STMicroelectronics N.V. (STM) Q4 2025 Earnings Report, Transcript and Summary

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

Thank you, Maura, and thank you, everyone, for joining our fourth quarter and full year 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 and Discrete, MEMS and Sensor Group and Head of ST Microelectronics 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'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 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. 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 Q4 and full year 2025 earnings conference call. I will start with an overview of the fourth quarter and the full year 2025, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. So, starting with Q4. We delivered revenues at $3.33 billion, above the midpoint of our business outlook range, driven by higher revenues in Personal Electronics and to a lesser extent in Communication Equipment and Computer Peripheral and Industrial, while Automotive was below expectations. Gross margin of 35.2% was also above the midpoint of our business outlook range, mainly due to better product mix. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.11, including certain negative one-time tax expenses impact of $0.18 per share. Q4 revenue marked the return to year-over-year growth. During the quarter, we further worked down inventories, both in our balance sheet and in distribution, and we generated a positive $257 million free cash flow. Looking at the full year 2025. Net revenues decreased 11.1% to $11.8 billion, mainly driven by a strong decrease in Automotive and to a lesser extent, in Industrial, while Personal Electronics and Communication Equipment and Computer Peripheral both grew. Gross margin was 33.9%, down from 39.3% in full year 2024. Excluding impairment, restructuring charges and other related phaseout costs, diluted earnings per share was $0.53. We invested $1.79 billion in net CapEx, while generating free cash flow of $265 million. Let's now discuss our business dynamics during Q4. In Automotive, during the quarter, we grew revenues 3% sequentially. Year-over-year revenues declined, but with continued improvement in the trend. Automotive design momentum progressed with design wins across both electric and traditional vehicle domains for applications such as onboard chargers, DC-DC converters, powertrain and vehicle control electronics. These included design wins for power semiconductors, smart power devices, automotive microcontrollers, analog and sensors. These awards supported by engagements with various OEMs and Tier 1 ecosystems, strengthen our position as a key supplier to the automotive industry. Regarding the acquisition of NXP's MEMS sensor business, the transaction we announced in July is still expected to close in H1 2026. In Industrial, revenues were better than expected, showing increases of 5% sequentially and 5% year-over-year. Importantly, inventories in distribution further decreased and are now normalizing. In Industrial, our portfolio of microcontrollers, sensing technologies and analog and power devices is strongly positioned to support industrial transformation trends and the need of physical AI. During the quarter, we saw design wins across industrial automation and robotics, building automation, power systems, health care and home appliances. In November, we held our STM32 Summit where we announced several key innovations, including the first microcontroller built on the 18-nanometer process, a next-generation wireless microcontrollers and an updated suite of edge AI software tools. Personal Electronics, fourth quarter revenues were above our expectations, down 2% sequentially, reflecting the seasonality of our engaged customer programs. During the quarter, we strengthened our position in mobile platform and connected consumer devices, both with our engaged customer programs as well as our open market offering for devices such as our sensors, secure solutions and power management products. Revenues for communication equipment and computer peripherals were up 23% sequentially, better than expected. In AI and data center infrastructure, we continue to reinforce our position supporting the increasing demand for higher power density and energy efficiency. During the quarter, we secured multiple design wins for silicon and silicon carbide-based power solutions, supporting next-generation AI compute architectures. We also continue to work with customers to bring our silicon photonics technology to the market. The strong momentum in optical connectivity technologies for data centers also contributed to a significant rise in demand for our high-performance microcontroller used in pluggable optics. The low-earth orbit satellite business based on our BiCMOS and panel level packaging technologies continued to progress during the quarter with shipments ramping to our second largest customer. Moving to sustainability. We remain on track for our key 2027 commitments. Carbon neutrality in all direct and indirect emissions from Scope 1 and 2 and focusing on product transportation, business travel and employee commuting emissions for Scope 3 and 100% renewable energy sourcing. A major milestone this year was the launch of Singapore's largest industrial district cooling system at our Ang Mo Kio facilities in Q4. We also continue to maintain our strong presence in the major sustainability indices where we were honored to be recognized in the Time world's most sustainable companies list for the second consecutive year. Now over to Lorenzo, who will present our key financial figures.

Thank you, Jean-Marc, and good morning, everyone. Let's have a detailed review of the fourth quarter. Starting with revenues on a year-over-year basis by reportable segment. Analog products, MEMS and sensor grew 7.5%, mainly due to Imaging. Power and Discrete products decreased by 31.6%. Embedded Processing revenues were up 1% to 2% with higher revenues in general purpose and automotive microcontrollers, offsetting declines in connected security and custom processing products. RF and optical communication grew 22.9%. By end market, communication equipment and computer peripheral and personal electronics both grew by about 17%. Industrial grew by about 5%, while automotive decreased by about 15%. Year-over-year, sales increased 0.6% to OEM and decreased 0.7% to distribution. On a sequential basis, Power and Discrete was the only segment to decrease by 3.9%. All the other segments grew, led by RF and optical communication up 30.5%, while Embedded Processing and Analog products, MEMS and sensor were up, respectively, 3.9% and 1.1%. By end market, sequential growth was led by communication equipment and computer peripherals, up 23%. Industrial was up 5% and automotive was up 3%, while Personal electronics declined 2%. Turning now to profitability. Gross profit in the fourth quarter was $1.17 billion, decreasing 6.5% on a year-over-year basis. Gross margin was 35.2%, decreasing 250 basis points year-over-year, mainly due to lower manufacturing efficiencies and to a lesser extent, negative currency effect and lower level of capacity reservation fees. On a sequential basis, gross margin improved by 200 basis points. Q4 gross margin included about 50 basis points of negative impact resulting from a nonrecurring cost related to our manufacturing reshipping program. In the next few quarters, we expect a similar negative impact on gross margin from the just mentioned nonrecurring costs. Total net operating expenses, excluding restructuring, amounted to $906 million in the fourth quarter, slightly increasing year-over-year due to unfavorable currency effect. They were slightly better than expected, reflecting our continued cost discipline and the initial benefit from our cost savings initiative. For the first quarter 2026, we expect net OpEx to stand at about $860 million, decreasing quarter-on-quarter. As a reminder, these amounts are net of other income and expenses and exclude the restructuring. In the fourth quarter, we reported $125 million operating income, which included $141 million for impairment, restructuring charges and other related phaseout costs. These charges are related to the execution of the previously announced company-wide program to reshape our manufacturing footprint and resize our global cost base. Excluding the nonrecurring items, Q4 non-U.S. GAAP operating margin was 8%, with Analog product MEMS and Sensor at 16.2%, Power and Discrete negative 30.2% Embedded Processing at 19.2% and RF and Optical Communication at 23.4%. Fourth quarter 2025 net loss was $30 million, including certain onetime noncash income tax expenses of $163 million compared to a net income of $341 million in the year ago quarter. Diluted earnings per share was negative $0.03 compared to $0.37 of last year. Excluding the previously mentioned nonrecurring item related to the impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP net income stood at $100 million and non-U.S. GAAP diluted earnings per share stood at $0.11, including certain negative onetime tax expenses impacting of $0.8 per share. Looking now at our full year 2025 financial performance. Net revenue decreased 11.1% to $11.8 billion. In terms of revenue by end market, Automotive represents about 39% of our total 2025 revenues. Personal Electronics about 25%; Industrial, about 21% and Communication and Computer Peripheral about 15%. By customer channel, sales to OEMs and distribution represent 72% and 28%, respectively, of total revenue in 2025. By region of customer region, 43% of our 2025 revenues were from the Americas, 31% from Asia Pacific and 26% from EMEA. Gross margin decreased to 33.9% for 2025 compared to 39.3% for 2024, mainly due to lower manufacturing efficiencies and to a lesser extent, the price and mix, lower level of capacity reservation fees, negative currency effect and higher unused capacity charges. Operating income stood at $175 million compared to $1.68 billion in 2024. Excluding $376 million for impairment, restructuring charges and other related phaseout costs, non-U.S. GAAP operating margin was 4.7%. On a reported basis, net income was $166 million and EPS was $0.18. On a non-U.S. GAAP basis, they stood respectively at $486 million and $0.53. Net cash from operating activities totaled $2.15 billion compared to $2.97 billion in 2024. Net CapEx expenditure was $1.79 billion in 2025, in line with our revised expectation and lower than the $2.5 billion of 2024. Free cash flow was $265 million positive in 2025 compared to the $288 million positive of the previous year. Inventory at the end of the year was $3.14 billion compared to the $3.17 billion at the end of the third quarter and $2.79 billion one year ago. Days sales of inventory at quarter end were 130 days, slightly better than our expectation compared to the 135 days for the previous quarter and 122 days in the year ago quarter. Cash dividends paid to stockholders in 2025 totaled $321 million. In addition, during 2025, ST executed share buybacks totaling $367 million. ST maintained its financial strength with a net financial position that remains solid at $2.79 billion as at end of December 2025, reflecting total liquidity of $4.92 billion and total financial debt of $2.13 billion. Now back to Jean-Marc, who will comment on our outlook.

Thank you, Lorenzo. Now let's move to our business outlook for Q1 2026. We are expecting Q1 '26 revenues at $3.04 billion, a decrease of 8.7% sequentially, plus or minus 350 basis points. We expect our gross margin to be about 33.7%, plus or minus 200 basis points, including about 220 basis points of unused capacity charges. This business outlook does not include any impact for potential further changes to global tariffs compared to the current situation. In terms of net CapEx for 2026, we plan to invest about $2.2 billion to support capacity addition for selected growth drivers like those for cloud optical interconnect and our manufacturing reshaping plan. To conclude, 2025 turned out to be a challenging year for the end market we serve, characterized by continued inventory correction in automotive and industrial, in particular, the first part of the year. The second half was better with gradual improvement of the revenue trend and a return to a year-on-year growth in the fourth quarter. We are entering '26 with a better visibility than entering '25 with the inventory correction in distribution progressively improving. Beyond the evidence of a cycle recovery, ST will benefit from the following company-specific growth drivers. In automotive, we see solid momentum in our engaged customer programs in ADAS, where we expect to grow this year and in the coming years. In silicon carbide power devices, following a significant contraction in 2025, we anticipate a return to revenue growth in 2026 with revenues projected to recover to 2024 levels by 2027. In sensors, we see strong demand, both in MEMS and imaging sensor and our planned acquisition of NXP MEMS business will strengthen our leading position across the automotive and industrial segment. In industrial, in general purpose MCUs, building on market share gains 2025 and a road map of new product launch for 2026, we are on track to return to our historical market share of about 23% by 2027. In Personal Electronics, where we continue to see strong momentum in our engaged customer programs in sensors and analog, we should keep on benefiting from increased silicon content in 2026 and beyond. In communication equipment, computer peripheral, in data centers, including cloud, optical interconnect and power and analog for AI servers and data centers, with the current market dynamic, we believe we can deliver $1 billion revenue before 2030 with already USD 500 million in 2026. In low-earth orbit satellites, we are expanding our customer base, and we anticipate continued revenue growth as low earth orbit constellation projects expand globally and penetrate new applications such as direct-to-cell constellation. Lastly, ST is uniquely positioned to address human wind robotics through our broad portfolio, spanning MCUs, MEMS, optical sensors, GNSS and power management. We are already generating revenues through engagements with major OEMs, and we estimate our current addressable bill of material at about $600 per system. Thank you, and we are now ready to answer your questions.

[Operator Instructions] Our first question comes from Francois Bouvignies from UBS.

My first question maybe for Jean-Marc, I wanted to come back to what you said about the outlook. I mean, if we look at your revenue guidance down 8.7% quarter-on-quarter, this is below seasonal -- better than seasonal, sorry, of minus 11%. And if we take into account less days, it's actually significantly above seasonal. So, I was wondering, I mean, this is looking quite interesting. And if we compare to other peers like TI yesterday or ADI and Microchip, you see a number of your peers talking about above seasonal. I mean what's your view on the trajectory from here? Do you think this above seasonal trend can carry on a little bit? Or we shouldn't get carried away like we did in the last two years where we have many fall starts? Do you see like a very genuine evidence of a cycle recovery from here?

Well, we will not guide for 2026 today, clearly, but we are confident in our ability to grow organically for next year. But it's clear that we enter in a better and healthier situation compared to '25. If you remember last quarter, okay, I already shared with you that we were seeing a backlog that were reading during the quarter better than the usual seasonality. And today, with the visibility we have on Q2 that generally speaking, okay, is plus, let's say, low mid-single digit, but we absolutely see no reason that we will not be at least capable to deliver it. More important, I think, beyond the cycle is to share with you that we see for the company some specific growth driver. First of all, in automotive, clearly, we will have the sensor. And at a certain moment, when we will complete the acquisition of NXP, of course, it will bring additional revenues. This is obvious. But we see also positive momentum on ADAS ASICs and the silicon carbide after last year that was pretty challenging. Well, in industrial, clearly, the dynamic is really strong, thanks to the inventory correction gone, but more important is our portfolio. So we have done a tremendous effort in introduction of new products in '25 and '26, and this will contribute beyond the cycle. For Personal Electronics, our engaged customer program, you know that we have the visibility, okay? So I confirm to you. So we confirm that it will support us beyond the cycle. And last but not the least, data center. But clearly, in 2026, cloud optical interconnect, so means both photonics ICs and analog mix signal by CMOS ICs plus our high-performance general purpose microcontroller will contribute because you know that the connectivity engine of the server will move to optical one. So this will be certainly an acceleration. And as well, we will start to contribute to the power supply unit and to the server from the green to the processor. Last but not the least, beyond the cycle in '26, we see also low earth orbit satellite communication with our engaged customer program, so with our ASICs really positive. This will be a bit offset by the capacity fee reservation. But all in all, I confirm really our confidence level to grow organically in 2026 and because we have, let's say, significant growth driver beyond the cycle of the market.

Very clear. And yes, maybe on the gross margin side, I mean, with it, I mean, obviously, it's a concern for the market. You delivered the guidance is in line on the gross margin, but 33.7%. But when I look at the consensus, it has 35.6% of gross margin for the year. So it would assume a recovery from here. So with the top line that you described nicely, should we see as well an improvement of gross margin from the level in Q1?

Maybe I take this one, Jean-Marc, about the gross margin. But today, of course, the gross margin will depend on the evolution of the revenue in the course of the year. As explained by Jean-Marc, we expect, let's say, to increase. But the gross margin today that we see in Q1, we believe is clearly the lowest point in the year, this expectation of 33.7%. So we will see some increase. This increase is also driven by the fact that we expect to have constantly reduction in our unloading charges during the year. So we expect some mild increase for the second quarter and then a more significant increase also driven by the seasonality of the revenues in the second half of the year. Yes, at this stage, we can say that the expectation for us is to have increase in our gross margin all over the year.

The next question comes from Andrew Gardiner from Citi.

I was interested, Jean-Marc, in digging a bit deeper into the automotive space. Clearly, your largest end market and the one where we're still seeing the most difficulty in terms of getting through the bottom of this cycle. There's a number of sort of end market data points out there that are, I suppose, still causing investors' questions in terms of the health of the market, tariff threats back and forth admittedly, but also not helping. I'm just wondering how -- can you give us a bit more detail in terms of how you're seeing your customers behave? Do you think inventory is absolutely at a bottom in terms of the automotive channel and at the OEMs and the Tier 1s. What kind of confidence do you have as we look into the future quarters that we can return to stronger demand trends?

Well, first of all, clearly, when we see our Q4 revenue in automotive, it was slightly below our expectation and mainly, in fact, driven by the pulling from inventory a little bit lower than expected from some Tier 1 means that the automotive market for, let's say, legacy application, clearly is pretty soft. Inventory correction is certainly gone, but there is a kind of a softness of this kind of application. What will be positive on automotive is clearly what is around, let's say, the electronic architecture, the new software-defined electronic architecture calling for more complex MPU, MCUs definitively. So this will be an important growth driver. But we know that the electrical powertrain will be still an important driver. But here, it is more the competition landscape that changed completely compared a few years ago because you see that out of, let's say, more than 30 million vehicles produced in China, more than half are battery based compared to America, where it is more marginal in terms of production. And in Europe, it is below 1/3. So here, it's more a question of the competition is in China. So you know that in China is more complex to compete. But the powertrain electronics, the demand is there. So, all in all, I think the automotive market based on 90 million, 92 million, 93 million vehicles out of which 17 million to 18 million vehicle battery based and similar number in hybrid is still changing in terms of mix as well from the car classification is more middle end or premium car, even this car now embed some electronics. So the market is not yet stable. So that's the reason why we have to be, let's say, cautious to adapt ourselves. But we see a different situation compared entering in '25, where we faced very strong inventory correction in Q1 last year, if you remember, from our main customer, this will not be repeated. It is more, let's say, a progressive stabilization of the market in terms of mix of car electrical hybrid thermal combustion engine and mix of car between high premium, premium and middle class and mix between China, APAC, Europe and Asia. So this is something we have to, of course, closely monitor and adapt ourselves with our supply chain. So this is how we see the automotive market.

Just a quick follow-up, given you mentioned China at length there. How is the partnership with Sanan progressing? Is that going as you anticipated? Is it helping your competitiveness in that market? Or is it still too early?

No. Clearly, so we will start to ramp up the facilities now, okay? We have modernized. We know exactly the efficiency of this fab. And clearly, it will be a key success factor in our capability to compete on the Chinese market.

The next question comes from Joshua Buchalter from TD Cowen.

I actually wanted to drill into the Personal Electronics segment a little bit more. I think there's some concerns of disruption or even pull-ins in the short term due to higher memory costs. It came in better in the quarter. Maybe you could walk through what the drivers you're seeing are there and if you're seeing any changes in order pattern. And I believe you called out higher silicon content in 2026. Was that referring to expectations for your largest customer this year?

Yes, you know that our revenue are mainly driven by our biggest customer and more on the high-end kind of product, which are, in some extent, less sensitive to the memory price. So, at this stage, with the visibility we have, first of all, we don't see significant impact detected by us. And I confirm that we expect to keep growing in personal electronics driven by our main customer in 2026, thanks to our increased device based on silicon and not module content increase in '26. So far, PE will be a growth driver for us in '26.

And then I think the last couple of quarters, you've been kind enough to give us your book-to-bill ratios in auto and industrial. It seems like things are getting better on the industrial side in particular. Can you update us, I guess, on those metrics and whether you're mostly done with the channel inventory clearing on the industrial side? Congrats on the solid results.

No. In Industrial, the book-to-bill was well above parity. Clearly. Also, beyond your question, I can tell you that the POS were growing, let's say, between low teens, mid-teens, which is a good news. So we continue to decrease our inventory. But on automotive is the book-to-bill is a little bit more complex because we have some few key customers that are putting order in one shot for six months. So the book-to-bill must be, let's say, assessed on one-year moving average or six months moving average. So corrected from this, let's say, abnormal, let's say, process, the book-to-bill was parity on automotive.

The next question comes from Stephane Houri from ODDO BHF.

I just wanted to come back a bit on the scenario for the year, and I know you're not guiding. But historically, you've been saying that the second half is like 15% above the first, that's normal seasonality. And then on the top of that, you may have some specific programs. With the sting point you guide on Q1 and we look at -- when I look at the consensus for the full year, it seems to be banking on something lower than that because of the starting point in Q1. So can you just confirm that you see now that the inventory correction is done normal seasonality throughout the year and maybe give some comments about the adds of some customer engage program?

No. On the inventory correction, what we communicated, okay, I and Lorenzo and myself is to say by end of Q2, we believe we will be hold the excess of inventory. And this today, I can confirm -- it's already the case for many product family. We are still here and there some pockets of excess inventory versus what we see. But looking at the current dynamic, POS, POP by end of Q2, this will go. So now it's sure that in H2, we will be exposed directly to the end demand. Now about again, what we consider engaged customer program be the cycle, let's say, we can split I have to say. One is the usual personal electronics, and why we say it's cycle is because silicon content increase, okay? So we have the visibility with the current visibility we have, okay? So this will help us to grow the cycle of personal electronics and assuming our main customer will perform in market share really well performed in 2025, okay? So this will drive our growth. Moving to communication equipment and computer peripheral, well, communication equipment. Communication equipment, it is clear that for the lower or satellite communication is an important driver because thanks to our capability to supply and compete, our growth is driven by our largest customer in this field of activity. And as we see is pretty successful. And certainly this year, will be another demonstration of the success. Now since two quarters, we are supporting our second largest customer that is growing as well. So it is clearly beyond the cycle. So this will be a significant growth driver beyond the cycle for ST. Last but not the least is AI data center. You know AI data center, okay, we were, let's say, a bit delay for what call the device addressing the power station we are in, let's say, process to close the gap and offer solution to our customers. But clearly, we will be at of the business dynamic, it is the optical engine or the cloud optical interconnect. So its photonics ICs, MOCs and high performance general microcontroller. And this will contribute to the growth of ST significantly in 2023. Then moving to the more, let's say, traditional market focus we have, so automotive industrial. For ADAS, ASIC, last year was a challenging one because we saw some inventory correction on, let's say, some legacy ASIC. But this year, okay, clearly, with the visibility we have, this will be a booster of growth. Finally, our SiC MOSFET, about the difficult year of '25 will grow again. And I can confirm to you that up to now in Q1, we have a good book-to-bill on silicon carbide that is very encouraging. And definitely, our sensor contribution with the acquisition of NXP MEMS plus the existing imaging sensor, existing MEMS we have. And I am very pleased that beyond the inventory correction done on general purpose microcontroller, the proliferation of our new products are really paying back very well. And I am really confident that in '27, we come back to our historical market share and '26 will be an important step to demonstrate it. So this is actually in a few words how we can describe '26.

I have a small follow-up on the gross margin comments. I think last quarter, you said that you think you would end up Q4 2026 above the level of Q4 2025 in gross margin. Do you still feel confident with what you see developing the mix, the underloading charges, et cetera, et cetera?

Yes. Yes, I confirm that at this stage, the expectation is that Q4 this year '26 should be better than Q4 '25.

The next question comes from Domenico Ghilotti from Equita.

A couple of questions. The first is on the unloaded charges. You are guiding for a significant drop in Q1. trying to understand despite the lower sales, I'm trying to understand if you see this number at the bottom and if you are already benefiting from, say, the efficiency plan that you carried out. And second is some color on, if you can, on the second client in low earth orbit. So should we assume that it is a significant number or just starting entrance of new clients or an add-on, but not particularly relevant?

Maybe I'll take the one of the unused charges. Yes, unused charges are declining in the first quarter. There are -- the reason -- the main ingredient of the declining in this quarter is the fact that, as you know, we are progressing with our programs to reshaping our manufacturing infrastructure. This program is progressively reducing our capacity in 6-inch for silicon carbide, 150-millimeter for silicon carbide and 200-millimeter for silicon. And we start, let's say, to move ahead on this plan. So this is, if you want, is something that is mechanical. At the end, the capacity is reduced. We are now moving our product on the existing capacity on one side, 8-inch for the silicon carbide and the 300-millimeter for the silicon. So that's why we see the level of unused capacity, notwithstanding that the revenue are lower in respect to the previous quarter to reduce. This trend will continue. Unused capacity will not disappear in the year, but will significantly reduce in the year and will be one driver for our improvement in the gross margin in the course of 2026.

About the second question, yes, it's significant. If not, we will not mention. But I can just confirm you to number in Q4, our CCP segment grew sequentially 23% and year-over-year 22%. Definitively, it is linked to the low or satellite business we have, and it is driven both by our first customer and then by the second one. So at 22%, 23% growth sequential and year-over-year, so you can conclude it is significant.

The next question comes from Sandeep Deshpande from JPMorgan.

My question is about your fab loading into the current quarter. Given what is happening with the gross margin in the current quarter, how is the fab loading going through in the quarter? And how is the mix shifting overall in terms of the gross margin? Because you have a revenue decline, but the gross margin is declining. So are you reducing your fab loading this quarter? Or are you increasing your fab loading? And my follow-up question associated with that is how the mix, particularly associated with your better margin microcontroller products is shifting?

In the quarter, as I was saying before, the unloading charges is mainly related to the fact that we are moving out capacity, reducing capacity in certain specific fabs. where, of course, we are now moving production in different fabs, 300 millimeters, so reducing our capacity. So at the end, when you look at the level of loading, we are not overloading our production, let's say, in the quarter. Clearly, if you look the inventory and you look where it will be the dynamic of the inventory in the quarter, as usual, you know that there is this seasonality in our inventory in which in the first half, our inventory is somehow increasing and then decreasing in the second part of the year. So, at the end, what it will be the impact is that now the expectation is end the quarter Q1 in the range of 140 days of inventory compared to the 130 days where we stand today. But I repeat that this is more related, let's say, to the normal dynamic of our inventory over the year than, let's say, loading our manufacturing infrastructure in a way that is -- the impact on unloading charges is mainly related to the fact that we started with our programs to reduce capacity in some specific areas. Clearly, the impact -- the positive impact, let's say, of this in terms of gaining efficiency and so on will come probably later, as you know, in our, let's say, manufacturing infrastructure. We do expect our program to be -- to start to yield a positive impact in our -- in our manufacturing efficiency more in 2027 than this year. But one of the impact that visible is the reduced level of unloading. Together also with the expectation of growth in terms of revenues. This we will see during the year, let's say, depending on the level of growth.

And my follow-up question is regarding about your microcontroller business, which is if you look at the Embedded Processing segment, it grew 1.2% year-on-year. I mean, many of your peers in this market are seeing better growth at this point. So why is ST growth in a key segment for ST lagging at this point or something else happening in that division?

So, embedded processing segment, clearly, the growth dynamic we have on the general purpose microcontroller is, let's say, at least consistent with our peers. Why it is a little bit offset? It is offset by our automotive microcontroller because, okay, up to now, our automotive microcontroller are more the microcontroller that will be, let's say, for some model of car moving to the software-defined vehicle architecture removed clearly. And I already explained that we have done a strong effort in 2025 to rework the road map of our micro, but this will be paid back, okay, more, let's say, end of '27 and '28. For the time being, yes, we suffer on the automotive microcontroller that is, let's say, optically offsetting the real good health of the general purpose. But the general purpose microcontroller, let's say, maybe I can share with you one number, okay, for Q1, the embedded processing solution segment will grow up low 30s. So above 30% year-over-year. So you can imagine that the growth of general purpose will be really, really strong more than, let's say, the secure microcontroller are growing a little bit less because driven by the market. And okay, of course, we have some offset linked to the automotive micro. But I can confirm to you that our general purpose microcontroller are performing or overperforming the market.

Mona, I think we have time for one more question.

Next question comes from Sébastien Sztabowicz from Kepler Cheuvreux. Sébastien Sztabowicz: Coming back to the transformation program, have you made any specific progress so far? And notably on the manufacturing front? And are you still on track to reach your savings ambition for the end of '27? And the second one is more on the OpEx trend. So Q1, we know where it will stand. But for the full year, where do you see OpEx trending? And how do you see the start-up costs impacting the OpEx 2023? Do you plan to accelerate a little bit further the cost-cutting actions for OpEx?

In terms of our reshaping programs, I would say that is progressing in line with the expectation. In the course of 2025, the main, let's say, impact was related to the savings in our OpEx that indeed, when you look at the overall are declining, notwithstanding, let's say, the negative impact of the euro dollars. So at this stage in the course of 2026, as I said, we will start, let's say, progressively to transfer some activity from -- in silicon carbide to 8-inch in silicon to the 300-millimeter. As I was saying before, is now expected to yield the benefit in our manufacturing infrastructure efficiency of this program towards the second part of 2027 and 2028. So my short answer is, yes, we are on track in respect to what we have communicated previously. So, this is the situation. In respect to the expenses of 2026, now the expectation remains substantially the same, means that at the end, at this level of exchange rate, including the impact of the hedging, we should be able to stay with a net OpEx means including other income and expenses on a low single-digit increase, something in that range, mainly driven by the fact that we will have a reduction in other income and expenses in respect to the one of 2025 due to the phaseout cost because, of course, let's say, from the one side, we reduced the capacity in our manufacturing 6-inch, 8-inch. But on the other side, we have a progressive phaseout from these steps that will be reported in this line. It's a temporary effect, but it will be there during 2026.

Thank you, Sébastien, and thank you, everyone. I think this is ending our call for this quarter. So, thanks very much all of you for being there, and we remain here at your disposal should you need any follow-up questions. Thank you.

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