STMicroelectronics N.V. Q2 FY2022 Earnings Call

Ladies and gentlemen, welcome to the STMicroelectronics Q2 2022 Earnings Results Conference Call and Live Webcast. I’d like to remind you that all participants will be in listen-only mode, and the conference has been recorded. The presentation will be followed by a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it’s my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead, madam.

Thank you, Myra. Good morning. Thank you everyone for joining our second quarter 2022 financial results conference call. Hosting the call today is Jean-Marc Chery, ST’s President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our President and Chief Financial Officer; and Marco Cassis, President of Analog, MEMS and Sensors Group and in his global corporate role, Head of Strategy, System Research and Applications and Innovation Office. This live webcast and presentation materials can be accessed on ST’s Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST’s results to differ materially from management’s expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the result this morning and also in ST’s most recent regulatory filings for a full description of these risk factors. Also to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up. And I’d now like to turn the call over to Jean-Marc, ST’s President and CEO.

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

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

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

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

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

Right. Thank you very much.

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

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

Maybe I can comment on the second half question by group and you can comment on the seasonality. Overall, for H2, so, Q3 and H2 more clearly, we continue to see strong growth in ADG definitively both automotive and power discrete, and it is clearly sustained by our capability to increase our manufacturing supply chain. AMS will grow in H2, but this is a usual attraction of our engaged customer program, which will increase in Q3 and then in Q4. We will grow as well for Analog and MEMS, but clearly this field of products is limited by our available capacity. Microcontrollers will grow but similar to Analog and MEMS, we also have limitations in capacity. We will see quite a significant growth in our RF Communication division related to customer engagement programs. And Lorenzo, you can comment on the seasonality.

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

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

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

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

I don’t know what you mean by abnormally strong. You mean sequentially or…

Sequentially strong.

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

Thank you, Adi. Next question, please.

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

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

So Lorenzo will comment on gross margin about the data points for 2023. I share with you the fact we are in control of our order flow. The backlog we have requested by our customers basically is covering and defending the product family, between 18 to 24 months of planned capacity. I must clarify this is planned capacity, which relates to our CapEx where we have spent this year and a lot of the CapEx we intend to spend next year. Essentially, we have 2022 sold out, and basically we have 2023 either sold out or particularly sold out depending on the product group in automotive. The full capacity of 2023 is sold out. So there’s no reason to doubt when which we believe we’ll return to, let’s say, normal capabilities to replenish inventories. I will continue to maintain that normal time is not before the end of 2023 and then in 2024.

As for the gross margin, it is still a bit early to discuss 2023. What I can say is that definitely, let’s say, we will have some tailwinds that are the exchange rate will remain at this level for sure, it will help. The product mix will also be in the right direction in this respect. For sure, what I can say is that 2023 will be another year and will put us back on our project path to achieve between 2025 and 2027, in the range of 50% gross margin.

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

Thank you, Tony. Next question please, Myra.

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

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

Lorenzo will answer.

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

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

Yes.

Does it answer your question, Sandeep?

Probably, yes.

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

The next question is from Sébastien Stabowitz from Kepler Cheuvreux. Please go ahead.

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

As for the CapEx, the project we intend to complete with GlobalFoundries is consistent simply with our $20 billion plus ambition. Of course, when we have prepared this plan, we assisted in many scenarios of manufacturing supplies to enable this ambition. Now, I must say that the scenario to build an adjacent fab to collaborate with GlobalFoundries with significant support from France is making the scenario competitive clearly. And then, we will also gain scaling advantages.

And the sequential growth, maybe Lorenzo?

Sorry. As I said before, AMS is a group that is driving the sequential growth. But I think that this will not be a surprise if I say that these are our imaging products that are really driving inside the AMS growth. There will be contributions from Analog and also MEMS that will be of lesser significance than the one of imaging. In the second half of the year, our engaged customer program in Personal Electronics with our main customers is definitely one that is important for us. So at the end, the growth comes from there in AMS. But I wanted to repeat that at the end there is not only AMS; we have still significant growth in ADG and MDG as well.

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

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

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

First of all, this is a public project called Trinity at Volkswagen aiming to develop the software-defined vehicle architecture and zonal. And here, in this platform, we will be deployed across the board in all the Volkswagen Group. ST will participate in two critical components: the MCU, which is a high-performance Stellar MCU developed on 28 FD-SOI embedded PCM technology, and the development in the architectural of the complex system on chips embedded, let’s say, processor, but also real-time processor, which are IP of ST. ST will retain ownership of, let’s say, the engineering and the manufacturing of this system-on-chip in cooperation with TSMC, which is very similar to what we have with Mobileye. This project will be material for ST.

Okay. Thank you. And with the other OEMs, have you continued to change the relationship concerning long-term agreements with attractive pricing for you?

It’s clear that we see an evolution in the ecosystem between carmakers, Tier 1, AMS, and ST. It is clear that our preferred model is the traditional carmaker-Tier 1 relationship with us. Of course, okay, changing the way the value chain operates. I guess everybody has understood that semiconductors are not commodities with infinite capacity and very short lead time. So, I guess, everybody has understood that you have to plan investment, you have to plan capacity, you have to provide visibility. When the value chain is between a carmaker, Tier 1, and semiconductor, it’s much more effective to maintain it as it is. What we are seeing is some evolution in some carmakers where for some parts of the vehicle system, clearly, there is an evolution where the carmaker is starting to design the architecture of the system and the device and will operate more like smartphones, where you will have the carmaker using an AMS, placing specification with us imposing the type of semiconductor that the EMS will have to use. We clearly see this trend increasing.

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

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

Hi, good morning, Jean-Marc. Good morning, Lorenzo. Thanks for taking the question. Just to clarify your response, Lorenzo, to Sandeep earlier in terms of pricing. I just want to make sure I heard it correctly; you’re saying of the year-on-year growth in revenue that we’re seeing in the second half of this year, 40% of that is coming from pricing. Is that right?

Yes. Broadly, yes, in the sense that when we look at the growth in terms of revenues, there are components including pricing, mix, and volume. The pricing component is in the range of 40% on a year-over-year basis.

Got it. okay.

While this quarter is increased, sequentially the pricing is substantially stable.

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

Today, we have some contracts that define the evolution of the pricing. I would say that in the mass market, probably will remain a little stable than this year.

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

No, today, we are clear on where we want to position the company next year for simple reason that our entire supply chain is, let’s say, providing constraints in terms of investment. You know that for scanners, lead time is basically 24 months for thin film deposition, etching and most of our processing tools is basically 18 months and so on for assembly and testing is above 12 months. So it’s clear that today we have quick orders; all the orders will contribute. We have clear visibility regarding the level of investment that we will need next year. We are currently in the process to secure the equipment since we faced poor reliability in the delivery of equipment earlier this year. We are deep diving into this because there are also their own constraints. But it is mandatory to make it, because as I said, we have changed our confirmation order policy now, confirming orders to our customers on a 24-month rolling basis.

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

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

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

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

This scenario does not exist.

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

Lorenzo, do you want to take that one?

At this stage, I don’t know why we should decline. I mean, at the end, let’s say, for the time being that what I said is that we will see some tailwinds from exchange rates, for sure, some improvements in our manufacturing efficiency. While there are negative impacts related to inflationary costs, these kinds of things. Let’s say, this is where we see; as I said before, I think that next year will be another year moving us along the path to achieving the 50% gross margin range in 2025 to 2027.

Okay. Thanks very much.

Thank you.

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