Operator
Ladies and gentlemen, welcome to the SC Microelectronics second quarter 2026 earnings release conference call and live webcast. I am Moira, the Congress Call Operator. I would 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. You can register for questions at any time by pressing star and one on your telephone. For operator assistance, please press star and zero. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jérôme Ranel, EVP, Corporate Development and Integrated External Communications. Please go ahead.
Thank you, Moira, and thank you everyone for joining our second quarter 2026 Financial Retail Call. Hosting the call today is Jean-Marc Sherry, ST President and Chief Executive Officer. Joining Jean-Marc on the call are Lorendo Grandi, President and CFO, Marco Cassis, President Analog Program Discrete, MEMS and Sensor Group, and Head of STMicrohistoric Strategy, System Research and Application and Innovation Office. And Remy Elwazan, President Microcontrollers, Digital IT and RF Project Group. These live webcasts and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST results to differ materially from management expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning, and also in ST most recent regulatory filing for a full description of this risk factor. 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 Cherie, ST President and CEO.
Thank you, Jérôme. Good morning, everyone, and thank you for joining ST for our Q2 2026 earnings conference call. I will start with an overview of the second quarter, including business dynamics. And I will hand over to Lorenzo for the detailed financial overview. I will then comment on the hot look and conclude before answering your question. So, starting with Q2. Our second quarter net revenues of $3.49 billion came in above the midpoint of our business output range, driven by higher revenues in communication equipment, computer and peripherals, and automotive. Gross margin was 34.8% and non-US GAAP gross margin was 35.2%. Both were in line with the midpoint of our business outlook range. Non-US GAAP diluted earnings per share was $0.31. During the second quarter, inventory in our balance sheet remained flattish. In distribution, inventory further decreased and is now below our standard target. We generated a positive $75 million free cash flow. Let's now discuss our business dynamics during Q2. During the quarter demand increase further, with strong bookings and book-to-bill close to two overall, We were well above one in whole-end markets and significantly above two in communication equipment, computer and peripheral, mostly driven by optical connectivity, including silicon photonics. We saw improved visibility and signs of tight supply in several product categories. Automotive revenues came in better than expected, increasing 14% sequentially and 60% of the This growth was driven by our solid position on application-specific ICs and sensors for conventional applications, electrical powertrains, and HEDAS. Automotive design momentum continued to be built across multiple OEM and Tier 1 ecosystems. We secured design wins across hybrid, electric and conventional vehicles, including applications in onboard chargers, powertrain and active suspensions. These wins were across our application-specific ICs and sensors. Specifically, our SmartPower ICs wins include custom devices for airbags, electronic stability control and suspension applications based on our popularity BCD technologies, manufactured in our AGRA 300mm buffer files. We have progressed well with the integration of the NXP MEMS sensor business, acquired in February. As we anticipated, the complementary technology and product portfolio is strengthening our automotive sensor business, with hours as key players for active safety applications and tire pressure monitoring. Industrial improved 20% sequentially and 34% share of errors. Importantly, inventory and distribution further decreased and is now below our standard target. This solid growth was driven by our general purpose microcontrollers and by analog with their wide ecosystems, and by our application-specific analog products, complemented by power conversion products. We are strongly positioned to support the ongoing transformation of factory automation, robotics, and power and energy infrastructure. Our portfolio is uniquely addressing the emerging needs of physical AI. where intelligent sensing, real-time control, and efficient power management are increasingly critical. During the quarter, we saw design wins across industrial automation, power systems, building automation, and home appliances. We continued to introduce new advanced sensors for this application. We launched a new series of industrial MEM sensors with onboarded AI. tailored for the fast-growing industrial condition monitoring market. We also announced a new compact 3D LiDAR module delivering AI-ready output data for low-compute edge AI systems running on microcontrollers and high-performance sensing in applications such as robotics, industrial automation, smart buildings, ER, VR, and healthcare. This is in line with our strategy to move beyond stand-alone sensors and deliver integrated sensing systems that support the world's edge air. Finally, we announced a further expansion of our collaboration with NVIDIA to accelerate physical air. As a partner in NVIDIA Helos for robotics and hand-to-hand functional safety system for industrial and humanoid robots, ST is bringing its microcontrollers, sensors, motor control, and security solutions to support Aero 3Dness across chips, evaluation kits, software, and reference designs. For personal electronics, second quarter revenues were up 3% sequentially and 20% euro earlier. This course was driven by increased content by device in our engaged customer programs and better-than-normal seasonality. During the quarter, we introduced a secure chip that helps smartphone and personal electronics manufacturers prepare for quantum-ready security requirements. It combines post-quantum cryptography acceleration with NFC, secure elements, and eSIM functions on a single DI. for use cases such as digital identity, payments, and digital car keys. We also introduced a new generation of ultra-low-power global shutter image sensors that deliver high-quality, always-owned vision to compact devices operating on batteries or or harvested energy, such as wearables, ERVR, and XR, it says, smarting appliances, and medical devices. They are engineered to deliver rich visual context and AI-ready data under type constraints on power, size, and cost. With the depth-stancing technologies I mentioned earlier and this device for AI vision, ST delivers a complete perception stack for LGRI to customers. Communication equipment, computers and peripherals, second quarters revenue were above expectations, showing increase of 13% sequentially and 50% year-over-year. This growth was driven by our engaged customer programs with our custom-designed products, boosted by our microcontrollers for optical connectivity. Indeed, ST is a core enabler for the Cloud AI era. We see strong traction on optical connectivity driven by silicon photonics ICs, electronic ICs, microcontrollers. For the power stage of Cloud AI, we are already successful with our microcontrollers and high-voltage power and analog products. And we are building a pipeline of design wins for low-voltage power and analog products. Therefore, we are raising our revenue ambition for data centers. We now expect revenue above $1 billion in 2026. And assuming the current dynamics continues, and with the current engagements we have, well above $2 billion in 2027. During the quarter, we secured multiple design wins across a range of products, from optical connectivity driven by silicon photonics ICs, electronic ICs and microcontrollers, to silicon and silicon carbide-based power solutions. In addition, we see a growing number of non-traditional AI server companies, including players coming from industries such as solar power and battery storage, where we are leveraging strong relationships to support their expansion into this field. In May, we held a webcast on the low Earth orbit satellite communication and new space opportunity for ST, highlighting how ST is positioned as a core semiconductor enabler across this new industry. We see a significant opportunity here, with our addressable market expected to reach around $3 billion by 2030, or about four times the 2025 level. SD expects to generate well above $3 billion in cumulative space revenue over the period 2026-2028. mainly with our MySemos, FDSOI, and panel-level packaging technology. Finally, in June, ST joined the 115 million euro series A financing of Coblee to accelerate the industrialization of its silicon-based quantum computers and bring its first commercial product to market by the end of 2026. For ST, the scale needed by high-performance computing customers can only be achieved if breakthrough quantum systems can be industrialized and integrated with semiconductor-grade standards and backed by a robust ecosystem. We are leveraging years of shared expertise in FDSOI and deep technological collaboration to accelerate the commercialization of COBLIS products through our 300 mm silicon farm environment. In May, we held our 2026 ST Microelectronics Annual Shareholder Meeting, where all resolutions were approved. Following the AGM, ST Supervariable appointed Mr. Armando Varicchio as the chairman and Mr. Nicolas Dufourque as the V-Chairman of the Superderivore. Now, over to Lorenzo, who will present our key financial figures.
Thank you, Remarque. Good morning, everyone. Let's start with a detailed review of the second quarter, starting with the revenues on a year-over-year basis. By the portable segment, analog products, MEMS and sensor grew 26%, mainly due to imaging and MEMS, and to a lesser extent, analog. Power and discrete products increased by 3.7%. Embedded processing revenues were up 35.5%, mainly due to general purpose microcontroller and, to a lesser extent, custom processing and connected securities. And RF and optical communication grew 32%. Buy and market. Communication equipment and computer peripherals grew 50%. Industrial, 34%. Personal electronic, 20%. And automotive, 16%. Here over here, sales to OEMs and distribution increase at 23.3% and 33.1% respectively. On a sequential basis, by reportable segment, analog product MEMS and sensor increase by 8.2%. Power and discrete by 19.2%. Embedded processing by 17.7% and RF optical communication by 8.6%. Buy-end market on a sequential basis, industrial group 20%, automotive 14%, communication equipment computer peripheral 13% and personal electronics 3%. Turning now to profitability. Gross profit in the second quarter was 1.22 billion dollars, increasing 31.1% on a year-over-year basis. Gross margin was 34.8%, increasing 130 basis points a year-over-year, mainly due to lower unused capacity charges and better product mix. On a sequential basis, gross margin increased by 100 basis points. Non-US gap gross margin was 35.2%. Q2 gross margin included about 60 basis points of negative impact resulting from non-recurring cost related to our manufacturing reshaping program. The negative impact on gross margin, just mentioned, and non-recurring cost, is expected to remain at a similar level over the rest of the year. Total net operating expenses, excluding restructuring, amounted to $970 million in the second quarter. Non-US GAAP OPEX stood at $960 million in line with the expectation given in April. For the third quarter of 2026, we expect non-US GAAP net OPEX to stand at about $980 million. The sequential increase is mainly due to startup costs and employee share award expenses that are more than upsetting the positive vacation seasonality effect. Excluding these two wins, Q326 non-US gap net of tax would have been at about $920 million. For full year 2026, we now expect a non-US gap net of tax to be slightly above 3.8 billion dollars taking into account increased employee share award expenses and the temporary impact of the startup cost reducing our other income and extensive positive line for full year 2026 non-us gap netto-tax are expected to increase low double digit year over year. Excluding NXP MEN's business acquisition and the exchange rate impact, like for like NetOPEX should be at high single digit year over year. Our cost saving plan is delivering its expected benefits. At the same time, we are accelerating our investment in new business opportunities. In the second quarter, we reported $187 million operating income, which included $68 million for impairment, restructuring charges, and other related phase-out 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. Q2 operating income also includes $24 million purchase price allocation effective from our acquisition of NXD's men's sense of business. Excluding these items, Q2 non-US GAAP operating income stood at $269 million. A non-US GAAP operating margin was 7.7% with analog product MEMS and sensor at 10.1%, power and discrete at minus 21.4%, embedded processing at 19.7% and RF optical communication at 21.2%. Second quarter, 2026, net income was $222 million. compared to a net loss of $97 million in the year-ago quarter. Deluted earnings per share were a positive $0.24 compared to a negative of $0.11 one year ago. Non-US GAAP net income stood at $291 million and non-US GAAP deluted earnings per share stood at $0.31. Net cash from operating activities totaled $502 million in the second quarter, including $44 million outflow related to restructuring, compared to a net cash flow from operating activities of $354 million in the year-ago quarter. Net capex was $409 million in the second quarter, compared to $465 million in the year-ago quarter. We now expect the 2026 net capex to be at the high end of our $2.2 billion range, range, reflecting accelerating investments in the selected growth drivers, including cloud optical interconnect. British law was positive at $75 million in the second quarter, compared to a negative $152 million in Q2 2025. Inventory, at the end of the quarter, was $3.19 billion, compared to $3.17 billion in Q1-26 and $3.27 billion in Q2-2035. Dases of inventory at the quarter-end were 126 days in line with our expectation, compared to 140 days for the previous quarter and 166 days in the year-ago quarter. Cash dividends paid to stakeholders in the second quarter of 2026 totaled $75 million. ST maintained its financial strength with a net financial position that remained solid at $2.01 billion as of June 27, 2026, reflecting total liquidity of $6.03 billion and a total financial debt of $4.02 billion. During the quarter, ST issued a new $1.5 billion dual tranche senior unsecure convertible bond, tranche A and tranche D, for $750 million each, due to 2031 and 2033, and announced the early redemption of at least $750 million convertible bond due in 2027. Now back to Jean-Marc who will comment on our outlook.
Thank you Lorenzo. Now let's move to our business outlook for Q3 2026. So we are expecting Q3 revenues of 3.7 billion dollars plus minus 350 basis points at the midpoint of our Q3 26 net revenues will increase 6.2% sequentially and by 16.2% year over year. We expect our gross margin to be about 37% plus minus 200 basis points, including about 70 basis points of unused capacity charges. This business outlook doesn't include any impact for potential further change global trade tariffs compared to the current situation. To conclude, in Q2, we saw demand further accelerating, strong bookings in all end markets and improved visibility. In Q3, revenues are expected to continue to grow sequentially and year over year, and gross margin to continue to improve. As previously anticipated, personal electronics seasonality this year is different compared to previous years. Revenue growth for personal electronics is expected to be below normal seasonality in Q3, moderating ST sequential growth in the third quarter. In Q4, we anticipate a revenue growth acceleration, mainly driven by our engaged customer programs in AI data centers and low-Earth-Arbite satellite communication. Q4 revenues to be above $4 billion, representing a sequential improvement better than normal seasonality. This translates into H2 versus H1 growth above our normal 15% seasonality. FT growth driver remains solid. We continue to see strong demand in AI data centers, reflecting the success of our products and technology portfolio. We are raising our revenue ambition for data centers. We now expect revenues above $1 billion in 2026. and assuming the current dynamic continues and with the current engagement we have, well above $2 billion in 2027. This confirms ST's strong position in the evolving AI data center. Thank you, and we are now ready to answer your questions.
Operator
We will now begin the question and answer session. Anyone who wishes to ask a question or make a comment may press star and one on their touchstone telephone. You will hear a tone to confirm that you've entered the queue. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question only. Anyone who has a question or a comment may press star and one at this time. The first question comes from the line of Jean-Albert Menon from Jefferies. Please go ahead.
Hi. Good morning. Thanks for taking the question. I was just looking into your second half guidance and trying to get a fee for your gross margin trend into Q4. So I know you don't want to guide on Q4, but you are talking about a bigger increase in revenue quarter on quarter, And we don't know how much it is, I agree, because you just said more than $4 billion. But I was wondering directionally whether you can give us any qualitative comments on how your Q4 gross margin could proceed and how you see that evolving into 2027 as well.
Okay. Thank you for the question. I take the question, Jean-Marc, about the gross margin, the evolution. Clearly, let's say, the midpoint of Q3 non-gap gross margin or gross margin for us in Q3 will be 37%. We are guided at this level of gross margin. That is increasing, let's say, about 180 basis points compared to the one of Q2. Clearly, starting from this Q3 gross margin at 37%, We do expect, let's say, for Q4, a sequential improvement in our gross margin, considering that our revenue will increase significantly. But you have to keep in mind that there is some at wins as well. One is that, let's say, our level of unloading charges will not change significantly in Q4 due to the fact that we are starting some fadding, particularly in China, let's say, in which we will still have some negative impact on our, let's say, level of unloading. And clearly, there is also still, let's say, these costs related to the transfer of technology, related to our shipping program in our manufacturing infrastructure, that will be still there, similar to the one that we have in the current quarter in future. So, yes, I confirm that there will be improvement, but there will be also some, let's say, at wins that are in our gross margin. I confirm that in 2.4, there will be an improvement in our gross margin, the sequential improvement compared to the 37.
So, that your revenue jump is going to be bigger, can we assume that your gross margin jump will also be bigger, or is that…
As I said, it will improve, let's say, compared to the 37, but still, let's say, it will be impacted by some ingredients that is related to this level of unloading that will not decrease, let's say, while when you look, let's say, the dynamic between Q2 and Q3 unloading was, let's say, decreasing. this will not be happening. Don't forget that when we look at the dynamic of our gross margin moving from those benefits, let's say in Q4 this effect will not be there, it will be neutral. So yes, I repeat, there will be an increase in our gross margin, but you have to also consider in your modeling that there are some adwins, temporary adwins, that will will be limiting somehow the improvement of our growth margin in Q4.
Thank you. Thank you, General Dan. Next question, please.
Operator
The next question comes from the line of Joshua Buchalter from TD Cohen. Please go ahead.
Hey, guys. Thank you for taking my questions. I guess I wanted to start with the data center number. Can you provide some more granularity on what's driving the big increase in 2027 versus the prior expectations? Like, how much of this is optics versus power? It did sound like there was some positivity on the power side. And I guess also is – you mentioned you were capacity constrained before. Is that number greater than $2 billion, assuming you're still constrained as well? Thank you.
So, before I pass the question to Remy to go in further detail, Well, it is clear that our growth in 2027 will be driven both by our specific engaged customer program on this field of activity, but clearly the overall success on optical cable connectivity. Clearly it will be the main driver of the significant growth we will do next year. No, I left Remy commented more on it, yeah.
To complement what John-Marc said, we see clearly in acceleration, the adoption of 800 gig and 1.6 terabit per second playable optics. And those are actually generation and categories of transceivers. We are now seeing a triple effect, and this triple effect is a fairly large market share when it comes to the microcontroller, taking care of the control plane, a growing share when it comes to the electronic IC driven by a BICMOS technology, and starting from next year but really accelerating next year is actually of a growing revenue in Silicon Photonics supporting Photonics IC that is being part of those plug-in or transceiver. Like we've explained you know we have a lot of scalability in terms of capacity on that technology because of the structure in our coal factory so we are not right now are gated by a capacity expansion to go and capture revenue at this stage.
Thank you both for all the color there. Maybe to follow up on that also, you know, I totally appreciate what, Lorenzo, you were highlighting from the manufacturing transitions and underloading charges, but on a like-for-like basis, should data center, as it grows, be accreted to gross margins? Thank you.
Yes, at the end, yes, this kind of, let's say, clearly, this has been already, let's say, moving from Q2 to Q3, and there will be also contributing from Q3 to Q4, product mix is contributing in a positive way to our growth margin. Yes, I confirm.
Thank you, Josh. Next question, please.
Operator
The next question comes from the line of Jacob Bluestone from BNP Paribas. Please go ahead.
Thanks for taking the question. So I had a question and a follow-up. On the pricing, could you maybe just give us a bit of an update? What are you seeing in terms of pricing, tailwinds, and when do you think that might impact revenues this year?
Yes, in terms of pricing, I would say that, of course, it's twofold. On one side, it is true that we see, let's say, in our input cost, price increase. Clearly, let's say, there are different materials or maybe, let's say, contractual activity that are increasing prices. On the other side, I would say that there is the other side that we confirm that in this context, In this context, let's say, of higher input cost, yes, we increase the prices on selected products. Clearly, let's say, this is an ongoing process that is, let's say, expanding in terms of, let's say, price increase, and I would say that at the end, what we see in our input because it's more than an offset of what we do, let's say, on our top line. So I would say that at the end, at this stage, let's say, the two impacts are more or less.
It's both. The demand is all in fold, and the reservoir use assembly and test, why we have increased our indication for the data center business, and next year is the same. And next year, okay, clearly we're closing the gap between the demand and our capability to, but it is really driven first by demand, then it is covered by engagement. Backlog for this year, 100% coverage, and next year, okay, engagement are covering our expectation. And definitively, our capability to go on this advanced 300 millimeter technology is a very important competitive factor for us.
Thank you. Thank you, Jacob. Next question, please.
Operator
The next question comes from the line of Sandeep Nishpande from J.P. Morgan. Please go ahead.
Yeah, hi. Thanks for letting me on. Could you talk about the revenue growth guidance into Q3 and then potentially into Q4 by your segments? Because you said earlier in the call that that personal electronics was weaker in the third quarter. But can we look at how the growth was in the other segments and based on what you're indicating for the fourth quarter at the moment of greater than $4 billion, at least directionally how to see the different segments in terms of your end markets into the fourth quarter based on your order book today?
I will take the question. Well, clearly, I am starting by the key growth driver, it's clearly our verticals communication equipment, computer and peripheral. I can say that in Q3 on the year-over-year growth, this segment will grow very similarly what we have achieved in Q2, so it means close to 60% growth, and definitively where we will have in Q4 a very strong acceleration, means, okay, we will be about 90% growth. The second really positive growth vertical is industrial. industrial in q2 we grew 32 percent and step after step q3 and q4 we will go close to 40 percent growth your earlier in growing in q4 and then clearly automotive is performing above what we expect and what is the market is expecting you know that for semiconductor industries the automotive is expecting to grow about 13%, 14% year-over-year, this is what we will achieve on this segment. PE is definitively a different profile, let's say, in the year-over-year growth, because it will be slightly negative, let's say, a mid-single digit during Q3 and Q4, as we anticipated in our previous call, that will put this segment at the end of the year for the full year, going, let's say, from low to mid-single digit that we already anticipated in the previous code. So my takeaway is really very strong growth on computer and communication, moving from 60% growth in Q2 to close 90% in Q4. On industrial, after a Q2 of 30% growth year-over-year, we will go close to 40% in Q4. Automotive, let's say low double digits, as expected consistently with the market. And this year, okay, different profile for PE. We will be on year-over-year negative on H2 after having been positive in H1. But on the full year, it is a low to mid single digit, which is consistent with the market of a smartphone that is decreasing because on the low-end, let's say, device, there is an impact because of the memory price. So this is the profile of the revenue which we support.
Thank you. Any follow-up, Sandy?
The question would be that, you know, you've seen this significant strength in computer and peripherals associated with the AI market. Is there not any flexibility in filling your capacity in the third quarter itself? Why does this have to wait until the fourth quarter, given that you still remain underutilized in the third quarter?
On, let's say, all the advanced technologies that are enabling our, let's say, growing industrial market and communication and computers, we are in a permanent growth and exactly at what we expect. And here, the only flexibility we could have is to continue to accelerate permanently, which is already on a really competitive path. Well, then, clearly, where we have still some, let's say, under-loading, and even sometimes, okay, in Q2, we face a slight delay in our capability to ramp up. It is on legacy, pure legacy analog technologies, because if you remember Q1, we were totally under loaders, so the Q2 ramp-up was challenging, so we delay a little bit this ramp-up, that in a certain extent has impacted also our capability on Q3 to fully fulfill the demand on legacy technology. So this is this, let's say, pure temporary capability to run, and some unloading charges specific to really legacy technology on analog that is, let's say, showing this figure.
Thank you so much. Thank you, Sandy. Next question, please.
Operator
The next question comes from the line of Domenico Guilotti from APRICA. Please go ahead.
Good morning. I follow up on the gross margin, so in the past you were guiding, so you were suggesting that at $4 billion sales per quarter, so the profitability gross margin would have been at least in the 40% range, and now you are suggesting that you will probably not be at that point in Q4, so I'm trying to understand how this, first of all, if you are still confident to get to the level of profitability we're suggesting, and there are some specific temporary effects on Q4 that we should take into account. And a follow-up on the AI data center demand and your customer-engaged program, can you give a sense of how concentrated is today the demand there and the engaged program supporting your $2 billion revenues for 2027?
Maybe I take the first question about the gross margin of $4 billion in respect to our model to be, let's say, above, let's say, the 40% gross margin. Here, I have to remind all of you that, yes, this is our model, but let's say we always said that there are two conditions that we need to achieve in order, let's say, to be above 40% when the company will be at $4 billion. One is the rain, of course, let's say, that this is what is happening, but the other point is that we complete our reshaping manufacturing program means that actually we have let's say done this transfer from the 200 millimeter to the 300 millimeter for this 150 millimeter to the 200 millimeter for the silicon carbide we are not yet there we are let's say in the middle of of this transformation. So clearly here we are not in the condition to have our manufacturing infrastructure at the right level of efficiency. The other way around I would say that in this moment in this world some kind of extra cost that are related to this transfer, the qualification of the products, the review of the mass of the products, all these kind of things that are impacting our gross margin and that clearly was super optimal efficiency due to this let's say transition so at the end we confirm our model to be let's say above 40 percent when the company is there but once we have done the let's say transformation when we have completed our programs that as you know it will be at the end of 2027 let's say not before so
this is the reason why let's say and not enough to be afforded at the right level of the second question maybe you can comment again the key growth driver that will put us on a trajectory well about 2 billion dollars make sure Yeah, we have discussed earlier about what we're doing on the optical front, and I insist on the fact that we are now at the intersection of three main vectors of growth, which is the oversized market share we have in 800 and 1.6 THP and MCU, the growing adoption of our B55X by CMOS process for electronic IC and the steep ramp we have on our photonics IC platform in 300 mm which is proven to be really really well adapted across the board by all the major actors and I think there was also a question related to the concentration of that revenue and which makes us actually quite confident about the composition of our revenue.
Thank you, Domenico. Next question, please.
Operator
Next question comes from the line of Didier Shevama from Bank of America. Please go ahead.
Good morning. Thanks for taking my questions. My first question is on the outlook. I think, Jean-Marc, in your prepared comments, you mentioned that your book to build was close to two, I think, overall, and above two in certain segments, like Optical Interconnect in particular.
I'm just wondering, does that imply that your first quarter seasonality might be a bit better than normal and I've got a follow-up thank you thank you no yes with this book to be what also is interesting is that one of the 100% of the booking we receive in Q2 well well about 50% were for next year. So, it means the customer now, they have understood that they have to provide us visibility. And the good news is that now, our total backlog is representing about an average of 4.5 to 5.25 of Q2 average revenue, which is clearly an improvement coming back to standard of visibility. So clearly, yes, Q1 is today on the dynamic to be well-loaded and clearly continuously boosted by our revenue related to AI data center.
Okay, great. Thank you. And as a follow-up, I just wanted to make sure I got the right hand of the stick on the financial models i think in the past you were talking about you know 45 gross margin on 18 billion and then maybe 50 percent gross margin on 20 billion obviously that's contingent on execution of the restructuring plan of manufacturing just wanted to make sure that this is still the case and whether you've got you know increased confidence that you can believe these sort of numbers around 2028.
No, but we confirm our confidence level to reach 18 billion dollars in 2028. And clearly, announcing the dynamic and increasing of our indication on data center, it is clearly one of the key growth drivers that we position our company on 18 billion dollars by 2028. Then, second, Lorenzo already commented that this business related to AI data center is effective, our growth margin. So we will have this mixed effect. Then, I confirm that, assuming we complete on time our reshaping program, on manufacturing and that the ethics will remain, OK, our model, we should be in position, OK, to reach the gross margin target consistently with our $18 billion model. Well, about $20 billion, OK, for the time being, let's reach together the $18 billion target. Then we'll speak about the $20 billion.
All right. Thanks very much.
Thank you, DJ. Next question, please.
Operator
The next question comes from the line of Stefan Uri from Oddo BHS. Please go ahead.
Yes, good morning. So, I would love to come back on maybe the satellite low 4-byte opportunity and if you can tell us what is the dynamic currently, notably with your main customer and the ramp of your second customer, and if you confirm the target of 1 billion for this year and if you have a view for next year already thank you thank you i'll pass the question directly hello stefan uh the um the the dynamic is uh it's quite healthy uh uh uh uh overall uh uh at the beginning of the discussion we speak to a well above 3 million dollars over 26 27 28
You have noticed that, and we spoke about that in the past, that it's very much a launcher-dependent business in the context of deploying satellites, and then deliver the services, which itself is a fuel behind user-terminal consumption, are clearly seen in the right direction of We see a strong 26 and an even stronger 27.
Okay, and can you comment on the level of profitability on the gross margin on this business like you did for data center?
Yeah, clearly, let's say, is a business combination of different gross margin, because clearly there are different products, the ones that are going to the satellite, the ones that are going to the way, the ones that are going to, let's say, the user terminal. Anyway, when we look, let's say, at the average of the gross margin of this business, yes, I confirm that also low-hard orbit satellite is then contributing, let's say, to the improvement of our growth.
Okay, thank you very much. Thank you, Stefan. Next question, please.
Operator
The next question comes from the line of Francois Bovigny from UBS. Please go ahead.
Thank you very much. My first question was on the capacity front. I mean, we see an acceleration of growth from a cycle perspective, but also from AI data centers. and you are seeing some tightness, as you say in the release, also TI suggested as well some tightness. So I was wondering, how do you feel about your capacity in the next, let's say, two to three years? I mean, do you think enough capacity to deliver the different growth scenarios, or are you evaluating maybe, you know, some brownfield or greenfield expansion down the line? So, the capacity of investing in the next two, three years will be helpful.
We have to see it under two angles. One angle is what is related now our capability to support AI data center. And at this stage, okay, we believe that we can sustain it and support it. Of course, under the assumption we are well-assessed the dynamic we have today on optical cable and microcontroller. And clearly here, the key success factor is crawl. And crawl will reach 15k waves of the week and will go above to support the dynamic of this business. Where clearly we see some tightness is clearly what is related to the general purpose microcontroller. Why? Because first of all we have two cumulative effects. There is first the enormous success of the microcontroller developed by Remy team for optical cable. and there is a solid recovery of the overall industrial market and where, okay, I mentioned during my address that in distribution, the inventory are now well below our standard and the POS dynamic is very strong. It is easier that we are facing at this moment some tension on the supply and increasingly tight. But here, basically, we have some key competitive advantages. First of all, we have our two 300mm fabs where clearly our microcontroller will be processed. The good news now is AGRA300 certainly will reach the full build-out pretty soon, before 2028, and will be capable to support the growth of microcontrollers as soon as we will have qualified the 19nm and 14nm technologies. Then the second important lever is our China for China strategy, that we start to pay back, Because if you remember, we have qualified 14 nanometer technology in China with our main partner. That will enable us to support the growth in China. That is very demanding, both for industrial distribution, but industrial OEM and also optical cable. On the other, let's say, technologies and products, But clearly the challenge for us is our transition phase between respectively 6-inch to 8-inch silicon carbide technology and 8-inch to 12-inch analog technology. And we are accelerating as fast as we can in synchronization with our customer that could create time to time some temporary tightness on the supply. So this is the overall picture. So three elements. Short term on microcontroller but we have exactly in our hand our capability to grow. All the new technology driven by AI data center we have the path to grow.
Some other tightness related to our reshaping but only temporary then after we have some pocket of capacity limitation time to time with OSAT but okay we manage it great thank you Jean-Marc and maybe my follow-up would be on silicon carbide actually I mean we see a lot of you know change in terms of silicon carbide demand, one driven by the Chinese EV car makers adopting 800 volts, supporting the silicon carbide growth, but also we see one of your main customers delivering strong deliveries. And on top of that, we have this 800 volts opportunity for silicon carbide.
So I was wondering if you saw an improvement on the silicon carbide front, and if you could provide any maybe guidance on on what to expect for and the mid thirties in terms of quarter over quarter this is also supported by a strong bookings with a book to build that is well above one which is resulting in a in a growing background so the dynamics are confirmed and are structural in this context i can confirm that this year we should grow consumer by revenues double digits in 26 versus 25, based on already design one and the backdrop, which is already visible. So the dynamics are positive. Of course, we are facing the transition between the 6 inches and the 8 inches.
Thank you for this quarter, so thank you very much, everyone, for joining us. And we remain at your disposal, should you need any further questions. Thank you. Thank you.
Operator
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