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STMicroelectronics NV (STM) Q4 2022 Earnings Call Transcript

STMicroelectronics NV Earnings Call - Final Transcript

STMicroelectronics NV (NYSE:STM) Q4 2022 Earnings Call dated Jan. 26, 2023.

Corporate Participants:

Celine Berthier — Group Vice President, Investor Relations

Jean-Marc Chery — President and Chief Executive Officer

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

Analysts:

Alexander Peterc — Societe Generale — Analyst

Didier Scemama — Bank of America — Analyst

Joshua Buchalter — Cowen & Company — Analyst

Francois Bouvignies — UBS — Analyst

Sandeep Deshpande — JPMorgan — Analyst

Andrew Gardiner — Citi — Analyst

Presentation:

Operator

Ladies and gentlemen, welcome to the STMicroelectronics Fourth Quarter and Full Year 2022 Earnings Conference Call and Live Webcast. I am Moira, the Chorus Call operator.

I would like to remind you that all participants will be in listen-only mode, and the conference is being recorded. The presentation will be followed by a Q&A session. [Indecipherable] 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, Investor Relations. Please go ahead, madam.

Celine Berthier — Group Vice President, Investor Relations

Hey, good morning. Thank you everyone for joining our fourth quarter and full year 2022 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, Enterprise Risk Management and Resilience and Chief Financial Officer; and Marco Cassis, President of Analog, MEMS and Sensor Group and Head of STMicroelectronics’ Strategy, System Research and Application and also the Innovation Office.

Live webcast and presentation materials can be accessed on ST’s Investor Relations website. A replay will be available shortly after the completion of this call.

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

Also to ensure all participants have an opportunity to ask questions during the Q&A session, 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 Q4 and full year 2022 earnings conference call.

Let me begin with some opening comments. Starting with Q4, ST delivered net revenues and gross margin above the midpoint of our guidance. Net revenues of $4.42 billion, increased 24.4% year-over-year and 2.4% sequentially. Gross margin was 47.5%. Operating margin was 29.1% and net income was $1.25 billion.

Looking at the full year 2022, net revenues increased 26.4% to $16.13 billion, driven by strong demand in automotive and industrial and our engaged customer programs. All three product groups contributed to the growth. Profitability improved on a year-on-year basis. Gross margin was 47.3%, up from 41.7%. Operating margin was 27.5%, up from 19%. And net income was $3.96 billion, almost doubling from $2 billion. We generated strong net cash from operating activities. We invested $3.52 billion in capex and delivered free cash flow of $1.59 billion. Our net financial position increased to $1.8 billion at December 31, 2022 from $977 million one year ago.

On Q1 2023, at the midpoint, our first quarter business outlook is for net revenues of $4.20 billion, increasing by 18.5% year-over-year and decreasing 5.1% sequentially. Gross margin is expected to be about 48%. For the full year 2023, we will continue to execute our strategy with a strong focus on automotive and industrial as a broad range supplier and a selective approach in personal electronics and communication equipments and computers/peripherals. We entered this year with the backlog higher than what we had entering 2022. We plan to invest about $4 billion in capex, mainly to increase our 300-millimeter wafer fabs and silicon carbide manufacturing capacity, including our substrate initiative. Based on our strong customer demand and increased manufacturing capacity, we will drive the company based on a plan for full year 2023 net revenues in the range of $16.8 billion to $17.8 billion, representing a growth range of 4% to 10% compared to full year 2022.

Now, let’s move to a detailed review of the fourth quarter. Both revenue and gross margin came above the midpoint of our guidance by 60 basis points and 20 basis points, respectively. On a sequential basis, Q4 net revenues increased 2.4%, driven mainly by ADG which increased 8.5%; MDG revenues increased 0.7%, while AMS revenues decreased 3%. On year-over-year basis, net revenues increased 24.4% with ADG and MDG growing 38.4% and 29.1%, respectively, while AMS increased 7% year-over-year. Sales to OEMs increased 26.8% and 19.5% to distribution. Gross profit was $2.1 billion, increased 30.7% on a year-over-year basis. Gross margin was 47.5%, increasing 230 basis points year-over-year, mainly driven by favorable pricing, improved product mix and currency effects, net of hedging, partially offset by the inflation of manufacturing input costs. Fourth quarter operating income increased 45.4% to $1.29 billion. Q4 operating margin was 29.1%, up from 24.9% in the year-ago period, with ADG at 27.7%, AMS at 25.8%, and MDG at 35.8%. Q4 net income was $1.25 billion, including a one-time non-cash income tax benefit of $141 million, compared to $750 million in the year-ago quarter. Earnings per diluted share were $1.32 compared to $0.82.

Let’s now discuss our full year results, starting with the business dynamics. 2022 was the year marked again by strong demand in automotive and industrial, still impacted by supply chain challenges, due to continuing shortages and capacity constraints. In the second half, we started to see a market softening in personal electronics and computer/peripherals. In automotive, we again saw unprecedented demand across all geographies, driven by increasing semiconductor pervasion, structural transformation and inventory replenishment. We continued to execute our strategy for car electrification, in particular in our silicon carbide business. We added a wide range of wins in next generation electrical vehicle designs with our power discrete solutions. The latest one is with Hyundai Motor, who has chosen our ACEPACK DRIVE silicon carbide MOSFET Generation 3-based power module for traction inverters in its current generation electrical vehicle platform.

In silicon carbide for Automotive and Industrial, we achieved $700 million of revenues with silicon carbide in 2022, with a plan to be above $1 billion in 2023. We finished the year with 115 awarded projects, spread over 80 customers, adding 25 projects and eight customers during 2022. About 60% of these projects are for automotive customers. We continue to lead in silicon carbide, as we have moved to high volume production of our third generation transistors for multiple automotive customers and we will ramp our fourth generation transistor in volume in the second half of this year.

In car digitalization, we had a range of wins with our MCUs and power solutions for new zonal car architectures. We won designs with our next- generation Stellar automotive MCU and announced a cooperation model with Volkswagen CARIAD including the joint development of a system-on-chip MPU. We also received awards with our partners, Mobileye for ADAS and Autotalks for V2X. In our automotive sensors, we continued to increase the scale of our business in inertial sensors, growing by over 40% year-over-year. In global shutter imaging sensors, we received awards for five key programs during the year.

In Industrial, demand was also very strong throughout the year, especially in Power and Energy, Factory Automation and Robotics, and in Industrial Infrastructure, what we define as the B2B part of the Industrial market. We continued to strengthen our embedded processing solutions leadership with our STM32 microcontroller and microprocessor families and ecosystem. We continued to win many designs in a wide range of industrial applications and to achieve record volumes and sales of STM32 products.

In Power & Energy Management applications, such as electrical vehicle charging stations, photovoltaic systems and industrial power supplies, we had many important design wins with our power discrete portfolio of both silicon and wide band-gap based devices, and we further extended our product offer during the year.

We progressed with sensors for industrial applications, with revenue growth of around 50% year-over-year. We introduced new industrial sensors such as the first Intelligent Sensor Processing Unit launched together with Generation 3 MEMS Sensors as well as time-of-flight sensors for touchless sensing applications. These enabled design-wins with customers in many areas such as equipment condition monitoring, asset tracking and healthcare. During 2022, we introduced 80 new industrial analog products with awards in applications for factory automation, motion control, metering, power tools and home appliances.

In Personal Electronics and Computer/Peripherals, we started to see a market softening in the second half of the year, while Communication Equipment demand remained solid throughout the year in the areas we are focused on. In Personal Electronics, in 2022, we won many sockets in flagship smartphones with motion and environmental sensors, time-of-flight ranging sensors, wireless charging products, touch display controllers, and secure solutions. We also leveraged our broad portfolio to address high-volume personal electronics applications such as smart watches, headsets and other wearables, as well as gaming accessories from leading player in each area.

In Communications Equipment, we progressed well with engaged customer programs for selected applications in cellular and satellite communication infrastructure and received new awards based on our proprietary technology. These were for satellite, optical and wireless infrastructure ICs based on our mixed-signal processes and 28 nanometer FDSOI.

Let me now share a summary of our main 2022 manufacturing initiatives. We are transforming our manufacturing base to enable our future growth and drive enhanced profitability, with a significant expansion of our 300 millimeter capacity and a strong focus on wide band-gap semiconductors.

In silicon carbide, we are following our plans to increase 10-fold the front-end capacity versus 2017 and to have 40% on our substrate needs internally sourced by 2024. We continue to ramp our silicon carbide front-end device production in our Singapore facility on top of the Catania 1 and we increased back-end manufacturing capacity in our sites in Morocco and China. We are building an integrated silicon carbide substrate manufacturing facility in Catania as an important step in our silicon carbide vertical integration strategy. Volume production is expected to start in the second half of this year and, just recently, we have produced in Catania the first 150 millimeter ingot out of this facility.

In terms of R&D activities, we have completed full MOSFET device processing using our internally produced 200 millimeter substrate. We have announced that we will cooperate with Soitec on silicon carbide substrate manufacturing technology, with an agreement to qualify Soitec SmartSiC technology for future 200 millimeter SiC substrate production.

In our 300 millimeter strategy, in 2022, we have further expanded capacity in our Crolles, France site. We also signed an MoU with GlobalFoundries to create a new 300 millimeter semiconductor manufacturing facility adjacent to ST’s existing facility in Crolles.

In Agrate, Italy, having completed in 2022 the first industrialization line and the qualification of the engineering samples, we are now ramping our new 300 millimeter wafer fab. We plan to have a capacity of about 1,000 wafers per week by the end of this year. These initiatives will be aligned with our sustainability strategy and our sustainable manufacturing commitment in terms of energy consumption and greenhouse gas emissions, air, and water quality.

We are on track to achieve our carbon neutrality and 100% renewable energy goals by 2027, as announced in December 2020. One important contributor to our plans was the adoption in 2022 of a district cooling system in Singapore, ST’s single largest wafer fabrication site. We expect to eliminate 30% of the site’s carbon emissions on completion. We also continued to work closely with external bodies and were well ranked by the Carbon Disclosure Project and included in the Dow Jones Sustainability World and Europe indices.

Looking now at full year 2022 financial performance in greater detail. Net revenues increased 26.4% to $16.13 billion. On a year-over-year basis, Automotive revenues grew 51%, Industrial was up 34%, Communications Equipment and Computer/Peripherals increased 19% and Personal Electronics grew 2%. This performance was consistent with both end-market dynamics and our strategy.

We have a strong focus on Automotive and Industrial as a broad range supplier of application-specific and general-purpose products, targeting leadership positions. Automotive represents about 33% and Industrial about 29% of our total revenues in 2022. We selectively address the Personal Electronics and Communications Equipment and Computer/Peripherals market, targeting some leadership positions with a few differentiated products or custom solutions, complemented by our general-purpose products portfolio.

In 2022, Personal Electronics represented about 27% of our total revenues and communication equipment and computer/ peripherals, 11%. By customer channel, sales to OEMs and distribution represented 67% and 33%, respectively, of total revenues in 2022; similar to the split in 2021. By region of origin, 41% of our revenue 2022 were from Americas, 30% from Asia Pacific, and 29% from EMEA.

Looking at the sales performance by product group. ADG revenues grew 37.2%, on strong growth in Automotive and in Power Discrete. AMS revenues were higher by 7.1%, with an increase in Imaging and MEMS, partially offset by a decrease in Analog. MDG revenues increased 37.5% with strong growth in both Microcontrollers and Radio Frequency Communications. Gross margin increased to 47.3% for 2022 compared to 41.7% for 2021, principally driven by favorable pricing, improved product mix, currency effects, net of hedging, partially offset by the inflation of manufacturing input costs. We delivered a strong increase in operating margin to 27.5% for 2022 compared to 19% in 2021. All product groups demonstrated year-over-year growth with ADG operating margin up to 24.6% from 11.8%, AMS operating margin up to 25.2% from 22.3%, and MDG operating margin up to 35% from 23.9%.

Net cash from operating activities increased 70% in 2022, totaling $5.2 billion. After investing $3.52 billion in capex in 2022, compared to $1.83 billion in 2021, our free cash flow increased 42.1% to $1.59 billion. Cash dividends paid to stockholders in 2022 totaled $212 million. In addition, during 2022, ST executed share buybacks totaling $346 million under our current share repurchase program. ST’s net financial position of $1.8 billion at December 31, 2022 reflected total liquidity of $4.52 billion and total financial debt of $2.72 billion.

Now, let’s move to our first quarter 2023 financial outlook and our plan for the full year 2023. For the first quarter, we expect net revenues to be about $4.2 billion at the mid-point, representing year-over-year growth of about 18.5% and a sequential decrease of about 5.1%. Gross margin is expected to be about 48% at the mid-point.

For 2023, based on our strong customer demand and increased manufacturing capacity, we will drive the company based on a plan for full year 2023 revenues in the range of $16.8 billion to $17.8 billion, representing growth over 2022 of about 4% to 10%. Automotive and Industrial will be the key growth drivers of our revenues in 2023. We plan to invest about $4 billion in capex. About 80% of this amount is mainly related to the increase of our 300 millimeter wafer fabs and silicon carbide manufacturing capacity including our silicon carbide substrate initiative. The remaining 20% is for R&D, laboratories, manufacturing maintenance and efficiency and our corporate sustainability initiatives.

To conclude, last May at our Capital Markets Day, we shared our value proposition. This is based on sustainable and profitable growth, with our ’25 to ’27 $20 billion plus revenue ambition and the related financial model; our end-market focus on Automotive and Industrial, as a broad range supplier of application-specific and general-purpose products, targeting leadership positions; on Personal Electronics and Communications Equipment and Computer Peripherals, with a selective approach, targeting some leadership position with a few differentiated products of custom solutions complemented by our general-purpose products portfolio; providing customers with differentiating enablers, and a reliable and secure supply chain; and last but not the least, a strong commitment to sustainability. In 2022, we made important progress in all these areas and we will continue along the same path in 2023.

Thank you, and we are now ready to take your questions and to answer them.

Questions and Answers:

Operator

We will now begin the question-and-answer session. [Operator Instructions] The first question comes from Alexander Peterc from Societe Generale. Please go ahead.

Alexander Peterc — Societe Generale — Analyst

Yes, good morning and thank you for taking my question. Congratulations for strong results and very solid guidance. Now, I just like to understand given your first quarter gross margin outlook is 48%. Are there any specific positive mix effect here at play that will shape out differently in the remainder of the year? I remember Lorenzo, you said previously that we should probably look at gross margins flat to maybe slightly up for the current year. Is that still valid and how should we think about the shape of gross margin over the year? Thank you.

Jean-Marc Chery — President and Chief Executive Officer

Lorenzo will take the questions. Thank you.

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

Okay. Good morning, everybody. Thank you for the question. For the gross margin of Q1, when I look sequentially this improvement, this is mainly driven by two factors, I would say. The first one is related to a positive product mix that is continuing, impacting positively our revenues and our gross margin. And actually, I would say, that in this first quarter, we have still some positive effect on price increase. This was mainly on some specific customer and some specific area, I would say, mainly in Automotive and partially also for some customers in the Industrial. Of course, it’s not the same magnitude that we experienced last year, but still there are some positive negotiation that are improving our gross margin. On the other side, of course, our gross margin is impacted by some increase also in our input costs in the manufacturing. All-in-all, anyway we see this improvement in respect to the previous quarter, in respect to Q4 of around 50 basis points.

Moving forward, the midpoint of our revenue indication for the year is expected similar to the one that we had in 2022. So we are substantially confirming what I was saying also during Q4. On one side, we have a positive product mix, the manufacturing productivity we expect some improvement. In terms of pricing, we expect substantially stability in term of prices. So with the price, we do not expect in the course of the year play significantly high positive or negative, but to stay substantially stable. All these will be offset for sure by increased input costs in our manufacturing and then we have not to forget that we start our 300 millimeter in Agrate that is super-optimal in terms of, lets say, volume and production this year, and this will impact for some extent our gross margin, especially in the second part of the year. So at the end, starting from the 48%, we see as an average in the year something more similar to 47% for the total year.

Alexander Peterc — Societe Generale — Analyst

Excellent. Thank you very much. And just a quick follow-up if I may. Can you tell us how far out your current and planned capacity is currently fully booked? And is the top-end of your guidance range aligned with the hypothesis that you remain sold out into year-end, how does this work out? Thank you.

Jean-Marc Chery — President and Chief Executive Officer

So about capacity, there is different dynamics. It is clear that we have to look now by technology and packaging clusters. It is clear that all technology which are related to automotive and, let’s say, B2B industrial, and here I am spoken about power technology, so SiC-MOSFET, IGBT, vertically integrated power, high voltage, low voltage MOSFETs, but as well, okay, some advanced [Indecipherable] and high performance microcontroller on 40 nanometer, our capacity are fully booked for the year, definitively. Well, for the other one which are more addressing personal electronics consumer market, we are going back, subsequently classified downward, okay. So during the year, the capacity is well utilized, but not fully booked for the year. And that’s the reason why for such, let’s say, market, now our lead time are improving, okay, moving forward.

Alexander Peterc — Societe Generale — Analyst

Thank you very much.

Celine Berthier — Group Vice President, Investor Relations

Next question please.

Operator

The next question is from Didier Scemama from Bank of America. Please go ahead.

Didier Scemama — Bank of America — Analyst

Yes, thank you very much and congratulations on the spectacular guidance for Q1 ’23. Jean-Marc, I’d like to understand one thing on your silicon carbide business. So number one, is it clear or is it — or did I understand correctly that you’ve slightly raised that guidance from $1 billion to $1 billion plus?

And then secondly, in that number, can you tell us a little bit about the mix between discrete versus modules because it seems like some of your competitors are shipping mostly modules, whereas you’re shipping mostly discrete, and obviously the value added of modules is substantially greater than the value added of discretes. In other words, comparing apples to apples, does it makes any sense? And I’ve got a follow-up. Thank you.

Jean-Marc Chery — President and Chief Executive Officer

Thank you. Yes, I confirm that our plan for 2023 is above $1 billion. And clearly, the mix, we have mainly in module. First of all, with one of our main customer, and the main part of the program, we have been awarded significantly based on the Acepack module we have. So our main business is module related. However, this is not a KPI, we communicate in detail. But qualitatively, I can confirm to you that it is mainly on module.

Didier Scemama — Bank of America — Analyst

Okay, excellent. And on the second half gross margin comment that you made, Lorenzo, can you quantify the sort of start-up costs in Agrate and Catania in the gross margins? That would be helpful. Thank you.

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

In terms of start-up costs we have two components, I would say. One is what is qualified start-up. So it means that these costs will not hit our gross margin, but will be reflected in other income and expenses. These from an accounting standpoint, let’s say, are the pure start-up costs when your fab is not yet, let’s say, at a minimal capacity. This will be visible in the line other income and expenses that actually this year will be somehow lower in respect to what we have seen in 2022 for this reason, but not impacting the gross margin. What I’m referring is, once the fab will be out of the start-up and will start to produce, we will be still in a sub-optimal situation in term of efficiency because the volume is not yet enough to really to have a wafer cost that is comparable with full build-out fab at 300 millimeter. This will impact the second part of the year on our gross margin. But what I’m saying is that starting with 48%, the average of the year will be in the range of 47%. So it means that, that will not give us opportunity to improve respect to the first quarter, that will not be even a big factor, because at the end the average will stay in this range.

Didier Scemama — Bank of America — Analyst

All right. And maybe just one quick one for Jean-Marc. Is there anything you want to call-out for the second half for Personal Electronics, is there a win or a loss or anything that we should be aware of when we model the business, please?

Jean-Marc Chery — President and Chief Executive Officer

Okay. So maybe I will comment the full year plan we have indicated at the midpoint. Clearly, at the midpoint of the plan, we indicated $17.3 billion. It is clear that we will grow every quarter sequentially, and we will grow every quarter year-on-year basis. But moving forward at, let’s say, softer pace. And why because we have to look dynamics, by product group and dynamics by verticals. So by product group as we said, clearly, ADG and MDG will grow double digit, while AMS will, let’s say, slightly decrease. By end market, it is clear that on automotive and industrial, the company will go and will perform better than the markets we address with double-digit, driven by the high-growing application we are focusing on and by the increasing capacity we built in H2 2022 and we are building in H1 2023.

On communication equipment and computer operational award, we will grow slightly in line with the market. And clearly, it is driven mainly by engaged customer pulls on we are, offset by let’s say the computer operational. Well, now in personal electronics, it’s a notion of dynamic here, we will have a decrease, we will, let’s say decrease of revenue so lower definitively the market. Why, because we will have a change in important engaged customer cohort which would be actually achieved on our gross margin, but with less convenience. So this is the dynamic we will have moving forward in 2022.

Didier Scemama — Bank of America — Analyst

Marvelous. Thank you so much.

Celine Berthier — Group Vice President, Investor Relations

Thank you, Didier. Next question, please.

Operator

The next question is from Matt Ramsay from Cowen & Company. Please go ahead.

Joshua Buchalter — Cowen & Company — Analyst

Hi. This is Josh Buchalter on behalf of Matt. Thank you for taking my question and congrats on the awesome results. I guess, I wanted to follow-up on the previous question and double-click on industrial and auto, in particular. I mean, it is widespread, I guess, concerns of macro softening. And one of your large peers, earlier this week, called out some weakness in digestion and industrial. I guess, can you walk us through and provide a little more granularity on what gives you confidence in industrial? And I guess also auto, is that still benefiting from replenishment inventory like it was last quarter? Thank you.

Jean-Marc Chery — President and Chief Executive Officer

Yeah. I think it’s important to spread industrial market into — I repeat, this is what we classify the B2B. In B2B, first of all, there is power and energy. And when I have spoken about power and energy, I have spoken about the generation of energy, conversion of synergy and storage. And with whole initiative, you have worldwide a renewable energy. And in all geographies, the demand for power electronics, and let’s say, both controller of, competitive microcontroller, driver and so and so is huge. There is absolutely no investment softening in this field of power and energy.

Then the second point, okay, but power and energy is — the main consumption of electricity in the world is related to motion, engine, motor or electrical engine. Everywhere in the world, there is initiative to make it more efficient, all the engine which are connected to industry and factories. Any other demand for power electronics, again in term of inverters, in term of bus controllers, MCU, power electronics is huge. This is exactly the same for factory, automation and robotics. So because of the shortage of talent in the world, because of the lesson learned from the post-pandemic, there is many, many industries which are making them more automated and asking for more robotics. Here, it’s the same. It’s also the same in the logistic. So robots you need in the massive, lets say, storage infrastructure are completely with robots asking for maybe microcontroller and so on and so forth.

And last but not the least, this is the heavy infrastructure that you have in countries and in cities. This market is growing at the same pace as automotive, asking for power, MCUs and BCD technology for driver.

Then the second part of the industrial market is more what we call the consumer one, which are battery-operated tool, because, since two, three years, there is an acceleration of all, let’s say, professional and consumer small tools to move forward, thermal combustion engine based plug-in on the grid to battery-operated. Yes, there is a softening of the market, but the expectation of customer is that we will start in Q2. [Indecipherable] where the volume are less, but is in, let’s say, similar or similar path. So here, I would like to insist that on industrial market, you have two different dynamics. You have really a dynamic which is from the B2B and here it’s driven by a transformation. So decarbonization and automation of the industry, so combination of semiconductor. And there is a second dynamic, which is going back to the main softening, which is battery operated tool, home appliances is basically the same, and at scale. So I don’t know what the main competitor you refer, say that I can confirm to you, this is what we see and this is the backlog we have and this is what the customer appreciate [Phonetic].

Celine Berthier — Group Vice President, Investor Relations

Does this answer your question?

Joshua Buchalter — Cowen & Company — Analyst

Yeah. Thank you for all the color there. I guess for my follow-up, I wanted to ask about silicon carbide substrates. So you’ve seen the leading player in substrates sort of have yield issues in the last quarter or two and it was great to hear you reiterate the confidence of 40% internal substrates over the next year. Could you just walk me through, what gives you — how can you be so confident, I guess, in your ability to both medium term and longer term, get access to substrate and particularly given some of your peers are going full vertical, others are going the other end in placing bets all over the place with multiple suppliers. It would just be great to hear an update on your view of silicon carbide substrate supply? Thank you.

Jean-Marc Chery — President and Chief Executive Officer

I would like to comment, let’s say, in the planning or reason of three to five years and to confirm what is our overall strategy. Again on substrate initiative, our intention was to, let’s say, build an internal source in order to warranty to any customer with whom we have a strategic agreement, let’s say, some security of the supply chain. We have seen during the past few years that some issues could occur. And one of the lesson learned, we have taken, this silicon carbide is so key enabling technology for the electrification of the machine and the decarbonization of the industry that we consider that towards our strategic independence to our key customer was that a key initiative of us.

Then the second objective to acquire internal capability on this substrate initiative is R&D and efficiency. We want to be, let’s say, not dependent to anybody to move our projection to 200 millimeter and we do not want to be dependent to anybody to strong innovation in our substrate initiative. As an example, the SmartSiC technology from Soitec. So now ST will be equipped very soon with all this internal capability through our first strategic independence to our customer and to derive in a self management mode our efficiency and innovation. So this is what we want during now and the next five years. Well, beyond this horizon, we will see, which complementary partnership or open partnership we can do. ST is not a company closed partnership. I would like to recall GlobalFoundries partnership, [Indecipherable] partnership. So ST is perfectly open to any manufacturing cooperation and agreement, but it’s too early to speak about that.

Celine Berthier — Group Vice President, Investor Relations

Thank you very much.

Joshua Buchalter — Cowen & Company — Analyst

Thanks for all the color.

Celine Berthier — Group Vice President, Investor Relations

Thank you. Next question please.

Operator

The next question is from Francois Bouvignies from UBS. Please go ahead.

Francois Bouvignies — UBS — Analyst

Hi, thank you very much. I have two quick ones. So first one is on, maybe microcontrollers has been a big driver in 2022 and seems to be still in Q1. Can you give some color around the dynamics in microcontrollers, specifically that has been constrained for the last few quarters? I mean, it looks like inventories are going up significantly. So what do you see in terms of supply/demand and pricing dynamic inventories for microcontroller specifically even though you assume pricing to be flat on average, but would be very interesting to have your microcontroller view specifically?

And the second question I had is on silicon carbide. It’s actually to confirm the 40% substrate in-house for, I think it was 2024. Jean-Marc, I was not sure, I understood you answer. I mean do you still target 40% next year or it’s maybe more like a three, five years aspiration now, just wanted to clarify that point? Thank you.

Jean-Marc Chery — President and Chief Executive Officer

It’s by 2024, means, by Q4 2024, we would like to have 40% internal production.

Francois Bouvignies — UBS — Analyst

Okay. And it’s 200 millimeter or 150 millimeter —

Jean-Marc Chery — President and Chief Executive Officer

I think it will be 150 millimeter at early stage and step after step we move to 200 millimeter.

Francois Bouvignies — UBS — Analyst

Clear. Good clarification. Thanks.

Jean-Marc Chery — President and Chief Executive Officer

On MCU, the markets remain strong overall. We have spoken about the STM32, I guess, general purpose. So the market remains very strong. Overall, I have spoken then, okay, I will give maybe some specific around. Yes, the demand, the capacity and inventories has started to be more balanced clearly. And the lead time are starting to reduce, step after step in certain product family and your pricing is stable. But we are still, let’s say, capacity constraint. It’s ultra-performing microcontroller for industrial application, for B2B application because of this ultra-performing microcontroller or which sometimes including, let’s say, connectivity, security and AI are in competition with microcontroller for automotive. That’s basically the same 40 nanometer technological capacity. And year-over-year, we are still on, let’s say, important capacity saturation lead time, which are, let’s say, quite above normal situation, and in certain extent some allocation. For the mainstream microcontroller STM32, for the ultra low power microcontroller STM32, we are moving step after step to a more normal situation. But I’ll repeat with still strong demand and pricing of 11 months, which is stable. What is there is, let’s say, go to market share value.

Francois Bouvignies — UBS — Analyst

Thank you so much.

Celine Berthier — Group Vice President, Investor Relations

Thank you very much. Next question please. I think we have time for one or two questions depending of the length of the question and answer for the next sub question and then we will adjust.

Operator

The next question is from Sandeep Deshpande from JPMorgan. Please go ahead.

Sandeep Deshpande — JPMorgan — Analyst

Yeah, hi. Thanks for having me on. Two or three questions, if I may quickly. Jean-Marc, you’ve had a great guidance for the full year, and you are highlighting that in the second half there is some mix shift with your main consumer electronics customer. So essentially, it looks like all your growth for the year is coming from the automotive/industrial space. Is that correct? And I would like to understand, what is exactly happening, because you mentioned in an earlier question that there is some shift happening in terms of the consumer electronics customer in terms of the part? I’d like to understand that and I have one quick follow-up.

Jean-Marc Chery — President and Chief Executive Officer

Yes. What I would like to confirm, okay, that in 2023 completing the plan we disclosed to you at the mid-point, our company will have about 70% of our revenue generated by automotive and industrial market, and about slightly above 30% from personal electronic and communication equipment and computer/peripheral. But it is perfectly aligned with a $20 billion ambition that we shared with you at the Capital Markets Day. This is exactly what we want to do. So this, yes, I confirm in 2023, we will finish the year in a mix in term of vertical exposure, which is a strategic target we set up at the management team during the Capital Markets Day. Well, then here, I repeat, on the personal electronic, overall moving forward along the year, we have a mix change in the important engaged customer program. Again this mix change will translate in less revenue year-over-year, the better gross margin generation. This is what I can confirm to you and this will happen smoothly moving forward across the year.

Sandeep Deshpande — JPMorgan — Analyst

Understood. Thank you. And just quick follow-up on manufacturing I have. I mean how much of your production in ’22 was 300 millimeters and going forward with your ramping up of Agrate, how should we look at that 300 millimeter as percentage of your production in ’23 and then in ’24?

Jean-Marc Chery — President and Chief Executive Officer

It was, let’s say, slightly above 25%.

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

Internal. We are talking about internal only.

Sandeep Deshpande — JPMorgan — Analyst

And Jean-Marc, is it because there was some conversation earlier on the margin mix because of the ramp up of the Agrate fab that there will be some negative impact on gross margin in the second half of this year but will it be accretive in ’24?

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

Yes, definitely. Of course, in the course of this year in 2023, we will not be in a scale for our 300 millimeter in Agrate, such as that will be accretive at the level of our gross margin, because at the end, as we said, we will end the year with 1,000 wafer per week, still it’s too low. And you know that our priority is to grow as fast as we can in this. In 2024, our expectation is that we will start to be neutral to our gross margin, and then in the second part of next year to be accretive as we target to increase this capacity along the 2024. This year, no, it will not be, let’s say, accretive to our gross margin. This is one of the reason that you see that irrespective to the starting point of our gross margin in the first quarter, we have no opportunity to improve over the year. And our average for the full 2023 will be close to 47% similar to the one that we had in 2022.

Sandeep Deshpande — JPMorgan — Analyst

Understood. Thank you so much.

Celine Berthier — Group Vice President, Investor Relations

Thank you very much, Sandeep. And now we have time for one last question.

Operator

Today’s last question is from Andrew Gardiner from Citi. Please go ahead.

Andrew Gardiner — Citi — Analyst

Good morning. Thank you for squeezing me in at the end here. Lorenzo, perhaps one for you. You normally give us a update in terms of your operating expense outlook. If you could help both in terms of first quarter as well as how you see things trending through the year? And then a quick follow-up after that if you don’t mind. Thank you.

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

In term of expenses, net operating expenses actually in the first quarter are expected to increase in respect to our Q4 operating expenses. And this is mainly due to negative impact over the calendar because during Q4, we have, let’s say, vacation at the end of the year, as you know very well the Christmas period. We have increase of activity. We have also some unfavorable currency effect in this quarter in respect to the previous quarter. We have also to consider that we will have a negative impact in the line other income and expenses. There are two reasons for that. One I was explaining before is due to the start-up costs that we account in this line. And the second reason is that we do expect in Q1 a lower level of R&D income grants, let’s say, due to the fact that for administrative reason we are not in the position to recognize, let’s say, all the amount of R&D grants in Q1. Most likely, there will be a catch-up in Q2 of these R&D grants due to the renewal of the various convention with the various authorities. So at the end, when we look at the Q1, our net operating expenses including other income expenses should fall in the range of $900 million to $950 million.

Andrew Gardiner — Citi — Analyst

And then in terms of how you think that trends through 2023?

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

Well, for the year 2023, let’s say I would say that this year will be a year of quite a significant, let’s say, investment in terms of R&D, in terms of activity, in terms of, let’s say, digitalization of our company. So we have many programs running. I would say that at mid-point, while in 2022 we enjoy a significant, let’s say, leverage on our expenses, my expectation is that, let’s say, in 2023, we will not enjoy a significant leverage on our expenses at the mid-point of our revenues indication.

Andrew Gardiner — Citi — Analyst

Okay. So steady as a percent of sales on ’22?

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

Yeah.

Andrew Gardiner — Citi — Analyst

Okay. And if I could just squeeze a quick follow-up in, back to the Personal Electronics question. If I go back to, how you guys framed the outlook for ’23 back at third quarter, you’ve given us an initial indication of growth and you said at that time that you thought you can grow across all three divisions in 2023. As we start the year here in January, you’re now saying no, AMS is going to be down driven by this reframing of the personal electronics relationship. Have something materially changed in the last few months? You know that’s driving this mix towards lower revenue, but higher gross margin, it feels like it’s more socket changed in any pricing dynamic because it was pricing on a similar path, gross margin logically wouldn’t move up. So is there anything more you can add to that? Thank you.

Jean-Marc Chery — President and Chief Executive Officer

I mean, yeah, there is two points. Point number one is the usual seasonality of Q1 of the personal electronic overall. This is not a surprise. And again what I commented of the mix change with an important engaged customer program is absolutely not a sub-point.

Andrew Gardiner — Citi — Analyst

Okay. That’s all you can say. I understand. Thank you very much, guys.

Celine Berthier — Group Vice President, Investor Relations

And just to clarify, because we had the question from [Technical Issues] the amount of net OpEx for Q1 is the $900 million —

Jean-Marc Chery — President and Chief Executive Officer

$915 million.

Celine Berthier — Group Vice President, Investor Relations

Exactly.

Jean-Marc Chery — President and Chief Executive Officer

I take some time cushion during these. But this time, it is little bit too much.

Celine Berthier — Group Vice President, Investor Relations

So with this thank you very much.

Jean-Marc Chery — President and Chief Executive Officer

Thank you, everybody and Happy New Year for Everybody.

Lorenzo Grandi — President, Finance, Purchasing, ERM & Resilience, Chief Financial Officer

Thank you.

Operator

[Operator Closing Remarks]

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