 revenues at $3.17 billion, plus/ minus 350 basis points. At the midpoint, our Q3 net revenues will increase 14.6% sequentially and decrease by 2.5% year-over-year with all end markets but Automotive back to year-on-year growth. We expect our gross margin to be about 33.5%, plus/minus 200 basis points, including about 340 basis points of unused capacity charges. Compared to the second quarter, gross margin is also impacted by about 140 basis points of negative sequential impact resulting mainly from currency effect and from the start of the nonrecurring costs related to our manufacturing reshaping program. This business outlook does not include any impact for potential further changes to global trade tariffs compared to the current situation. For the full year 2025, we plan to maintain our net CapEx plan between $2 billion and $2.3 billion, mainly to execute the reshaping of our manufacturing footprint. To conclude, we expect Q3 revenues to show solid sequential growth driven by a cyclical recovery and our engaged customer programs. This will enable a continued year-over-year improvement. Our priorities remain supporting our customers to designing our products, accelerating new product introductions and executing our company-wide program to reshape our manufacturing footprint and resize our global cost base. Finally, I confirm we are executing our plan to deliver annual cost savings in the high triple million dollar range exiting 2027. Thank you, and we are now ready to answer your questions.

[Operator Instructions] The first question comes from the line of Janardan Menon from Jefferies.

My question is mainly on gross margin. I was -- could you just pull out the one-off effect from your manufacturing reshaping program in your Q3 gross margin guidance? And then I was wondering whether you could comment on how you expect gross margin to evolve into subsequent quarters. I mean sales are growing and your utilization levels are growing. So how would you expect -- what will be the various puts and takes that you would expect gross margin evolution beyond Q3?

I take the question. Thank you for the question, Janardan. But in terms of the gross margin of Q3. First of all, I wanted to clarify the gross margin, but pricing are not collapsing. Let's say, pricing are in line with what was our expectation. So at the midpoint of our sequential basis, gross margin is negatively impacted, as we said, by this 140 basis points that is resulting mainly from currency effect and to a lesser extent, from the start of nonrecurring costs related to our manufacturing reshaping program. You asked me more or less to size, I would say that in this 140 basis point around 20% of this 140 is related to the reshaping of the manufacturing, let's say, program. This negative impact is offset by the lower weight of unused capacity charges in Q2 was 370 basis point impact. In Q3 is more in the range of 340 basis points. And some improving manufacturing efficiency even if -- we have to remind you that in Q3, this efficiency is still suboptimal. We have some basis point that is related to the fact that we are not yet, let's say, at the best our efficiency. The combination of price and mix, I would say that is pretty neutral to the gross margin on a sequential basis, let's say. So these are the main drivers, I would say, that are impacting our gross margins in the third quarter. But in respect to what is the expectation moving forward. Directionally based on the current level of euro dollar that we say spot in the range of $1.17 that in Q4 should bring us in an effective rate that is in the range of $1.15 [indiscernible] we should see a nice improvement in respect to Q3, driven by less unused capacity charges, enhanced manufacturing efficiency, partially, of course, offset by weaker U.S. dollar. Clearly, in Q4, gross margin will depend ultimately on the level of revenues and where it will be positioned, let's say, the euro dollars. At this stage, it's a little bit more difficult to be more specific than that.

Understood. So do you have any visibility on Q4? Would you, at this stage, expect that your revenue further improve in Q4? Or is it too early to call that?

We expect our revenue in Q4 to grow sequentially.

The next question comes from Joshua Buchalter from TD Cowen.

There's obviously a lot of uncertainty out there given the geopolitical environment. I was wondering if you could maybe speak to any potential changes in your customers' order patterns or the prospect of any potential customers who are -- who could have been pulling in parts? Have you seen any changes downstream?

When we see our dynamic from the beginning of the year, basically, the good news is that in Q3, all our, let's say, verticals will grow sequentially and year-over-year, except the Automotive specific to one customer. And I would have been delighted that Q3 would have been the turning point, but we are about minus 2% year-over-year, which is $80 million. Well, be aware that 90% of this $80 million gap versus a turning point is, in fact, intangible. It is capacity fee reservation from carmaker that has decreased by $70 million. So from a product perspective, customer demand, we are basically at the turning point, which is very positive. But now about our customer engagement programs in our market. In Personal Electronics, in computer equipment, communications equipment, computer peripheral, basically, okay, we have no surprise, no change. While in Industrial, you know that is more fragmented, it is distributed, but clearly, now we are in the up cycle. But with the speed of the turning point, okay, will depend on the macro economy. Now Automotive. Automotive, okay, what is the situation we have to manage and acknowledge. But we know that basically in front of us, we have a market of 90 million vehicles, out of which 30 million vehicles are battery electrical vehicle and hybrid electrical vehicle. The challenge we have managed altogether is that the competition landscape, the mix inside the automotive market is much, much less stable than 2, 3 years ago. Why? Because there is a strong dynamic between Chinese competition, Europeans changing mind about electrical car, America as well and so on. So we are not protected time-to-time, quarter-to-quarter to have one customer-specific change. And this is what happened clearly in Q2 and is confirmed in Q3. Well, so this is only this automotive market. We have to pay attention. Now what will make us confident moving forward is the strength of our product portfolio. Clearly, our large customer base and I repeat, in Automotive, in Q3, we grew sequentially, not yet year-over-year, but in Q4, we will grow again sequentially.

Okay. But you did not observe any pull-ins in the June quarter?

No.

Okay. And then for my follow-up, I got a few inbounds from investors regarding the Mobileye foundry relationship with TSMC, when that came out earlier in the month. Could you maybe speak to which parts you're still providing and then maybe, I realize the EyeQ 5 and 6 are on 7-nanometer. How we should expect that customer to trend over the next few years? And maybe speak to the engagement there.

No, it is well known we use the technology of TSMC starting EyeQ 5 generation. But EyeQ 5, EyeQ 6 and EyeQ 7, ST, okay, did the design and all, let's say, the enablement and the support, okay, the engineering support. So from this announcement, okay, we don't expect any surprise from our revenue for the next 3, 5 years at least.

The next question comes from the line of Francois Bouvignies from UBS.

So my question would be, Jean-Marc, early June, I believe you said that you would reach at least the midpoint of the guidance in Q2 and I guess when you said that you had in mind to do better than just roughly in line like you did today. And then you said you would maybe with our tariff grow year-over-year, and now you're guiding for minus 2.5% year-over-year. So what happened since early June? I mean it seems that things deteriorated. And if I understand correctly, is it only your customer program? Just trying to understand what happened since June for, because it seems a bit short of what maybe you would have hoped. I just want to understand the moving parts.

Well, thank you for your question. I anticipated it a little bit in my former answer. Look at the facts, what is the dynamic on your year- over-year growth for ST. So Q1 was minus 27%, Q2 minus 40%, and we then close to minus -- to 0, so minus 2% basically in Q3 at the midpoint of our guidance. So it's $80 million gap. Well, I repeat, this $80 million for your consideration because what is important is customer demand, product, volumes or the flow of product. Well, 90% of this gap is related to intangibles. Well, yes, intangible is revenue, but it is not, okay, flow of product. It is not measuring the capability of ST to address its addressable market. So this is a positive point. But I would have expected, okay, to compensate this 90% of intangible by stronger dynamic, okay, on autonomous. But unfortunately, okay, we have one customer-specific change in the forecast of Q3 that prevents us to move to this position. But on Automotive, again, the sequential growth in Q3 will be pretty solid because we expect, okay, let's say, high single digit growth in Automotive in Q3 and we will grow again in Q4. So yes, there is one customer specific, but nothing related to the overall market dynamic. I repeat what I said a few minutes ago, Now we have to acknowledge that for a while, we will have in front of us an automotive market moving forward and growing, again, 90 million vehicle, at least 1/3 is related to a mix of battery-based electrical and hybrid electrical but with competition landscape changing in a very dynamic way, where we have to manage, and we are not protected time to time to have one customer-specific. And yes, okay, not at the level of our expectation. Well, this we can manage, but this is a situation we have to face that is completely different than a few years ago. So, I, of course, regret, okay, to not be on the turning point of Q3. But again, I repeat, 90% of the gap is intangible. The rest is really customer specific. The good news is industrial, personal electronics, computer peripheral and communication equipment grew significantly year-over- year. Automotive grew significantly on a sequential basis, and we grow again in Q4.

That's very helpful. And just to clarify, this customer change, is it a market share shift? I mean is it structural? Or is it just an order inventory or forecast adjustments? Is it temporary or longer term?

It is absolutely not a market share loss. It is specific to the customer. I cannot comment, but I am pretty sure that long term this customer will recover.

The next question comes from the line of Sandeep Deshpande from JPMorgan.

My question is regarding Q4. You mentioned, Jean-Marc, that you will grow sequentially in Q4. But will you -- based on what you see today, will you be able to grow year-on-year in Q4 across the board at the company? Excluding some of these issues you've had in Q3, based on what you see today, I mean, following up on your earlier response, do you see an impact in this guidance from the new U.S. rules on EVs, et cetera, which could have an impact on silicon carbide or any of your other businesses?

Thank you, Sandeep, for the question. What I can -- the fact we have in our hand is that the backlog that is positioned on Q4 today, if we compare exactly at the same date, the quarter of Q3, it is showing significant sequential growth. So if the booking of Q3, because I repeat, okay, we are also facing market situation that are turning up from a cyclical point of view, but also the visibility is pretty short. But it is clear that if we have a booking dynamic in Q3 on the similar path of what we have seen in Q2 and in Q1, but we should expect in Q4 to grow sequentially and then, okay, to be at the turning point or very close to the turning point. But again, this is the mechanics, okay, we are following. So yes, we expect to grow sequentially in Q4 taking into account the portfolio. And under the assumption, we will see a booking dynamic similar of what we have seen in Q1 and Q2. Finally, okay, we should be in position to grow year-over-year in Q4. But again, we will not be protected against something specific a customer that decide, okay, to decrease inventory because you want to prefer, okay, to protect 2026. So we are not protected this circularity, okay, with some customers. Overall it means what? It means the trend is positive. The dynamic is positive. ST has come back on a growth trajectory. But the overall environment and specifically the market of Automotive is not strong enough to generate, okay, a buffer of backlog in order to absorb all the variation. So altogether, of course, we have to communicate very carefully and accurately to monitor this dynamic. So this is the point -- the other point of the question was?

The other part of the question was on whether any of the dynamics you're seeing in Q2 and then beyond are to do with the new U.S. tax bill which has implications on EVs?

Nothing significant specific to this point. Again, what we are acknowledging and reviewing our mid-plan on silicon carbide and electrical vehicle is a dynamic, well, I guess, everybody has acknowledged and understand that compared 2, 3 years ago, in '25, the volume of electrical car is basically 5 million cars less than was forecasted 5 years ago. So what is important is to look the trend. Then the second trend is a mix between battery based and hybrid vehicle. So we have to understand, okay, with all the set of regulation constraints that worldwide are implemented and then the competition of the Chinese carmaker, all this trajectory of growth will move. And this is what matters for us in order to design our manufacturing capacity. What I can say in silicon carbide, the main important for us now is to close the 6-inch as fast as we can, start the 8-inch, adjust the capacity to the market demand. And we confirm that we strongly believe that we can keep 30% market share on this market. Different past 2, 3 years ago, for sure. But okay, we're adapting ourselves and silicon carbide midterm, okay, will be a growth driver of the company.

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

Yes. I have two questions. First one is about the comments you made earlier about the gross margin. I think you used the term nice gross margin improvement to be expected in Q4. And I just wanted maybe to come back on the reasons for that and also the impact of the ForEx, if the dollar stays at this level. And I have a follow-up.

I take this question, and thank you for this question. Clearly, let's say, what are the drivers that we do expect in Q4 to substantially, let's say, help a sequential increase in our gross margin. On one side, clearly, we expect that our unused capacity charges will decline in respect to what we have in Q3. This is expected. Q3, I have to say that if you compute the annual capacity charge, $1 million, let's say, you see that in Q3 at the end, similar to the one that we had in Q2. This is due to the fact that in Q3, we will, let's say, put stronger control on our inventory. We do expect to achieve something in the range in terms of days for our inventory, 140 days. So it means that at the end, unloading charges still are significantly during this quarter will decrease in the next quarter in Q4. The other element that you have to take in mind is that Q3 is still impacted by a negative efficiency, yes, from our manufacturing. Yes, it's improving. When we look, let's say, the sequential dynamic moving from Q2 to Q3, but still is not at the optimal level. We will continue to improve in Q4. So this means that this is another driver that will help, let's say, the improvement of our gross margin in the next quarter. But this is assuming that, let's say, the exchange rate will stay substantially similar to the one that we have today. Clearly, there will be some negative impact because the impact of our hedging policy will be a little bit lower than what we have, let's say, in the current quarter. But at the end, let's say, most of the negative impact of the exchange rate has been already reflected in the Q3 gross margin. So this will not be, unless there is still another big movement in the euro dollar, it should not be, let's say, another element assuming I repeat that we stay more or less at the level of the spot that we have today. So these are the dynamics that we see moving from Q3 to Q4 for our gross margin. So some improvement related to these impacts.

Okay. And the follow-up is about the industrial market because we talked a lot this morning about the weakness of Automotive revenues compared to the expectations. But I just wanted to understand what is the driver for the recovery in Industrials. Is it inventory replenishment, pull in or real demand behind that? And yes, if you can give some color, that would be helpful.

Well, first of all, you know that a significant part of the Industrial market for us is done through the distribution. So what is positive is POS. So the sales of our distributor increased in Q2, both sequentially and year-over-year. And our POP were below the POS. So we are seeing a dynamic where the revenue recognition we have, the POP is below the POS. The POS is growing both sequentially and year-over-year. So inventory and distribution are going to normalization, I have to say, in Asia Pacific, excluding China, back totally to normal in China but still a bit higher than normal, okay, in EMEA and America. But the dynamic is, again, industrial distribution, POS growing both sequentially and year-over-year. POP, as I described, below the POS. So it is not inventory replenishment. It is real demand, okay? And after from other OEM, pretty fragmented. Clearly, the growth is driven by a more smart industrial for us and in a lesser extent, for Power Energy, while we don't see, I repeat also this is an opportunity. I said that any effect of pulling on industrial, especially from China for ST. So there is zero pulling in China from Chinese customer or distributor for ST. So we are immune against that. And as far as products are related, one of the main drivers, which is very encouraging user is general purpose. The general purpose microcontroller, again, went back to both sequential growth and year-over-year high teens. So showing the strength of our portfolio and ecosystem, today, it is not the same case on general purpose and analog. Why? Because on general purpose, analog, we have still some other inventory that we are controlling with our POP and Power & Discrete a little bit similar. So this is basically the key driver of the Industrial market. Distribution, because of POS demand, then the Smart Industrial lesser extent, power energy from product, it is a general purpose microcontroller and in a less extent, for sure, general purpose analog and Power & Discrete because still some other inventory that we are controlling. So we control our POP.

The next question comes from the line of Gianmarco Bonacina from Banca Akros.

A couple of questions. The first one is on gross margin again. I think early June remarks, you said that when the company will reach again $3.6 billion to $3.8 billion, that will be about 600 basis point improvement, I guess, over the level of Q2 or Q1, I'm not sure. So given the euro dollar now is approaching $1.20, can we expect this level of improvement maybe going into next year or the year after, could be a little bit lower, so maybe 400 to 500 basis points?

Thank you for your questions. So I will pass to Lorenzo to answer.

No. Clearly, when we were modeling our gross margin, if you remember, and we will say that the level of our, let's say, model intermediate, more than $18 billion. We were modeling with an exchange rate in the range of $1.09, let's say. Clearly, when we are at this level, there is an impact that you see when we move from this $1.09 that substantially was the one of last quarter. Now we are moving to $1.15. We have an impact that we size between $1.20, we said 140 basis points, including also some small adjustments. Clearly, let's say, moving an exchange rate at the spot rate, this will worsening. Anyway, let's say, you have to consider that, yes, there is the negative impact of the FX. But still, we have, let's say, some leverage, let's say, in terms of gross margin. Because today, we are still impacted by significant amount of a new charge. And when we will be at that level of revenues, this will substantially disappear. So we are talking about 340 basis points in Q3. Then you have also to consider that there is a negative impact related to the manufacturing efficiency that is not yet the optimal, let's say, level. Then there is another impact that we need to consider that is somehow, let's say, impacting negatively our gross margin that we are not still in an optimized mix, means that, let's say, for instance, our, let's say, level of the overall industrial that is at the end, let's say, the one that is more accretive to our gross margin still stay at the level that is not the one that we should be in our, let's say, portfolio of revenues it is now more closer to 20%, 21%, and then, 25%, 26% that we would expect, let's say, in a more normal situation for our company. So all these elements, we do expect that we will improve our gross margin. Clearly, let's say, it remains that the model was, let's say, done and FX that was $1.09. So we need also to see where the exchange rate.

Just a quick follow-up more strategically on China because we're at the end of June, an article in DIGITIMES saying that Chinese automakers are moving to align with government directives by planning to use, let's say, domestically developed and manufactured automotive chips. And the article mentioned that in case there was a choice between a fully China chip and one designed by foreign firm but fabricated in China, many automakers will opt for the former. So can you remind us roughly how much is your exposure in terms of sales to Chinese OEM and Tier 1? And we know that you have a strategy China for China. So do you see this as, let's say, enough to, let's say, offset this potential headwind that this article was mentioning?

So waiting to deliver the exact numbers. Yes, I confirm that we built our strategy China for China that I repeat it's encompassing not only manufacturing localized, but also design application labs, customer support, competence center, in order, okay, to be seen as a Chinese player, I have to say. While this strategy is, let's say, very active on power, so silicon carbide and microcontroller, and we do believe that will be a strategy enabling ST to compete against local player, okay, and to be perceived by future authorities as a local player. Well, we are not proven that some specific company owned by the state, in fact, okay, will apply strictly this kind of rules. But overall, okay, our Chinese customer as a whole are pragmatic. If we offer them a supply chain local, application support design, quality labs, reliability labs, okay, they will manage us as a local player. So we do believe our strategy, okay, will mitigate a lot, okay? This effect, yes, again, if there is some specific company honored by the state, okay, it will be difficult to prevent this kind of dynamic. And then about the exposure?

Our revenues to Chinese customer headquartered in China is in the range of -- it depends on the quarter, of course, but it depends, let's say, but it's in the range between 13%, 14% of our total revenues, what do we sell to the headquartered Chinese customer.

Okay. Just for Automotive, right?

No, this is the total. But for Automotive is very similar. I would say that at the end, let's say, when you take Automotive...

Okay, 13% of [ 40 -- X-percent ], okay.

Exactly.

The next question comes from the line of Lee Simpson from Morgan Stanley.

Can you hear me?

We can hear you now.

Okay. So I just wanted to ask about general purpose microcontrollers and the pricing there. It did look from our channel checks as though things were very strong in April, stable in May but somewhat erratic going through June. So I just wanted to get a sense for how you thought the pattern was for pricing on general purpose microcontrollers into the second half and if indeed, this might vary by region. And then the second question I had was really on the timing of readiness for the 800-volt DC-DC supply for the PSU. We are hearing that it's quite difficult to meet that spec as delivered by NVIDIA and whether or not you had confidence that you could hit the full 800-volt supply.

Thank you for your questions. So Lorenzo will comment the price and I will let Marco to comment on the NVIDIA opportunity.

On the pricing in general purpose microcontroller, what I can tell you is that we see really, let's say, low single-digit pricing part. We have not detected any strange behavior, I have to say. But clearly, let's say, maybe region by region, the dynamic is a little bit different, but at the end, I can confirm that, let's say, on the general purpose, this is the -- what we see today is nothing particularly, let's say, strange in terms of behavior. And yes, you may have some pocket in which maybe there is a competition, a little bit more aggressive and so on. But at the end, I would say we are with a price in the range of low single digit and this is what we have seen since the beginning of the year. Nothing particularly different.

Yes, on the 800-volt, yes, you're right. Surely, it is challenging in terms of specification. As you know, at least our proof of concept, which is enhance of NVIDIA and on which we are working very close with them, it's a combination of different components. So you have the GaN, you have the SiC, you have galvanic isolation drivers to drive the board overall. I'm confident it's -- some of the components are more mature than others. So the wide band gap material are fine. We're still working to develop drivers, galvanic isolated, to make sure that the overall performance will be there. It's a work in progress. So far, so good. We have things to fix, but I think that -- I do not see a real road block at this stage that we cannot handle. Of course, it's a work in progress.

Just on that point, as a work in progress, it does seem to suggest this is maybe second half '26, early '27 as a sales impact rather than anything sooner?

This is too early to say. It's a big change in terms of architecture. So -- and we will do everything we can to be as soon as possible, ready to support. We are confident that we can be part of the early adopters, but too early to say.

We have time for a very quick question for the last one.

The last question for today is from Sebastien Sztabowicz from Kepler Chevreux. Sébastien Sztabowicz: Going back to the inventories in the distribution channel. Could you please quantify the level of inventories in the channel today? You were mentioning last quarter a bit less than 2 months of excess of inventory. I would be -- I would say, curious to know where we are today. The second one is linked to pricing environment in China and specifically on silicon carbide, we are seeing some price war ranging between the EV OEMs there. How do you see prices for silicon carbide building there? And do you have any kind of visibility on your design that are expected to ramp in China on silicon carbide from 2026? Or it's too early to know what will be the pace of ramp of those designs?

Thank you. Lorenzo will take the question on the channel inventory, and Marco will comment on the silicon carbide in China.

Yes. In respect to the inventory, I would say that during Q3, our inventory in distribution has progressed in the right direction. It's true that when we were meeting, let's say, in Q2 after our earnings release of the Q1 quarter, let's say, our inventory in average, was with an excess in the range of 2 months. Now I have to say that has declined at least by 1 month in average. So we are in average, let's say, still with some excess of inventory, is not across the board in the sense that now we see some families like, for instance, general purpose that are normalized in terms of inventory, especially in some regions, we are really at the normal level even slightly before. Maybe there is some difference region by region. Other family are suffering still a little bit more in terms of normalization of the inventories likely in some product line in Analog. But I would say that now the situation in distribution is getting in the right direction. We see now, let's say, the inventory moving down, let's say, and being, let's say, more in line with our target expectations. Still some excess, but moving in the right direction in terms of reduction.

On silicon carbide for China, yes, you're right, the price pressure in China on silicon carbide is a strong price pressure, but we are counteracting this, first of all, with accelerating the introduction of the new generations that are bringing advantages both in terms of performance and in terms of value creation for the components. So Generation 4 is introduced. We are working for the Generation 5. Let's not forget that we have also a manufacturing footprint that is going to make us competitive also for that market, which means we are moving, as Jean-Marc was saying, from 6 to 8 inches. And specifically in China, we are going to have our manufacturing center that will start end of this year, the beginning of next one. We are addressing also -- we are expanding, addressing not only the automotive but much more now also the Industrial market. So all these components together should materialize in a growth in -- on the Chinese market. Clearly, the dynamics are strong, but I think we are pretty well equipped to counteract the dynamics that we see in that market. China for us will be an important engine of growth in the years to come. I hope this answers your question.

We anticipate 2026, okay, to be again after the point of '25, okay, a year of growth for silicon carbide.

Thank you, Sebastien. Thanks, everyone. This concludes our con call for today. If you have any further questions, please reach out the Investor Relations team. Thank you very much.

Thank you. Bye-bye.

Thank you.

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