STMicroelectronics N.V. Q1 FY2023 Earnings Call

Ladies and gentlemen, welcome to the STMicroelectronics' First Quarter 2023 Earnings Release Conference Call and Live Webcast. I'm Andre, the Chorus Call operator. I would like to remind you that all participants will be in listen-only mode and the conference is being recorded. At this time, it's my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead.

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

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

The first question comes from Didier Scemama with Bank of America. Please go ahead.

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

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

I take the question. Good morning, everybody. Regarding the gross margin at the midpoint of our revenue guidance for the year, we expect a gross margin between 47% and 48%. During the year, we anticipate a positive product mix and manufacturing improvements. We should see overall price stability, although this will be countered by rising food costs in our manufacturing. Additionally, in the second half of the year, we will experience the impact of ramping up the 300-millimeter production, which will not be operating at optimal capacity and will affect our cost of goods sold in that timeframe. Looking at this year compared to last year, if we examine the first half versus the second half, our gross margin in the first half has benefited from a sequential positive price effect and a strong positive impact from the product mix. In contrast, the first half has not yet been significantly affected by the rise in input and manufacturing costs. In the second half, however, we expect to face increased pressure on sales prices, although on a yearly basis this will be relatively neutral. Nonetheless, during the latter part of the year, we will experience negative price pressure sequentially. Manufacturing input costs are set to rise, and we will also see less optimized production in specific areas that are more sensitive to consumer or personal electronics. As I mentioned earlier, the 300-millimeter production, currently in the start-up phase, will also add to our cost of goods sold in the second half of the year. Ultimately, I want to reiterate that we expect a gross margin to range between 47% and 48%.

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

Yes.

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

We cannot discuss pricing in general terms as we are encountering complexity due to significantly different market dynamics. It's important to manage pricing selectively, as competition varies greatly between consumer connected devices and power solutions. We do believe that in the second half of the year, particularly in the consumer segment, production and supply lead times will return to normal, which may create some price pressure in specific locations. However, we will manage this situation carefully. Overall, as Lorenzo mentioned, we expect pricing to be stable throughout the year, with some pressure anticipated in the second half.

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

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

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

Thank you, Jean-Marc, for the information. I'm aware that there are sensitivities regarding some of the upcoming matters. As a follow-up, Lorenzo, you mentioned potential impacts on gross margin in the latter half of the ramp-up for 300-millimeter capacity. I wanted to delve into that a bit more. To expand on Didier's inquiry, there seems to be some concern in the market about pricing and margins. So, first, could you quantify the gross margin impact of the 300-millimeter ramp-up for the second half of the calendar year? Additionally, with strong margins projected at 49% in the guidance, people are curious if this is just a peak or a new normal. How do you view that? Also, if there's price pressure, when do you anticipate that the 300-millimeter capacity will reach a scale that positively impacts margins instead of serving as a near-term challenge during the ramp-up?

In the latter half of the year, we will start to see the effects of the 300-millimeter fab as it transitions out of the ramp-up phase. Currently, it is incurring saturation or excess costs that will impact our cost of goods sold. While the precise extent of this impact is uncertain, it is important to note that this situation is temporary. The 300-millimeter fab needs to reach an appropriate operational level before it can contribute positively to our gross margin, which is unlikely to happen in 2023. We'll be operating below 1,000 wafers per week, significantly below that level, which does not support an accretive gross margin and will increase costs. Looking at the second half of the year, three components will influence our gross margin. First, there's the effect of the 300-millimeter ramp. Second, we will see increased manufacturing costs starting to materialize in our financial statements, which are currently partly suspended in inventory. This impact will begin to show in our results from this quarter, with more significant effects in the third and fourth quarters. Lastly, we are facing pricing pressures and changes in our product mix. When evaluating the gross margin between the first and second halves of the year, I would estimate the impacts from these three elements to be roughly equal. On one hand, pricing challenges will affect our revenue, while increased manufacturing costs and the 300-millimeter fab expenses will place additional pressure on our margins. It’s worth reiterating that this is a temporary situation. We also have some fabs not operating at optimal levels as we manage our inventory, particularly for areas exposed to consumer electronics, to prevent excess stock. All these factors are considered in our gross margin guidance for the year, projected to be between 47% to 48%, while these challenges will affect our gross margin negatively in the second half of the year.

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

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

Yes. Lorenzo will provide additional comments. We want to emphasize the key factors driving gross margin improvement. As Lorenzo explained, we are experiencing temporary ramp-up impacts, which were anticipated, but they are being counterbalanced by the coal ramp-up as planned. Additionally, as Agrate reaches the appropriate scale, it will contribute positively to ST's gross margin. The 300-millimeter technology is a significant component of this. Another crucial element is transitioning to 200-millimeter silicon carbide, where our advanced technology will help reduce costs and improve gross margin. These are the two main contributors. In the second half of the year, some of our fabs will not be fully optimized due to factors related to personal electronics. For context, in 2020, personal electronics are expected to decline by 25%, with half of that drop coming from a change in product mix that does not involve silicon. This will impact fabrication loading. However, we anticipate recovering from this temporary slowdown as the demand for advanced BCD technology and lower technology for automotive and industrial applications continues to grow. By 2024, we expect to resume full loading of our fabs, which supports our confidence in achieving the $20 million-plus target and a 50% gross margin. Regarding automotive pricing, we are repositioning this business as customer demand and technology have significantly evolved compared to two years ago. We are now working with 40-nanometer and 28-nanometer technologies, and we may soon reach 18-nanometer technology. The mix has changed dramatically, and there is no longer excess capacity. Investments in this sector are being made cautiously, and the foundry market is quite tight, with limited competition in automotive. Therefore, we anticipate returning to more normalized pricing discussions with our customers, where we will engage in direct conversations with automakers. This trend is becoming increasingly clear, distinguishing our current model from those of five or ten years ago.

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

Next question, please.

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

Good morning, everyone. I appreciate the opportunity to ask a question. I have two follow-ups related to previous inquiries. First, Lorenzo, you mentioned the importance of closely managing inventories in light of current market conditions. I noticed that inventories increased significantly during the quarter. It seems, however, that demand at a group level was not an issue, as you exceeded your guidance and maintained solid gross margins without slowing down operations. Could you explain what contributed to the rise in inventory this quarter? Was this unexpected towards the end of the quarter, or is it more of a strategic move in anticipation of market trends in the second half? Additionally, I have a follow-up question regarding silicon carbide.

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

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

First of all, we now have four manufacturing locations: two for fabrication in Singapore and Catania, and two for assembly in Shenzhen and another site in Morocco, all running at full mass production. Thanks to the capital expenditure we made in the second half of 2022 to boost capacity, we've also diversified our raw material sources to mitigate potential difficulties we anticipated from a vendor last year. This has secured our capacity. Additionally, I think it’s important to note that our demand is well diversified now, with our largest customer accounting for less than 65% of our expected total revenue. The programs we've won over the past two to three years are beginning to generate significant revenue for us. Overall, I want to emphasize that we invested last year and executed the capacity implementation successfully. With all four locations operating at full capacity, our demand is well diversified, and we have new programs ramping up alongside our main customer. We have also secured different sources worldwide to support our growth ambitions, aiming to exceed $2 billion to $1.5 billion.

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

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

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

Inventory, you mean in the channel...

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

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

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

I will start with the backlog. Currently, our total backlog requested by customers represents about six quarters of revenue. It is fairly balanced with the end markets we serve, including automotive, power energy, and professional B2B industrial sectors. Our backlog coverage exceeds these six quarters. Orders entering now are being processed smoothly for 2024 because we can still provide customers with lead times well over one year. As we move forward, quarter after quarter, our backlog is consistently aligning with strong end demand and the lead times we are able to offer. There is also a dynamic where demand remains solid and is growing alongside the existing backlog, but we are reducing our lead times. When we do that, customers adjust their orders to maintain a backlog coverage that aligns with the shorter lead times. In this case, the coverage will be between three to four quarters of total backlog. For the consumer industrial segment, particularly servers, we are progressing in this area. However, there are some markets experiencing weak end demand and inventory corrections, leading to a reduction in our backlog and lower orders, especially in computer peripherals, computer-related products, and personal electronics. We are returning to a normal situation where some customers, well-managed in their supply chains, offer us a rolling two years of visibility, while others provide the usual three to four quarters of visibility. Overall, I would classify our backlog as six quarters. We anticipate finishing the year 2023 with a coverage between four to five quarters, which is still above normal levels. A typical situation is three to four quarters. This dynamic is consistent with our guidance to reach at least $17.4 billion at the midpoint for the year, with the potential to exceed that.

Does this answer your question?

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

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

Thank you very much. And we have exceeded the time. So I apologize that was the last question.

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