STMicroelectronics (NYSE:STM) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.
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Summary
STMicroelectronics reported Q3 2026 net revenues of $3.76 billion, surpassing the midpoint of their outlook due to strong performance in communication equipment and computer peripherals, particularly from AI data centers and low Earth Orbit satellite revenues.
Gross margin was 37.3%, above the midpoint of expectations, with non-U.S. GAAP diluted EPS at $0.37. The company generated positive free cash flow of $351 million.
STMicroelectronics is seeing strong demand across end markets, especially in AI data centers and industrial applications, with a book-to-bill ratio well above 2. Inventory levels in distribution remain below target.
Automotive revenues increased 5% year-over-year, driven by application-specific ICs and sensors. The company is focusing on design wins in hybrid, electric, and traditional vehicle segments.
The outlook for Q4 2026 anticipates revenues of $4.15 billion, a 10.5% sequential increase, with a gross margin of approximately 39%. The company projects full-year 2026 revenues of about $14.5 billion, a 22.8% increase year-over-year.
Strategic initiatives include expanding capacity to meet demand in AI data centers and satellite communications, as well as continuing to improve profitability through manufacturing reshaping.
Management highlighted ongoing cost discipline and strategic organizational changes aimed at aligning business objectives with market dynamics.
Full Transcript
Sandra (Operator)
Ladies and gentlemen, welcome to the STMicroelectronics third quarter 2026 earnings release conference call and live webcast. I am Sandra, the conference call operator. I would like to remind you that all participants are in listen-only mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing 1 on your telephone. For operator assistance, please press 0. The conference must not be recorded for publication or broadcast at this time.
It is my pleasure to hand over to Jerome Ramel, EVP Corporate Development and Integrated External Communications. Please go ahead, sir.
Jerome Ramel (EVP Corporate Development and Integrated External Communications)
Thanks, Andre, and thank you everyone for joining our third quarter 2026 financial results call. Hosting the call today is Jean‑Marc Chéry, ST President and Chief Executive Officer. Joining Jean‑Marc on the call are Lorenzo Grandi, President and CFO, and Remi El‑Ouazzane, President, Microcontroller, Digitalized and RF Product Group. This live webcast and presentation materials can be accessed on ST Investor Relations website. A replay will be available shortly after the completion of this call.
This call will include forward‑looking statements that involve risk factors that could cause actual 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 STMicroelectronics’ regulatory filings for a full description of these risk factors. 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 Chéry, ST President and CEO.
Jean-Marc Chéry (President and Chief Executive Officer)
Thank you, Jerome. Good morning everyone, and thank you for joining STMicroelectronics for our Q3 2026 earnings conference call. I will start with an overview of the third quarter, including business dynamics, and I will hand over to Lorenzo for the detailed financial overview. I will then comment on the outlook and conclude before answering your questions. So starting with Q3, our third quarter net revenues of $3.76 billion came in above the midpoint of our business outlook range, mainly due to higher revenue in communication equipment and computer peripherals driven by AI data center and Low Earth Orbit satellite revenues. Communication and Personal Electronics gross margin was 37.3%, above the midpoint of our business outlook range. Non‑U.S. GAAP diluted earnings per share was $0.37 during the third quarter.
Inventory in our balance sheet increased slightly to support the expected increase in Q4 revenues. In distribution, inventory decreased and continued to track below our standard target. We generated positive free cash flow of $351 million. Let’s now discuss our business dynamics during Q3. During the quarter, the ongoing recovery and secular growth across the end markets we serve continued to gain momentum. Demand strengthened further in Q3 with bookings increasing sequentially and book‑to‑bill remaining well above 2 overall. Book‑to‑bill was well above 1 in all end markets and significantly above 2 in communication equipment and computer peripherals and industrial. Visibility improved, inventory in distribution continued to track below our standard target, and demand continued to outpace supply across multiple product categories.
Automotive revenues were stable sequentially and increased 5% year over year. Our solid position in automotive continued to be driven by application‑specific ICs and sensors for core applications, electrical powertrain and ADAS. We maintain our automotive design win momentum with OEMs and Tier 1 suppliers across the portfolio of ST product families including microcontrollers and power and discrete. These wins cover hybrid, electric and internal combustion engine vehicles in areas including onboard charging, powertrain and active suspension, as well as a first award for 48‑volt electromechanical braking.
We made progress with our automotive MEMS business supported by the successful integration of NXP’s MEMS sensors, achieving several key customer awards in telematics, cockpit control and tire pressure monitoring. We had another important design win with our in‑cabin monitoring solutions, and we introduced a new automotive image sensor for infrared in‑cabin sensing designed to extend driver and occupant monitoring across more vehicle models. Industrial revenues improved 12% sequentially and 40% year over year. This solid growth was mainly driven by our general‑purpose microcontrollers, analog and power conversion products. During Q3, the broad‑based recovery in industrial continued and inventory in distribution declined further, remaining below our standard target. We had design wins across industrial automation, robotics, power systems, building automation, power tools and home appliances.
Our portfolio combines intelligent sensing, real‑time control and efficient power management to support the transformation of factory automation, robotics and power energy infrastructures and the growing physical AI market. At the Embedded World North America event, we had a demonstration together with Nvidia illustrating our broad cooperation on robotics. We showed an integrated robotics development path from digital twin to deployed application based on our inertial sensors, microcontrollers and imaging solutions.
We are continuing to strengthen these capabilities with new products. Our latest launch is a miniature 6‑axis motion sensor with a machine learning core designed to improve accident alerts, robot teaching, drone stabilization and structural monitoring. By bringing AI processing into the sensor, systems can reduce energy use and save resources in onboard processing. We continue to expand our STM32 offering with a strong pipeline of new products and software innovations. You will hear more about these at our STM32 Summit on November 3rd, followed by a dedicated STM32 analysis call on November 18th.
For Personal Electronics, third quarter revenues came in better than expected, up 12% sequentially and down 4% year over year. During the quarter we had design wins with secure solutions, MEMS and imaging sensors and microcontrollers across a variety of devices including smartphones, gaming headsets, earbuds and smartphones. For Communication Equipment and Computer Peripherals, third quarter revenues were above expectation, increasing 14% sequentially and 64% year over year. This strong growth mainly reflected the contribution of our company‑specific growth drivers in AI data center and Low Earth Orbit satellite communications. For AI data centers, we continue to see strong demand driven mainly by our silicon photonic ICs, electronic ICs and microcontrollers as well as power solutions.
This supports our revenue expectation for 2026 of about $1.3 billion and, assuming the current dynamic continues and with the current engagements we have, our revenue ambition of well above $2 billion in 2027 and further growth beyond. Now over to Lorenzo, who will present our key financial figures.
Lorenzo Grandi (Chief Financial Officer)
Thank you, Jean‑Marc. Good morning, everyone. Let’s start with a detailed review of the third quarter, starting with revenues on a year‑over‑year basis by reportable segment. Analog products, MEMS and sensors grew 8.8%, mainly due to MEMS and, to a lesser extent, analog and imaging. Power and Discrete products increased 11.3%. Embedded processing revenues were up 24.1%, mainly due to general‑purpose microcontrollers and RF. Optical communication grew 46.2%.
By end market, communication equipment and computer peripherals grew 64%, industrial 40% and automotive 5%, while personal electronics decreased 4% year over year. Sales to OEMs and distribution increased 10.2% and 38.8%, respectively. On a sequential basis by reportable segment, Analog products, MEMS and sensors increased by 9.4%, Power and Discrete by 2.8%, Embedded Processing by 5.7% and RF Optical Communication by 13.4%. By end market on a sequential basis, communication equipment and computer and peripherals grew 14%, industrial 12%, personal electronics 12%, while automotive was flat.
Turning now to profitability, gross profit in the third quarter was $1.40 billion, increasing 32.2% on a year‑over‑year basis. Gross margin was 37.3%, increasing 410 basis points year over year, mainly due to lower unused capacity charges and a better product mix. On a sequential basis, gross margin increased by 250 basis points. Q3 gross margin included about 60 basis points of unused capacity charges and about 40 basis points of negative impact resulting from non‑recurring costs related to our manufacturing reshaping program.
Looking beyond these near‑term effects, improving our gross margin remains a key priority. We remain committed to achieving the 44% to 46% gross margin of our intermediate financial model once our manufacturing reshaping plan is completed. Starting from the approximately 39% gross margin expected for Q4 2026, we see a clear path to margin expansion. First, Q4 2026 temporary headwinds, including approximately 40 basis points from unused capacity charges and approximately 30 basis points from non‑recurring costs associated with our manufacturing reshaping program, are expected to largely disappear during the second half of 2027.
Second, we continue to expect more than 400 basis points of structural gross margin improvement from the reshaping of our manufacturing footprint. This benefit is expected to materialize as a step function either toward the end of 2027 or in early 2028, subject to the shutdown of legacy fabs and customers’ qualification timing. Finally, we expect better mix and price to contribute to margin expansion over time. While input cost increases are expected to be a headwind, the timing and the magnitude of these effects remain more difficult to assess.
Moving now to total net operating expenses, in the third quarter these amounted to $979 million. Excluding restructuring, non‑U.S. GAAP OpEx stood at $972 million, better than the indication we gave in July, reflecting continuing cost discipline. For the fourth quarter of 2026, we expect non‑U.S. GAAP net OpEx to stand at about $1.035 billion. The sequential increase is mainly due to the calendar days effect net of vacation. This would lead the full year 2026 non‑U.S. GAAP net OpEx slightly above $3.8 billion, in line with our expectation.
In the third quarter we reported operating income of $367 million, which includes $55 million for impairment, restructuring charges and other related phase‑out costs. These charges are related to the execution of our company‑wide program to reshape our manufacturing footprint and to resize our global cost base. Q3 operating income also included $7 million in purchase price allocation effects from our acquisition of NXP’s MEMS sensor business. Excluding these items, Q3 non‑U.S. GAAP operating income stood at $429 million and non‑U.S. GAAP operating margin was 11.4%, with Analog products, MEMS and sensors at 14.1%, Power and Discrete at negative 17.1%, Embedded Processing at 23.1% and RF Optical Communications at 26.2%.
Third quarter 2026 net income was $291 million compared to $237 million in the year‑ago quarter. Diluted earnings per share were $0.26. Non‑U.S. GAAP net income stood at $344 million and non‑U.S. GAAP diluted earnings per share stood at $0.37. Net cash from operating activities totaled $1.02 billion in the third quarter compared to $549 million in the year‑ago quarter. Net capex was $643 million in the third quarter compared to $401 million in the year‑ago quarter. Free cash flow was positive at $351 million in the third quarter compared to positive $130 million in Q3 2025. Inventory at the end of the quarter was $3.25 billion compared to $3.19 billion in Q2 2026 and $3.17 billion in Q3 2025.
Days sales of inventory at quarter end were 126 days, better than our expectation, unchanged from the previous quarter and compared to 135 days in the year‑ago quarter. Cash dividends paid to stockholders in the third quarter of 2026 totaled $83 million. In addition, ST executed a share buyback of $91 million. ST maintained its financial strength with a net financial position that remains solid at $2.11 billion as of September 26, 2026, reflecting total liquidity of $5.31 billion and total financial debt of $3.21 billion. Following the exercise of the option for the early redemption of ST’s convertible debt due in 2027, bondholders exercised their conversion rights on the total $750 million convertible bonds.
ST settled the bonds on a net share basis, delivering $750 million and about 4.2 million shares from treasury stock. Finally, while we are not providing a quarterly indication for 2027, for modeling purposes please note that 2027 will have 86 calendar days in Q1, 91 in Q2, 91 in Q3 and 97 in Q4. Now, back to Jean‑Marc, who will comment on our outlook.
Jean-Marc Chéry (President and Chief Executive Officer)
Thank you, Lorenzo. Now let’s move to our business outlook for Q4 2026. We are expecting Q4 revenues of $4.15 billion, plus or minus 350 basis points at the midpoint. Our Q4 2026 net revenues will increase 10.5% sequentially and 24.7% year over year. We expect our gross margin to be at about 39%, plus or minus 200 basis points, including about 40 basis points of unused capacity charges. This business outlook does not include any impact of potential further changes to global trade tariffs compared to the current situation.
For 2026, the midpoint of this outlook translates into full‑year 2026 revenues of about $14.5 billion, representing a 22.8% year‑over‑year increase. Beyond the cyclical recovery across our end markets, the year‑over‑year growth is supported by ST’s company‑specific growth drivers, including AI data centers and low Earth orbit satellite communications. Gross margin is expected to be about 36.4%. Non‑U.S. GAAP gross margin is expected to be about 36.6%, representing an improvement of 270 basis points versus fiscal year 2025.
To conclude, we continue to see very strong demand for our AI data centers and low Earth orbit satellite communications products and technologies, alongside an ongoing cyclical recovery in automotive and industrial. With demand across many of the markets we serve exceeding available supply, we are expanding capacity in line with ST’s strategic roadmap and growth opportunities. At the same time, improving profitability remains a key priority as we progress toward our intermediate financial model.
As mentioned earlier by Lorenzo, this is supported by our company‑specific growth drivers combined with the execution of our company‑wide program to reshape our manufacturing footprint and resize our global cost base. Before handing over to Jerome, I would like to mention a few corporate developments. Earlier this month, the Supervisory Board asked me to be reappointed in my current role for an additional year. I was honored and pleased to accept. The proposal for my reappointment as Chairman of the Managing Board and ST’s President and CEO will be submitted for shareholder approval at ST’s 2027 Annual General Meeting of Shareholders. Finally, earlier today we announced updates to ST’s organization aimed at better aligning our vision and business objectives with evolving market dynamics.
This will strengthen the coordination between our strategy, technology and product roadmaps, accelerate innovation and time to market, ultimately supporting our long‑term growth opportunities. Remy Elwazan is confirmed as President, member of the Executive Committee and Head of Microcontrollers, Digital ICs, RF and Optical Communication products. He will also take on leadership of the Imaging Sensor Group and be appointed ST Chief Technology Officer. Marco Cassis is confirmed as President, member of the Executive Committee and Head of Analog, Power and Discrete and MEMS products. He will also take on leadership of R&D for Analog, Power and Discrete and MEMS technologies and be appointed ST Chief Strategic Officer.
The new organization and the related adjustments to our reportable segments will take effect on January 1, 2027, with implementation of the changes to be completed by the end of March 2027. Thank you, and we are now ready to answer your questions.
Sandra (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 1 on the telephone. You will hear a tone to confirm that you have entered the queue. If you wish to remove yourself from the question queue, you may press star and 2. Participants are requested to use only handsets while asking a question. In the interest of time, please limit yourself to one question only. Anyone with a question may press star and 1 at this time.
Our first question comes from Joshua Buchalter from TD Cowen. Please go ahead.
Joshua Buchalter (Analyst)
Hey, guys, thank you for taking my question, and congrats on the results. I guess to start, I wanted to ask about some of the comments you made on gross margins. So I believe you said after the manufacturing transition headwinds abate, there’d be a step‑function increase of 400 basis points to gross margin. Is that sort of going to hit all at once? Because I think you previously said we shouldn’t expect gross margins to get to 40% until sort of second half ’27 or first half ’28.
So I guess is the expectation that it very quickly goes from 40 to 44? Thank you.
Lorenzo Grandi (Chief Financial Officer)
Maybe I take this question. Clearly in terms of gross margin, what we said is that the impact of our reshaping plan in manufacturing will factor into our gross margin once we will close our fabs. You know that there are four fabs, the legacy fabs that we intend to close, and clearly the positive impact will be visible when we will be able to close. This will happen in the second part of next year, so it will happen toward the end of 2027 and at the beginning of 2028.
Clearly here it depends on the acceptance of the customer for three of these fabs. Substantially, we believe that we have all in our hands; still some discussion for one of those in this respect. I would say that in any case we will continue to see improvement of our gross margin moving forward along the various quarters, also due to the fact that we have a positive impact of the mix and improvement in terms of manufacturing variance. As I was saying, progressively reducing our unloading charges and reducing also the temporary impact of negative costs due to the activity to transfer product from the legacy fabs to the new 300‑millimeter fabs, or in case of silicon carbide to the 200‑millimeter.
Joshua Buchalter (Analyst)
Okay, thank you for all the color there, Lorenzo. For a follow‑up, any help you can give us with either context or any sort of tighter range on the data center contribution for next year of well greater than $2 billion? And any help you can give us on how much you expect to be MCUs versus electronic ICs and PICs and power? Thank you.
Lorenzo Grandi (Chief Financial Officer)
On the revenues, I assume—Josh, your question was on revenues.
Jean-Marc Chéry (President and Chief Executive Officer)
Okay, so I will give the overall picture and Remy will comment the detail. Well, as I said during my speech, this year we will generate about $1.3 billion revenue for data center. More than 85% coming from AMD RF. So mainly microcontroller, silicon photonics and electronic ICs on BiCMOS. But next year I will not give in detail. Okay. We will be well above doubling this number and we will communicate in January, of course. Okay. A number for 27 and an indication for 28 or maybe.
Okay, you can comment some more detail. Sure.
Remy El-Ouazzane (President, Microcontroller, Digitalized and RF Product Group)
Microcontrollers in data centers will see a steep growth year on year to grow 2x in revenue size. I won’t give you the exact number. The contribution of silicon photonics next year will start to grow and become very relevant. I would say that actually it will be tens of percent of the complete revenue consideration. We will not share the exact details. As to BiCMOS, I think the bulk of the effect we will see is from 28 onwards because we’ve won a lot of sockets over the past quarter and I think that you’ll see the effects mainly in 2028, even though actually it would be non-negligible in 27. But I guess from a contribution standpoint it will be very, very visible in 28.
Jean-Marc Chéry (President and Chief Executive Officer)
Thank you, Remy. So about 1.3 billion this year, well above doubling next year, and we continue to grow in 28, and we will communicate more detail in January.
Sandra (Operator)
Thank you. Josh, next question please. The next question comes from Francois Bouvignies from UBS. Please go ahead.
Francois Bouvignies (Analyst)
Thank you very much. Just a question on the gross margin as well. I mean a bit more short term here about the Q1. I was looking at the history and it’s a bit all over the place. The gross margin direction in Q1 and it seems to be that in up cycle it’s up quarter on quarter. In the down cycle it’s down quarter on quarter. The average is down 70 bps. But it’s very, very diverse. So I was wondering if you could help us on the direction of the gross margin, given all the moving parts right now.
For the Q1, please.
Lorenzo Grandi (Chief Financial Officer)
For Q1 we see gross margin. Clearly we don’t give indication of the gross margin of the following quarter. But what I can say is that we see gross margin at least at the current consensus for Q1, let’s say. More than that, I would not say at this stage.
Francois Bouvignies (Analyst)
Okay, thank you, Lorenzo. And maybe one on the satellites. Could you maybe update on—you mentioned data center? But what about LEO into next year? How is it shaping? I mean, you kept your guidance for a long time. It’s a broad guidance of above 3 billion. But I was wondering if you could give more color on this year as you get more visibility, please.
Jean-Marc Chéry (President and Chief Executive Officer)
I pass the question directly to Remy.
Remy El-Ouazzane (President, Microcontroller, Digitalized and RF Product Group)
Yeah, we see a lot of momentum across the board, not only in SpaceX, but other programs that are going to be ramping. I would expect actually next year to be as good, if not better than this year in terms of revenue contribution. As a matter of fact, I do believe that we are right now working hard to go and find more capacity to enable even more revenue. So that’s the momentum we’re into. Kind of very consistent with what you’re hearing from one of our customers’ earning calls in terms of the momentum they’re getting.
Francois Bouvignies (Analyst)
Sorry, Remy, you mean that revenue contribution as percentage of revenues or just growing on absolute? Just clarify this point.
Remy El-Ouazzane (President, Microcontroller, Digitalized and RF Product Group)
My comment was the latter. Revenue not larger than this year.
Francois Bouvignies (Analyst)
Okay, thank you.
Sandra (Operator)
Thank you. Francois Daguerre, next question please. The next question comes from Sebastian Sabovi from Kepler Cheuvreux. Please go ahead.
Sebastian Sabovi (Analyst)
Yeah, hi everyone and thanks for taking my question. On a global basis, what kind of visibility you have for the coming quarters and where the backlog is steadying at the end of Q3? And attached to that on the revenue side, how do you see the seasonality building up for 27? Should we expect a better than usual seasonality?
Jean-Marc Chéry (President and Chief Executive Officer)
Thank you. Sebastian, your line was breaking up. Can you rephrase the question? What is the seasonality for Q1 you were asking—no, seasonality for 27. Do you expect better than usual or normal seasonality moving into 27? Okay, now the seasonality will be different. Why? Because as I explained a few minutes ago, we are on the dynamic where we are basically rebalancing the spread of ST across the various vertical. As an example, at the midpoint of the guidance we provide, okay, the automotive vertical’s weight of total revenue ST will be about 35% and then, okay, industrial will be let’s say between 22, 24. CCP, so means the digital infrastructure, also data center, low Earth orbital satellite and some legacy, will be slightly above 20% and personal electric 22%. For 2027 we expect to see CCP continuing to grow. So you see the balance between the verticals will be significantly different.
So of course it will impact the seasonality. So this is some indication we will give, okay, clearly in January. The first was the first question was on the backlog level today and what kind of visibility do you have for the coming quarters based on your backlog right now? You see, okay, with the book-to-bill that was well above 2 and the revenue of $3.775 billion. Now our backlog is well above $20 billion. So it representing, compared to Q4 midpoint of the guidance, now about 5/4 of revenue, which start to be appropriate visibility to drive, to drive our operation.
We are still far the peak of 2023 and 2022. Thank you, Sebastian.
Sebastian Sabovi (Analyst)
Thank you.
Sandra (Operator)
Next question please. The next question comes from Menon Yonardan from Jefferies. Please go ahead.
Janardan Menon (Analyst)
Hi. Thanks for taking my question. I’ll just start with a sort of clarification, then I have a question after that, but both on gross margin. You had said that you don’t expect Q1 gross margin to be at least in line with current consensus. I’m just looking at both Visible Alpha and Bloomberg. It’s about 38%. So are you suggesting that gross margin could decline slightly quarter on quarter given that you are guiding at 39% in Q4? And then the question also is on gross margin.
So your target model, medium-term target model is 44 to 46. If you take more than 400 basis points from the fab conversion, that means you’re sort of saying before that comes through, it’s about 41%-ish. So should we assume that between Q4 this year at 39% and let’s say Q3 2027, your gross margin will essentially go up by give or take around 200 basis points? And then as you go beyond that, you will get the full effect of 400–450 basis points. And when you give that target model, you did not have so much of visibility on the AI side where you said that your margin is above the target model on areas like silicon photonics.
So given that that is so strong, is there a chance that your gross margin in this cycle, with the help of that as well as pricing, could actually end up above that target model? Thanks.
Lorenzo Grandi (Chief Financial Officer)
So basically, Janardan, you want to know the gross margin in Q1 and for 2027, right? I will let you guide for the gross margin going forward. But no, no, at the end clearly the path, and we said also before, clearly one of our focus is to increase our profitability, increase the gross margin. One of the key elements on the gross margin definitely will be our reshaping plan, as we said, our reshaping plan. Let’s say we factor it in in our gross margin toward the end of next year and in 2028, let’s say substantially. And this is one of the important elements.
The other important element is that the growth that we are in AI and the growth in the AI infrastructure and the growth that we have, let’s say now in the industrial, that is very significant as you have seen, is accretive for our gross margin. And this we do expect continuing, say, progressively in 2027, so bringing a positive impact on the gross margin. As I said, about the gross margin of the Q1 quarter at this stage for me, I don’t want to guide, but what I said is that we’ll be at least at the level of the current consensus. But what to say more than that?
Clearly, let’s say there are other elements that we need to consider, and one of the elements that you have to keep in mind is that we are also in an inflationary, let’s say, environment for which there is cost increase in our input cost. This will, let’s say, have some impact. But on the other side there are other positives that are, as I said, the impact of the improvement of manufacturing efficiency, the mix that will enter, and also some continued price increase on our top line.
Janardan Menon (Analyst)
Understood. Just on the first answer. So you are suggesting, I understand it, that because of the strong AI growth you could end up above the target model. Is that the way I should understand your answer?
Lorenzo Grandi (Chief Financial Officer)
Can you repeat the question? The question is if we can end up above our target model. The point is that for the time being we target to be at our target model. Let’s say then of course, as I said, there are many components. One could be the mix, let’s say. We see, but we will, let’s say, update you moving forward, let’s say in January and during the next year.
Janardan Menon (Analyst)
Understood. Thank you.
Sandra (Operator)
Thank you. Jonathan, next question please. The next question comes from Gianmarco Bonacina from Banca Akros, please go ahead.
Gianmarco Bonacina (Analyst)
Good morning. Just a follow up on your book-to-bill. If you can provide a little bit more color for the different verticals. And also you talked about seasonality for the year. If you can give also some indication given that you indicate you have good visibility. Also in terms of the Q1, also with the comment you made on the calendar days, we know that normally Q1 is down about 10% sequentially. So if you can indicate directionally this time, given seasonality and visibility, maybe the performance will be different.
Thank you.
Jean-Marc Chéry (President and Chief Executive Officer)
So about the book-to-bill. That is significantly above 2 for ST overall. It’s above 1 for each of our end markets, product group and region, and specifically it is well, well above 2 for communication equipment and computer, peripheral and industrial. When I say well, well above two, I have to say well above three. Okay. About the seasonality, again, what we can say—similarly, Lorenzo commented that we feel comfortable to deliver the gross margin at least at the consensus for Q1—we feel comfortable to deliver at least the revenue consensus for Q1 on the calendar we have indicated. Despite having only 86 days in Q1.
Sandra (Operator)
Thank you. Thank you. Next question please. The next question comes from Didier Scemama from Bank of America. Please go ahead.
Didier Scemama (Analyst)
Yeah, thank you. Good morning, gentlemen. Two questions. One, can you give us a sense of the early indications of your pricing negotiations with your Tier 1 customers, if you want to share anything about that? And I’ve got a follow up. Thank you.
Lorenzo Grandi (Chief Financial Officer)
Let’s say that what we can say is that in terms of pricing, we confirm that in this context that is higher input cost and increasing lead time, we are increasing pricing on some selected product. This of course is an ongoing process. When we look, let’s say, about pricing, assuming that this factor between supply and demand remains and this is what we see today when we look at the evolution of our backlog and when we look at the building, as I say, the fact that next year we may have internal pricing stability or slightly increase, but this is not out of reach. We think that is something that we may see. Anyway at this stage it is a little bit early to comment more in general because as you can understand, the discussions for next year, let’s say, have not yet been completed.
So we have discussions with our customers.
Didier Scemama (Analyst)
Yeah, no, very clear. Sorry.
Lorenzo Grandi (Chief Financial Officer)
I will try to be much more clear. Okay. With the visibility we have, with a quarter of 86 days, we are comfortable to deliver the consensus of Q1.
Jean-Marc Chéry (President and Chief Executive Officer)
No, no, no, there is no specific pull-in. We just deliver the demand of the customer, and no, we don’t see a specific pull-in. Thank you. Didier, next question please.
Sandra (Operator)
The next question comes from Jacob Bluestone from BNP Paribas. Please go ahead.
Jacob Bluestone (Analyst at BNP Paribas)
Hi, thanks for taking the question. I just had a question on your silicon photonics ramp. Just wondering if you can give a little bit of an update on how that is progressing in terms of yields, and maybe if you can also update us a little bit on your expansion of your production capacity there. Thank you.
Jean-Marc Chéry (President and Chief Executive Officer)
I pass the question to Remy.
Remy El-Ouazzane (President, Microcontroller, Digitalized and RF Product Group)
Hi Jacob, we are going as planned. The electro-optical yields our customers are getting at this stage are setting a new bar for the industry. Keep in mind that we are truly the only at-scale 12-inch SiPho players shipping right now, and I think it speaks volumes for the value of 12-inch in critical dimension and yield entitlement. So I can say with high confidence that our customers are very, very, very happy with the yield that our technology platform is providing.
Clearly, this year the contribution is not marginal, but it’s not at all to the tune of what it will be next year. We expect a steep growth, which itself is backed up by the fact that we’ve communicated that we’d increase capacity by 4x year on year. Actually, it will be a little bit more than 4x when you look specifically at the numbers. So I think silicon photonics in STMicroelectronics is going to be a long growth story, for which we happen to have actually long-term visibility.
Sandra (Operator)
You have a follow up, Jacob?
Jacob Bluestone (Analyst at BNP Paribas)
Hey, quick one — maybe I don’t know if you can comment at this point — but just in terms of the, you obviously had lower OpEx this quarter, obviously flagging a little bit of a step up for Q4. If you could maybe just give us an update on the outlook for your OpEx beyond here. Do you think it could be sort of flattish next year, or given some of the cost inflationary pressures you flagged, could it be up next year?
Lorenzo Grandi (Chief Financial Officer)
On the OpEx of next year, directionally I would say that they will go up. At this stage it’s a little bit too early to comment. But keep in mind that during 2027 we will keep on continuing our cost savings programs, which should bring, let’s say, something in the range of 100–120 million dollars benefit. We should have also, especially in the second part of the year, some decline in our start-up costs. These means that are impacting our other income and expenses in a negative way.
Conversely, on the other side we are accelerating some of our investment in new business opportunities, as you can imagine. And then on the other side there will be also, let’s say, some impact related to the normal wage, salary inflation, these kinds of things. So there will be some increase next year, well below, let’s say, with anyway an improvement in our sales expense to sales ratio.
Jacob Bluestone (Analyst at BNP Paribas)
Very clear, thank you.
Jean-Marc Chéry (President and Chief Executive Officer)
Thank Jakob. Next question please.
Sandra (Operator)
The next question comes from Stephane Ory from ODDO BHF. Please go ahead.
Stephane Ory (Analyst at ODDO BHF)
Yes, hello, thank you very much. First question is a clarification on what has been said about the satellite opportunity for next year. Because basically you’re saying you’re not sure you will grow, but you’re working hard to do so. Can you maybe elaborate and separate a little bit what is the end-demand at the moment and how many customers you have beside your main customer, and what is also linked to the capacity ramp issues. Thank you.
Remy El-Ouazzane (President, Microcontroller, Digitalized and RF Product Group)
I’ll repeat what I said, Stefan. I said that actually I expect next year revenue to be same or better than this year revenue. That’s the first thing I’ve said. This year revenue was a record year for that business due to the fast growth of major customers. Next year that growth continues unabated and comes with additional customers piling on top. And we are actually working hard to release pockets of capacity to be able to capture the entire demand they have, because I can say with confidence that at this stage, when we look at front-end module technology and of BiCMOS technology, there is nothing coming close to it. And keep in mind that actually technology matters in that case, because the noise figures that you can actually get out of the technology will translate into the efficiency of the spectrum, which itself translates into the efficiency of the deployment.
So we truly have a first-row-seat position in those accounts. And right now I will state that next year we are most likely going to be capacity-gated and not demand-gated, and we are working, as usual, to find ways to go and release more and more capacity over time. That’s the summary of what I said.
Stephane Ory (Analyst at ODDO BHF)
Okay, thank you very much for repeating that then. And the second question, the follow-up, is about automotive. We didn’t speak a lot about automotive today and there is a sense that the book-to-bill seems to be above one, so improving. At the same time the situation among the automotive customers doesn’t seem to improve. So what is your view on what’s going to happen in 2027? And if you can maybe elaborate a bit about the electromobility opportunity and the software-defined vehicle opportunity at the same time.
Thank you.
Jean-Marc Chéry (President and Chief Executive Officer)
Automotive. First of all, the visibility we have from our European Tier 1 is really stable since more than six months now, which is really positive compared to the previous year. In ’26 we expect to grow for the full year ’26 on automotive, let’s say slightly above 10% for us. That is basically consistent with the market. It is pretty well spread with our main product groups — except, of course, radio frequency and optical cables; we are not yet putting optical cables in cars.
But between IMS and power and discrete and, let’s say, the digital processing solutions, the growth will be pretty similar. But then, yes, we are seeing an acceleration of our power discrete in Q4, and the year-over-year growth of power discrete overall in Q4 will be well, well above 20–25%. So this is driven by the European market of electromobility. So we expect next year the automotive verticals to contribute to the growth of the company, most likely pretty well at the average, because, okay, I repeat, next year the growth drivers of the company will remain the AI data center, will remain the infrastructure in industrial, will remain the B2B industrial business — so for factory automation, robotics, this kind of stuff. For consumer, overall we believe it will remain soft or weak. Good confidence level to continue to grow in automotive, driven by European electromobility and also the many circuit wins we have in internal combustion engine cars and hybrid.
Stephane Ory (Analyst at ODDO BHF)
Okay, and just one follow-up view on silicon carbide for 2027.
Jean-Marc Chéry (President and Chief Executive Officer)
Silicon carbide. First of all, this year we will grow about 20%, which is positive news. So clearly the main growth driver is European, let’s say, electrical car, and this will continue next year. Importantly for us on silicon carbide, and also part of our, let’s say, turnaround of the profitability of this group, is diversification. We have engaged first of all for the power supply of data center, but also for power applications requesting high power conversion in the industrial market. So next year will be another year of growth, of significant growth, for our silicon carbide, and we expect to have the benefits of the wafer size conversion to 8-inch, both from Catania and Chongqing.
Sandra (Operator)
Thank you, Stephane. We have time for one more question. The last question comes from Sandeep Deshpande from JP Morgan. Please go ahead.
Sandeep Deshpande (Analyst)
Yeah, hi, thanks for letting me on. Just quickly coming back to the gross margin question. You’ve got this 400 bps of gross margin improvement once the reshaping program is over. How much of that is coming from — you know, today you’re running both the 200 and 300 millimeter fabs — and so what percentage of your gross margin uplift is from that versus how much of it, could you remind us, is coming from because you would have lower costs on the way forward, etc., so associated with the shift to 300 millimeters?
And my second question is that, despite your revenue growth, which was quite considerable in both areas — the Analog, MEMS and Sensors business, and in your Power & Industrial business — your margin actually declined year on year in both those business units. Why was that?
Lorenzo Grandi (Chief Financial Officer)
Okay. In terms of, let’s say, clearly improvement of above 400 basis points, it is a combination of different elements. Clearly the size of the wafer, the fact that we move from fabs that are poorly automatized — so with a significant cost of labor — to, let’s say, fabs that are much more automatized. Now, to split the various contributors is a little bit complex to be done. When we look, let’s say, then at the profitability of AMS, let’s say overall going down on a year-over-year basis, clearly here is the group where there is the measured impact of the legacy fab on which we are now transferring the products. Clearly here there is an impact related to the fact that in this moment there are some extra costs, as I was explaining, overall for the company. But there is also, let’s say, an impact on the efficiency of this fab on which we are transferring the costs.
So here, when we look at this segment, clearly it is now suffering about this transition phase. It’s also true that it will be one of the groups that will, let’s say, enjoy more when we will finally move to the new fab — to the most advanced fab — here, especially for the 300 millimeter, and at the same time the Power and Discrete, where Power and Discrete will enjoy the move from the 150 to the 200 millimeter.
Sandeep Deshpande (Analyst)
Just a quick question on this. When you talk about the guidance of 39% gross margin in the fourth quarter, you’ve highlighted how much underloading is involved. But how much of this 39% gross margin has impact from this negative impact from this double-counting of cost, etc.?
Lorenzo Grandi (Chief Financial Officer)
So for what concerns, let’s say, the underloading, yes, it is 40 basis points. The extra costs related to the new masks, transfer of the process trials, and so on — we estimate that in the range of 30 basis points. It’s more difficult to say the overall inefficiency created by this activity in the fab. You know, it’s something that we don’t quote because it’s a little bit more difficult to really say what is this impact. But this is an impact that, of course, will disappear when we will move to the new fab.
Anyway, it is 40 basis points, let’s say, the unused, and 30 basis points the extra costs. This is what we report usually each quarter. Thank you.
Jerome Ramel (EVP Corporate Development and Integrated External Communications)
Thank you, Sandeep. And thank you everyone. I think that concludes our call. So thanks everyone for joining us and feel free to reach out if you have further questions. The IR team.
Sandra (Operator)
Ladies and gentlemen, the conference is now over. Thank you for choosing ChorusCall and thank you for participating in the conference. You may now disconnect your lines. Goodbye.
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