STMicroelectronics NV (NYSE:STM) Q3 2022 Earnings Call dated Oct. 27, 2022.
Corporate Participants:
Celine Berthier — Group Vice President, Head of Investor Relations
Jean-Marc Chery — President and Chief Executive Officer
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
Analysts:
Jerome Ramel — BNP Paribas Exane — Analyst
Matthew Ramsay — Cowen and Co. — Analyst
Stephane Houri — ODDO BHF — Analyst
Johannes Schaller — Deutsche Bank — Analyst
Janardan Menon — Jefferies — Analyst
Adithya Metuku — Credit Suisse — Analyst
Andrew Gardiner — Citigroup — Analyst
Presentation:
Operator
Ladies and gentlemen, welcome to the STMicroelectronics Q3 2022 Earnings Results Conference Call and Live Webcast. I am Moira, the Chorus Call operator. And the conference is being recorded. The presentation will be followed by a Q&A session [Operator Instructions] The conference must not be recorded for publication or broadcast.
At this time, it’s my pleasure to hand over to Celine Berthier, Group Vice President, Head of Investor Relations. Please go ahead, madam.
Celine Berthier — Group Vice President, Head of Investor Relations
Thank you, Moira. Good morning. Thank you everyone for joining our third quarter financial results conference call. Hosting the call today is Jean-Marc Chery, ST’s President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our President of Finance, Purchasing, ERM and Resilience and our Chief Financial Officer; And Marco Cassis, our President of Analog, MEMS and Sensors Group and also Head of STMicroelectronics’ Strategy, System Research and Applications and Innovation Office.
This live webcast and presentation materials can be accessed on ST’s investor relations website. A replay will be available shortly after the conclusion of this call. This call will include forward-looking statements that involve risk factors that could cause ST’s results to differ materially from management’s expectations and plans.
We encourage you to review the safe harbor statement contained in the press release that was issued with the result this morning and also in STs 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 and Chief Executive Officer
Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q3 2022 earnings conference call. So, let me begin with some opening comments. So, starting with Q3. Q3 net revenues of $4.32 billion and gross margin of 47.6% came in above the midpoint of our business outlook range, driven by continued strong demand for our product portfolio. Year-over-year net revenues grew 35.2%. This revenue growth was accompanied by improved profitability. Gross margin at 47.6% up from 41.6%, operating margin at 29.4% up from 18.9% and net income more than doubling at $1.1 billion.
On a sequential basis, net revenues increased 12.6%. For the 9M period, net revenues increased 27.2% to &11.7 billion, driven by growth in whole product groups and sub-groups. We reported a gross margin of 47.3%, operating margin of 26.9% and net income of $2.71 billion.
On Q4 2022, our fourth-quarter business outlook at the mid-point is for net revenues of &4.4 billion, increasing by 23.7% year-over-year and by 1.8% sequentially with a gross margin of about 47.3%. For the full year 2022, both revenue and gross margin expectations are in line with the plan we shared in July. The midpoint of our Q4 guidance translates into a full year of 2022 of revenue growth of about 26.2% to $16.1 billion, with a gross margin of 47.3%. We are on track with our 2022 capex plan of about $3.5 billion to $3.6 billion.
Now let’s move to a detailed review of the third quarter. Net revenues increased 35.2% year-over-year with growth across all product groups and sub-groups. Year-over-year sales to OEMs increased 34.1% and 37.4% to distribution. On a sequential basis, net revenues increased 12.6% and we have 210 basis points above the midpoint of our outlook. Gross profit was $2.06 billion, increasing 54.7% on a year-over-year basis. Gross margin of 47.6% coming in at 60 basis points above the midpoint of our guidance, increased 600 basis points year-over-year, mainly driven by a favorable pricing and improved product mix, partially offset by inflation of manufacturing input costs.
Third quarter operating income more than doubled to $1.27 billion. Operating margin was 29.4%, increasing from 18.9% in Q3 2021. We hold three product groups contributing to the growth and expansion in both operating income and margin. Both net income and diluted earnings per share, more than doubled year-over-year with net income reaching $1.1 billion from $474 million and diluted earnings per share increasing to $1.16 from $0.51.
Looking at the year-over-year sales performance by product groups. ADG revenues increased 55.5%, on growth in both Automotive and in Power Discrete. AMS revenues grew 9.7% with growth in Analog, in MEMS and in Imaging. MDG revenues increased 47.7% with growth in both Microcontrollers and in RF Communications. In terms of operating margin, all product groups demonstrated year-over-year expansion with ADG operating margin of 25.9% up from 10.8%. AMS operating margin of 27.2% compared to 24.3% and MDG operating margin increasing to 36.7% from 23.5%. Net cash from operating activities increased to $1.65 billion in Q3 compared to $895 million in the year-ago quarter. For the 9M period, net cash from operating activities increased 67.6% to $3.65 billion. capex in the third quarter was $955 million compared to $437 million in the year-ago quarter and $2.61 billion for the 9M period compared to $1.28 billion in the same period of last year. Free cash flow was $676 million up from $420 million in the year-ago quarter. For the 9M period, free cash flow increased 22.6% to $988 million.
During the third quarter ST paid $55 million of cash dividends to stockholders and we executed $86 million of share buyback under our current share repurchase program. ST’s net financial position increased to $1.46 billion at October 1st, compared to $924 million at July 2, 2022. It’s reflected total liquidity of $4.09 billion and total financial debt of $2.63 billion.
Let’s now discuss the market and business dynamics of the quarter. Given for ST products continued to be strong in Q3 and let me share with you a few data points. First, our backlog still covers six to eight quarters of our planned capacity depending on the product type. Book-to-bill remains well above parity and our manufacturing capacity is fully saturated. From an end market standpoint, automotive and what we call the B2B part of the industrial market, namely factory automation and Industrial infrastructure, remained strong driven by semiconductor pervasion and structural transformation. The Consumer Industrial and Personal Electronics market are softening, the demand for ST products remain solid in the selected areas we target in those markets. The computer peripherals market is softening as well.
Let’s now go into more detail on automotive. We continue to see strong demand in Q3 reflecting the combined effects of the ongoing electrification and digitalization transformation of this industry. Semiconductor pervasion in legacy automotive and replenishment of inventories across the automotive supply chain. Bookings remained strong across all customers and geographies. Backlog visibility remains above 18 months and well above our current and planned manufacturing capacity through 2023. The accelerated transformation of the automotive industry continued to drive our design wins during Q3.
For car electrification, we again increased the number of ongoing silicon carbide programs awarded. Between the automotive and industrial markets, we now have 110 projects spread over 79 customers. About 60% of these projects are for automotive customers. We will achieve about $700 million of silicon carbide revenues this year. We’re in line with our revenue target of about $1 billion of silicon carbide revenue in full year 2023. We have new design wins in automotive applications in Q3, with both silicon and silicon carbide power discrete. This include business for an epic drive power module based on 1,200 volt silicon carbide MOSFETs, and Generation 4 silicon carbide MOSFETs, for traction inverters projects.
We also won designs for multiple electrical vehicle makers with rectifiers and protection products and with ultrafast and silicon carbide diodes. With our broader automotive portfolio, we won several sockets in electrical vehicles with solution for battery management systems, zone control units and car headlight control. This includes a win with our innovative data bus solution in a old lighting application that supports simpler, most cost-effective implementation of next-generation car architectures.
In car digitalization, we also secured a number of design wins. This includes the smart power cheap for power supplier in zone architecture vehicle control unit. We won automotive microcontroller for Battery Management System and an advanced chipsets for satellite radio receivers. In our automotive sensor business, we won several new design for 6-axis Sensors and with our recently announced global shutter image sensor for driver monitoring systems.
Moving now to Industrial. Here, we continue to see strong demand throughout the quarter, especially in business to business industry. With some slowdown in consumer industrial, that is bringing the level of demand closer to what we can effectively sell. Demand was strongest with both distribution and OEM. During Q3, we saw normalization of inventories of our products and distributors, with terms averaging around 4%, but totally consistent with the end market dynamics.
Across the industrial market, we see two main trends driving a structural transformation in the market and accelerating the increase in semiconductor content. Digitalization of devices and systems, and energy management and power efficiency improvements. We address the industrial market focusing on three areas, business to business, the largest part, which includes automation, power energy and transportation.
Consumer Industrial which includes home appliances, smart buildings and power tools. And specialized industrial addressing for example as scale. Across these three areas, we had key wins, thanks to our broad portfolio. In business to business, we have design wins for products such as motor drivers, metering and powerline communication solution, industrial sensor, power discrete and our STM32 embedded processing solutions including our industrial microcontrollers and microprocessors.
Applications included electrical vehicle charging stations, next generation smart water and electricity meters, industrial lighting, remote wireless monitoring and photovoltaic systems. In consumer and industrial, we have design wins with power, analog sensor and embedded processing products in applications such as home appliances, e-bikes, power tools, vacuum cleaners, consumer power suppliers and air conditioners.
On innovative win, I would like to highlight here, is our high performance STM32H7 Dual Core MCU to perform artificial intelligence, predictive maintenance, in the refrigerator from a measure appliance manufacturer. And in specialized industrial, I would like to highlight the win in a medical grade, a remote care wearable device with an STM32 wireless MCU, supporting Bluetooth and also short range wireless protocols. Before closing on industrial, a few words on our continued investment in building the best ecosystem around our general propose MCUs. In the quarter, we released a new version of our TouchGFX graphic interface creation tool and we launched an update to our artificial intelligence development tools to bring support for deeply quantized neural networks enabling more accurate machine learning on existing Microcontrollers.
Moving now to Personal Electronics. Demand for our products, is the selected areas we target in the smartphone market was again above expectations. We have selective focus in this market on high-volume smartphone application and personal devices. We address them with differentiated or custom products while leveraging our broad portfolio. During the quarter, we won sockets in flagship smartphones and wearable devices with wireless charging solutions, motion and environmental sensors, time-of-flight ranging sensors, touch display controllers and secure solutions. We also had a design wins with high performance STM32 MCUs, in gaming accessories for leading console makers.
In communication equipment and computer peripherals. We continue to see deployment of both 5G infrastructure products and of lower satellite programs and service around the globe. In parallel, we saw the computer peripheral markets softening. The cloud market remains strong. In this end market, we target selected high-volume application again with differentiated products or custom solutions while leveraging our broad portfolio. New wins here include secure solutions, time-of-flight sensors, and general-purpose microcontrollers for notebook, PCs and tablets. We received awards based on peripheral technology for optical and wireless infrastructure ICs, with leading edge mixed-signal processes as well as a CPU for space application based on 28 FD-SOI technology. I confirm our continued progress with key customer engagement in our focused application in cellular and satellite communication infrastructure.
Now let’s move to our 2022 fourth quarter outlook. For the fourth quarter at the midpoint, we expect net revenues to be about $4.4 billion representing year-over-year and sequential growth of 23.7% and 1.8% respectively. Gross margin is expected to be about 47.3% at the midpoint.
Turning to the full year of our Q4 guidance at the mid-point, translates into 2022 net revenues of about $16.1 billion, representing growth of about 26.2% year-over-year with a gross margin of about 47.3% both in line with the plan we shared in July. We consume our 2022 capex investments range of about $3.4 billion to $3.6 billion. Before concluding, let me briefly summarize some recent key developments related to our integrated device manufacturer model and strategy.
As we outlined at our Capital Market Days in May, we are transforming our global manufacturing operations. With additional capacity in 300 mm manufacturing and a strong focus on wide bandgap semiconductors. We have a unique position in our 300-millimeter wafer fab in Crolles of strengthened by the new project with GlobalFoundries that we announced in July. And we continue to invest into a new 300 millimeter wafer fab, La Gran, Italy. Here our activities are progressing according to plan with first volume ramping in H1 2023.
I am also pleased to share with you that the first production lot has been successfully released recently for buybacks, transferred successfully means yield at the best. On October 5th, we announced that we will build an integrated Silicon Carbide Substrate manufacturing facility in Catania, Italy to support the increasing demand from customers for silicon carbide devices across automotive and industrial applications. This initiative will be important step in our silicon carbide vertical integration strategy. Production is expected to start in the second half of 2023. The investment in Catania of EUR730 million of five years will be partially supported financially by the State of Italy in the framework of the National Recovery and Resilience Plan. And it will create around 700 direct additional jobs at full build out.
All these initiatives Crolles and Catania will contribute to our sustainability strategy and commitments. These new facilities will provide our customers with the products and solutions, they need to increase energy efficiency and reduce CO2 emissions. Moreover, our new facilities will contribute to a sustainable manufacturing commitments in term of energy consumption and greenhouse gas emissions, air and water quality.
To conclude, based upon our year-to-date financial results and fourth quarter outlook, 2022 will be another way of progress for ST in line with, our focus on smart mobility, power energy management and IoT and connectivity within our core business and targeted high growth areas. Our commitment to our integrated divest manufacturing model, with strategic technology and manufacturing investments to support our customers’ current and future needs and our $20 billion plus revenue ambition that we outlined at our Capital Market Day. Thank you and we are now ready to answer your questions.
Questions and Answers:
Operator
We will now begin the question-and-answer session. [Operator Instructions] First question is from Jerome Ramel from BNP Paribas Exane. Please go ahead.
Jerome Ramel — BNP Paribas Exane — Analyst
Yes, thank you for taking my question. Good morning. Maybe could you give us a little bit color on the dynamic division for Q4 in terms of revenues? And also an update on volumes versus prices, that would be helpful? Thank you.
Jean-Marc Chery — President and Chief Executive Officer
Okay. So, I will give some color on the growth of Q4. Clearly, in Q4, we will have Automotive contributing to the growth, clearly including Power Discrete. In Analog, MEMS and Imaging. Analog clearly impacted by the softening of the market in computer peripherals, so they will not contribute to the growth. And MEMS are impacting by the softening of the market in personal electronics smartphone. Okay, which is Android comp. Imaging will grow and on the MDG, MDG will be, let’s say more, let’s say flattish, because there is some growth but offseted by, let’s say, some specific product and customer. So, yeah, it’s much more mixed. And Lorenzo on volume and price.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
Good morning to everybody. Looking at the price dynamic in specifically in Q4, we do not expect that to have a material change in term of pricing means in both, in both directions, both increasing or decreasing, we expect that what is the pricing level that we see today in the market and we have experience in Q3. So, I would say that in term of dynamic both in term of revenues both in term of let’s say, gross margin, there is no major impact in term of pricing. Pricing we see quite stable, let’s say overall.
In term of dynamic of the revenues and so also reflecting in term of the dynamic of the gross margin, maybe there is some impact in the mix, the mix was quite favorable in the previous quarter in Q3 and is one of the reasons, which we beat both the revenues and our midpoint in term of gross margin, while moving from Q3 to Q4, the mix is a slightly less favorable and this also explain a little bit the declining term of gross margin.
Jerome Ramel — BNP Paribas Exane — Analyst
Thank you.
Celine Berthier — Group Vice President, Head of Investor Relations
Thank you very much, Jerome. Next question please, Moira.
Operator
The next question is from Matt Ramsay from Cowen and Co. Please go ahead.
Matthew Ramsay — Cowen and Co. — Analyst
Yes, thank you very much everybody. Good morning. Jean-Marc, I wanted to ask a couple of questions about your silicon carbide business. Your, one of your key suppliers last evening in the States, Wolfspeed had some had some challenges in some of their materials business that affected their own devices business volumes, but I think an important distinction is that at least in our models, after talking to their management team last night, the estimates that we have in our model for their materials business that they sell to external customers such as yourselves those estimates actually went up.
So, I guess the question is just the visibility near term on supply of silicon carbide from your key partners? And then the second part of the question is just your confidence in starting to ramp your internal supply, it sounds like you’ll be starting to ramp in the second half of 2023 and if you could just give any color around that internal silicon carbide ramp that would be really helpful? Thank you.
Jean-Marc Chery — President and Chief Executive Officer
Now, I can mention that first of all, when there is a yield issuance silicon carbide, the STs immediately left them and when they would cause is amplified the C of STs calling the COD. So for sure, we have many actions with Gregg Lowe during the quarter. Yes. Okay. We faced okay some — let’s say, issues but which has not, let’s say a limiting factor so, our capability to grow our silicon carbide business in 2022 and especially in H2. So again we will deliver on our target of about $700 million, and more importantly, I take the opportunities and the 1/4 of this business, is not related to our major customer.
What about our, let’s say, internal facilities? Again this vertical integration strategy decision is still totally valid. We want to have about 40% of our internal need cover. We will continue to cooperate strategically with Wolfspeed, it’s important partner for us and another source as well. Now, we are simply executing our strategy and then okay to convert the silicon carbide in 8 inch as soon as we can, to implement innovation, we haven’t working on to optimize the silicon combined usage or we are simply executing our strategy, but it will not change our relation with Wolfspeed.
Matthew Ramsay — Cowen and Co. — Analyst
Thank you, Jean-Marc. I really appreciate you addressing that, we got a ton of questions over the last 12 hours on that, just given this area of the space. So, I really appreciate the detail there. Just as a quick follow-up, Lorenzo, I heard your comments just now on gross margin for the fourth quarter and I guess those dynamics. I guess, the question I get fairly often is gross margin trends into 2023. If you could maybe talk us through some of the puts and takes there and how you’re thinking about margins, maybe a little tiny bit of headwinds in the near term, but off of really, really high base, on a relative basis? So just how you’re thinking about margins, puts and takes into next year would be helpful? Thank you very much, I appreciate it.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
For Q4, our gross margin, as we said, that let’s say the dynamic of our gross margin for this quarter is a blend in this range of 47.3 and as I said that the dynamic looking at, let’s say the evolution from the previous quarter, is that there are two components that are going, let’s say in that direction two detrimental, our gross margin. One is, as I was saying is the mix, it’s a little bit less favorable than what it has been in the previous quarter in Q3. On the other side, you know that progressively, we are impacted by these inflationary cost in our COGS. These are two negative component.
On the other side, there is a positive one. That is the exchange rate, the exchange rate is going in the positive direction. When we look at the next year for sure, let’s say there are the various components on one side, there are some positive one that may remain. One is the FX, maybe this is difficult to predict, but at this stage if we stay in this level, for sure we play in a positive way. There is, let’s say, the positive on the fact that our product mix is supposed to be improving in the next year.
On the other side, we also will win some productivity in our manufacturing, let’s say, in term of our ability, let’s say to — with our full fab, let’s say to gain some productivity but on the other side, we will have also some some headwinds, because at the end, the inflationary costs that will not disappear. We will continue. So even if probably we will not increases infrastructures, we have seen this year, let’s say, but we will still be a negative impact in our gross margin for sure next year we will have the ramp up of two 300 mm that at the end you know before, let’s say, to be fully efficient that we’ll go through a period in which the efficiency will be not at the best, we need to increase their capacity. So at the end, let’s say, we will have, let’s say this component some in the right direction, some in the negative direction.
Overall now, we are working on our sales and operating plan to see how, let’s say, we will develop them next year, let’s say, and I would say that this stage is a little bit early to give let’s say a firm indication on the evolution of our gross margin. I think as usual, we will discuss these entering in the next year, we will discuss about the capex evolution, we will discuss about the revenue evolution and we will comparing these also with some conversation about the dynamic of the gross margin.
Matthew Ramsay — Cowen and Co. — Analyst
Thank you both for the color, I appreciate it.
Celine Berthier — Group Vice President, Head of Investor Relations
Thank you, Matt. Next question please, Moira.
Operator
The next question is from Stephane Houri from ODDO BHF. Please go ahead.
Stephane Houri — ODDO BHF — Analyst
Yes, good morning. Thank you for the question. Actually I’d like to talk about 2023, even though I know you’re not going to give a guidance for next year, but could you share with us your views your initial views on 2023, with the order book that you have, but at the same time, the environment which is getting, let’s say more nervous. So as a CEO, how do you prepare 2023? And how do you prepare the company for next year? And the second question is about the main client, your main client there has been a lot of, let’s say, conflicting news flow during the quarter. So, can you share with us what is your vision of what’s happening there? Thank you very much.
Jean-Marc Chery — President and Chief Executive Officer
Okay. So the situation for 2023. Again, I would like to repeat what we have, both in terms of data point, but also direct input from our customer as our relations are more and more close. On automotive, I confirm that that there is basically two train. Overall, the production of light vehicle will be around $85 million we achieved this year should go next year. But more important is the electrical battery base vehicle. So this year should be around $7 million and next year should be about $10 million. And you know that there is a factor of four to five in term of semiconductors content.
So clearly we confirm that both from a, let’s say, data points visibility, we have in our backlog, but conversation with our customer. The demand for electrical vehicles for the transformation of electrification is fully for strong demand of semiconductor. And yes okay, on thermal combustion engine, it’s not a secret that yes maybe there is some softening of the market but here, the content of semiconductor is still increasing. So there is some mitigation effect. So all in all we confirm that from our perspective, the semiconductor automotive, let’s say verticals will grow next year.
About industrial is, basically quite similar path because discussing with the customer and I guess this morning some announcement and from because some of ST, the infrastructure, robotics, automation after the lesson learned from COVID, but also shortage of workers and so on. The demand is very strong and the demand of semiconductor in automation, robotics, power energy infrastructure, renewable energy, charging station for electrical car all according very, very important human, any same both data points so means backlog we have in our hand. Plus, let’s say, the discussion we have with customers are showing, let’s say, a very strong dynamic, whatever is the geography.
Yes. On consumer industrial that I name during my speech, there is a softening of the demand in term of building, home appliances, power tools. The power tools, it is clear, it’s power tools from retailer. So, for the consumer, but if you take power tool for professional, the demand is still very strong. Why? Because it is increasing the productivity of the worker. But here again, it’s not, absolutely not similar than the pure consumer electronic, here, we see market softening. But just at the level of what we can sell in terms of capacity.
So, all in all, that’s the reason why, when we look at the data point provided by the values, let’s say, industrial analyst, it is clear that the some of ST in term of growth, both in 2022 and in 2023 is showing a much better picture that the time of semiconductor. Why? Because this time of semiconductor is haevily impacted by memory and microprocessor, serving computer, personal computer but also smartphone and personnel electronic and especially smartphone overall Android base. So, that is the reason why we do believe that with the data point we have from analysts, the customer view and the backlog. So I repeat, this is what I said today, when I put the session operating plan we are building for 2023 and the Q4 run rate, we have, we have another old backlog, which represents depends product line of course between six to eight quarters of, right.
So at the end this is making us very confident, to ties the company next year on the trajectory of growth and of course we will communicate the launch of expected growth next year entering in the year, in January, where we will disclose the capex to support it and revenue and as Lorenzo said the gross margin. So again my takeaway is very simple. We have proven point, proven data point of solid market in automotive and industrial for the reason I have explained. Yes, there is a market softening on consumer, always the upcoming back to your latest point the revenue we extracted and the value we extracted through our partnership with our main customer has been great this year. The guide us on a very accurate way. The forecast, they provided to us entering in 2022 versus one we have today shift below 2%. I don’t say plus-minus, but within a very, very accurate manner. And we have the visibility for next year. So again, overall, we’ll have the company on a growth trajectory.
Celine Berthier — Group Vice President, Head of Investor Relations
And there was question on — you gave the answer.
Jean-Marc Chery — President and Chief Executive Officer
That is what I answered.
Stephane Houri — ODDO BHF — Analyst
Yes, thank you very much, Jean-Marc, very, very complete.
Celine Berthier — Group Vice President, Head of Investor Relations
Thank you very much, Stephane. And the next question, Moira.
Operator
The next question is from Johannes Schaller from Deutsche Bank. Please go ahead.
Johannes Schaller — Deutsche Bank — Analyst
Yes, thanks for taking my question. Good morning. Obviously a lot of questions already on the outlook from here and I think one of the things you haven’t really discussed too much is the pricing dynamics you’re seeing. I think in Q4, you are not expecting a big benefit, but how do you conceptually think about pricing in your three divisions as we go into next year? And in particular on MDG, I think Microcontrollers has obviously seen a very benign pricing environment and also very strong margin expansion on the back of that. How do you think about pricing here and then can you maybe help us understand a little bit better the margin expansion over the last two years in MDG? How much of that you think was pricing driven and is there any risks of pricing actually coming down as we go into next year in some of your divisions? Thank you.
Jean-Marc Chery — President and Chief Executive Officer
So Lorenzo will take the answer, of course. But I would like to repeat what I said few minutes ago. The pricing must be considered versus the market. So I repeat, when you have Automotive transformation, electrification, digitalization and B2B industrial, the demand is very strong. Microcontrollers are key components, they are calling for more processing computer power. They are calling for more connectivity, they are calling for artificial intelligence, they are calling for secure connection.
So you have to understand that pricing is not across the board. Pricing, of course in some countries in Asia addressing the small consumer device, the small toy and so on and so forth, maybe here you may have some pressure on pricing. But when you address Microcontrollers for automotive when you address for industrial OEM, it is a totally different story. So, pricing must be considered at the highest level of granularity. For saying that, Lorenzo will give you more color.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
Yes. At the end, let’s say, on top of what already explained by Jean-Marc, what we see, as I said, today, we don’t see, let’s say, significant evolution in term of pricing. Also, when we look at this product line, the microcontrollers, in particular, it’s true that there is some element as we said that let’s say on some, let’s say, low-end products that maybe we can have a little bit more pressure. But at the end overall, I have to say that the price is quite stable.
In 2023, we are not modeling, let’s say, a significant change in term of pricing, in terms of, for sure, let’s say we don’t think that there will be a significant increase in respect of where we stand today. We more and more let’s say relatively stable pricing, let’s say, maybe with some small decline, as we said in some areas, let’s say which maybe the demand is a little bit less stronger than has been during during this year. When we look let’s say, the dynamic of the profitability of this business, yes, for sure a price is a component but as not be under evaluated also, the product mix. The value that we are, let’s say, bringing in our products is constantly increasing and this is actually is well reflected in the improvement of the profitability of this product line.
So, I would say that the two components go and let’s say price definitely, yes, it’s true that this year we had a positive contribution from pricing, but definitely also the contribution that we saw in term of the product mix in the top line and in the profitability has been definitely not negligible. So, it’s quite important. And here is where I think, let’s say next year will be the positive element that we take into consideration may be price will not step up, will be more — let’s say flattish or mild decline, but we will continue, let’s say, to have a positive impact coming from our product mix and the innovation that we’re bringing to our customers.
Johannes Schaller — Deutsche Bank — Analyst
That’s very clear. Thank you so much. Thank you, Lorenzo.
Celine Berthier — Group Vice President, Head of Investor Relations
Thank you. Next question please, Moira.
Operator
The next question is from Janardan Menon from Jefferies. Please go ahead.
Janardan Menon — Jefferies — Analyst
Hi, good morning. Thanks for taking the question. I was just wondering about the distribution channel right now both in China and elsewhere. In the past, you’ve always talked about what you’re seeing at the U.S. level and in channel in general. Can you give us a little bit of how that dynamic is evolving into Q4? And when you talked about pockets of weakness could be in microcontrollers in some limited areas, would you assume that that would be coming predominantly in the channel? And have you seen any evidence of that happening so far? And then, a small follow-up is just on your Q4 guidance, can you give us what exactly would be the impact from currency, the positive impact from currency on your Q4 gross margin that will be very helpful? Thank you.
Jean-Marc Chery — President and Chief Executive Officer
Lorenzo will answer the last question. The distribution in China, first of all, distribution of all is in a very a similar situation in terms of backlog coverage than the overall company. So, it means the backlog we have from distribution is representing, okay, between six to eight quarters of Q4 revenue on it. So exactly the same profile. And then distribution is the copy paste of the market. So clearly, we have distributor, when we have distributor fully generalist, addressing both automotive, industrial market, and you know that we are pushing.
And when I say industrial, let’s say, the infrastructure of industrial, terms of inventory are very high and the POS is growing. When you have, okay, a distributor addressing more consumer industrial, terms are standardizing and POS is standardizing. And when you have distributor addressing the pure consumer electronics, so small personal electronic device. Yes, you have the POS decreasing and we are monitoring very carefully the inventory turn. Why? Because we are controlling the allocation of PCs and allocation of capacity. So in fact, the situation of distribution in China and overall in the world is really a copy paste of the dynamic of the market and of the verticals. And today, this is the situation we are seeing.
Janardan Menon — Jefferies — Analyst
And in your MDG, you’ve often talked about having up to 100,000 customers, which I presume in many cases, are small and medium-sized businesses, but sort of in the industrial market. What is the dynamic that you’re seeing in that particular segment? Is that still holding up reasonably well?
Jean-Marc Chery — President and Chief Executive Officer
On microcontroller, clearly, about the 100,000 customers, there is customer we address through the distribution and there is what we call medium-sized OEM. In 2022, we set up programs to specialist support medium-sized OEM with microcontroller in order to protect them because, you know that we face this a shortage in terms of capacity. And we were in conflict between, a strong push from automotive industrial B2B OEM. And we set up specific programs for a medium-sized customer and I can confirm to you that this medium-sized customer, first of all, they grew a lot in 2022, well above the average of the company. And they will continue to grow in 2023.
Of course, the small customer and especially those, addressing the personal electronics market in Asia and in China. Yes, certainly here, we have lost some market share against the local, let’s say, microcontroller provider. But it is not the main part of our business. Again, the main part of the business for microcontroller is industrial OEM definitively important OEM whatever the market definitively, and we have managed at the best all of our allocation.
We see some price pressure on the low-end personal electronics. Again, we have the capability to compete because we are using a mature technology, very cost effective. We are using an important foundry providing now, the right capacity at the right price. And here, we can compete. So, we don’t see any specific content to this situation.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
At the end in the quarter, POS was growing both sequentially than year-over-year.
Jean-Marc Chery — President and Chief Executive Officer
Exactly.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
So data point. About the effects — the modeling the effects for our companies is always more or less the same. I was giving a rule of thumb many times, let’s say, about the 1% change in the — every dollar, how this translates in our operating margin on our — in our operating profit in our gross profit, let’s say, in the range of 1% of difference in terms of, let’s say, exchange rate euro-dollar exchange rate it translates between $8 million to $10 million equally split substantially between gross profit and operating profit, I mean, half in gross profit and the remaining half in the expenses by growth.
So, at the end, if you make the computation in Q3, our effective exchange rate was in the range of 1.08 including of course, hedging, in Q4 will be 1.03. So, at the end, the positive impact we estimate on our gross margin moving from Q3 to Q4 is in the range of 30 basis points, something like that positive impact. Of course, this is offseted by, as I was saying before, by, let’s say, less favorable mix and the impact in the impact of continued cost increase in our cost. So, at the end, overall, our gross margin is declining 30 basis points.
Janardan Menon — Jefferies — Analyst
Understood. Thank you very much.
Celine Berthier — Group Vice President, Head of Investor Relations
Thank you. Next question please.
Operator
The next question is from Metuku Adithya from Credit Suisse. Please go ahead.
Adithya Metuku — Credit Suisse — Analyst
Yes, good morning, guys. Thank you for taking my questions. So firstly, I just had a quick clarification on MDG. You said something a lot about demand softening driven by a specific customer. I didn’t quite catch that. I just wondered if you could give us a bit more clarity there? And then secondly, a question for Lorenzo just on opex. Firstly, I wanted to understand how do you expect all these chips act to impact your opex and the R&D grants you receive? And secondly, can you give us some color on the gross opex and the R&D grants that we should model in Q4 and into 2023, if possible? Thank you.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
Okay. So maybe I take this one on the opex directly that is simple to answer. In terms of opex for the current quarter, we see definitely an increase in respect to the one of the previous quarter, you have to keep in mind that in Q3, we are impacted by favorable seasonality on our opex basis in Europe, where the vacation plays positively in terms of accounting of the opex. So, at the end, let’s say, what we see for the quarter, including the impact of the other income and expenses, that is including the grants it will be something in the range of $830 million, $840 million in the quarter.
If you make the math, you will see that at the end, the quarterly expenses all over the year it will be something in the range of between 800 and 805, let’s say, if you take the total expenses of the net expenses divided by 4. That is more or less what we have guided already in Q3 was a little bit higher in Q3, but the difference is mainly driven by the positive impact of the exchange rate.
In respect to the question on the grants, I would say that at the end, in terms of grants for R&D, we do not expect a significant change in respect to what we have had in the past in the sense that at the end, we are — this year, just to give you an idea, let’s say, the overall other income and expenses will be, as already anticipated, more or less in the range of $140 million, something like that. We do not expect moving forward, let’s say, significant change.
Of course, there could be some — as it happens also in the past, volatility due to the fact that at the end, you need to conclude and to sign the final let’s say, convention with the various bodies, let’s say, that are providing these grants like the government or similar. And here, you may have some quarter up so quarter down, depending when you really, let’s say, concluded this kind of administrative procedure when there is the renovation of these grants.
But in general, moving forward with the visibility that we have today, the level of the grants will remain stable. The difference is more than the grants in R&D in the grant financing of investment like the silicon carbide fab that has been announced beginning of October, and Jean-Marc mentioned in his introduction speech, let’s say, in which, let’s say, for instance, our investment in Catania for the silicon fab, $740 million has been partially finance through let’s say, this kind of new instruments that are available now for finance the investment in the semiconductor. And this is a difference maybe in respect to the past.
Jean-Marc Chery — President and Chief Executive Officer
So coming back to your question on the microcontroller. General microcontroller, you have everywhere. You have in automotive, noncritical, okay, system where you need to have real-time, let’s say, control but you have it in some automotive system. You have it in industrial robotics, automation, infrastructure. You have it in obviously, in personal electronics, important customer programs and you have it in communication equipment. And sometimes in computer peripheral, with important customer forum. Everywhere, we are selective.
For all this part of the business, either automotive industry and engaged customer program, the demand is not softening. Where the demand is softening, as I repeat, it is on pure consumer personal electronic, we address through distribution because we know it’s well known that there is a market softening in the consumer. Why? Because the consumer the consumer, they change their behavior versus the purchase of this device.
So but I repeat clearly for ST, the demand is not softening overall for microcontroller general purpose, is still very strong. we have still between six to eight quarter backlog coverage versus the capacity we allocate all the market where we want to address high growing area, the bookings as well with a book-to-bill well above one. So the dynamic is very positive. Yes, okay, we have seen some sign of weakening on pure consumer. But here, we address through the distribution. And through the distribution, we manage our inventory at the right level.
Adithya Metuku — Credit Suisse — Analyst
Got it. So your previous comment on one customer softening, was that like one of the consumer distributors seeing some softening, but the rest of the business remains very strong?
Jean-Marc Chery — President and Chief Executive Officer
Exactly.
Adithya Metuku — Credit Suisse — Analyst
Okay. Got it. Thank you.
Celine Berthier — Group Vice President, Head of Investor Relations
We have time for one last question.
Operator
Today’s last question is from Andrew Gardiner from Citi. Please go ahead.
Andrew Gardiner — Citigroup — Analyst
Good morning. Thanks for squeezing me in. Just two clarifications really. One on the opex comment that you just answered Lorenzo, if I go back to what you said at 2Q, then you were quite clearly guiding to between $810 million and $850 million per quarter on average for the year. Now you’re well below that. I think your prior answer seems to suggesting a moderate change, but it feels more significant based on what you’ve told us previously. How would you characterize that shift? And sort of where are you finding some of these savings, particularly given the inflationary environment you’ve already acknowledged.
And then also on capacity, with the 2Q results, you also gave us a sense as to your internal capacity growth relative to foundry wafer supply. How is that at the moment in terms of how your — the kind of growth that you’re seeing in terms of fourth quarter, your ability to get increased wafer supply from the foundry partners? Just an update on that would be helpful. Thank you.
Jean-Marc Chery — President and Chief Executive Officer
Could you tell me the first question.
Celine Berthier — Group Vice President, Head of Investor Relations
The first question was on opex?
Andrew Gardiner — Citigroup — Analyst
Yes. On opex just going back to the prior statement, we had a much higher level budgeted for this year than what you’ve just indicated.
Celine Berthier — Group Vice President, Head of Investor Relations
Not that much, if I can — because it was.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
I think that I don’t remember exactly when, but I think my indication on opex was something in the range 810, 820 in average, let’s say. Yes, actually, today, the visibility is a little bit lower this is not really driven by any significant, let’s say, change in our programs or something like that. I would say that — if you remember, entering Q3, my guidance of expenses was a little bit higher for the quarter than what it came up.
Now I didn’t enter, let’s say, in a lot of detail for Q3 but in Q3, if you want, we had two positive effects. One positive effect was that other income and expenses came a little bit higher than expected, and this is a little bit technical. There was some positive on grants and that was positive also related to our FX position, but fine. At the end that this is maybe not recurrent. And actually, there was also, let’s say, a little bit higher level of occasion in respect to what was supposed to be entered in the quarter and was the normal seasonality. So, at the end, we came lower than expected, a part, let’s say, a little bit positive effect of exchange rate.
Moving to Q4, we are back, let’s say, at a normal level. Indeed, as I said, we will be between 830 and 40 million at the end of the month, it brings you a little bit down in respect to the 810 million and 820 million, if I remember well that I was guiding a few months ago. Yes, you’re right. It’s coming a little bit lower. But at the end, to be honest, is not really related to that we have done significant changes in respect to what was our objective in terms of program project and things like that. It’s not driven by that, but it’s mainly driven if you want maybe by our ability to forecast so precisely these numbers. But yes, at the end, we are more or less there.
Jean-Marc Chery — President and Chief Executive Officer
So about capacity, if I well capture your question. We are increasing our capacity according to our plan. That’s the reason why we have confirmed our capex, range between $3.4 billion to $3.6 billion. If you remember well, during the Q2 earnings, I share with you that Q3 revenue will be driven mainly by our capability to increase our manufacturing. And clearly, we increased in Q3 versus Q2, our manufacturing production value by 12.5% completely consistent, with our revenue increase. Well, I don’t want to hide that, yes, we put many equipment maker under scrutiny because they are struggling to deliver their equipment on time versus their commitment. More carefully they are facing many issues on their own supply chain.
About next year, okay, next year, we will increase our capacity consistently with the sales and operating plan, we will decide. And consistently with the objective of $20 billion plus that I confirm for 2025 to 2027, and we will increase it consistently. From foundry side, now clearly, there is one partner which is supporting us much better than in 2022 according to our demand, clearly, and it’s a very good news for us. especially in the sense that it is supporting our microcontroller business. And other foundry partner we are used to is more complex. They are still facing some issues to increase their support at the expected level because of a capacity limitation.
Andrew Gardiner — Citigroup — Analyst
Thank you very much.
Celine Berthier — Group Vice President, Head of Investor Relations
Thank you so much. With this we’ll complete our call.
Jean-Marc Chery — President and Chief Executive Officer
Thank you.
Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer
Thank you. Bye-bye. [Operator Closing Remarks]