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Edited Transcript of STM.MI earnings conference call or presentation 23-Jan-20 8:30am GMT

Q4 2019 STMicroelectronics NV Earnings Call

Geneva Jan 25, 2020 (Thomson StreetEvents) -- Edited Transcript of STMicroelectronics NV earnings conference call or presentation Thursday, January 23, 2020 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Celine Berthier

STMicroelectronics N.V. - Group VP of IR

* Jean-Marc Chery

STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board

* Lorenzo Grandi

STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO

* Marco Luciano Cassis

STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development

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Conference Call Participants

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* Achal Sultania

Crédit Suisse AG, Research Division - Director

* Aleksander Peterc

Societe Generale Cross Asset Research - Equity Analyst

* Alexander Duval

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Andrew Michael Gardiner

Barclays Bank PLC, Research Division - Director

* David Terence Mulholland

UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware

* Jerome Andre Charles Ramel

Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor

* Matthew D. Ramsay

Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst

* Sandeep Sudhir Deshpande

JP Morgan Chase & Co, Research Division - Research Analyst

* Stephane Houri

ODDO BHF Corporate & Markets, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the STMicroelectronics Fourth Quarter and Full Year 2019 Earnings Conference Call and Live Webcast. I am Alessandro, the Chorus Call operator. (Operator Instructions) And the conference is being recorded. (Operator Instructions) The conference must not be recorded for publication or broadcast.

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

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Celine Berthier, STMicroelectronics N.V. - Group VP of IR [2]

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Thank you, Alessandro. Good morning. Thank you, everyone, for joining our fourth quarter and full year 2019 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, Infrastructure and Services and Chief Financial Officer; Marco Cassis, President of Sales, Marketing, Communications and Strategy Development.

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 expectation and plans. We encourage you to review the safe harbor statements contained in the press release that was issued with the result 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 1 question and a brief follow-up.

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

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [3]

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So thank you, Celine. Good morning, everybody, and thank you for joining us for our Q4 2019 earnings conference call.

Let me begin with some opening comments. Starting with Q4. We delivered a solid quarter. Net revenues at $2.75 billion grew 7.9% sequentially, above the midpoint of our guidance of 5%, with all product groups contributing to the growth. Q4 '19 gross margin was 39.3%, 110 basis point higher than the midpoint of our guidance. This was mainly due to better-than-expected manufacturing efficiencies and improved product mix. Our operating margin was 16.7%, and our net income was $392 million.

Moving to the full year 2019. We delivered results aligned with the full year expectation we provided in April 2019: net revenues of $9.56 billion, with a gross margin of 38.7% and an operating margin of 12.6%. Our free cash flow for the year was $497 million, including CapEx of $1.17 billion, and our net financial position was $672 million.

On Q1 2020. Our first quarter outlook is for net revenues of $2.36 billion at the midpoint, a year-over-year increase of 13.7%. The gross margin this Q1 is expected to be 38% at the midpoint, including about 80 basis points of unsaturation charges.

For the full year 2020, we plan for year-over-year growth, outperforming the markets we serve. The broad long-term trends in electronic systems that we are focused on are driving demand for our products. These trends are smart mobility, power and energy applications and IoT and 5G. We plan to invest about $1.5 billion in CapEx to support our strategic initiatives and revenue growth to progress towards our midterm revenue ambition of $12 billion.

Now let's move to a detailed review of the fourth quarter. Q4 net revenues confirm our return to year-over-year growth that started in Q3. Net revenues increased 4% year-over-year in the fourth quarter, driven by analog, microcontrollers, Imaging and MEMS, partially offset by lower Automotive sales. AMS grew 9.9%; MDG grew 7.6%; while ADG was down 4.5%. On a sequential basis, revenue increased 7.9%, 290 basis points above the midpoint of our guidance, with all 3 of our product groups contributing to the growth. AMS performed above expectations on strong demand for our key products for personal electronics. The 2 other business groups performed in line with our expectations, with a solid growth in MDG, especially in general purpose microcontrollers and digital ICs, and growth in automotive and power discrete products.

Our gross margin was 39.3%, 110 basis points above the midpoint of our guidance, mainly due to better-than-expected manufacturing efficiencies and improved product mix. This gross margin embed about 100 basis points of unsaturation charges. Our net operating expenses were $618 million, in line with our expectations. Our operating margin was 16.7%, up 360 basis points sequentially.

On a year-over-year basis, our Q4 operating margin was down 10 basis points, with an improvement in the AMS operating margin fully offset by a decline for MDG and ADG. Our net income was $392 million, and diluted earnings per share were $0.43.

Let's look now at our full year results. Starting with the recap of the market and business trends we saw during 2019. Clearly, during the year, we have operated under global soft market conditions, although with different dynamics for each end market we address. In Automotive, we saw, on one hand, very healthy demand for smart mobility applications driven by the electrification and digitalization of car systems and platforms. On the other hand, the legacy automotive business, which is closely linked to the number of car registration worldwide, faced challenging situation with global registrations down 5% in 2019.

The industrial market and distribution has been operating under soft conditions since Q3 2018. Starting from March 2019, point of sales of our distributors in Asia restarted sequential growth. There was an acceleration in the fourth quarter with a return to a year-over-year growth. Since March as well, Americas stopped declining but remains flat. In Europe, we have not seen any recovery and it is still declining. In general purpose microcontrollers, the inventory correction at our distributor was completed in Q3 2019, while some excess inventories remain in general purpose analog and non-power discrete.

In personal electronics, demand for our key product was solid, getting stronger during the year and exceeding expectations in the second half. All devices, smartphones, accessories, wearables, contributed with some early contribution from 5G smartphones.

In communication, equipment and computer peripherals, the hard disk drive market decreased as expected, dropping 13% in 2019, with a recovery in the second half. We saw 5G infrastructure growth compensating the wind-down of our legacy assets and set-top box business.

Looking now at our results. They are aligned with the full year expectation we provided in April 2019. Net revenues were $9.56 billion, decreasing 1.1% year-over-year and within the range we had indicated. We had a strong H2/H1 growth of about $1 billion, driven by a stronger-than-expected contribution from engaged customer programs and new products. Sales to OEMs represented 70% of total revenues, while distribution represented 30%.

By region of origin, 38% of our 2019 revenues were from Americas, 33% from Asia Pacific and 29% from EMEA. In terms of revenue by product group, 2 of them grew while 1 declined. ADG revenues increased 1.4%. Revenue from Automotive product subgroup were substantially flat, reflecting 2 opposing dynamics: growth in car digitalization with ADAS and microcontrollers and the decline in legacy product. Revenues for the Power Discrete subgroup increased, mainly driven by silicon carbide products, power MOSFET and IGBT, and partially offset by the non-power discretes.

AMS revenues increased 4.6%, driven by personal electronics application and partially offset by lower sales in industrial and hard disk drives.

MDG revenues decreased 10.3%, mainly due to the inventory correction at our distributor, which affect the general purpose microcontrollers during the first half of the year. MDG restarted year-over-year growth during the second half of 2019.

Gross margin was 38.7% at the high end of our April 2019 launch, impacted by 70 basis points of unsaturation charges. Controlling our operating expenses in line with our model, we delivered an operating margin of 12.6%. By product group, AMS posted an operating margin of 18.1%, MDG was 13.4% and ADG was about 10%. Net income was above $1 billion, translating into $1.14 diluted earning per share.

Moving now to other financial indicators. Net cash from operating activities increased 1.3% to $1.87 billion. CapEx was $1.17 billion, in line with our investment plan. Free cash flow in Q4 were $461 million, bringing the full year free cash flow to $497 million, net of $127 million paid for the acquisition of Norstel. Cash dividends totaled $214 million. As part of our existing share buyback program, we repurchased shares totaling $250 million in the year. From a balance sheet perspective, we exited 2019 with a net financial position of $672 million, substantially stable compared to last year.

Now let's move to our first quarter 2020 outlook and the full year 2020. For Q1, we expect at the midpoint net revenues of $2.36 billion, increasing year-over-year by 13.7% and decreasing sequentially by 14.3%. On a sequential basis, revenues from all of our 3 product groups are expected to decline in what will be a shorter and seasonally lower quarter, though we anticipate better than usual seasonality for personal electronics products.

On a year-over-year basis, main revenue growth drivers are expected to be personal electronic products, MEMS, imaging and analog products, general purpose microcontrollers and silicon carbide products. Our gross margin guidance at the midpoint is 38%, including about 80 basis points of unsaturation charges. The sequential gross margin decrease is mainly due to the impact of the usual annual contract pricing negotiations and unfavorable product mix. Year-over-year, the decrease is mainly due to unsaturation charges and related manufacturing inefficiencies, including the start-up of the 200-millimeter fab we acquired in Singapore last year and usual price declines not fully compensated by improved product mix and a positive currency effect net of hedging.

For the full year, we plan to return to solid revenue growth, outperforming the markets we serve. We are operating in a market, driven by broad long-term trends in electronic systems. This is driving demand for semiconductor content, and as a consequence, for our products and solutions. We also see that the supply chain has now substantially normalized from the excess inventory effect we saw last year. The current view for the market we serve is positive, and we expect the next 3 months will be important to confirm these dynamics.

In terms of Capex, we plan to invest about $1.5 billion in 2020 to support our strategic initiative and revenue growth in order to progress towards our midterm revenue ambition of $12 billion. This amount includes the addition of capacity for some of our existing technologies and investments and mix evolution for our 200-millimeter fab. It will also support the R&D activities and the maintenance required by our manufacturing operations and infrastructure. This also includes about $400 million of investments for strategic initiatives: continued investments in our new Agrate 300-millimeter fab that will support our growth in BCD, IGBT and other power technologies; R&D for gallium nitride power technologies and production ramp-up for gallium nitride for RF devices; and investments for silicon carbide, these include substrate activities following the acquisition of Norstel. They also support our plans to establish internal manufacturing of 150-millimeter wafer and drive the evolution to 200-millimeter wafer.

To conclude. Our 2019 financial performance was aligned with the full year expectation we provided in April. Revenues were within the range, operating margin was above 12%, and free cash flow covered our cash dividends and share buybacks, maintaining our financial flexibility with a stable net financial position. At the same time, we invested $1.17 billion to support short-term demand as well as our strategic programs for our future growth.

For 2020, we plan to return to solid revenue growth, outperforming the markets we serve. Smart mobility, power and energy management, the IoT and 5G are driving the demand for semiconductor content. ST is very well positioned to support its customers across these trends, thanks to our product portfolio, enabled by our differentiated technologies. We continue to progress towards our midterm revenue ambition of $12 billion and deliver sustainable, profitable growth.

We look forward to meeting you at the Mobile World Congress in Barcelona on February 25 and at our Annual Capital Markets Day in London on May 6 to discuss our end market and product strategy in detail.

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

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Stephane Houri from ODDO.

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Stephane Houri, ODDO BHF Corporate & Markets, Research Division - Research Analyst [2]

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So this is Stephane Houri from ODDO. I just wanted to come back a bit on the automotive market because you said that you are seeing some contradictory trends between the mass market and smart automotive products. So can you give us some details on how you see the growth in this market for you in 2020? And if you could give us some outlook for the silicon carbide projects that you have.

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [3]

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Now so I will take the question, and certainly, Marco Cassis will complement it. Now first, to go straight to the point about silicon carbide, let's say, initiative, we see our revenue in 2020 above $300 million. Then in Automotive. In Automotive, clearly we confirm that next year, overall, certainly the car registration will be flattish. We see different dynamic, Europe, America and Asia/China. But before to go inside this dynamic, we clearly confirm that, overall, what is related electrification, so means, okay, car moving to electrical powertrain or hybrid car or mild hybrid car is really a solid trend. Clearly, we see as well that ADAS [utilization], Level 1, Level 2, okay, are still really -- is still solid and continuing. A specific -- a little bit more specific to ST microcontroller, our, let's say, advanced microcontroller in 40-nanometer is really solid in terms of growth perspective.

Well, clearly, if we assess by regional -- but we do believe that in America, the region is stable between thermal combustion engine and electrical car powertrain. In Asia, certainly we expect that -- and in China, you know that the main driver is China. So we touched down the bottom in Q4, and we will see stability in Q1, and we expect, okay, slightly some growth starting Q2 and the remaining part of the year. Now I have to say that Europe is more complex. Certainly, Europe is more complex because you know about the WLTP effect. And clearly this is something we are monitoring very carefully in terms of mix between electrical car -- full electrical battery car, hybrid car, mild hybrid car and gasoline thermal combustion engine and the trend of the dealer. The mix here is more complex. However, again, we do believe that we touched down the bottom in Q4 last year.

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Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [4]

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Okay. This is Marco. I would like to give you a little bit more color on silicon carbide. So we are, in this moment, engaged in 50 projects with 26 customers. And roughly, this is 50% with automotive customers and 50% with industrial customers. So this is just showing you that our pipeline of opportunities, expansion of opportunities in silicon carbide keep accelerating, and we are extremely well positioned there.

For what is related with Automotive, I'll just reconfirm what Jean-Marc has just said to you. Clearly, 2019 was a difficult year in terms of car registration with a minus 5% year-over-year and minus 8% specifically on China. The forecast for this year is to go to a stabilization with a small growth of plus 1%. This combined with an increase of penetration of ADAS and electrification should help us to grow during this year. But the legacy market is stabilizing now and we'll see how it's going to evolve.

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Stephane Houri, ODDO BHF Corporate & Markets, Research Division - Research Analyst [5]

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Okay. And could you -- and the follow-up is still on silicon carbide. Last year, I think that one customer was about 80% of your sales, if I'm correct. In 2020, how many customers will be live and driving growth in Automotive and in Industrial, if you can give us the detail?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [6]

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Main revenue contributor, okay, this year is still our main automotive customer because you know that other, let's say, electrical car, Phase 1, they move more on IGBT. So it is clear that for us, still the main revenue contributor is our main customer. Moving to a 3-year horizon, we clearly believe that the contribution from this customer will account for about 50% our total SiC revenues, thanks to significant growth with other automotive and industrial customer. So it means we will start, okay, to have contribution from the other one next year.

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Operator [7]

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The next question comes from Achal Sultania from Crédit Suisse.

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Achal Sultania, Crédit Suisse AG, Research Division - Director [8]

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Just if you can talk about, maybe, about the inventory on your books. Obviously, inventory is down $100 million a quarter in Q4 -- Q3 and Q4 both, but we're still looking at the fab underloading charge, which is down from 100 bps last quarter to 80 bps, your guidance for Q1. Clearly, like it seems you're still trying to manage inventory on your books very carefully. So should we expect some level of fab utilization pickup from -- starting from Q2?

And then secondly again on inventory in the channel. Obviously, we saw a pickup in your microcontroller business starting from Q3 last year. I guess some of the inventory in general purpose analog and discrete you mentioned previously were still running a bit higher than expected or normalized level. So where are we on those 2 products in terms of inventory in the channel?

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Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [9]

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Lorenzo speaking. I'll take the question. I will start from our inventory in the books. As you have seen, in Q4, our inventory went down materially. We are now in the range of 90 days. As usual, in the first part of the year, our inventory will likely increase -- will increase due to the fact that, of course, we are preparing also the revenues, therefore, the growth revenues expected in Q2 and in the second half of the year. So I do expect to have some increase in the number of days in our inventory, but it will be definitely lower than what it was last year. You remember, last year, we ended Q1 with an inventory on hand in our books that was in the range of 125 days. This year, I do expect it to be materially lower than this number of days, something in the range of 110 or something like that, so an increase but not a huge increase.

In terms of unsaturation, we -- actually, we had in the first quarter, as you know, an unsaturation that is impacting in the range of 80 basis points our gross margin. What is our visibility at this stage for unsaturation along the year? Yes, the unsaturation will continue also with a lower level in Q2. But then our expectation is that we will substantially go a full saturation of our fab, almost a full saturation of our fab in the second part of the year. So we will impacted in the first half for some unsaturation moving down from Q1 to Q2, and then in the second part of the year, we should really see this level be substantially not material.

In terms of inventory in the channel, maybe I'll leave Marco to answer -- have answer to this question.

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Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [10]

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So we're seeing this moment that the supply chain now normalized from excess inventory effects. The only exception is for a few standard products, such as the general purpose analog and non-power discrete. Overall, again, we see the supply chain now normalized.

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Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [11]

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Maybe I can add a little bit more color about unsaturation because to be honest, unsaturation for us in this first part of the year, more than on the control of our inventory that, of course, we put in place. It's not the point. But it's also related to the fact that we have unsaturation related to the fact that we see a quite significant change in terms of the mix with acceleration in demand on new technology, most advanced technology, and low demand on the legacy technology. This is creating lack of capacity, if you want, the need to invest for -- improve our mix, moving toward most advanced technology, while we have in this first part of the year more access on the legacy technology. This will be cured during the first half, and this is also one of the reasons why we will see unsaturation moving down during the year.

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Operator [12]

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The next question comes from Sandeep Deshpande from JPMorgan.

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Sandeep Sudhir Deshpande, JP Morgan Chase & Co, Research Division - Research Analyst [13]

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I have a couple of questions. So firstly, I have a question on your spending. I mean you raised CapEx in the year. You -- in your prepared remarks, you indicated that you're spending on various devices. Is there any particular segments that you are spending on, such as -- I mean is majority of the spending going towards power transistors or it is going towards your optics and sensors? So maybe you can give us some product color in where the spending is happening given that there is a significant increase in spending.

And then I have a follow-up regarding, overall, your sensors business. I mean maybe you can give us a roadmap on what you see at this point, I mean, where your optical sensors are going towards?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [14]

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Thank you, Sandeep. It's a very exhaustive question. About the Capex, well, clearly, I think I have been quite clear about the strategic initiatives, so I do not come back on it. Now the remaining $1.2 billion, part of it is to invest in R&D, equipment, more for differentiation. So new materials, okay, new film for imaging, this kind of stuff; and overall, let's say, maintenance, okay, to continue to have really efficient fabs and assembly plant.

Now about the capacity increase, I have to say it is driven by advanced technology enabled our products. So I would like to speak about BCD8, BCD9, 40-nanometer, secure microcontroller, 28 FD-SOI, image -- advanced imaging sensor. So it is really power MOSFETs, IGBT, low-voltage MOSFETs, okay, driven by mild hybrid car -- hybridization of the car. So it is well spread across our product portfolio and driven by differentiated and advanced technology. So -- and as Lorenzo mentioned a few minutes ago, one part is for additional capacity increase to support our solid growth we expect for 2020 second half and the first half of 2021 and because there is a lead time, okay, between the CapEx and the revenue. It is point #1. And another part is the mix adaptation of our fab, mainly Singapore, where we will have to adapt this fab, okay, to support advanced technology I mentioned. So this is, okay, for the CapEx.

About our sensor. Well, clearly, ST -- well, first of all, direct Time-of-Flight for our ranging sensor or auto focus support and so on and so forth, so we continue to grow. And basically, we address all the smartphone player. About deep [math] sensing front side, ST really will continue to act as a leader to address front-facing face recognition, both for structured light and other technology, if they are requested. And ST is also a key player for the rear-facing. So we developed a strong product and technology to address the [world-facing] and back end side of the smartphone. And we do expect to start to grow on this business starting next year.

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Operator [15]

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The next question comes from Matt Ramsay from Cowen.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [16]

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I wanted to -- you guys covered some of the silicon carbide stuff for 2020 in the commentary, and really appreciate the detail. I wanted to ask the first question on longer-term visibility in the silicon carbide business. You've closed Norstel and obviously signed a new agreement with ROHM for supply. Maybe what do you see for sort of a multiyear visibility of design wins across silicon carbide? And how long might it take you to integrate those deals into the supply? And then I have a follow-up.

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [17]

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Right. I feel -- so again, okay, Marco will complement. But no, I confirm that our -- the current program we have, so 51, are well spread between Automotive and Industrial. It's totally consistent in terms of funnel of opportunities for ST to sustain our objective of 30% market share of this business and achieve by 2025 minimum $1 billion of revenue extracted from this MOSFET on silicon carbide. And clearly, that's the reason why, in order to secure short/midterm our supply chain, we have increased our agreement with Cree and we have agreed a strategic agreement with SiCrystal. In parallel, as many times shared with you, we have invested in Norstel, a European-based raw material provider, to develop an internal supply chain. And we will decide timely what would be the weight of this internal supply chain. But more important, this internal supply chain will be also a key driver for R&D, so means of conversion to 200-millimeter. And for sure, a key driver to improve ourselves in terms of yield efficiency and productivity for the raw material. So at the end, to support our $1 billion target by 2025, we will have a well-spread and balanced supply chain between 2 key players, Cree and SiCrystal, and one internal one to secure our supply from Europe and driving our R&D and conversion to 200-millimeter. So this is our strategy on silicon carbide.

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Matthew D. Ramsay, Cowen and Company, LLC, Research Division - MD & Senior Technology Analyst [18]

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As a follow-up for Lorenzo. I wanted to ask about gross margin. There was some fairly significant upside in the fourth quarter. You guys mentioned mix and manufacturing efficiencies, but the guidance for March is sort of back towards where consensus was. You also mentioned sort of a negative mix effect and some pricing negotiations. Maybe you could break out some of the pieces of that gross margin on a sequential basis and -- that would really be helpful on the drivers.

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Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [19]

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Yes. Sure. In Q4, actually, our gross margin came better than expected. We were guiding the range of 38.2%. We came at 39.3%. Actually, there was 2 important components there, and we will remind about that. One was related to the mix. The mix went better than expected. This was driven by products, I would say, some of our products related to personal electronics and also, let's say, products related to the microcontroller. That came with an improved mix in respect to what was our initial expectation. Second point, there was a much better performance in our manufacturing, especially in back end. Because you know that in our -- substantially, our manufacturing machine which is different between front end and back end. Front end is something that efficiency in the fab are somehow reflecting in the next quarter gross margin; while back end, if you perform better in the second part of the production phase, that is back end. This is also reflecting during the quarter. We have a good surprise mainly driven by higher level of volume in -- on the back end side. This was the reason that brings the gross margin a higher level than expected.

On the other side, when we look at the dynamic of the gross margin moving from Q4 to Q1, we see this decline as 130 basis points. This is -- there is definitely an impact related to the price, the renegotiation that we have at the beginning of the year. This is impacting our gross margin in Q1, and this is usually seasonal. In terms of price renegotiation, we have this impact with the step-down beginning of the year. We recover partially during the year, of course, thanks to efficiency mix and so on, but it's difficult to recover in the first 3 months. Then we have a mix that is not as favorable as it was in Q4. What we see in this quarter, the mix is substantially a detractor on the gross margin. If you want, you can model something in the range of 100 basis points with the pricing and then 50 basis points with the mix. Then we have some recovery here and there but -- in term of some manufacturing efficiency. But at the end, let's say, we lose substantially this 130 basis points due to these 2 big drivers for Q1.

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Operator [20]

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The next question comes from Aleksander Peterc from Societe Generale.

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Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [21]

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Can we first touch upon the OpEx? Where do you see it in the quarter -- in the first quarter and how we should model it going into the remainder of the year? And I have a follow-up.

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Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [22]

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In the -- about the OpEx, you see that substantially, OpEx in Q4 came in line with the expectation. You have also noticed, when I talk about OpEx, I always include also the impact in the line, other income and expenses. That was quite positive in the quarter due to the fact that we had grants, as I was anticipating entering the quarter, recognized during the quarter, during Q4. The expectation for the next quarter is to have expenses that will stay in the range of between $620 million, $630 million, net Opex, including the other income and expenses. The quarter is shorter, so you will see, let's say, lower negative expenses in SG&A and in R&D and a little bit lower level of other income and expenses possible.

When we will look at the year, I'm pretty sure that sooner or later, I will have these questions so maybe I will anticipate, what is the current visibility today. As I was saying last year, when I was discussing with you, in terms of structure, we think that the company could sustain the growth that we target. Saying that, of course, there will be some increase in our expenses and at the level of the inflation rate plus, let's put it this way. So at the end, including other income and expenses for the year, what I see for the full year 2020, an average in the range between $600 million and -- something that will range between $640 million, $650 million.

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Aleksander Peterc, Societe Generale Cross Asset Research - Equity Analyst [23]

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Okay. And then secondly, you had very, very strong AMS margin. Now I'd just like to understand if this was a particularly favorable mix or is this the new now for the seasonally strong fourth quarter at ST.

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Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [24]

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Well, I was mentioning that Q4 was impacted by favorable mix and good performance in manufacturing, especially in back end. I would say that the group that was enjoying more these 2 effects is actually AMS, as you can see from the results of the quarter, from the operating margin we report. Yes, I confirm. This group was there, was enjoying these 2 positive effects during the quarter.

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Operator [25]

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The next question comes from Alex Duval from Goldman Sachs.

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Alexander Duval, Goldman Sachs Group Inc., Research Division - Equity Analyst [26]

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My first question was just to come back on this new CapEx guidance of $1.5 billion. Obviously, that's decently up year-on-year and a bit ahead of consensus. Obviously, you've given a lot of detail on some of the specific technologies you're investing in. But I just wanted to clarify to what extent this is about safeguarding products -- projects that you already had envisaged when you issued your $12 billion target? And to what extent it's about going after new opportunities that recently have come on to your radar? And if so, any more color on that would be interesting. Also related to your smartphone activities, there have been some reports recently there could be lower smartphone unit shipments than expected at one very large Chinese smartphone player. And therefore, given that, that potentially could have been a big incremental opportunity for ST, to what extent do those kind of situations in China have an impact for ST? And to what degree can you diversify within China or taking other steps in order to mitigate any impacts on that incremental opportunity?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [27]

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Thank you for the questions. So I take the CapEx one and Marco will comment about smartphone. Now about CapEx, so I repeat. So $1.5 billion, okay, out of which, okay, there is $400 million again for our strategic initiatives. So I repeat. So it is Agrate's 300-millimeter fab because beyond 2021, starting 2022 and beyond, okay, we will need to have advanced analog and smart power technology going to 90-nanometer, and let's say, and shrinking out. So we must prepare ourselves.

But then, second, it is an initiative on gallium nitride, both for our power and energy control strategy. Because again, ST, starting, okay, 2 years from now, we have totally completed our position to address this market with, I repeat, high-voltage PowerMOS, low-voltage PowerMOS, IGBT modules, silicon carbide MOSFET, and soon, gallium nitride MOSFET. So we have the full spectrum of technology, package and module to act as a leader on this market and capture the megatrend. So this is the second strategic initiative on the GaN. And then consistently, with the acquisition of Norstel, we will start to elaborate our own facilities on substrates. So this is about strategy.

Then about, let's say, the remaining CapEx. Well, remaining CapEx, it is clear that what is happening in 2020, after a global soft market condition of 2019, is quite usual. You see the demand for high-end technology, a great acceleration. So for us, all the demand, I repeat: BCD8 shrink, BCD9, BCD10 soon, 28 FD-SOI, 40-nanometer for secure solution, 28, okay, for microcontroller automotive, 40-nanometer for general purpose microcontroller, IGBT for hybridization, low voltage for mild hybrid, all these application occurring for capacity increase in our fab because we offer solutions enabled by differentiated technology. So our CapEx is either to add on capacity on this technology and application or to adapt the needs of our wafer fab. And you know very well the model because I very often share with everybody. Basically, you need to increase capacity $0.8 per $1 of growth; and to maintain your infrastructure, adapt the needs, put new equipments in R&D, basically, you need to spend 7% of your sale. And as we subcontract with our partner, 20% of our production for foundry and about 30% in assembly and test, of course, this model is discounted by this external production ratio to total production. So this is the model. So this CapEx is fully consistent with the model and with our strategy. So this is about CapEx.

Now I would like Marco to speak about smartphone.

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Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [28]

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About smartphone, as you know, 2019 still was a year with a number of smartphone declining year-over-year. 2020, the expectation is that the smartphone are going to increase again, leveraging on the introduction of the 5G smartphones coming to the market. So there will be an increase of number of stores with an increase of ASP inside the phones. On top of that, for the Chinese smartphone-maker, [while there has been], we are leveraging, of course, on the leadership position that we do have, for example, on wireless charging or on MEMS, and we are expected to gain market share in those sets.

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Operator [29]

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The next question comes from Jerome Ramel from Exane BNP Paribas.

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Jerome Andre Charles Ramel, Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor [30]

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Jean-Marc, 2 points on the strategic initiative. Interesting comment on gallium nitride. You seem to be more active on that field. So 2 questions on the gallium nitride. When are you expecting to start shipping the gallium nitride on silicon for RF power? And on power that you reviewed, should we expect some traction in automotive for the 48-volt anytime soon?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [31]

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A very technical question. About RF, by next year, okay, we expect to start to generate revenue starting 2021. For power device, what is clear that -- why GaN is so important in our technology portfolio is because each time you need to have -- to increase the frequency and you need to have power, the GaN is a good answer for charging whatever is onboard charger for automotive or other kind of device charger where you need to grow fast. And with RF power, this technology is great. And silicon carbine, silicon carbide is a key success factor each time you go to a very high power. As an example, to move to 850 volt, to have very fast charger and to optimize, okay, the battery and the footprint, silicon carbide is mandatory and is a killer in front of the IGBT. So this is the breakdown.

Well, clearly, for power GaN, we are developing the technology. We are in parallel with the initiative that I cannot disclose now because, okay, it's confidential for the time being. And -- but clearly, this initiative are to boost our positioning on this power device using GaN. And we expect it will contribute to our 3-years plan toward about $12 billion revenue.

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Jerome Andre Charles Ramel, Exane BNP Paribas, Research Division - Analyst of IT hardware and Semiconductor [32]

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And maybe as a follow-up. On the comment you made on 3D sensing, developing new films, are we talking about polymer film?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [33]

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It's a new film.

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Operator [34]

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The next question comes from Andrew Gardiner from Barclays.

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Andrew Michael Gardiner, Barclays Bank PLC, Research Division - Director [35]

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I just had another one on the CapEx spending, if I could sort of try the question a different way. Clearly, you're spending a lot more this year than you have done in the prior 2 years. And I can understand how you're -- what you're describing, Jean-Marc, in terms of the strategic initiatives and why they need investment. I'm just wondering if this step-up in plan was sort of always on your -- always on the cards for this year in terms of your internal planning. Or in fact, are you seeing the opportunities materialize a bit sooner, and therefore, you've actually had to pull forward some of the spending to get things in place to drive the product ramps, drive the revenue? And so therefore, relative to the $12 billion target you've set out there for the medium-term, is this high level of CapEx suggesting that we could see that a bit sooner rather than later?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [36]

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Yes. So you -- if you remember what we mentioned, okay, at our Capital Markets Day, we said basically 2 important things. We speak about 2019, okay, which are facing global soft market condition. We have to go through delivering a solid performance. And in that time, okay, we need to spend the CapEx between $1.1 billion to $1.2 billion in order to support the second half of growth and to support strategic initiative. But what we say -- on another side, we say, in order to support our ambition toward $12 billion midterm, we know and we shared clearly with you that our CapEx will be, by year, in the range of $1.1 billion to $1.5 billion. It was in May. You know that the main outcome -- again, the main outcome of this past 2019 year, which was really a global soft market condition, but really with very different dynamic. And I'll repeat again. On legacy automotive, on industrial market, clearly, we see an acceleration of the obsolescence of the mature technologies; but in the same time, we see an acceleration of demand for more sophisticated technology, analog or embedded processing solution, in order to enable more complex products. And here, we see an acceleration. And this is calling for capacity because ST are especially developing technology targeting this kind of market.

On another end, okay, we comment about personal electronics. So personal electronics, whatever are the device, smartphone, wearables and accessories, our content of semiconductor ST-specific is increasing. So it is calling for capacity increase, but let's say, according to the demand. Then for microcontroller overall, embedded processing solution, again, you know that here, we subcontract widely in foundry. But clearly, for secure microcontroller, automotive microcontroller and some specific system-on-chips embedding microcontroller in 40-nanometer, here, we see the same phenomena for more, let's say, acceleration of new technology and products. So that means overall, according to the plan we have today, in term of revenue growth, in term of mix, in term of technology, for the second half of 2020 and the first half 2021, we need to spend this CapEx on top of the strategic initiative I have shared with you. Again, always targeting above 20% of outsourcing in foundry, thanks to the partnerships -- the main partnership we have with companies like TSMC or Samsung; and with the OSAT in assembly and test, where we are well above 30%. So this is, again, the color about CapEx.

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Andrew Michael Gardiner, Barclays Bank PLC, Research Division - Director [37]

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I'm just wondering if I could follow-up, I mean, in terms of what you're describing there in terms of the growth in the second half of this year and into the first half of next. You guys have talked clearly for some time now about outperforming the market which you serve. You didn't specify a number there for what you think the served market is going to grow. You just mentioned TSMC. I mean they've talked about semis ex memory growing 8% this year. That's not perfectly analogous to your served market, but there are similarities. I mean how do you see your served market growing in 2020?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [38]

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Okay. This is a public information, okay? The latest forecast from WSTS for the market we serve is about, 2020, a year of growth of 7.5%. We expect that the next 3 months will confirm this dynamic, and this is a number we have taken into consideration, elaborating our business and industrial plan to drive the company.

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Celine Berthier, STMicroelectronics N.V. - Group VP of IR [39]

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Alessandro, we will take the last question for today. Obviously, Investor Relations team remain available for any of your other question. We can take some calls after this call. Thank you very much.

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Operator [40]

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The last question comes from David Mulholland from UBS.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [41]

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Just 2 quick ones for me. Firstly, on the trends you're calling out into Q1 in AMS and for personal electronics to be better than seasonal. Can you just give us some color on whether that's because your largest customer there is trending better than seasonal? Or if this is because you're seeing other products and other customers starting to ramp up a bit more, I guess, things like your RF power amplifier business.

And then secondly, just on the various silicon carbide supply agreements that you signed. Can you just help us understand the structure of those and whether they have some sort of take-or-pay arrangement or whether there's just flex in that? What are you giving to get this commitment from the supplier on the capacity?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [42]

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Well, about the better-than-usual seasonality on smartphone, it is well spread. And no, we cannot comment in detail the customer rationale. But I can say it is well spread, and there is various, let's say, good reason behind, and it's better, okay, really than usual seasonality. But it is -- for ST, it is well spread across our customer base. And we address all the customers, okay, whatever they are, Chinese or American.

About silicon carbide, you know that I cannot comment the detail of strategic agreement and contract. Again, I do believe that a company like and Cree and SiCrystal, they perceive ST as a strategic partner, a key player with today a leading position on silicon carbide. And thanks to the 51 programs, we are in a good position to achieve 30% market share and $1 billion revenue by 2025. So I guess this is the reason why these 2 companies are interested with us to participate to our success.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [43]

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But if I can just clarify now because there's a lot of variation and expectations on how pricing will trend for wafers. Have you already potentially pre-agreed things like pricing over the next 2 to 3 years as part of that?

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [44]

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Now our ambition is sustainable and profitable growth, so we are acting consistently.

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David Terence Mulholland, UBS Investment Bank, Research Division - Director and Equity Research Analyst - Technology Hardware [45]

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I tried.

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Celine Berthier, STMicroelectronics N.V. - Group VP of IR [46]

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That's fair. Thank you very much. This will conclude our call, I think. Thank you very much, all of you, and see you next quarter for this type of calls. And in the meantime, as Jean-Marc has reminded, we have a presentation at Mobile World Congress on the 25th of February and our Capital Markets Day on the 6th of May.

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [47]

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And I take the opportunity because it is still possible to wish everybody a happy and profitable new year 2020.

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Celine Berthier, STMicroelectronics N.V. - Group VP of IR [48]

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In France, it's still possible.

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Jean-Marc Chery, STMicroelectronics N.V. - President, CEO, Acting President of Human Res. & Corp. Social Resp, and Member of Managing Board [49]

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It's still possible. Thank you. See you soon.

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Lorenzo Grandi, STMicroelectronics N.V. - President of Finance, Infrastructure & Services and CFO [50]

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Thank you. Bye.

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Marco Luciano Cassis, STMicroelectronics N.V. - President of Sales, Marketing, Communications & Strategy Development [51]

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Thank you.

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Operator [52]

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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. Goodbye.