STMicroelectronics NV

PAR:STMPA

Earnings Call Analysis

STMicroelectronics Reports Q3 and Forecasts Q4

In Q3 2023, STMicroelectronics' net revenues rose to $4.43 billion, a 2.5% increase year-over-year, led by Automotive's growth, offset by weaker Personal Electronics revenue. Gross margin remained stable at 47.6%, operating margin fell to 28%, and net income held steady at $1.09 billion. Q4 outlook expects a 3% decrease in net revenues to about $4.3 billion and a gross margin of approximately 46%. The 2023 full-year forecast anticipates a revenue growth of 7.3% to $17.3 billion, with a gross margin of 48.1%.

Revenue Growth and Margins Forecast

The company's guidance for Q4 translates into an overall positive forecast for 2023, with net revenues projected to hit around $7.3 billion. This reflects a healthy 7.3% growth from the previous year. Gross margins are also expected to be robust at about 48.1%. This uptrend aligns with the expectations set back in late July, despite a minor adjustment driven by slower order realization in the industrial market of Asia, specifically affecting the $100 million difference at the midpoint of projections.

Challenges in the Industrial Market and Q4 Outlook

Trouble has been brewing in the industrial segment, particularly within the Asian market. Heading into Q4, a notable slowdown in order bookings—primarily for general-purpose microcontrollers—did not meet the company’s expectations. However, the company pointed out a return to normalcy in terms of lead time and capacity utilization across the semiconductor industry. The visibility into the next year remains strong for the automotive sector due to committed programs with key accounts, but for industrial markets, especially concerning mass-market distribution and OEM, the forecasts are more reserved and dependent on Q4 performance and inventory adjustments.

Inventory Management and Operational Expenses

Inventory levels are projected to decrease, settling between 100 and 110 days by year-end, pointing to a disciplined approach to inventory management. On the operational front, expenses are expected to rise slightly in Q4 to between $950 million and $960 million, owing, in part, to a reduction in R&D grants compared to Q3, and typical seasonal shifts. Over the full year, however, the average quarterly net operational expenses (OpEx) should average between $925 million and $930 million. Going forward, the company is committed to tightly managing operating expenses while continuing to safeguard its R&D and digital transformation initiatives.

Capital Expenditure and Leadership Continuity

The capital expenditure (net CapEx) for 2023 remains on track at approximately $4 billion, which demonstrates the company's commitment to investing in its future growth. Additionally, there's an impending leadership vote at the next Annual General Meeting, with a proposal for the current President and CEO's reappointment, signaling potential continuity at the helm as the company navigates the evolving business landscape.

Earnings Call Transcript 2023-Q3

[Celine Berthier, executive]

Good morning and thank you, everyone, for joining our third quarter 2023 financial results conference call. Hosting the call today is Jean-Marc Chery, ST's President and Chief Executive Officer. Joining Jean-Marc on the call today are Lorenzo Grandi, our Chief Financial Officer; and Marco Cassis, President of Analog, MEMS and Sensors Group and Head of STMicroelectronics Strategy, System Research and Application Innovation Office.

This live webcast and presentation materials can be accessed on ST's Investor Relations website. A replay will be available shortly after the conclusion of this call.

This call will include forward-looking statements that involve risk factors that could cause 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. [Operator Instructions]

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

[Jean-Marc Chery, executive]

Thank you, Celine. Good morning, everyone, and thank you for joining ST for our Q3 2023 earnings conference call. Let me begin with some opening comments.

Starting with Q3. So third quarter net revenues of $4.43 billion came in above the midpoint of our business outlook range, and Q3 gross margin of 47.6% was 10 basis points above guidance. Q3 net revenues increased 2.5% year-over-year. As expected, the revenue performance was driven mainly by continued growth in Automotive, partially offset by lower revenues in Personal Electronics.

Looking at our year-over-year performance. Gross margin remained stable at 47.6%, while, as expected, operating margin decreased to 28% from 29.4%. And net income was stable at $1.09 billion. For the 9-month period, net revenues increased 11.1% year-over-year to $13 billion driven by growth in the ADG and MDG product groups and partially offset by a decline of the AMS product group.

We reported gross margin of 48.7%, operating margin of 27.6% and net income of $3.14 billion.

On Q4 2023, our fourth quarter business outlook is for net revenues of about $4.3 billion at the midpoint declining year-over-year and sequentially by about 3%. Gross margin is expected to be about 46%. For the full year 2023, the midpoint of our Q4 guidance translates into revenue growth of about 7.3% to $7.3 billion with a gross margin of 48.1%.

Now I will move to a detailed review of the third quarter. Net revenues increased 2.5% year-over-year. This performance was driven mainly by ADG and continued strength in Automotive and to a lesser extent, by MDG. As expected, AMS revenue decreased mainly reflecting lower revenue in Personal Electronics. This includes the impact of the change in product mix in an engaged customer program in Personal Electronics that I first mentioned in January.

Year-over-year, sales increased 2.1% to OEM and 3.4% to distribution. On a sequential basis, net revenues increased 2.4% with ADG up 3.6%, AMS up 5.3% and MDG down 1%. Net revenues came in 130 basis points above the midpoint of our outlook, mainly reflecting higher sales than expected in Personal Electronics.

Gross profit was $2.11 billion, increasing 2.4% year-over-year. Gross margin of 47.6% was stable year-over-year, and improved product mix was offset by higher manufacturing costs and unused capacity charges.

Year-over-year, third quarter operating income decreased 2.4% to $1.24 billion. Operating margin was 28%, decreasing by 140 basis points versus 29.4% in the year ago quarter. This was due to higher OpEx-to-sales ratio as we continue to invest in innovation and in the digital transformation of the company. On a year-over-year basis, both net income and earnings per diluted share in the quarter were stable at $1.09 billion and $1.16, respectively.

Looking at the year-over-year sales performance by product group. ADG revenues increased 29.6% on a double-digit growth in both the Automotive and Power Discrete subgroups. AMS revenues decreased 28.3% with lower revenues in the 3 subgroups. MDG revenues increased 2.8%. Revenues grew in RF communication and were substantially flat in the Microcontrollers subgroup.

In terms of operating margin by product group on a year-over-year basis. ADG operating margin increased to 31.5% from 25.9%. IMS operating margin decreased to 18.8% from 27.2%, while ADG operating margin decreased to 35.1% from 36.7%. Net cash from operating activities increased to $1.88 billion in Q3 versus $1.65 billion in the year ago quarter.

Net CapEx in the third quarter was $1.15 billion compared to $955 million in the year ago quarter. Inventory at the end of the third quarter was $2.87 billion compared to $2.38 billion in the year ago quarter. Days sales of inventory at quarter end was 140 days compared to 126 days in the previous quarter and 96 days in the year ago quarter. Free cash flow was $707 million compared to $676 million in the year ago quarter.

During the third quarter, ST paid $58 million of cash dividends to stockholders, and we executed an $87 million share buyback under our current share repurchase program. ST net financial position of $2.46 billion as of September 30, 2023, reflected total liquidity of $5.05 billion and total financial debt of $2.59 billion.

I will now go through a short update on some of our strategic focus areas in Q3. First, wide bandgap semiconductors. We began volume production of gallium nitride transistors, which simplifies the design of high-efficiency power commercial systems. We support the development of safe and reliable wide bandgap power systems for high-power applications with industry-leading galvanically isolated drivers. In the quarter, we introduced new STGAP products, specifically designed for PowerGaN transistors based on ST unique IP and advanced BCD technology.

In silicon carbide, we continue to increase the number of engagements. We are now working with 94 customers and 150 projects, up from 90 customers and 140 last quarter, which here range from electrical vehicle applications, such as onboard chargers to power module, its solar power system. We confirm our revenues for silicon carbide products will reach about $1.2 billion this year.

In car digitalization, we saw continued design win momentum with our latest generation of automotive microcontrollers called Stellar across key applications. These include design wins in zonal modules for software-defined vehicle architectures and in next-generation battery management systems in partnership with major carmakers.

In ADAS, the EyeQ6 project with Mobileye is progressing to plan with early volume ramp-up this year. We have also seen strong market interest in ST high-precision GNSS solution, Teseo, adapted for ADAS systems.

At the end of September, we held our annual Industrial Summit event in China. We do over 1,300 customers in person and over 50,000 participating online. The theme of this year's event was powering new sustainable innovation and was focused on helping customers address climate-related challenges. We showcased 150 demos in 3 market segments, automation, power energy and motor control, where ST has created dedicated competence centers located close to our customers.

The registration of new designs in distribution we are receiving for our flagship STM32 family is increasing year-over-year on all our products, including matured. This is a really positive indication of the market total appetite for our products.

Moreover, we released the first ST cellular narrowband IoT ultracompact and low-power modules, combining cellular IoT connectivity and geo localization capabilities for wide-ranging IoT, smart metering and industrial application. We further enlarge the reach of application and new scale for industrial customers by introducing new products, such as time of flight and thermal MOS infrared sensors as well as the third generation of inshore sensors.

To support our strategic focus areas in number processing. We have new ecosystem tools towards STM32 family. We also continue to expand our engagements with customers to deploy HAI for a growing range of use cases. This is based both on our extensive to see allowing porting of AI algorithm to our existing MCU portfolio as well as the Alpha customer engagements for our latest neural processor-enabled MCU.

To conclude this review in our radio frequency communications business, we are continuously expanding our strategic collaboration on specific targets, which provide high-speed Internet connectivity to a growing customer base in more than 60 countries around the world. They are ramping up their next-generation products, which leverage our [indiscernible] processes as well as innovative and highly differentiated packaging technology.

Now let's move to our fourth quarter 2023 financial outlook and our plans for the full year 2023. For the fourth quarter, we expect net revenues at the midpoint to be about $4.3 billion, representing a year-over-year and sequential decline of about 3%. Q4 gross margin is expected to be about 46% at the midpoint, including about 130 basis points of unused capacity charges.

For 2023, our Q4 guidance at the midpoint translates into 2023 net revenues of about $7.3 billion. This represents growth of about 7.3% year-over-year with a gross margin of about 48.1%. The $7.3 billion is consistent with the indicated range we provided late July. The $100 million difference at the midpoint relates mainly to the industrial end market in Asia where the level of orders materializing towards the end of Q3 to learn of our Q4 backlog has been below our expectation. We confirm our 2023 net CapEx plan of about $4 billion.

To conclude, in September, the Supervisory Board asked me to be available for reappointment as a sole member of the Managing Board and President and CEO. I was very honored and pleased to accept the proposal. This will be proposed for shareholder approval at ST's 2024 Annual General Meeting of Shareholders.

Thank you for your attention, and we are now ready to answer your questions.

[Operator]

The first question comes from the line of Didier Scemama with Bank of America.

[Didier Scemama, analyst]

Maybe just a couple of questions, Jean-Marc, if I may, on Q4. If you could give us a sense of the various end markets. We're hearing obviously, weakening demand in industrial. I think in a conference earlier this year, you mentioned that you were fully booked for autos for 2024. So I wondered whether you could maybe talk also about the rest of the business next year. Any sort of early indication on revenue growth and also gross margins?

[Jean-Marc Chery, executive]

Well, for Q4, I repeat, clearly, we have seen on the industrial market, especially in China -- Asia, China, that the order booking, okay, entering in the lead time window were not materializing at our expectation. And it has mainly impacted the general-purpose microcontroller. But this is for Q4. But now, okay, we have to acknowledge altogether that we went back to normal in terms of lead time and capacity utilization for this kind of device and for semiconductor industry except very few product lines like silicon carbide as well.

About 2024, well, clearly, we have very good visibility for 2024 for Automotive. And for all, I have to say, the engaged customer program with our global strategic key accounts. Everywhere, we have, let's say, a custom-design product or where we have proliferated our product.

Model for, let's say, industrial market, both mass-market distribution and OEM. But now the visibility is limited. And for sure, customer, let's say, wait to the to put order, okay, when they are in the lead-time window. So we have to monitor very carefully the net in Q4 to understand, okay, or will be, let's say, next year for mass-market industrial, both for OEM and distribution.

Well, if you want to classify next year very simply, but we are convinced that Automotive will go definitively because we have the visibility. And again, okay, the demand will be driven by the mobility, by the digitalization, by the pervasion of, let's say, the electronic in legacy application or it is based on the production volume that will remain around 85 million, 90 million vehicles.

We do believe that for Personal Electronics, we touched down some bottom in Q4 and next year, like-for-like because, okay, again, we have to remove the optical modules still present in '23. Like-for-like, okay, we will slightly grow. Well, then again, on industrial, the mass market and distribution, it's a bit early. So we have to monitor carefully what is happening in Q4 in terms of inventory. But it is clear that discussing with some customers, okay, they are assessing their end demand, they're assessing, okay, their inventory level. And this could also trigger some inventory correction both in Q4 and maybe early next year.

[Didier Scemama, analyst]

Okay. Very well. And on the under loading of the fabs in Q4, is that -- where do you think your inventories will end up at the end of this year? And do you expect the under loading of fabs to carry on into the first half?

[Jean-Marc Chery, executive]

So I'll let Lorenzo to answer.

[Lorenzo Grandi, executive]

Good morning, everybody. In respect to this quarter, we do expect, let's say, at the end of the year to be substantial in terms of inventory in the range of between 100 and 110 days, in the midpoint, 105 or something like that. So there will be a further decline in our inventory during this quarter. This, of course, is triggering as it's been already done in Q3 some unloading charges. These unloading charges in this quarter will impact, of course, our gross margin are fully embedded in our guidance.

But as I said, for sure, let's say, for the gross margin of the evolution of the loading in respect to the next year, a lot will depend from what Jean-Marc said about the evolution of the market order entry for the industrial market. But we expect still some unloading charges continuing at least for the first half of next year.

[Operator]

The next question comes from the line of Andrew Gardiner with Citi.

[Andrew Gardiner, analyst]

Just following on the cost side of things. Lorenzo, obviously, you've given us some clarity in terms of unloading and how you expect gross margin to track. But given how the end market is shaping up at the moment, what are your plans in terms of OpEx, I suppose, specifically for fourth quarter? Can you help us there in terms of the breakdown? And then perhaps just more generally into 2024, again, I understand you don't want to quantify things too much, but just sort of your initial thoughts in terms of OpEx trends into next year would be helpful as well.

[Lorenzo Grandi, executive]

Thank you for the question. In this quarter, the OpEx -- let's say, last quarter in Q3 OpEx came quite low in respect also to our expectation. But this is mainly driven, let's say, by the seasonality of Q3. You know that in Q3, we are impacted -- positively impacted in terms of cost by the vacation period, especially in Europe.

Now looking at the current quarter. Our expectation in this quarter to have OpEx ranging between $950 million, $960 million. This is including, I remind you always, the other income and expenses. So let's call it net OpEx. This is increasing compared to the previous quarter, compared to the Q3. There is a lower level of grants -- R&D grants. I remind you that the level of grants in Q3 was quite high, also because there was a catch-up over the previous quarter for grants that were possible to be recognized during Q3.

And then for sure, Q4 has, let's say, unfavorable seasonality in respect to the previous quarter. Well, this means that for this year, our average quarterly net OpEx will be something between $925 million and $930 million when we look at the full year.

For next year, of course, our OpEx will be in line with respect to the business evolution. We will maintain control on our operating expenses. For sure, we will continue to protect our R&D, and we will continue to protect our digital transformation programs.

[Andrew Gardiner, analyst]

If I could also just follow up on the comment you've made in terms of seeing weakness start in the industrial space, particularly in China, and that it's affecting general-purpose microcontrollers. Clearly, I think that brings some flashbacks to September of 2018, where that was a part of the market that started to face troubles as we hit that particular downcycle. Things are a bit different this time around. But I'm just wondering how you're handling things, what you might be able to do a little bit differently this time around given that you're starting to see some of the same signs.

[Jean-Marc Chery, executive]

Compared to -- remember very well, 2018 and 2019. Well, first of all, okay, the overall economic situation and world is rather different. Here, I can only say fact, okay. Again, the dynamic in Q3 of order, when customers, okay, acknowledge the fact that they are entering the lead-time window were below our expectation. This is the fact number one.

Well, fact number two, yes, we discussed with our customers, OEM and distributor, especially in China. But this is also overall a bit global dynamic. We see our customers that are really reassessing their end demand. They are revisiting their sales and operating plan. And of course, okay, as we supported well from supply chain point of view, since, okay, Q4 2022, of course, okay, they will certainly readjust their inventory.

Then again from the other side for the industrial market, okay, clearly -- and that's the reason why I mentioned, okay, the registration STM32. The demand, okay, will be clearly driven by all application related to renewable energy generation, energy storage, power conversion, charging infrastructure for e-mobility, more factory automation and motor control, which are more related to CapEx. Well, this will be related to the overall economy. So that's the reason why we have to monitor it.

More consumer application for the time being are still weak, okay, and discussing with our customers. They don't expect, okay, to have a strong recover before Q2 next year. So this is the situation that we have to monitor. And now, we know to do it, okay. We clearly monitor the order entry. We adapt our supply chain. And for sure, entering in generally, we will have a better visibility and moving forward as well.

[Operator]

The next question comes from the line of Joshua Buchalter with TD Cowen.

[Joshua Buchalter, analyst]

I wanted to ask about gross margins also. So I think last quarter, you had called out mix, start-up costs and underutilization as driving the sequential decline. As we go from the third quarter to the first quarter, is it all underutilization charges? Or are mix and start-up also playing a role here? And then as we think about exiting the year, you should have inventory at your target, but the first quarter is seasonally down. And so I'm wondering how would underutilization charges trend in the first quarter of the year under that dynamic where you're at your inventory level, but you're also seasonally down.

[Lorenzo Grandi, executive]

No. As I was saying also before, yes, for sure, in Q4, we are impacted by some underutilization. You remember that we were preparing the year in the first half of 2023, let's say, expecting a stronger second part of the year -- second half of the year. So that was the reason why we were creating some inventory in order, let's say, to serve this expected demand that at this stage did not materialize, as you see from our guidance of the second half.

So this is the reason why we put under control our inventory. This is creating some unloading charges that we have in the second half of the year impacting our gross margin, bringing back to the level of days of inventory, as I was saying before, our, let's say -- I would say, standard normal level by year-end. It's something, as I said before, that will be ranging between 100 and -- max 100, but I think it will be closer to 100, 105 days of inventory.

Moving on the next quarter in Q1 and in the first half, but a lot will depend on how the order entry will materialize during this quarter on especially for the industrial market. Because as was said that for Automotive, we have a quite clear visibility. Where, let's say, the visibility is less is on the industrial.

But our expectation and still we will have some level of unloading in Q1 and probably also something in Q2. And the level of unloading in Q1 will be probably similar to the one that we have in this quarter.

[Joshua Buchalter, analyst]

For my follow-up, I wanted to ask about silicon carbide. There's concerns given some slightly weaker commentary in your lead customer that silicon carbide growth could slow. Could you talk about the diversification efforts that you're undergoing? And in particular, how is your visibility into both -- into substrate supply, both externally and your internal vertical integration efforts going for next year?

[Jean-Marc Chery, executive]

For us, next year would be, let's say, a step ahead, consistent with our objective to deliver $2 billion in 2025. And so we have the capacity installed. We have the supply chain secure. And we have the customer base and backlog consistent with this objective. And I will communicate, okay, at Q4 earnings and in January, the objective of silicon carbide revenue we would have next year. But be sure it will be a consistent step with the $2 billion objective of 2025.

[Operator]

The next question comes from the line of Sandeep Deshpande with JPMorgan.

[Sandeep Deshpande, analyst]

I have 2 questions. Firstly, this is the first quarter that we are seeing since the whole COVID period that you're seeing a year-on-year decline in terms of your guidance in the fourth quarter. How do you see this progressing? Clearly, you've seen the softness in the industrial space. First quarter is typically also a seasonally weak quarter for you. How do you see this progress on a quarter-to-quarter basis in the first and second quarter? Will you go back to growth in the first or second quarter of the year on a year-on-year basis?

And then my second question is regarding the mix of the product into next year as that really. Now you've lost some business in Personal Electronics, and maybe that goes up a little, as you said. But Automotive will be a larger part of it. So will the mix overall help the gross margin into next year? Or is it that the underutilization charges continue and so that the gross margin is more going to be driven by underutilization charges rather than product mix?

[Jean-Marc Chery, executive]

Thank you, Sandeep, for your question. So for next year, I repeat what we see. Again, for the visibility is very clear, again, on Automotive and where we will grow next year. And on the -- every quarter, we will grow year-over-year, I have to say. For Engage customer program, it's exactly the same. And I repeat with our strategic accounts, so whatever are related to Personal Electronics but also to communication equipment, where we have all this important program. So we have the full visibility.

And again, on Personal Electronics, like-for-like, okay, we should grow. Communication equipment and computer peripheral, now here, I have to say that next year will be a transition year because we will think also step by step our legacy activity where we want to be no more present. It is basically enterprise communication. But we will accelerate with our Engage customer program with SpaceX, Starlink and the other opportunity we won.

Well, the important question is mass-market distribution and industrial OEM. But you know this market is fragmented. Yes, Q4 is a sign that, again, I repeat, we discuss with customers. They are revisiting assessing their end demand because it is related to the overall economy. It is related also to the Automotive. Of course, okay, making the shipment, it could trigger some statutory adjustments for inventory adjustment. It's difficult now to assess how long it will last. So this is what I can say. That's the reason why I say very candidly that Q4 for industrial and mass market will be very key to understand the dynamics. So this is what I can say at this moment.

[Celine Berthier, executive]

And there was a question on the group.

[Lorenzo Grandi, executive]

The mix, I think, somehow Jean-Marc was answering giving us some color. Of course, let's say, no doubt that when we look the industrial market for us is very accretive. So it means that depending on the way that this will evolve will, of course, being positive for our gross margin in respect to the -- what is now in Q4.

With respect to Personal Electronics, well, here, actually, we have not lost anything here. The reality is a change of the architecture, which we are present. So it means that at the end, we have not any longer the optical module. But we have, let's say, silicon inside. For us, it's positive in terms of gross margin mix. And let's put in this way, not in the revenues, of course, because the is different. But definitely in terms of the gross margin is positive.

[Celine Berthier, executive]

Okay. Did we answer your questions, Sandeep?

[Sandeep Deshpande, analyst]

Yes.

[Operator]

The next question comes from the line of Aleksander Peterc with Societe Generale.

[Alexander Peterc, analyst]

My first question would be really on what we should expect on the price fronts. Usually, if I remember well, you had in the first quarter some customary price declines every year. So that was a little bit of a pressure on gross margins in Q1. That didn't really happen in this year because of the general price increases. But is the normal pricing pattern sector return in '24 in the first quarter? And then I have a quick follow-up.

[Jean-Marc Chery, executive]

Now about price, okay, and Lorenzo will comment, okay. What I can say, basically, I already said in April. We saw some price effect, okay, in distribution, which is normal, okay. When you go back normal, let's say, situation in terms of supply, POS, POP that you are well balanced, okay, between demand and offer. You go back to normal, let's say, price effect, okay. Let's say, low single digits on a yearly basis, okay?

We know it, okay. Everybody know it. This is something which is attacking the semiconductor industry. So generally speaking, it starts on distribution. So we have seen it in April, okay? We see it in Q3, and we will see it in Q4, clearly. Then for the rest, okay, there is no specific, okay, price effect and price pressure from customer. We have contract, okay. We have new products, okay, we have engaged customer program. There is no surprise, okay? There is coming back to a normal situation. More than that, okay, I cannot comment.

[Alexander Peterc, analyst]

And a quick follow-up. Just on Automotive, where you have very good visibility. Can you tell me if excluding silicon carbide, is your Automotive business set to grow meaningfully next year or not?

[Jean-Marc Chery, executive]

Yes.

[Alexander Peterc, analyst]

Meaningfully? Okay.

[Jean-Marc Chery, executive]

Yes. well understood. So if I remove silicon carbide, yes.

[Operator]

The next question comes from the line of Francois Bouvignies with UBS.

[Francois-Xavier Bouvignies, analyst]

So I wanted to follow up on Alek's question on Automotive. I mean, this quarter, you delivered 30% growth. I mean, if you look at TSMC, it was down 11% year-over-year, recalling that the industry is going through an inventory correction. And also, I'm sure you saw as well the macro data with OEMs. Orders for auto is coming down significantly, especially in Europe.

We also saw GM and Honda with pushouts of EVs. So it seems to be very different than what you report and also what you say into next year, what you just said. So I'm just wondering, do you see anything? Or is your guidance factoring some maybe EV penetration slowdown into next year? Because I guess it's something that you would see that happening. Or it's just your lead times so long that basically you don't see it yet? I'm just trying to reconcile basically what we see on the ground and what you are delivering and how it can be disconnected, if you see what I mean.

[Jean-Marc Chery, executive]

Perfectly. I see there is no disconnection. Now if your question is this year, basically at 17.3%, the Automotive segment we support basically will grow 36%. Well, clearly, also embedded in this fantastic growth, but there is a specific item which are related to the period of shortage that ST has benefited in 2023 was a capacity fee reservation and which is quite material.

However, even if you remove this effect on our growth performance, our Automotive segment in 2023, okay, basically will grow 28%. So next year, I have to say that this capacity fee reservation will be still present, but in, let's say, less order of magnitude than 2023. And it's normal because, okay, exceptional product line. Now we have the capability to better support the carmaker through the Tier 1 or directly.

Well, then the Tier 1 and the carmaker, they are acknowledging as well that we are reducing our lead time and reducing our lead time. But step after step, okay, we could see booking order with a book-to-bill below 1 on Automotive, simply the fact that they will stop to load 18 months in advance and 24 in advance. And we could anticipate that in 2025, okay, instead to have a 100% backlog coverage, we will be maybe 80% backlog coverage. So this is a trend we are seeing, point number one.

Point number two, well, I'm sorry again, with all the respect I have with TSMC, they have a partial view of automotive, okay? We have the full spectrum of product portfolio to see what is happening in automotive. And I confirm to you that except so like-for-like without the silicon carbide, we will grow. For sure, we will not grow at 28%. We will grow significantly but not at 28%. This I can confirm to you.

So as a takeaway, I can tell you that, yes, next year, we will have a little bit benefit less on capacity fee reservation. We will see our customers acknowledging our capability in '24 to better deliver with shorter lead time. So normally, they are booking will, let's say, a decline in order to adjust themselves to this fact. So we will expect to enter in '25 with 80% coverage on Automotive. So this is the point number two.

Point number three, we will grow overall in '24. And it is based on stable production car volume that we consider around 85 million. But yes, the feedback we have from our customers and the feedback there is from analysts is next year is more than 90 million vehicles produced. This is not the base of our forecast.

But then point number 3, I repeat, okay, this year is 11 million to 12 million of battery-based electrical vehicle. Next year, we can expect, okay, to go well above 15 million again. So this will call for a big demand for power electronics and micro. Then, okay, you have the change of architecture that are coming from the old definitively. And then the customer, having acknowledged that we can better supply, they come back to better sophistication of the legacy. So there is more and more semiconductor and electronics in legacy applications. So all in all, this is building a scenario for next year of growth for Automotive, for ST, taking into account the portfolio we have.

[Francois-Xavier Bouvignies, analyst]

Great. Very clear, Jean-Marc. And maybe my follow-up would be on the CapEx. I mean, as we see the orders, I mean, excluding autos, a bit uncertain and the utilization charges, how do you think about the budget of your CapEx next year? And obviously, I don't expect you to give your CapEx. I mean you can if you want. But is it something that you review given the current situation that maybe delay some of the project or CapEx? I mean, how flexible do you want to be on your CapEx side given the current environment? That's -- yes, that's the second question.

[Jean-Marc Chery, executive]

No, I mean we are running, let's say, every 2 months, okay, let's say, 2 years SNOP with different scenario and so on and so forth. I can confirm to you that we have the flexibility, okay, to adjust our CapEx. And yes, in some circumstances, okay, where there is, okay, not on Automotive, I let not on our global key account engage customer program but on mass-market distribution and, let's say, small OEMs, some uncertainty that we have to monitor that the CapEx we will spend next year will be below the CapEx we have spent this year.

[Operator]

The next question comes from the line of Stephane Houri with ODDO BHF.

[Stephane Houri, analyst]

Actually, the question is about the Chinese market and the competition you may face there because if you listen to the large equipment manufacturers, basically, they are selling a lot of machines, and those machines are probably going to be used to manufacture to build chips for automotive. So how do you see this happening? Is it putting a bit more pressure? Is it changing your plans? And I have a follow-up.

[Jean-Marc Chery, executive]

Let's thank you, Stephane. I think I sometime already answered this question. We have initiated now since 2 years, some, let's say, diversification in our source of microcontroller but analog as well, including power analog BCD or silicon carbide, okay, with our joint venture with. We will use the cases -- we will take benefits of this investment done in China to produce, okay, our microcontroller.

And as I said during my address, we are building -- and we have already built, I have to say, an infrastructure in China to support this market. So foundry, we will use local foundry for microcontroller, including paneling some of our technology. We have already built competence center to address the high-growing application, so power energy, motor control, robotics, all this kind of stuff.

So we have reinforced our application engineers. We have a deep relationship, okay, with a distributor for demand creation and they are higher lot of application energy. So -- and then we have our ecosystem of the STM32 that we complete, okay, with all the different feature of connectivity and AI.

So in fact, we will -- we are competing in China like Chinese but stacking our ecosystem and our wide portfolio, which is the widest portfolio of STM32 and against competition, but there is Chinese. But we sole source American. So it's competition, as usual, I have to say. But yes, we have adapted ourselves step after step since 2, 3 years when we have seen this trend to take advantage of the investments that are done in China.

[Stephane Houri, analyst]

Okay. Very clear. And then the follow-up is that maybe you have heard that one of your big European competitor has said that even with a flat car market, they will grow more than 10%, basically. They said low teens. I guess with that with all the things that you -- all the elements that you've given for next year, this statement would apply probably to you also, right?

[Jean-Marc Chery, executive]

I will give you indication only next year.

[Operator]

The next question comes from the line of Jerome Ramel with BNP Paribas Exane.

[Jerome Ramel, analyst]

First question, Jean-Marc, if I look at whatever your SAM is going to be, and I understand the lack of visibility, can you share with us what you think about your own market share trajectory versus your SAM? And the reason I'm asking is because if I look at your Q4 guidance, I think for the first time in maybe 20 years, you have higher review than one of your largest competitors in the U.S. So first, to understand the dynamic of your market share gain for the coming years and how much of that is embedded in your guidance or target of reaching $20 billion revenue between 2025 and 2027?

[Jean-Marc Chery, executive]

Well, thank you for -- to have taken not potentially in Q4 if we deliver the midpoint of our outlook and our main competitor delivers per range, we will be able above. Thank you, it's good, but it is not the most important, okay? Yes, certainly, this year, we'll increase our market share, most likely because we know that WSTS will make a revision in November. So we will see what will be the market. For the time being, as I said, in August, SAM should grow 3.4%. So as by fact, we will grow 7%. So means we will win market share.

We have other indication from India that our SAM, okay, this year will grow 1%. So this is confirming. So when I take this data, I have to say that this year, we will win market share. And again, it has been mainly driven by our capability to grow in Automotive, to grow in silicon carbide. Clearly, $1.2 billion is quite material.

We have taken benefits of this capacity reservation. We have been heavily impacted by the Personal Electronic definitively. But as everybody -- okay, no more than everybody. Until okay, Q3, for sure, the industrial mass market was solid. But now, okay, we are entering this period.

About next year, it's difficult again to say today. But our ambition is to continue to win year after year market share driven by a new product in production, technology, differentiation. Well, yes, I confirm the $20 billion-plus model in terms of revenue. But in the time frame we indicated, '25 to '27. More clearly, '24 will be a transition period to this model, clearly.

[Jerome Ramel, analyst]

And just to make sure, you're confirming also the gross margin target of 50%?

[Jean-Marc Chery, executive]

Yes, we confirm the model, yes.

[Jerome Ramel, analyst]

Okay. And maybe just a follow-up question on silicon carbide. There were the rumors that you might need another silicon carbide fab in the French neater. I don't know if you can confirm or not. But maybe another way to ask the question, with the current capacity you have, how much revenues can you target with the current capacity, including the front-end JV?

[Jean-Marc Chery, executive]

Well, clearly, with the manufacturing footprint we have today installed where we can support, okay, above the $2 billion of $25 billion. So this is a good news, point number one. Today, as you know, we are concentrating to ramp up our raw material fab in Catania in order to achieve as soon as we can 40% of internal production. It will be a good cost driver.

But then if -- we plan to go well above $5 billion between '28 to 2030. And this is clear that we will need to have, okay, 2 additional fab. One in China that will support the Chinese market. So this is the JV we have just set up. And progress are moving very well, and I will visit them very soon. More then we will decide on timely when we have to build another fab. And of course, we will communicate. But for sure, to go well above $5 billion between '28 to 2030, we need Salad and another fab.

[Operator]

The next question comes from the line of Simon Coles with Barclays.

[Simon Coles, analyst]

You talked about underutilization charges, but you didn't split out Agrate. So I was just wondering if you can confirm Agrate's sort of peak drag in 4Q, and we can continue to expect that to improve in 2024 and be accretive in the second half of '24.

[Lorenzo Grandi, executive]

Yes. The plan for the 300-millimeter in Agrate is substantially unchanged. It's true that this year and in the first part of next year, Agrate will not be accretive. At this stage, we can confirm that Agrate will start to be neutral and then to be, let's say, adding a positive contribution starting the second part of next year and Q4 and then definitely in 2025, yes.

[Simon Coles, analyst]

And can I just quickly clarify? The 130 basis points impact on gross margin in 4Q, that doesn't include the drag from Agrate?

[Lorenzo Grandi, executive]

No, it's only the impact of the unloading tranches.

[Celine Berthier, executive]

Thank you very much. Very short. Thank you very much, Simon. I think that now this is the last question, and we can conclude the call.

[Jean-Marc Chery, executive]

Thank you. Thank you, everybody.

[Lorenzo Grandi, executive]

Thank you very much. Bye-bye.

[Jean-Marc Chery, executive]

Bye.