STMicroelectronics NV (STM) Q1 2023 Earnings Call Transcript

STMicroelectronics NV (NYSE: STM) Q1 2023 Earnings Call dated Apr. 27, 2023 

Call participants:

Celine Berthier — Group Vice President, Investor Relations

Jean-Marc Chery — President & Chief Executive Officer

Lorenzo Grandi — Chief Financial Officer

Analysts:

Didier Scemama — Bank of America Securities — Analyst

Matthew Ramsay — TD Cowen — Analyst

Stephane Houri — Oddo BHF — Analyst

Andrew Gardiner — Citigroup — Analyst

Sebastien Stabowitz — Kepler Cheuvreux — Analyst

Lee Simpson — Morgan Stanley — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the STMicroelectronics First Quarter 2023 Earnings Release Conference Call and Live Webcast. I’m Andre, the Chorus Call operator. [Operator Instructions]

At this time, it’s my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead.

Celine Berthier — Group Vice President, Investor Relations

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 Analog, MEMS and Sensors Group and Head of STMicroelectronics Strategy System Research and Application Innovation Office. This live webcast and presentation materials can be accessed on ST’s Investor Relations website. A replay will be available shortly after the conclusion of this call.

This call will include forward-looking statements that involve risk factors that could cause results to differ materially from management’s expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning, and also in ST’s most recent regulatory filings for a full description of these risk factors.

Also, to ensure all participants have an opportunity to ask questions during the Q&A session, please limit yourself to one question and a brief follow-up.

I’d now like to turn the call over to Jean-Marc, ST’s President and CEO.

Jean-Marc Chery — President & Chief Executive Officer

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 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 mid-point of our guidance, mainly due to product mix in a price environment that remained 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%.

On Q2 2023, at the mid-point of our second quarter business outlook is for net revenues of about $4.28 billion, 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 to 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%, reflecting lower-than-expected revenue 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 effects, 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 points growth in operating margin. On a year-over-year basis, net income increased 39.8% to $1.04 billion from $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 Power 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 term 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 1st, 2023, reflected total liquidity of $4.52 billion and total financial debt of $2.66 billion.

Well, let’s now discuss the business dynamics. During the first quarter, demand in the Automotive market and in the Power and Energy portion of the Industrial market remained 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.

Demand in consumer industrial, communications infrastructure and networking, including data centers and servers, softened; and demand for Personal Electronics and Computer Peripherals further weakened. Our backlog is now about six quarters, at the mid-point of our full-year 2023 indication, still above a normal situation, but with different coverage consistent with the various end-market dynamics. In Automotive and Industrial, we are still well above the capacity we can serve on some technologies and packages. In the other end markets we serve, we are back to a more normal level of coverage.

Moving now to a Q1 review by end market. In Automotive, demand in the first quarter remained strong. Against this backdrop, we continued 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 the 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 many different customers. We had design wins in Q1 with both silicon and silicon carbide power discrete in automotive applications. This included an ACEPACK power module and silicon carbide MOSFETs for traction inverters, as well as projects with silicon MOSFETs in battery management systems.

In mid-April, we announced that we signed a multi-year 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 from multiple electrical vehicle makers including our Stellar automotive MCU for an on-board charging application. In car digitalization we had a number of design wins in key areas. In next-generation car architectures, our e-fuse products for a zonal controller solution gained traction.

In driver monitoring systems, we were successful with our global shutter automotive image sensor. Legacy automotive remains dynamic and silicon pervasion continues to increase. Here, we had several wins for our SPC5 microcontrollers for vehicle body control, as well as our latest product for a secure door zone platform. In our automotive sensor business, we won several new designs for vehicle dynamics, airbag and anti-theft 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 improvements. During the quarter demand remained strong overall in both OEMs and distribution, with different dynamics across the areas we serve.

In B2B industrial we continued to see strong demand in Power and Energy. Factory automation, robotics, and building control grew revenues in line with our strong backlog, but while new orders normalized. Consumer Industrial such as battery-operated tools and home appliances softened. During Q1, we continued 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, sensors and embedded processing products leveraging ST’s unique position.

Wins included system solutions comprised of power discrete, power management and STM32 MCUs in renewable energy applications, and multi-product

Solutions for smart meters and smart grid applications. We also won sockets with intelligent power switches, motor drivers, industrial sensors and secure solutions in applications such as industrial automation, asset tracking, and server power supplies.

In the quarter we made a number of announcements related to our STM32 product portfolio and ecosystem. These included a new highly affordable MCU series to replace 8-bit MCUs, a new high performance MCU series with enhanced security features, a new wireless MCU and new MPU products. We also continued to build the best developer ecosystem with two industry firsts. We introduced a certified MCU security platform that combines hardware and software to simplify development of secure embedded 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, MEMS sensors, and time-of-flight ranging sensors.

In Communications Equipment and Computer Peripherals, new wins here included products for LEO satellites, a number of products for computer peripherals including secure solutions, time-of-flight sensors and MCUs, and ASICs for communications infrastructure based on our proprietary technologies.

Now, I would like to mention that we issued our Annual Sustainability Report last week. 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 environmental non-profit CDP, 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 annual A List.

Now, let’s move to our second quarter 2023 financial outlook and our plans 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 a decline in Personal Electronics. Gross margin is expected to be about 49.0% 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 300mm wafer and silicon carbide manufacturing capacity including, for silicon carbide, our substrate initiative. The remaining 20% is for R&D, laboratories, manufacturing maintenance and efficiency and our corporate sustainability initiatives.

Based on our visibility, we will now drive the Company based on a 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 serve. But based on our leadership position, strategic approach and current visibility, we anticipate 2023 another year of revenue growth and profitability improvement toward our $20 billion-plus ambition and related financial model.

Thank you. And we are now ready to answer your questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from the line of Didier Scemama with Bank of America. Please go ahead.

Didier Scemama — Bank of America Securities — Analyst

Good morning. Thank you so much for taking my question. Jean-Marc, I’ve got a — maybe a first question looking at the second-half and the sort of changing dynamics that you highlighted. There’s been a number of sort 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 part 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? Thank you.

Jean-Marc Chery — President & Chief Executive Officer

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 the growth of 4% H2 versus H1. And again, it’s important that in H2, as I well knew during our Q4 earnings announcement in January, we will have a specific mix change in important to key customer program in Personal Electronics. And this mix change is material, here I am spoken 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 we grew year-over-year H2 2023 versus H2 2022. So this is okay. The demonstration that okay, we are really resilient in front of the Personal Electronic market.

Well, about the backlog, well, 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 and Energy related and B2B Automation Robotics and, let’s say, Building Controls. But, well, okay, we are still [Indecipherable] for the second part of the year is more on consumer industrial, it’s more let’s say on service and definitively on pure consumer related like Personal Electronics and Computer Peripheral. So that’s the reason why our confidence level have raised the low end of our indication from $16.8 billion to $17 billion is very good. We have not traced [Indecipherable] because on power energy and automotive we are still facing some capacity limitation in key technology cluster that 14 nanometer silicon carbide IGBT all okay, which really driven our growth. So this is H2 versus H1 dynamic and the complexity, let’s say, of the environment we are facing.

Now, about gross margin, okay, Lorenzo.

Lorenzo Grandi — Chief Financial Officer

I’ll take the question. Good morning, everybody. About the gross margin — for the gross margin at midpoint of our revenue indication for the year, we do expect to have a gross margin ranging between 47% and 48%. In the year, of course, the positive product mix we have manufacturing productivity improvement. Substantially we will see an overall price stability. This will be offset by increased input costs in our manufacturing and then we have not to forget that in the second part of the year, we will have the impact of the ramp up of the 300 millimeter in Agrate that will not be at their optimal capacity and this will impact our COGS in the second-half. This is the dynamic, let’s say, when we look at the current year with last year.

If we go a little bit more in specific to compare, let’s say, the first-half with the second half of this year. Of course, in H1, gross margin has benefited from a sequential positive price effect. We had also a strong positive impact on the product mix, while in the first half of the year, our gross margin has not yet been significantly impacted by the increase of the input and manufacturing cost. In H2, on the contrary, we expect to be impacted by some increase sales price pressure even if in the year these will be of, let’s say substantially neutral, well, in the second part of the year, we will see negative price pressure when looking sequentially. Manufacturing input cost will increase. Then there will be also some less optimized production level in some specific fabs, the one that are more exposed to Consumer or Personal Electronic. And as I was saying before, in the second part of the year, there is the impact of our 300 millimeter Agrate that — today’s in the start-up, but in the second part of the year will enter in our cost of goods sold. So at the end, let’s say, the visibility, I repeat, the visibility for the year will be with a gross margin that will be ranging between 47% and 48%.

Didier Scemama — Bank of America Securities — Analyst

Got it. I just wanted to clarify, Jean-Marc, did you say the headwind from your sort of marquee customer in Personal Electronics did $0.5 billion year-over-year in the second-half, is that what you said?

Jean-Marc Chery — President & Chief Executive Officer

Yes.

Didier Scemama — Bank of America Securities — Analyst

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

Jean-Marc Chery — President & Chief Executive Officer

Yeah, okay. My first comment is you cannot speak about price generically across the board. As we describe, okay, we are really facing a complexity with really significant different market dynamic. And of course, okay, you have to manage your price, let’s say, being selective. It is clear when you face, let’s say, competition on pure consumer connected device is absolutely not the same when you are competing [Indecipherable] where you are managing the power solution. So we cannot speak about the price across the board.

Yes, we do believe that in H2 in the field of consumer, well, you will have, let’s say, lead time of production, supply coming back to normal and potentially here and there in some specific location some capacity flexibility to see price pressure and ST we will manage it selectively. Overall, okay, it will end on what are described Lorenzo, so I consider, we should see a price okay basically stability [Speech Overlap] and in H2, yes okay, we see some minus.

Didier Scemama — Bank of America Securities — Analyst

Okay. Thank you so much.

Operator

The next question comes from the line of Mat Ramsay from TD Cowen.

Matthew Ramsay — TD Cowen — Analyst

Thank you very much, everybody. Good morning. Guys, my first question, I wanted to ask the silicon carbide target you guys had talked for a while about $1 billion in 2023 and 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 that 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 suppliers, 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 is any update, I think you mentioned in the script, increasing investments on your internal substrates. If you could give us an update on the timelines there where you can guys, can start to supplement your supply with internal supply that would be helpful. Thank you.

Jean-Marc Chery — President & Chief Executive Officer

Okay. I will not comment, okay, the other competitor and supplier clearly. I really confirm the $1.2 billion. We know that ST, okay, accounting some number, we see that in 2022 we have about 40% of market share. And with this $1.2 billion, looking like according to the market that we are that we will increase our market share. But thanks to our capability to deliver wafers out and module and package out according to customer expectation and same, okay, to the multi-ports we have in all material.

Saying that we are really on track to be in position starting 2024 to produce raw material for our own need and going forward okay to achieve 40%. Now, this will be first in 6-inch definitively. We are preparing the 8-inch conversion. So we have already produced one 8-inch ingot form our former [Indecipherable] let’s say facility and we are qualifying the 8-inch device according our qualification protocol. So we anticipate that we will stop 8-inch activities, let’s say, in second half of 2024.

Now, then still we have, let’s say other opportunity for silicon carbide. First to qualify also the SmartSiC Technology, which will be very, very instrumental for decreased both for 8-inch wafer size conversion. We will qualify in the second half of 2023, our Generation 4 silicon carbide that we will start to offer in 2024. So this is what I can confirm to you.

Well, then looking at the market evolution and the number of program and the number of customer we have, we are very confident to deliver about $2 billion in 2025, 2026 and then okay to have a target okay long-term well above $5 billion when the market will reach $15 billion. So, this is really the roadmap. We execute I don’t say clock watch, but we execute every quarter and every year fully consistently with what we said in the beginning.

Matthew Ramsay — TD Cowen — Analyst

Thank you, Jean-Marc, for the detail. I realize the sensitivity on some of the near-term stuff there. As my follow-up, Lorenzo, you had talked about some of the potential gross margin impacts in the second-half of the ramp of 300 millimeter capacity. So I wanted to ask about that a little bit, maybe just kind of follow-ons to Didier’s questions. There is certainly some angst in the system around pricing and margins. So I guess the first one is, could you maybe quantify if you could the gross margin impact, just from the 300 millimeter ramp in the second half of the calendar year? And then I mean really strong margins up to 49% in the guidance, I think folks are wondering if that’s — is that a peak, is that a new normal? How would you consider that and maybe if there is some price pressure, when do you feel like the 300 millimeter capacity will be at a scale to be a positive driver of margins rather than a near-term ramp up headwind? Thank you.

Lorenzo Grandi — Chief Financial Officer

Clearly, in the second part of the year, when the 300 millimeter fab in Agrate will exit from the ramp up accounting today is bringing, let’s say, equivalent of the saturation cost. So the excess cost in the line other income and expenses. We will see, let’s say, this impact coming directly in our costs. How much of this will impact? Of course this is temporary because because it’s due to the fact that the 300 millimeter is not at a reasonable, let’s say level, that will reach in order to be substantially neutral and start to contribute positively to our gross margin in the course of the 2024. In 2023 for sure this will not that will not happen. We need to reach in 2023 our capacity will be still, let’s say, at the level of below 1,000 wafer per week, let’s say significantly below. So at the end, this is a size for 300 millimeter that is definitely not accretive for the gross margin will be an increase in the cost.

Looking overall, let’s say, the second part of the year, as I was saying before, there are three components that are impacting our gross margin. On one side, there is the impact of the 300 millimeter. On the other side, there will be the impact, let’s say, of the fact that we will start to see materially the increased cost in our manufacturing that’s today is partially, let’s say, suspended in our inventory. But then it will come down in our P&L starting already partially in this quarter in Q2, but definitely with much higher level of impact during Q3 and Q4. And the other side, there will be also, let’s say, some impact related to the price pressure that we were discussing before, and the mix.

How these will account when we compare the first-half and the second-half of our gross margin? I would say that one-third, one-third, one-third more or less, let’s say, we can see that this is the impact of these three main elements that on one side or the impact on pricing in our topline, on the other side is the impact of the increased cost in our manufacturing costs. On the other side is the 300 millimeter.

And I repeat, just to clarify, this is a temporary impact, let’s say. And then of course in the second part of the year as I was saying before, there are some of our fabs that are not working at optimized production level. Why? Because, of course, we are also keeping under control our inventory, and as you see, we have some of these fabs the ones that are more exposed to Consumer or Personal Electronics, let’s say, we needed to be sure that we are not inflating our inventory. So this is another impact that is fully taken into consideration in our indication of gross margin of the year between 47% to 48%, but will contribute in any case to add on our gross margin in the second part of the year as a detractor.

Matthew Ramsay — TD Cowen — Analyst

Thanks, Lorenzo. Appreciate it.

Operator

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

Stephane Houri — Oddo BHF — Analyst

Yes. Good morning. Thank you very much for taking my question. Actually, I wanted to come back on the pricing 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. So, is that what you’re seeing at the moment or not yet?

And the question linked to that is with the total 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 timeframe of your plan? Thank you very much.

Jean-Marc Chery — President & Chief Executive Officer

Yes. Definitively. But of course Lorenzo will further comment. Again, we repeat what are the key driver for gross margin improvement. I think Lorenzo elaborated that we have the topline impact of Agrate definitively, which is not — absolutely not a surprise. It is mitigated by the ramp up of coal at the same time and each time we are increasing coal ramp up according to the plan of record we have [Indecipherable] project, okay. For sure we mitigate also Agrate. When Agrate will reach the adequate scale, Agrate will contribute to the gross margin of ST. So the 300 millimeter is one of the main elements.

I repeat the second element is the silicon carbide moving forward to 200 millimeter and thanks to the SmartSiC Technology, which is really key to make the 200 millimeter successful. Okay. We will have important leverage to decrease our cost and of course, okay to contribute to the gross margin improvement. It is clearly the two important, let’s say, contributor. Well, then after the loading of our fab [Indecipherable] in H2 some fab, okay, will face, let’s say, not fully optimized loading, but it is mainly related to Personal Electronics. But just to give you an order of magnitude, in 2023, at the midpoint, Personal Electronics will decrease 25% and half of the decrease is not silicon impact, because it is optical module product mix change with no impact on the loading, but has an impact on the loading. So of course, in H2, we have this temporary non-loading that we will compensate moving forward, because the demand on advanced BCD technology, advanced power technology for automotive and industrial is more and more increasing.

So, then okay we will come back to a full loading of our wafer starting 2024 definitively. So that is the reason why we confirm to you that the $20 billion plus ambition, we will deliver the 50% gross margin. Well, about the pricing Automotive, now we position this business and the demand of the customer on technology cluster that radically changed compared two years ago. Now, we are 40 nanometer technology 28, maybe tomorrow we will be at 18 technology, silicon carbide, IGBT modules. So it’s a complete different mix compared to the base.

And on this technology, there is no excess of capacity and the investments are cautious. There are no excess of investment worldwide on all these kind of technology, let’s say, clusters because first it is either on 300 millimeter or it is [Indecipherable] and this is calling for capex that companies are spending cautiously and you know that in this field of activity the foundry business is quite tight. There is no let’s say excess of foundry competition competing in the field of automotive. So that’s the reason why, yes, we will go back, normalize price discussion with the customers. More and more we will have strict discussion with the car markers. Clearly, it is a trend we are seeing, so the model moving forward is not the model we have five years ago or 10 years ago.

While saying that, Lorenzo you can complement.

Lorenzo Grandi — Chief Financial Officer

Yes. Maybe just a clarification, when we were talking about the impact of pricing in the second part of this year is not actually in automotive, automotive has been really scarce the pricing as I was saying is increasing indeed, there is a strong decline in price on a sequential basis on different areas within automotive with that the one that are most exposure to the difficulties of the market we are talking here about a big consumer portion of the industrial. And indeed at the end between automotive increasing, price maintaining pricing and, let’s say, some other areas in which there is a normal dynamic of price decline, at the end the price will be substantially flattish in the year. Irrespective to the gross margin, adjusted confirm what Jean-Marc has said and of course also, let’s say we need to consider that reaching our target, let’s say, of 50% gross margin of $20 billion plus is not linear. It means that we may have some quarter like you have seen in which we are very close or ready to the target like in Q1, some other in which we will be a little bit, let’s say, down, one of the reason we’re discussed before now let’s say when we introduce our 300 millimeter not yet at the full size. So, but at the end the trend will be that one, when we one that will bring the Company to a gross margin at 50%, let’s say, when the size of our topline will be in the range of $20 billion.

Stephane Houri — Oddo BHF — Analyst

Okay. Thank you very much.

Celine Berthier — Group Vice President, Investor Relations

Next question please.

Operator

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

Andrew Gardiner — Citigroup — Analyst

Good morning, guys. Thank you for taking the question. Two follow-ups to questions that have been asked, if I could. First, Lorenzo, you mentioned inventories and making sure that you were sort of continuing to manage inventories pretty tightly given the end market dynamics that you’re seeing. Inventories rose quite a bit on your books in the quarter. Yet, of course, it doesn’t seem as though you weren’t short of demand per se in the quarter at a Group level. Clearly you beat your guidance and you didn’t pumped the brakes on — you didn’t need to pump the brakes on the fabs in the first quarter at a high level, like, you’re still delivering gross margins well in excess of your guidance. So can you just sort of describe what was driving the inventory increase in first quarter? Did that come as a bit of a surprise, perhaps towards the end of the quarter or is it, it’s really there in preparation for what you’re seeing across the different end markets in the second-half? And then I have a follow-up on silicon carbide.

Lorenzo Grandi — Chief Financial Officer

Yes, for sure I take this question. You know, our Q1 came better-than-expected in term of revenues. Let’s say, mainly impacted by two elements. The first one was better mix irrespective of 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 area, while instead that did not happen. This had a 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 entirely are higher because we were 100, we are at 122 days compare 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 Electronic and in Consumer, where the market were weaker than what we were expecting. So we were, 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 bringing an increase in our inventory that was not forecasted, let’s say, at the beginning of the quarter.

We were 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, let’s say, the Agrate 300 millimeter [Indecipherable] that we will have in Agrate 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, let’s say, will be slightly above the number of days that we had, let’s say, at the end of 2022. So it will be something in the range of 105, 110 days of inventory at the end at of 2023.

Andrew Gardiner — Citigroup — Analyst

Thank you. And then just quickly on silicon carbide, Jean-Marc to the comments you made in your prepared opening now at $1.2 billion for 2023, let’s say, nearly 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.

Jean-Marc Chery — President & Chief Executive Officer

First of all, internally now we have really our four manufacturing location, two for fabs so Singapore and Catania and two for assembly so Shenzhen and Bouskoura in Morocco running altogether full mass production. And thanks to the capex we spent in H2 2022 to increase the capacity. Then we have diversified our raw material source, because also we anticipated some difficulties of [Indecipherable] in the second half of last year. So we secure ourselves in terms of success.

Well, and last, okay, I think it’s important I mentioned that now the demand we have is really well diversified. Our main customer is representing below 65% of the total revenue, we expect. And we have the program we won during the past two, three years that are starting to generate significant revenue for ST. So all in all, I would like simply to confirm that we invested last year and we have executed the capacity implementation properly. Now, with four location running full speed we have a demand well-diversified and new program ramping up on top of the main customer we have and we have secured worldwide with different sources located in different places in the world to secure our offer waiting for our internal source to be ready and to sustain our ambition to grow both $2 billion and towards $5 billion.

Andrew Gardiner — Citigroup — Analyst

Thank you very much.

Celine Berthier — Group Vice President, Investor Relations

Thank you. Next question please.

Operator

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

Sebastien Stabowitz — Kepler Cheuvreux — Analyst

Yeah. 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 Gen4 is likely to ramp, if I’m right, by H2 this year. Could you provide a little bit of timing for the ramp of Gen4, but also Gen5 and what kind of improvement are you expecting from Gen4 and Gen5 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 inventory standing with the normative level? Thank you.

Jean-Marc Chery — President & Chief Executive Officer

So, the Generation 4 will be maturity what we classify maturity mass production in the second half of 2023. So 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, let’s say, market. So we will ramp up smoothly in 2024 according 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 [Indecipherable] technology, where we significantly improve the performances and with absolutely no gap versus the best-in-class technology we can assess.

Well, then we will move to Generation 6, where we will make a description, but, okay, I will comment in due time definitively. So, again, Generation 4 and 5, let’s say, we 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 change. 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 effect, which are not so easy to control when you increase the wafer size of silicon carbide is point number one. And the point number two, we will implement the SmartSiC 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 we’ll make easier the conversion to the 200 millimeter.

So two technology in the next three years implementation and two measure process change 200 millimeter and SmartSiC in production. And that later on we will introduce the Generation 6, which will be a description in term of [Indecipherable] transistor.

Sebastien Stabowitz — Kepler Cheuvreux — Analyst

And on the inventory question towards Industrial where are we standing right now?

Lorenzo Grandi — Chief Financial Officer

Inventory, you mean in the channel proposal?

Sebastien Stabowitz — Kepler Cheuvreux — Analyst

Yeah, definitely in the channel. Thank you

Jean-Marc Chery — President & Chief Executive Officer

You know that we monitor pretty well the inventory at the distribution channel. Well, yeah, okay, it’s clearly following the market dynamic, when you are through distribution addressing mainly, okay, for us the industrial market, we are coming back now to a normal coverage in term of inventory. So means we have our inventory term between — term of three to four whatever other devices, microcontrollers, analog, power overall of course. And of course we have some inventory, which are, let’s say at the upper limit that we accept generally like MEMS. Why? Because they have been impacted by the Personal Electronic market dynamics.

So that’s the reason why. Okay. We will control in our, let’s say revenue target okay the inventory at distribution level. Again, except the inventory in front of customer market, we do not detect any excess of inventory. Inventory our distribution are just at the level for distributor to manage term business to manage a situation, which is a normalized situation.

Well, then about our Tier 1 and let’s say the supply chain supplying the carmaker, at this stage, okay, 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 BCG 9, BCG 8 and the demand is still very, very strong. So we do believe that on this kind of technology cluster, there are no inventory in excess across the supply chain.

Sebastien Stabowitz — Kepler Cheuvreux — Analyst

Thank you.

Celine Berthier — Group Vice President, Investor Relations

Okay. Thank you. Next question please.

Operator

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

Lee Simpson — Morgan Stanley — Analyst

Thanks. 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 second half of the year. So I think as others have suggested, we are seeing some signs of slowing demand in MOSFETs lack of tightness being seen in various areas and power semis and 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 the relative size of backlog? Thanks.

Jean-Marc Chery — President & Chief Executive Officer

So, I will start with the backlog. So today the total backlog we have in our hand requested by customers represents about six quarters of revenue. I would like to say that it is pretty on balance versus the end market we are in. Again, on automotive, overall, on power energy and professional B2B industrial the backlog coverage we have are well above the six quarters and the order entry we are seeing now are loading smoothly year 2024. Why? Because, the lead time we can provide to these customers are still well above one year. So moving forward quarter after quarter, they are loading our backlog consistently with the hand demand, which is very strong and the lead time we can offer.

Then you have another dynamic where the demand is solid growing with the existing backlog, but clearly we are reducing our lead time. And clearly when you are reducing our lead time, the customer order will take into account. So they are temporarily reducing their order in order to have the backlog coverage, which is consistent with your lead time. Earlier, the coverage will be between three to four quarter total backlog and on the consumer industrial on servers, on this kind of activity we are going in this direction. Then you have some markets where clearly there is a weaken demand. There is clearly inventory correction and then, okay, the backlog we have is reducing and we have outlook. It is typically the computer peripherals, computer-related and the Personal Electronic. And here we are going back to a normal situation where we have for some customer, which are, let’s say, well in control with our supply chain, they give us rolling two years visibility and there is some customer that are delivering usual three to four quarter visibility.

So, I have to say if I would like to classify overall our backlog we are six quarter, we do believe we will finish the year 2023 with the coverage will be between four to five quarters, which is still above the normal situation. Normal situation is three to four quarter. So this is a dynamic, I can tell you and this is totally consistent with the indication we have provided to the year to reach at the midpoint $17.4 billion, but still with the possibility to go through the upper range.

Celine Berthier — Group Vice President, Investor Relations

Does this answer your question, Lee?

Lee Simpson — Morgan Stanley — Analyst

Yeah, it does. Just wanted to circle back on perhaps the evidence or perhaps the product categories where you’re seeing those pricing headwinds and particularly as it relates to autos, I mean, are we factoring more on power semis or do we see this starting to happen as perhaps a peak pricing dynamic around control? Thanks.

Jean-Marc Chery — President & Chief Executive Officer

I mean, to come back to your MOSFET point, MOSFET is part of the power supply or power management of some application in the field of servers and computers. Of course, here as this market is softening or is weakening currently the demand for this specific MOSFET is weakening. But MOSFET is very large, okay, you have high voltage, you have low voltage MOSFET then you have IGBT, you of the silicon carbide. Again, and the MOSFET are going everywhere and are going everywhere in all the application. And I can confirm to you that on MOSFET overall addressing all the automotive application and importantly energy storage, energy conversion, energy transportation, the demand is very strong and the capacity are fully loaded. And we are still struggling to support our customer at the level of what the demand on IGBT on SiC carbide on VI power, vertical integrated power on BCG 9 for power switches and on low voltage and high voltage MOSFET as well. Everywhere it is for power management for automotive and industrial applications. Yes, on computer, the demand is weak but this is not a surprise.

Lee Simpson — Morgan Stanley — Analyst

Okay. Thank you.

Celine Berthier — Group Vice President, Investor Relations

Thank you very much. And we have exceeded the time, so I apologize this was the last question. Thank you very much all of you. This will end our presentation this time.

Lorenzo Grandi — Chief Financial Officer

Thank you.

Jean-Marc Chery — President & Chief Executive Officer

Thank you.

Operator

[Operator Closing Remarks]