STMicroelectronics N.V.
Q1 2017 Earnings Call Transcript

Published: 27 Apr 2017

[Operator:]

Ladies and gentlemen, good morning or good afternoon. Welcome to the STMicroelectronics Q1 2017 Earnings Results 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. After the presentation, there will be a Q&A session. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Mr. Tait Sorensen, Group Vice President-Investor Relations. Please go ahead, sir.

[Tait Sorensen:]

Good morning. Thank you, everyone for joining our first quarter of 2017 financial results conference call. Hosting the call today is Carlo Bozotti, ST's President and Chief Executive Officer. Joining Carlo on the call today are Jean-Marc Chery, Chief Operating Officer; Carlo Ferro, Chief Financial Officer; and Georges Penalver, Chief Strategy Officer. This live webcast can be accessed through ST's 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. 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 Carlo Bozotti, ST's President and CEO. Carlo?

[Carlo Bozotti:]

Thank you, Tait, and thank you for joining us on our first quarter earnings conference call. Our agenda today includes an overview followed by a detail discussion of our results and our outlook for the second quarter. But before starting this detailed review of the quarter you might have seen that this morning we also released the main resolutions proposed to our Annual General Meeting of Shareholders. Among the resolutions, I have accepted to the proposal to extend my role as President and the CEO for one more year, and I am fully committed to drive this company forward. And of course this is with the support of the newly appointed Deputy CEO, Jean-Marc Chery and the strong executive team. Our objective for 2017 is to achieve a sustainable revenue growth and margin expansion through our strategic focus on Internet of Things and the Smart Driving. The first quarter represented a very good start towards achieving this objective. Revenues increased 12.9% year-over-year to $1.82 billion. We saw healthy growth across all our regions, product groups and sales channels. On a sequential basis, revenues decreased 2.1%, which was 30 basis points better than the mean point of our guidance. Gross margin increased 420 basis points year-over-year to 36.6%. We benefited from a strong improvement in manufacturing efficiencies, a better product mix, lower unused capacity charges, and favorable currency effects, partially offset by the normal pricing adjustment at the start of the year. On a sequential basis, gross margin came in at 60 basis points, better than the midpoint of our range on better than expected product mix. Operating income before impairment and restructuring grew by $139 million year-over-year to $134 million in the first quarter driven by higher revenues, improved product mix, manufacturing efficiencies, better fab loading and the set-top box restructuring program. In turn, operating margin before impairment and restructuring reached 7.5% of net revenues. Net income also saw a very strong year-over-year swing of $149 million to $108 million. Free cash flow of $62 million doubled already year ago quarter even with the higher capital investments we are making this year to support our growth plans. We ended the quarter with a net financial position of $518 million, stable compared to the Q4 2016, and up by $79 million from the year ago quarter, another indicator of our progress. Now, let's move to a detailed review of our product groups, beginning with Automotive and Discrete. ADG revenues increased year-over-year by 5.6%, reflecting growth in automotive and strong growth in power discrete products. On a sequential basis, ADG revenues posted a better than seasonal results with a decrease of 1.2%. ADG's operating margin was 5.4% in Q1, substantially stable in comparison to the year ago period. Moving to customer activity, bookings in automotive were robust in the first quarter. Thanks to our focus on technologies and products, enabling greener driving, we had important design wins related to car electrification, particularly in the area of battery management and on-board charging. A number of OEMs worldwide selected products such as our MOSFET, both high and low voltage silicon, as well as silicon carbide, our 32-bit microcontrollers and the lithium-cell balancing device. We also captured the Body Control Unit for a module from an American Tier-1, and the Power Control Unit for a door zone application at a major European Tier-1. We also had a number of important wins related to a more connected and safer driving experience. We started production of a 32-bit microcontroller for embedded security in a next generation automotive gateway. We won an award for a seat belt pre-tensioner application with our 32-bit microcontroller for a major Tier 1 European customer. And we had multiple wins with a parking brake application specific product. In our infotainment portfolio, we were awarded new business to our processors, AM/FM tuners, and the Class AB amplifiers from Japanese Tier-1 for the Asian market. In addition, we had design wins and multiple global Tier-1 for rectifiers, protection devices and automotive-grade IPAD devices for powertrain, on-board charger, ADAS and Safety, and high-speed data line networks. Successes in our power discrete business includes a number of wins in Asia for both high and low voltage power supply applications, and a continued expansion of our business on RF integrated passive devices for the IoT market with several large customers. Moving to our Analog and MEMS Group, AMG, revenues increased 19.9% year-over-year, driven by strong growth in MEMS, continuing the significant progression begun in the second half of 2016. We also enjoyed solid growth in analog products following second half 2016 rebound. On a sequential basis, AMG revenues increased 1.6% better than seasonal with both product areas growing. The strong improvement in AMG product portfolio and competitive position have translated into a significant turnaround in its operating performance over the last two quarters with operating margins of 9.4% in Q4 2016, and 10.1% in Q1 this year, compared to substantially breakeven results one year ago. Our ability to design in multiple products into flagship smartphone and IoT devices was evident during the first quarter. First, we ramped production of several products inside the Samsung Galaxy S8 and S8+ smartphones, including 6-axis ultra-low-power MEMS inertial measurements unit and optical-image stabilization gyroscope, a barometric sensor, a touch controller, and the multifunction protection switch. And in the new and very popular Nintendo gaming system, the Switch, we have motion sensors and the touch controller, as well as multiple STM32 microcontrollers, and Near Field Communication controller from our Microcontrollers and Digital ICs Group. As well, we continue to gain share with motion and the environmental sensors in smartphones and wearables worldwide, but also in communication systems. Automotive is an important focus area for our sensor business. Moving to IoT, we continued the strong design-in momentum in low-power wireless connectivity with our Bluetooth low energy solutions, as well as the SPIRIT sub-1GHz family for home and building automation. During the quarter, we also launched a partnership with USound to produce the world's first piezo-MEMS speaker with excellent sound quality, targeting IoT applications. In smart industry, we broadened our customer base for our STSPIN32 motion control family, including multiple designs for our newly introduced intelligent motor control devices. We also started production for a 6-axis inertial sensor for high-end industrial applications. In addition, we won multiple designs for a range of analog products for the next-generation smart metering solutions. Our broad analog portfolio strongly complements our other product families, allowing us to design-in more silicon content across our customer base. Now, let me share some highlights on our Microcontrollers and Digital ICs Group. MDG saw a strong progression, with revenues increasing year-over-year by 11.4%, or 14.6% if we exclude discontinued businesses. Key drivers were strong growth in general purpose microcontrollers and growth in digital products. MDG's operating income and margin also had very positive swing, with its operating income up $64 million year-over-year, and its operating margin of 10.2% in the first quarter. With our general purpose microcontrollers, we again set a new quarterly revenue record. With a goal to continue the momentum going forward, we introduced new products for our existing STM32 families, including new STM32L4 MCUs, adding larger memories, enhanced graphics support, and increased power-saving flexibility. We continued to expand the STM32 ecosystem with tools from STM partners. For example, we teamed with DSP Concepts to offer STM32 users free access to an advanced audio design tool. We also introduced the MCU Finder for PC desktops, a new STM32F7 Nucleo board and Discovery kit, a new STM32 board to evaluate low-power, long-range IoT connectivity. Getting our development tools into the hands of embedded developers is a key step in the design-in process. And, with over 1 million STM32 development kits now shipped to the market, we are on the right track to expand our base of over 40,000 customers. Moving to security; we announced the availability of the new advanced Near Field Communication ST20NFCD (sic) [ST21NFCD] (14

[Operator:]

The first question is from Achal Sultania from Credit Suisse. Please go ahead.

[Achal Sultania:]

Hi. Good morning, everyone. Just a clarification on the MEMS business. I think you talked about the several chips being used in the Galaxy S8 and S8+ devices. I think in some of those sockets, in the past you've shared that chip with some other supplier because that device has had two variants, one with Qualcomm chip and one with Exynos chip. Can you give us some color as to whether that is still continuing with S8 and S8+, or are you becoming more of a sole supplier in some of those sockets in this generation?

[Carlo Bozotti:]

Well, of course, it's difficult for me to comment on such detailed question. But the impression that we have is that certainly our share is lion's share.

[Achal Sultania:]

Okay. But if the share is not changing, it's lion's share, but it's not changing from last year. Is that the right way to think about it?

[Carlo Bozotti:]

Well, you can see, if the share is 100%, it's difficult in general to change.

[Achal Sultania:]

Okay. Thank you. And one question on the automotive side of things. I think you've talked about bookings being strong in Q1. I think we're starting to see some data points that China obviously was very, very strong last year, and the year-on-year comps are a bit difficult as we go into Q2, Q3 of this year. Are we seeing any signs of that as yet in the bookings number, or you think that the content increase is enough or is accelerating, which will offset any slowdown in volume growth? Is that the case, or are you not seeing any volume slow down as yet?

[Carlo Bozotti:]

No. It's the opposite. We see an acceleration of our business in the automotive. Q1, it is certainly a low point for automotive, and we expect to grow significantly. Overall, I also want to make the point that we have, on top of ADG, other products that we sell to automotive customers, of course, including our sensors, and including our digital products (22

[Achal Sultania:]

Okay. Thanks. Thanks a lot, Carlo.

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

Thank you, Achal. Next question?

[Operator:]

The next question is from Gareth Jenkins from UBS. Please go ahead.

[Gareth Jenkins:]

Thanks. Just a couple if I could. The CapEx run rate looks like it's tracking slightly below your full year guidance. So just wondered whether you're finding more efficiencies in CapEx than you thought, or whether we should expect a pick up through the rest of the year, and then I have a follow up. Thank you.

[Carlo Bozotti:]

Carlo will take this.

[Carlo Ferro:]

Thank you, Carlo. Good morning, everyone. Now, I will not read the first quarter number as a sign on the run rate (24

[Gareth Jenkins:]

That's great. Thank you very much. And just as a follow up, can I just have a follow up take on the under saturation charges, presumably zero in the last quarter and zero going forward from here from that statement?

[Carlo Ferro:]

Yeah. Very minor, in both cases we are running with the fab almost all at full loading. We are in the process of increasing capacities, improving the service to customer, and building higher revenues for the next quarters.

[Gareth Jenkins:]

Thank you.

[Carlo Ferro:]

You're welcome.

[Tait Sorensen:]

Thank you, Gareth. Next question, please?

[Operator:]

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

[Sandeep Sudhir Deshpande:]

Yeah. Hi. Thank you for letting me on. My question is regarding the next-generation technologies in 3D sensing. You have some technologies associated with 3D sensing. Can you, Carlo, possibly help us understand what technology you have associated with this? And is it purely sensing technologies, or are you also selling digital chips associated with this? Secondly, my question is regarding the CapEx you announced earlier this year. What percentage of the CapEx are you spending on front-end versus back-end? Thank you.

[Carlo Bozotti:]

Okay. Our activity in this field is very broad, and I think, Jean-Marc will comment here. And then, Carlo will take the second question.

[Jean-Marc Chery:]

So Jean-Marc speaking. So more basically to make history as simple as possible for 3D sensing, we see really two technologies which are key enablers, is what we call structured light; and the second one, we call Time-of-Flight technology, and in Time-of-Flight, it was direct or indirect Time-of-Flight. What I can say at this stage is that, ST from silicon point of view, we own, we develop, we control, we are able to make the manufacturing of all technologies which are key, whatever is the Time-of-Flight or the structured light. Then, in term of module assembly of the key module linked to this technology, we completely control the technology in term of module assemblies. We have the skill to manage all the critical components which are related to the structured light, and we are able to make the manufacturing of the module. So ST is completely well positioned with his specialty imaging strategy to address this market of 3D sensing, whatever are the technology, Time-of-Flight or structured light.

[Sandeep Sudhir Deshpande:]

Sorry. I have one follow up on that, Jean-Marc, which is, does your technology require a separate digital chip beyond the sensing module that you will sell?

[Jean-Marc Chery:]

Of course. Okay. You need to have a digital chip to embed the software because structured light is very complex request in term of software. So you have the separate chips, digital chips to receive the signal from the various component and create the 3D image.

[Sandeep Sudhir Deshpande:]

And do you supply that digital chip as well?

[Jean-Marc Chery:]

No.

[Sandeep Sudhir Deshpande:]

Okay. Thank you.

[Tait Sorensen:]

Thank you, Sandeep. Next question?

[Carlo Ferro:]

I guess, Sandeep has a second question on the capital spend in this year between front-end and back-end. When taking front-end manufacturing and R&D this is about 55%. Probing, assembling and testing will be about 45%.

[Sandeep Sudhir Deshpande:]

Thank you, Carlo Ferro.

[Carlo Ferro:]

You're welcome.

[Tait Sorensen:]

Thank you, Sandeep. Next question?

[Operator:]

The next question is from Adithya Metuku from Merrill Lynch. Please go ahead.

[Adithya Metuku:]

Yes. Good morning, guys. So my question is firstly a clarification. Could you give us some highlight on the growth rates in the automotive, microcontroller and Analog and MEMS businesses in the past quarter? And then I have a quick follow up on OpEx.

[Carlo Bozotti:]

So the first question is about the growth rate on automotive.

[Adithya Metuku:]

Automotive, microcontroller and Analog and MEMS.

[Carlo Bozotti:]

Right. So I think we can go through Carlo, we'll go through family-by-family if you – we have all the data, of course.

[Carlo Ferro:]

Your question is in reference to which period, the first quarter?

[Adithya Metuku:]

Yes. First quarter.

[Carlo Ferro:]

Okay. It's in the press release, right?

[Adithya Metuku:]

No. I don't mean the groups. I mean automotive within the division that you disclosed.

[Carlo Ferro:]

Okay. So I believe that the answer, the best way for characterizing it is that in the area of ADG, both automotive and the power and discrete enjoyed better than seasonal trend overall. Then in the case of AMG, it has been another strong quarter for MEMS, but also a stronger quarter for analog. And certainly in the field of MDG, you may have noted there is some further erosion in the area of the digital business and the legacy business there, while general purpose microcontrollers remain particularly solid.

[Adithya Metuku:]

Okay. My quick follow up is on OpEx, Carlo Ferro. Could you give us a bit of color taking into the current spot rates what you expect in terms of growth in net OpEx in the next quarter and then the second half of the year? Thank you.

[Carlo Ferro:]

Yeah. We remain on our target to maintain, in average, the net OpEx in the range of $550 million. We have anticipated that there is some unbalance quarterly due to seasonality, particularly third quarter is cheaper in seasonality, if I can use the word. Second quarter and fourth quarter a bit higher. So I would basically (31

[Adithya Metuku:]

Okay. Thank you.

[Tait Sorensen:]

Next question, please?

[Operator:]

Next question is from Jerome Ramel from Exane BNP Paribas. Please go ahead.

[Jerome Ramel:]

Yeah. Good morning. A question on automotive in Q1, I mean, Automotive and Discrete you were up 5.6% year-on-year, and you mentioned that discrete grew faster. So my question is, why the automotive growing not in line with peer, because peer is quite distant to peer in Q1 (32

[Carlo Bozotti:]

Well, I think, first of all we need to look at the perimeter. As I said, I mean, there will be a strong acceleration of the growth, and this will be across the board for all automotive products. It will be on what we traditionally called APG, which is smart power and microcontrollers and digital automotive. It will be on Power MOS, it will be on SiC, and it will be also on our MEMS, for instance, for automotive applications. And the visibility that we have today for the automotive growth year-over-year is far above the 5.6% that you mentioned.

[Jerome Ramel:]

Okay. And maybe a follow up. I had in mind that your MEMS business for automotive was about $150 (33

[Carlo Bozotti:]

Well, this is a very detailed question. We are growing significantly. I think it still is below $100 million.

[Jerome Ramel:]

Okay. Thank you very much.

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

Thank you, Jerome. Next question?

[Operator:]

The next question is from Janardan Menon from Liberum Capital. Please go ahead.

[Janardan Menon:]

Hi. Good morning. Thanks for taking the question. Just going back to a comment that you made that your CapEx in the second half will also depend on what the volume expectations are, et cetera, and you talked about the significant ramp in the second half of revenue. I was just wondering, what is the visibility that you have on that? I mean, is it that you are yet to get your purchase orders and your purchase orders will come later on, and that will give you a better feel for what that revenue ramp will look like, or do you already have a pretty good feel for how that will look like, in terms of volume and ASP? And if there is any sort of movement in that number, is that mainly from a back-end CapEx point of view, or would you consider adding front-end CapEx as well in the second half, if the volume required for that? And second question is, at your Mobile World Congress presentation, I think there was a comment saying that you had a $1 billion run rate on IoT microcontrollers. I was just wondering, can you put together a number for what is your IoT revenue at this point in time, if you go through all the different divisions, and what would you say the ballpark figure of growth for that business right now?

[Carlo Ferro:]

Maybe Janardan, I take your question quite quickly, to refer like (35

[Janardan Menon:]

Okay. Can I get one more...

[Carlo Bozotti:]

(35

[Janardan Menon:]

Understood. Thank you

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

Thank you, Janardan. Next question, please?

[Operator:]

The next question is from Andrew Gardiner from Barclays. Please go ahead.

[Andrew M. Gardiner:]

Hi. Good morning, gentlemen. Thanks for taking the question. Not to belabor the point too much on the second half visibility. But you mentioned the sort of key product ramp for the back half of the year, I think sort of on the sensing side of things. You've also highlighted in the past silicon carbide ramp. Just, how's your visibility there, in terms of so the key customer starting in the back half of the year? And also, can you perhaps shed a little bit more light about engagement elsewhere? I think you said you had a win in Asia for silicon carbide. Just how you expect trends to progress there for 2018 and 2019, based on customer engagement?

[Carlo Bozotti:]

We are, first of all, in the condition to confirm the ramp, which is not a major program that we have described. And this program is also, as we already said, is also calling for important capital investment. The silicon carbide is an important contributor in the second half. Is starting, I think is pretty nowadays (38

[Andrew M. Gardiner:]

Thank you, Carlo.

[Carlo Bozotti:]

Yes.

[Tait Sorensen:]

Thank you, Andrew. Next question, please?

[Operator:]

The next question is from Mathias Santos Silva from Morgan Stanley. Please go ahead.

[Mathias Santos Silva:]

Hello. Thank you for taking my question. First, regarding to the CapEx ramp, is this entirely related to models to be launched this year, or is there also some in there regarding models to be launched next year? And also, in the application that's going out in the market in the second half that will drive that revenue ramp, do you forecast that kind of application going into broad-based smartphone manufacturers as well, or is it mostly related to that one customer perhaps? Thank you.

[Carlo Bozotti:]

Well, CapEx (39

[Carlo Ferro:]

Yeah. On CapEx, as you could expect at the end, intense capital spending is, at the end, addressing all the, I'll say, three relevant objective for us, which is to start the new program in the second half of the year, is to build capacity for expanding revenues in the second half of the year, and preparing a capacity for 2018. And this is almost across all the different process technologies for the company, and to serve a growth for all the three product groups in the Imaging division, or the subset of our business.

[Carlo Bozotti:]

Yeah. To respond to the second question, when we talk about this major project, of course, it's not one single device. This is obvious. And some of the products are certainly suitable for many, many customers, while some other products are more dedicated to one customer.

[Mathias Santos Silva:]

Okay. Thank you for that.

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

Thank you, Mathias. Next question?

[Operator:]

The next question is from Robert Sanders from Deutsche Bank. Please go ahead.

[Robert Sanders:]

Yeah. Good morning. A question for Jean-Marc. You mentioned you had a capability in structured light. I was just wondering what capability you have today in wafer level optics, or are you partnering with firms like CDA (41

[Jean-Marc Chery:]

Now, what is important when you would like to control this kind of technology is to have the skill, the technical skill in the critical component. Of course, in structured light one of the critical components is disfactored (42

[Robert Sanders:]

Great. That's helpful. And just on the Time-of-Flight, I think the current proximity sensors is only a $1 component, the one you shipped into the iPhone. But I would assume, with an array, these multi-point Time-of-Flight sensors are significantly higher. Do you have a sort of rough estimate of how much more content this could generate?

[Carlo Bozotti:]

Well, we cannot comment on the price. Of course, price and complexity are related, and also I do not want to comment on the price of the existing solution. You mentioned it, so certainly not possible for us to comment on the price. But clearly with more content, more complexity, the evolution of the price is in the right direction.

[Robert Sanders:]

Okay. Thanks a lot.

[Carlo Bozotti:]

Thanks.

[Tait Sorensen:]

Thank you, Rob. Next question, please?

[Operator:]

The next question is from Stéphane Houri from Natixis. Please go ahead.

[Stéphane Houri:]

Yes. Hello. Good morning.

[Carlo Bozotti:]

Good morning.

[Stéphane Houri:]

I have a question on gross margin because you commented that the unused (45

[Carlo Bozotti:]

Well, Carlo will comment. I will say, the potential is significant.

[Carlo Ferro:]

Again, you note, Stéphane, that already in the guidance for the next quarter we are anticipating at midpoint of the guidance another step of progression. I believe really what is nicely coming in as a factor there is that the innovation is making product mix able to somehow compensate the natural, or be till the future of (46

[Stéphane Houri:]

Okay. Thank you. And just a follow up, if I may. Looking at your Q2 guidance of 5% growth, could you give us some indication about what's going to happen into the different division which is going to fastest growing and the one who will grow less?

[Carlo Bozotti:]

Yeah. Carlo?

[Carlo Ferro:]

As usual, without characterizing specifically growth by sub-groups, I may indicate to you whether we expect more solid growth sequentially for the next quarter, and this is certainly about the automotive and the micromemories, and secure microcontrollers, is in its second level for power discrete and analog. And in the case of digital, will be a further slight erosion associated with the phase out of legacy.

[Stéphane Houri:]

Okay. Very good. Thank you very much.

[Carlo Ferro:]

You're welcome.

[Tait Sorensen:]

Thanks, Stéphane. Next question?

[Operator:]

The next question is from Amit Harchandani from Citigroup. Please go ahead.

[Amit B. Harchandani:]

Good morning. Amit Harchandani from Citigroup, and thanks for taking my question. Two, if I may. My first question would be around trends in the distribution business and also inventory levels across the supply chain. Could you maybe share your thoughts in terms of the segments? How you've seen the trends in distribution evolve as you've gone through the quarter? And maybe some initial thoughts on the month of April. And then I have a second question after that. Thank you.

[Carlo Bozotti:]

The visibility, well, first of all, we know, while Q1, and I can say that it was unprecedently strong POS with a very healthy situation, and this is across the board. I have to say that Asia is strong, but Europe that is important for us in distribution of growth, is also very, very strong, even stronger than Asia. And we do not see any change in April. We see a very good trend in the month of April, both in terms of bookings and in terms of POS. I would like to underline again that the situation of inventory is pretty healthy. And of course, what we are trying to do here, for instance, yesterday and the day before yesterday, we had a major event in China on our STM32. We had 2,000 participants to this event, and this is mostly developers, people working with our microcontrollers and building around our microcontrollers with other products. And this is exactly what we want to do, we want to sell more around our STM32. So we are encouraged by this trend. So we see a good momentum. It was strong in Q1. I think somebody mentioned before that our general-purpose microcontroller, it was $1 billion business or so before. I think, today the run rate is more, $300 million per quarter and growing. And this is, I believe, it is a fundamental family for our mass market strategy and for our distribution business. We want to sell more of the rest of our kits together with our STM32. So pretty good visibility in distribution.

[Amit B. Harchandani:]

Thank you for the detailed comments, Carlo. And maybe as a second question, I was looking at the press release this morning with respect to the proposal for the new executive team, and the creation of the position of Deputy CEO. Just wanted to understand your thoughts behind coming up with this new executive team structure. Is it in response to what you see out there in the industry? And also, should we maybe look at the creation of a Deputy CEO position as a step in the succession planning, thinking one year from now, or am I getting a ahead of myself? Thank you.

[Carlo Bozotti:]

Yeah. Well, I think, first of all, I believe this is a unique opportunity for Jean-Marc. We've been working with Jean-Marc, it's now many, many years, in fact, since the moment of creation of the company in 1987. So it's certainly an important step for Jean-Marc. I mean, Jean-Marc in his career managed manufacturing, technology, certain products, and this is a unique opportunity to expand. We mentioned in our press release that there will be a more stronger involvement of Jean-Marc in sales and marketing. So I think he's well deserved. Times are (52

[Amit B. Harchandani:]

And just the rest of the executive team structure, the changes there, I just wanted to understand the thought process behind that, (53

[Carlo Bozotti:]

Well, there are basically two changes; one change is the unification (53

[Amit B. Harchandani:]

Thank you very much, Carlo.

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

Thank you, Amit. Next question?

[Operator:]

The next question is from Lee Simpson from Stifel. Please go ahead.

[Lee Simpson:]

Great. Thanks for letting me on there. Maybe if I just circle back to OpEx, if I could, and SG&A, in particular. SG&A looked pretty steady last year, but going into Q1, things have picked up perhaps a little higher than just my modeling. But just trying to get a sense for how that pans out to the year. And I'm looking in particular for comments as they relates to restructuring. I mean, obviously restructuring has been heavy for last two years. I just wonder, if the restructuring charges having now peaked means the SG&A, the downside, or the ability to push SG&A down has maxed out already. Thanks.

[Carlo Ferro:]

I believe the short answer to your question is, the status of progression in the set-top box restructuring (56

[Lee Simpson:]

Great. I guess, in summary, we can expect some further savings in R&D as a result.

[Carlo Ferro:]

Again, what we could expect going forward in the next quarter is expenses, and (57

[Lee Simpson:]

Got you. That's very clear. And maybe just circling back to the earlier question, I think this one goes to Jean-Marc, you were very good at giving us detail around the expansion to an array solution in Time-of-Flight. But you step back from giving the ASP increase. In the absence of giving us an ASP increase, could you give us perhaps the silicon area increase?

[Carlo Bozotti:]

This is even worse.

[Lee Simpson:]

Well, I guess, if we can get a ratio on the array itself. I mean, are going from a 0.4 by 0.4 (58

[Carlo Bozotti:]

No, we cannot comment. Also of course, it's never that clear whether we are talking about exactly the same thing. It is about the evolution of the Time-of-Flight, or is a more complex chipset. I already mentioned that we are not talking about one product here, and I think it's very, very complex. What I can say is that this is a unique capability that we are (59

[Lee Simpson:]

Great. Thanks anyway. Thank you.

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

So stay tuned, Lee. Thank you. Next question, please?

[Operator:]

The next question is from Veysel Taze from ODDO. Please go ahead.

[Veysel Taze:]

Yeah. Hi. Good morning. Thank you for taking my questions. I have one question regarding your MEMS business. It was a little bit difficult to read the development in the MEMS business if you look at the inventory – or the news flow from China about inventory correction there, et cetera. But your MEMS business has grown very strong in Q1. I see the point that, Samsung, you had one additional design win versus the prior generation with the touch controller. Was that the main driver, or are there other factors which drove the business here?

[Carlo Bozotti:]

The touch controller is not reported in the MEMS. The touch controller is reported in our Analog. So there is no relation. I mean, of course, it's reported in AMG, but you talk about MEMS. So I wanted to be accurate. Now, what we see, MEMS, it is strong demand, the month of March was pretty strong bookings. I have to say that in February, with the Chinese New Year, it was a correction, but very, very strong March booking on MEMS. Carlo mentioned before that we will grow sequentially on MEMS, moving into Q2, so the growth year-over-year will be substantial growth. And the priorities are always the same. I think we wanted to diversify this business, diversify in terms of technologies, so not only MEMS sensors, but also MEMS micro-actuators. We want to diversify in terms of customers. So you mentioned Samsung, but we want to be more spread with many customers, including important customers in China. And we, importantly, want to diversify in terms of market segments. And I mentioned before that what we do in MEMS for automotive is not yet the level, I believe, of the potential that we have in this area, and this is certainly an important priority. So I tried to give you the three axes; diversification in terms of technology, diversification in terms of customer base, and diversification in terms of market. The momentum is good, and we see a good trend. The month of March was pretty strong, and the demand is strong.

[Veysel Taze:]

Sorry. I think I missed – the touch controller is part of which segment?

[Carlo Bozotti:]

Analog.

[Veysel Taze:]

Okay. And second question, regarding the gross margin, and what Carlo Ferro mentioned regarding the scaling up of the volumes and the fabs. If I look your gross margin profile, first half this year versus first half of last year, so it seems like around 400 basis points year-over-year growth. So the question would be, what could be the kind of leverage you're trying to get in the second half of the year as indication? I mean, last year, you had roughly 37% in second half of the year. Is there – what would be like the opportunity there? The 400 basis points, I guess, in first half would be too high.

[Carlo Ferro:]

You see, for the time being, it's nice to see that now is several quarters in a row that each quarter, gross margin is (1

[Carlo Bozotti:]

So, we cannot give the guidance for Q3. I think, as I said, we believe there are significant opportunities. Carlo mentioned already very well, I mean, what is the effect and all, (1

[Veysel Taze:]

One final one on your auto business, if I may. In the auto business, you mentioned that growth will accelerate for the rest of the year. And if I look at the growth in Q1, it was above 5% year-end. But nevertheless, if I look some of the peers, they are expecting for this year double-digit growth in their auto business. And also Q1 for some of them, look really stronger than your Q1. So any indication how strong this acceleration could be? So could we move into double-digit range or high single-digit?

[Carlo Bozotti:]

Yeah. Well, my comment before was year-over-year. And I was saying that when we compare with others, we need to take in consideration also the organization of the company. And we have products that are important products for automotive that are maybe not in ADG or in APG (1

[Veysel Taze:]

Thanks a lot.

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

Thank you, Veysel. Based on time, we'll take one more question, Moira.

[Operator:]

The last question is from Gianmarco Bonacina from Equita SIM. Please go ahead.

[Gianmarco Bonacina:]

Yes. Very good morning. Just a quick one about car electrification. You mentioned new design wins in Q1. I read in the press release, in particular, there is one on SiC MOSFET with Asian OEM. Can you give a little bit more detail? Is this in Japan or in China? And then more broadly, can we say that the bill of material for you is pretty similar, either if it's hybrid or a pure electric, or let's say, on average, there is in lot of (1

[Carlo Bozotti:]

Well, first of all, on the customer, every time we can mention the customer, we tend to do. When we cannot, we are not in the position of comment on the customer name, and we do not do. I think what is important for us is the two applications; one of course is the inverter; and then it's the system that is driving the electric model. And our proposition here, of course, is to start replacing IGBT with our SiC Power MOS. And there are many, many Power MOS per inverter. And now, I cannot say the number, but there are many, many Power MOS per inverter, tens of Power MOS per inverter. And this is one opportunity. Every time there is an inverter, so every time there is an electric model in the car, so of course, including hybrid, there is another application where we believe that the SiC is also a very good solution, is the on-board charger. And I think our products are suitable both for the inverter and the on-board charger. For the customer, I've been told the other day, maybe I can say the region, not the customer. Yeah, I can say the region of the customer, so it's China.

[Gianmarco Bonacina:]

Okay. Thank you.

[Carlo Bozotti:]

Thank you.

[Tait Sorensen:]

Thank you, Gianmarco.

[Tait Sorensen:]

At this point, we'll go ahead and wrap up. And as Carlo mentioned earlier on, we will have our Capital Markets Day on May 11 in London. If you need any information on that, please contact Investor Relation. And again, thank you for participating.

[Carlo Bozotti:]

Thank you.

[Carlo Ferro:]

Thank you.

[Operator:]

Ladies and gentlemen, the conference is now over. Thank you for choosing Chorus Call. And thank you for participating in the conference. You may now disconnect your lines. Good-bye.