STMicroelectronics NV (STM) Q3 2021 Earnings Call Transcript

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STMicroelectronics NV (STM 1.94%)
Q3 2021 Earnings Call
Oct 28, 2021, 3:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Ladies and gentlemen, welcome to the STMicroelectronics Q3 2021 Earnings Release Conference Call and Live Webcast. I'm Moira, the Chorus Call operator. [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.

Celine Berthier -- Group Vice President, Head of Investor Relations

Thank you, Moira. Good morning. Good morning, everyone, and thank you for joining our third quarter 2021 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; and 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 expectations and plans. We encourage you to review the safe harbor statement contained in the press release that was issued with the results this morning and also in ST's most recent regulatory filings for a full description of these risk factors. [Operator Instructions]

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

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

So good morning, everybody, and thank you for joining ST for our Q3 2021 earnings conference call. Let me begin with some opening comments starting with Q3. Net revenues increased 6.9% on a sequential basis to $3.2 billion, substantially in line with the midpoint of our business outlook range. The revenue performance was driven by strong global demand and by our engaged customer programs in Personal Electronics. This was partially offset by lower-than-expected revenues in Automotive caused by more severe-than-anticipated reduced operation at our Malaysian manufacturing facility due to the pandemic. Our gross margin at 41.6% came in 60 basis points above the midpoint of our range.

Looking at our year-over-year performance, net revenues increased 19.9%. Our gross margin of 41.6% and operating margin of 18.9% improved from 36% and 12.3%, respectively. Our net income nearly doubled to $474 million. On a year-to-date basis, net revenues increased 30 -- 31.8% to $9.2 billion driven by growth in all product groups except the Radio Frequency Communications subgroup. For the nine-month period, we reported a gross margin of 40.4%, operating margin of 16.7% and net income of $1.25 billion.

On Q4 2021, at the midpoint of our outlook, we expect net revenues in the fourth quarter to be about $3.4 billion, representing an increase of 6.3% sequentially. Gross margin is expected to be about 43% at the midpoint, representing a sequential increase of 140 basis points. For the full year 2021, based on the midpoint of our Q4 '21 guidance, we now expect full year revenues of about $12.6 billion, representing a year-over-year increase of 23.3%, at the high end of the range we provided in July. This growth is expected to be driven by continuing strong dynamics in all the end markets we address and our engaged customer programs. Our 2021 capex investment plan of about $2.1 billion remain unchanged.

Now let's move to a detailed review of the third quarter. The revenue performance was driven by strong global demand and by our engaged customer programs in Personal Electronics, partially offset by the impact of the pandemic in Malaysia. Net revenues increased 19.9% year-over-year, with higher sales in our three product groups and all subgroups except, as expected, the Radio Frequency Communications subgroup. Year-over-year sales to OEMs increased 9.9% and 48.6% to distribution. On a sequential basis, net revenues increased 6.9%, substantially in line with the midpoint of our outlook.

This growth was mainly driven by IMS, up 25.2%, and, to a lesser extent, MDG, up to 2.6%, while ADG decreased by six.7% caused by more severe-than-anticipated reduced operations at our Malaysian manufacturing facility due to the pandemic. Specifically, the incremental revenue impact in Q3 related to Muar is about $100 million, above our initial assessment, mainly for the Automotive subgroup. Gross profit was $1.33 billion, increasing 38.7% on a year-over-year basis.

Gross margin increased year-over-year to 41.6% from 36% mainly driven by manufacturing, both efficiencies and better loading as well as product mix and more favorable pricing. These positive drivers were partially offset by negative current effects, net of -- currency effects, sorry, net of hedging. Our third quarter gross margin was 60 basis points above the midpoint of our guidance driven by product mix. Third quarter operating margin was 18.9% from 12.3% in Q3 '20, with improvements in all three product groups. Both net income and diluted earnings per share nearly doubled year-over-year, respectively reaching $474 million and $0.51 from $242 million and $0.26 per share in Q3 '20.

Looking at the year-over-year performance, all product groups recorded double-digit growth. ADG revenues increased 18.1% on growth in Automotive and Power Discrete. AMS revenue increased 27.1% on higher Analog, MEMS and Imaging Product sales. MDG revenues increased 12.9% on growth in Microcontrollers, partially offset by the expected decline in Radio Frequency Communications. By product group on a year-over-year basis, all product groups showed improvement in operating margin. ADG operating margin increased to 10.8% from 5.8%, AMS operating margin increased to 24% from 17.5% and MDG operating margin increased to 23.9% from 17.4%.

Net cash from operating activities more than doubled to $895 million in Q3 versus $385 million in the year ago quarter. capex in third quarter was $437 million compared to $319 million in the year ago quarter. Free cash flow improved to $420 million compared to a negative $25 million in Q3 '20. We exercised the call option of the early redemption of our 2024 Tranche B convertible bond issued in 2017. As a consequence, bondholders exercised their conversion rights on the total of $750 million principal amount of the bond. In the third quarter, we fully settled this bond, delivering about 5.8 million treasury shares and paying $1.26 billion in cash, which includes the $750 million principal amount.

During the third quarter, we paid $55 million of cash dividends to shareholders, and we executed a $87 million share buyback in connection with our new share repurchase program initiated on July one of this year. Our net financial position was $798 million at October two, 2021, reflecting total liquidity of $3.46 billion and total financial debt of $2.66 billion. Let's now discuss the market and business dynamics. Similar to the second quarter, the backdrop of strong global demand continued with supply chain remain stretched -- remaining stretched, sorry.

In Automotive, bookings remained strong in Q3, and the backlog still covers about 18 months of demand. Demand continued to be well above our current and planned manufacturing capacity. One of the biggest challenge in the quarter for the whole automotive industry has been the pandemic situation in Malaysia, a country accounting for 13% of the worldwide chip assembly, testing and production. This had an impact also on us.

First of all, to Muar, deepest regret. It impacted our employees and their families at our site in Muar. Then there was an operational impact. With the worsening of the situation in July and August, the impact of reduced operations in our facilities in Muar became more severe than anticipated when providing our Q3 2021 business outlook. Our site went through a period of partial or complete closure with a progressive return to 100% production capacity during Q3.

Moving now to car electrification and digitalization. In car electrification, we added to our list of projects for silicon carbide devices. overall. Overall, our engagement increased again during the quarter, now with 85 ongoing programs and 70 customers equally split between industrial and Automotive. I am pleased to announce that based on our strong pipeline of design wins and market dynamics, we now anticipate to reach our target of $1 billion of silicon carbide revenues in 2024, one year earlier than planned. New design wins in Q3 include a generation-three silicon carbide MOSFET for an electrical vehicle climate control compressor. There were also a number of other electrical vehicle applications where we had success with complementary technologies.

These includes sockets for high- and low-voltage silicon MOSFET and microcontroller in battery management systems and traction inverters, MOSFETs and inverters, onboard chargers and DC-to-DC converters and VIPower in electrical vehicle battery packs. In car digitalization, during the quarter, we had a number of design wins with our 32-bit automotive microcontroller family in applications like body domain, Smart-Gateway as well as a win for our Teseo GNSS chipsets in an audio/video navigation system. Also, in our automotive sensor business, we won sockets with automotive-grade inertial measurement units across multiple applications such as telematics, door control and navigation.

Moving now to Industrial. We continue to see very strong demand both in high-end and consumer industrial and with distribution as well as OEMs, in line with our broad approach in the highly fragmented industrial market. Inventories of our products at distributors continue to be lean across all product families with high inventor turns. We address the industrial end markets with our general-purpose and secure embedded processing solutions, power/energy management products and our sensors and analog portfolio.

In embedded processing, we are continuing to strengthen our leadership through the STM32 family offering and ecosystem. As I have mentioned before, we have a particular focus on wireless connectivity, security and artificial intelligence. We are seeing increasing success with our STM32 wireless product line, achieving design wins across a broad customer base. We strengthened support for wireless design with additional software tools as well as new modules that will help developers grow faster. In artificial intelligence, we released tools that add new artificial intelligence methods to our STM32Cube.AI.

In power and energy management, we achieved a number of wins with our Power Discrete portfolio. For example, with silicon carbide transistors and modules, with high- and low-voltage silicon MOSFETs, with IGBTs and with diodes. Applications include solar inverters, energy storage systems, power adapters, home appliances, air conditioning and lighting, welding and industrial power supplies. We also won a 1,200 SiC-based power module for an electrical vehicle charging station.

In the quarter, we also had many new designs with our industrial analog products with award in application like motion control, smart grid, factory automation and home appliances. We continue to win business in sensor for industrial application, such as power tools, and with our specialized devices like inclinometers. Moving now to the personal electronics market. In Q3, we continued to see strong demand for smartphones and for other connected devices, including wearables, tablets, hearables, true wireless stereo headsets restarts and game consoles.

Our first strategic objective in Personal Electronics is to lead in selected high-volume smartphone applications with differentiated products or custom solutions. During the quarter, we won sockets in a number of devices with motion sensors, ambient light sensors, time-of-flight ranging sensors for laser autofocus, wireless charging products, touch display controllers and secure solution. Our second objective is to leverage our broad portfolio to address high-volume applications. Here, we had wins with a broad range of light, motion and environmental sensors as well as with analog power and microcontrollers in applications such as smart watches, true wireless stereo headsets and smart shoes.

We also progressed on engagements with several leading players for our laser beam scanning solutions for augmented reality. In communication equipment and computer peripherals, we continue to see adoption of 5G-related products as well as a sustained demand for PC, mainly for enterprise notebook. Moreover, following the recent Helios satellite launches, I can confirm that our programs and ramp-up are on schedule. We have three strategic objectives in our approach to this end market.

One is to address selected applications in cellular and satellite communication infrastructure. In this area, we were awarded new sockets in a radio frequency design for satellite. We also target selected high-volume applications with differentiated products or custom solutions while leveraging our broad portfolio. Our wins here include time-of-flight sensor for laptops, many general-purpose MCU design wins as well as a win with our MasterGaN family for smart charging control in an ultra-slim power adapter. Now let's discuss the fourth quarter outlook.

For the fourth quarter, we expect net revenues to be about $3.4 billion at the midpoint, representing a growth of 5.1% year-over-year and 6.3% sequentially. Gross margin is expected to be about 43% at the midpoint, representing year-over-year and sequential increase of 420 basis points and 140 basis points, respectively. Based upon our year-to-date results and Q4 midpoint, we now expect 2021 net revenues of about $12.6 billion, at the high end of the range we provided in July. This plan will translate into year-over-year growth of 23.3% at the midpoint. Drivers of this expected growth are the continuing strong dynamics in all the end markets we address and our engaged customer programs.

To conclude, our results in the third quarter and higher sales plan for the full year reflect strong year-over-year revenue growth, translating in higher operating profitability, net income and free cash flow. Revenue growth stems from the expected continuation of strong dynamics in all the end markets we address and our engaged customer programs. Our focus stays on customers. We continue to adapt our supply chain to support their strong demand. We also continue to provide leading-edge technology and product innovation to enable smarter mobility, more efficient power and energy management, the wide-scale deployment of IoT and 5G and a more sustainable world.

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

Questions and Answers:

Operator

[Operator Instructions] The first question is from Stephane Houri from ODDO. Please go ahead.

Stephane Houri -- ODDO--- Analyst

Yes. Good morning, everyone. Actually I have two questions. The first one is an update because last quarter, you basically said that end demand was more than 30% above the current supply. So can you please update this statement and comment on your visibility for 2022 revenue growth? And the second question is about the gross margin guidance in Q4. 43% is a level that honestly I haven't seen for many, many years, if ever. So can you comment a little bit on the elements of this gross margin evolution and if this level can be seen as a sustainable level going forward? Thank you very much.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

Thank you for the questions. So I will take the one related to the revenue perspective, and Lorenzo will take the one about the gross margin. Well, I can confirm that for 2021, yes, OK, we are seeing unconstrained demand, which will -- let's say, are really well above our manufacturing capacity and sales plan, OK, in the range you mentioned. Things will improve next year, definitively, but the gap will be still quite material.

About 2022, what I can say, having the following elements in our hand, basically the market we sell will be supposed to increase by 8%. Looking at our backlog coverage that, again, OK, is above the manufacturing capacity we are planning, we are planning based on the investment, OK, we are doing currently and will contribute, OK, for the first half next year. And the investment we are planning for the first half next year will contribute to the second half. I can say that we are -- I am -- we are very confident that, OK, ST will perform materially better than the market we sell for next year.

And again, we will communicate, OK, end of January the capex we intend to do for 2022. And we will provide the detailed number for the year indication in April. But I can confirm now that we are very confident to perform much better than the market we sell. Lorenzo?

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

Yes. So maybe I take the second question about the gross margin, the dynamic of the gross margin. Good morning to everybody. A gross margin of 43% is our guidance for the current quarter here, that we will see an improvement in respect to 41.6% we posted in the last quarter, in Q3. And this is mainly driven by two elements. On one side, we have still a positive price environment that is helping our gross margin, as well as we also have improved efficiency.

This especially will be in our -- both in front end but especially in our back end, where today, all our plants, including, of course, the plant in Malaysia, in Muar, are running at full capacity and at full efficiency. Looking at the total year, let's say, if -- at a midpoint of our Q4 guidance, the gross margin for the total year will come in the range of 41%. Moving forward, of course our gross margin has some seasonality quarter-over-quarter.

Anyway, the price environment moving in 2022, considering the backlog that we have and the situation of the business, I would say that they remain positive. And definitely, we still have room for manufacturing productivity gain and definitely also for a better product mix moving in the next year. We have also to consider that -- however, the recent increase in our cost. There is inflationary cost there that are not yet fully reflected in our gross margin at the moment in Q4. This will progressively materializing in the next quarters.

Additionally, you have also to consider that we are investing, let's say, the investment that will increase our depreciation, as, of course, the increased production and in capex, there is a lag of time between when you can increase your production and have a full efficiency of your investment. Anyway, when I look at all these ingredients altogether, I think that let's say, we have a -- moving in the coming quarters, we -- definitely we have opportunity to improve our yearly gross margin in respect to the 41% and moving in 2022.

Stephane Houri -- ODDO--- Analyst

Okay. Thank you very much.

Celine Berthier -- Group Vice President, Head of Investor Relations

Next question, please.

Operator

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

Matt Ramsay -- Cowen -- Analyst

Yes. Good morning everyone. Thank you very much. I guess just following on the margin question a little bit, and congratulations, guys. 43% is a heck of a level. I guess, Lorenzo, could you walk us through a little bit more specifically what kind of driver -- or I guess how material is the pricing increases in your gross margin that you're seeing and maybe what you plan for the next couple of quarters? And I guess the reason for the question I get asked a lot, how much of this pricing increase that you guys are seeing right now in this environment where demand is materially better than supply, how much of that price increase do you guys think is sustainable through the cycle versus transitory? And I guess my second question is just on the ADG business. Obviously, some headwinds in Malaysia. Jean-Marc, if you could talk about how you see that business recovering and potentially how quickly in the first half of the year and maybe even in the fourth quarter. Thanks.

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

I take the one on gross margin. When I -- when we look at the gross margin, let's say, for sure there is an ingredient there that is, as I was saying before, related to the price. If you want -- when we look at our progression of the gross margin, both if I look sequentially, even if I look year-over-year, of course, year-over-year there are many components. But I would say there are two main drivers. On one side are the price environment.

On the other side is the product mix and manufacturing efficiency. This impact, I would say that all in all when I look at, let's say, the progression is more or less in the 50-50. How much is sustainable, the pricing rise? I think that in a short, medium-term, I think this situation will stay also because, as I was saying before, let's say, here is an inflationary environment both from our side, let's say, to our customers but also, let's say, for our cost.

I said what -- I repeat what I said before. Let's say looking at the level of profitability in term of gross margin of this year, I think that combining together, let's say, price environment, manufacturing efficiency, and also discounting, of course, on the other side, the headwinds that are mainly related to this price increase from our supply, I think that there is room to progress moving year 2022, our gross margin, compared to the year 2021. Of course, following some kind of seasonality that we normally have, I mean, which -- let's say, the gross margin in the first quarter and first half generally is a little bit lower in respect of the gross margin in the second half.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

To -- about the second question on Automotive and Power Discrete, yes, I can confirm that this group will be a key contributor to the growth in Q4 for ST. Just as a matter of transparency, so I mentioned during my speech that versus what we already embedded in our guidance, the impact of Muar has been $100 million, mainly impacting the Automotive Product Group.

But what we already embedded in our guidance was $70 million. So you see a total impact of Muar of $170 million on Automotive -- mainly on Automotive Product Group and, in a lesser extent, on Microcontrollers. So now Muar operation completely resumed during September. All the people are vaccinated. We have, let's say, in full agreement with the Malaysian authorities, OK, to really adopt, let's say, protocols to avoid any further lockdown and closure of our plant. So yes, OK, I am very confident that, OK, ADG will be a key contributor of the growth in Q4 and next year.

Matt Ramsay -- Cowen -- Analyst

Thank you very much, guys. I appreciate it.

Celine Berthier -- Group Vice President, Head of Investor Relations

Thank you, Matt. Thank you. Next question please Moira.

Operator

Your next question is from Johannes Schaller from Deutsche Bank. Please go ahead.

Johannes Schaller -- Deutsche Bank -- Analyst

Yes. Thanks for taking my questions. Firstly, we have seen a few semiconductor companies talking about destocking of components even in this very strong demand environment. And I think that's mostly in PC and smartphone, and it relates to components that are not in tight supply. But then there was restocking, but the final product, the PC or the smartphone, couldn't be built. Can you maybe give us a bit of an overview on your product portfolio, if you are seeing any of such dynamics in any of your businesses?

Jean-Marc, I think you already mentioned on the distributor channel you see very lean inventories. But maybe there are some product groups we should consider here where inventories have recovered already. And secondly also, Jean-Marc, I think you maybe scared the market a little bit when you talked about flat imaging sales about a year ago in 2022. Can you now just maybe give us a quick update to better understand the dynamics in imaging? And maybe also, give us an idea of how that business is growing in the second half of this year compared to the second half of last year. Thank you.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

So thank you. Sorry. Thank you for your question. Now first of all, OK, about Personal Electronics and computer, as you know, our strategy is to address selectively this market basically with a custom-designed solution. So you have no inventory and custom-designed solution as a principle because, OK, we have a perfect connection with our customers, and we are working, OK, with forecasts and, let's say, real-time sales. So we have not seen any inventory, OK, change because, OK, we have no inventories. However, you know as well that we are addressing also this market, taking opportunity of our, let's say, greater general-purpose product portfolio, so like MCU on power.

And clearly, overall on Personal Electronics and computer, we have not seen, OK, an, let's say, adjustment in the inventory pipeline. Well, I would like to recall that, OK, even if worldwide, OK, we have seen here and there some fluctuation in the smartphone market, all the markets related to accessories, so headset, OK, all this kind of stuff, is very dynamic, is very strong.

So we have absolutely not seen that. Well, about Imaging, well, clearly, in H2 this year compared to, let's say, H2 last year, there is a different profile of the revenue between Q3 and Q4. Because if you remember well, last year was a little bit exceptional mainly related to one of the... our major customers because the program and the introduction of one were a little bit delayed, which was not the normal signature of revenue.

This year, OK, is coming back to normal. So we have a strong Q3. And basically, OK, that's the reason why we shared with you that our AMS group contribute a lot on the Q3 revenue growth both sequentially and on a year-to-year basis.

Well, in Q4, definitively this year, OK, is a different profile compared to Q4 last year. Also, the number of the quarter or the day of the quarter is materially lower. Basically, we have six days less in Q4 2021 versus Q4 '20. Well, then, OK, last but not the least, I guess you have seen, OK, like me many communication from Tier one on the architecture of their system, OK, that I will not comment but, OK, by the way, quite well balanced between [Indecipherable] and modification.

And I would simply to confirm that, OK, this Imaging product group will contribute this year to the growth of the company. We have completed, as I said a few minutes ago, the sales and operating plan of the company for next year that will target a material growth better than the market we serve. Imaging, OK, will materially contribute to this growth. And with the visibility we have, I am very confident that Imaging, OK, will be a key contributor of the revenue model, OK, that ST will disclose, OK, certainly next year at our Capital Market Day.

Johannes Schaller -- Deutsche Bank -- Analyst

That's very clear, Jean-Marc. Just maybe one quick follow-up on the inventory question. Is there anything in automotive, even some smaller components, that may be less supply constrained where you see any inventories right now? Or is there really nothing in your view within the supply chain at your customers?

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

To the day-to-day life we have with our customer, OK, first, the Tier one and the carmaker, that the list of, let's say, components of [Indecipherable] To the capability of the semiconductor to support the automotive industry is quite wide. Well, then the carmakers and the Tier one, they manage their supply chain, and we don't know -- we have not the visibility of the way they behave, OK, facing this shortage of many components for the time being.

And oh, they prepare, OK, their Q4 and next year. But from our, let's say, visibility for our whole consignment stock, because that the business model, OK, with the automotive industry is consignment stock, and then, OK, the push-out to their whole supply chain, we have no, let's say, over-inventory in our, let's say, supply chain. If we have a slight inventory increase for ST, it's simply due to the fact that in Q3, OK, we have seen our Muar operation, OK, facing many closures. We have decided to not stop wafer supply. Why? Because, OK, we strongly believe that we will recover, OK, Muar, let's say, issues during the course of the next few months. And all this water will be absorbed, OK, thanks to the strong demand we have from the automotive industry.

Johannes Schaller -- Deutsche Bank -- Analyst

That is very helpful. Thank you so much.

Celine Berthier -- Group Vice President, Head of Investor Relations

Thank you very much, Johannes. Next question please, Moira.

Operator

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

Didier Scemama -- Bank of America -- Analyst

Good morning. And thanks for taking my question. I just wanted to come back to your gross margin puts and takes. I think that was quite useful. I just want to understand one thing with regard to calendar year 2022. So you're talking about inflationary pressures, which I fully understand, coming from your subcontractors, materials, etc. But so far, those costs have already started to come through, and yet you are guiding for, if I remember, the highest gross margin since 3Q 20 -- 2000. I think you did 47% there, if I recall. It was, I think, the second or third quarter I covered ST.

So my question to you is, when you look at 2022, pricing is starting to move up for you guys. Your long-term contracts are probably starting to get repriced as well, which was not the case, I suspect, in 2021. So in other words, for your gross margins to not be above 43% or at least well above 41%, you would have to assume that either your depreciation is going to go up massively into 2022 or that you cannot, if you want, more than pass on or at least pass on the inflationary pressures you get from your subcontractors and materials. I'm just trying to understand, why -- what are the bits there that I'm missing?

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

Yes. I take your questions. It's quite a big question. Yes, of course, when I look at the dynamic of our gross margin, there are different elements, as you were mentioning. On one side, for sure the inflationary costs that we see are not yet fully reflected correctly in our current gross, in our expectation of the gross margin, let's say, even if also during this year, they were progressively entering in our gross margin in 2021 already because we were protected by some long-term agreement. But progressively, these long-term agreement were expiring. So yes, it's true that, let's say, a portion of these inflationary costs will come inside the year 2022. It's even true that on the other side, we have a -- we see positive impact on our gross margin moving in 2022 coming from product mix, coming from improvement in manufacturing, in our efficiency, in our back end.

So this will, on one side, offset this negative impact. There is -- will be seasonality during the year, as I was mentioning before. And what we think and what we see looking at the next year is that our gross margin in average for the year 2022 will be, let's say, improving in respect to the average that we have in 2021. So we see, let's say, still opportunity to progress in gross margin in the next year.

Didier Scemama -- Bank of America -- Analyst

Very well. Thank you for the details on that. I wanted to ask also a little bit about the macro environment. So we've seen some reports of power cuts in China. So I just wondered if you could give us a little sense of situation on the ground over there. You said your distribution inventories were lean. Have you seen any sort of negative activity or negative impact from those power cuts? Or any slowdown in the China economy with regards to your distribution business or direct business with OEMs in that region?

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

Absolutely not. I think, OK, with what happened in Malaysia, it's enough for ST. But in China, absolutely not.

Didier Scemama -- Bank of America -- Analyst

Okay. Brilliant. And then maybe one tiny one since this one was short. You said that Q4 is short by six days. Is there any sort of number you can give us for Q1? Is it a more normal quarter for Q1?

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

Yes. So Q1 will be, let's say -- Q4, I would qualify Q4 as a normal quarter because it's 90 days. What was not really normal was Q4 last year. That was a longer calendar days for ST. This year, let's say, this quarter is 90 days, and Q1 will be similar, I think.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

92.

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

Huh?

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

92 days.

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

92 days, OK.

Didier Scemama -- Bank of America -- Analyst

Thank you very much.

Operator

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

Jerome Ramel -- Exane BNP Paribas -- Analyst

Yes. Good morning. Question, could you update us on the capacity coming from foundry and also the ramp-up of your own capacity specifically for silicon carbide and gallium nitride? On the gallium nitride, when are we going to see this program to become material for STMicro?

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

As I said, OK, on the nonrecurring point, OK, the support we receive from the foundry in H2 versus H1, as far as volumes are concerned, is below, OK? I already explained why because, OK, during last March, OK, some decision had been taken about allocation to support the automotive industry and to detriment of the industrial market. Well, I don't want to comment more than that. One good news is that part of our sales and operating plan, of course there is our internal manufacturing capacity and foundry commitment to us.

And I can confirm that next year, OK, they will increase, OK, their support, especially to support a lot of growth on microcontroller. Silicon carbide. Well, silicon carbide, OK, we are, let's say, continuing to increase quarter after quarter our capacity first in assembly in Shenzhen and in Bouskoura, OK, both for application-specific, OK, modules or packages. We continue to increase our capacity in Catania, and now we have the double source in Singapore.

We are in close connection with our suppliers. So our capacity is steadily increasing with the -- to support, OK, the very strong demand of our customers and especially, OK, one, OK, with whom we are engaged. Longgang, OK. Longgang, OK, you know that our strategy, OK, was to go fast on the market with again, OK, using TSMC as a foundry. So this is what we are doing. So our revenue will start, OK, to grow next year. And in parallel, embedded in our capex for 2021 and 2022, there is capacity we are building in our wafer fab in Tours that will contribute, OK, to the revenue more, let's say, in 2023, 2024 and beyond.

Jerome Ramel -- Exane BNP Paribas -- Analyst

Thank you. And maybe a follow-up just on the opex. How should we model opex for Q4? Thank you.

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

In term of opex, let's say, in Q4, we will see some increase in respect to Q3. Of course, there is seasonality. Q3, we are benefiting of the vacation. Anyway, when you model the expenses, I confirm what I was saying in July. When you take the full year expenses for 2021 and you split by four, let's say, to have an average quarterly opex, they will stay in the range of seven -- net opex -- including other income and expenses, our net opex will remain in the range of $735 million, $740 million per quarter.

Jerome Ramel -- Exane BNP Paribas -- Analyst

Thank you.

Celine Berthier -- Group Vice President, Head of Investor Relations

Okay. Thank you very much, Jerome. Next question please, Moira.

Operator

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

Francois Bouvignies -- UBS -- Analyst

Hi, everyone. I have two small questions. The first one is coming back on the silicon carbide. So you talk about your capacity, which is helpful. But you also said today that you expect $1 billion to reach in 2024 versus 2025. So I wanted to have a sense, can you explain what is driving this kind of accelerated road map? Is it one specific customer? Is it like more Automotive, industrial? Anything you can give around the drivers of this accelerated path would be helpful.

And the second question is the inventory, coming back to that slightly. Sorry about that, but you talk about the inventory situation now. But I wanted to have your view with your experience, how you see the inventories in the next quarters basically. How should we think about the development of these inventories given the high demand? I mean should we expect inventories to be different by products or inventories to increase slightly from here? Just to have your sense of how we should think about that going forward. That would be helpful. Thank you.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

Okay. Well, first of all, about silicon carbide, OK, we work on the market that very recently. And now clearly, when you look -- the compound average growth rate of the electrical vehicles is increasing a lot for the next three years versus, OK, what was expected one year ago. So first of all, the first input parameter is the data point, OK, we receive from various analyses about an acceleration of the adoption of the electrical vehicles in the next three years.

By the way, I will not make any advertisement, but I guess you are aware that in September, the first vehicles which had been sold in Europe is an electrical vehicle. So you see it is a clear sign of an acceleration of the electrical vehicles, OK, within the overall, let's say, plan of production forecast. So this is the point number one. So our confidence level, OK, for the next three years of the market for electrical vehicles is really increasing. Well, then, specifically for ST, it is clear that, OK, now we have a number of programs increasing. And then it's a mix. It's a mix where high volumes contributing to revenues are related to Automotive, where we have already a famous, ongoing, engaged programs with one important customer.

That is, let's say, running very, very well, and I guess you can assess, OK, with the various publication. Then the other, OK, opportunities, OK, will start to fly in the near term. And this is clearly, OK, from a volume perspective and revenue perspective the main driver of our $1 billion revenue that we will deliver full year in 2020/'24. And for sure, OK, we have also the other contribution from industrial market, where here it's more fragmented. However, OK, from the industrial market, our strong expectation are on the charging station, because here, OK, we expect a strong proliferation of the charging station everywhere in the world, in Europe, OK, in order to support this electrical vehicle increase.

Then about inventories. You asked for my -- thank you. You asked for my experience. Now simply, what I can tell you, the inventory situation today in many supply chains is not sustainable. When you have complex supply chain between, OK, an OEM customer, Tier one, Tier two, EMS, OK, distributor, Tier three, you cannot operate smoothly all these operations, point number one, if you have no inventory. Point number two, the logistics. I guess you are really aware that there is a congestion of, let's say, the logistics by sea, OK, by boat. All the big harbors in the world are totally congested. A part of the traffic now is going to air flights. Air flights today are basically also congested because, OK, the reduction of number of flight and plane. And it is very similar, OK?

These logistic constraints, OK, increase of lead time related to the logistics, will also push, OK, all the manufacturing actors in the world, OK, to increase a little bit their security or safety inventory. So for me, that's the reason why the demand of semiconductor, which is strongly driven by the mega trends, OK, again, smart mobility, power/energy, efficiency, connectivity, 5G, IoT, on top of logistics, which is becoming much more constrained, and the situation today of inventory, which is very lean, will be really sustained and will last, OK, for a material time.

Celine Berthier -- Group Vice President, Head of Investor Relations

Does it answer your question, Francois?

Francois Bouvignies -- UBS -- Analyst

Yes. Thank you very much.

Celine Berthier -- Group Vice President, Head of Investor Relations

Thank you very much. So then we have one last question, Moira.

Operator

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

Sandeep Deshpande -- JPMorgan -- Analyst

Yes. Hi. Thanks for letting me on. My question is actually regarding your view into -- clearly, you've been supply constrained this year, Malaysia issues, etc. But what's your view is into -- looking into '22 based on your backlog not only on your revenue front but also in terms of being able to continue to supply? Will you continue to be supply constrained in '22? And then the follow-up is on costs. And the cost follow-up is related to what is your depreciation in '21? And what will it be in '22? Thank you.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

So Lorenzo will comment on the cost question. But sorry, Sandeep, I have not captured very well your first question.

Celine Berthier -- Group Vice President, Head of Investor Relations

Will you be -- will you have at least some supply constraints? And what is the level of supply constraints you will get in 2022?

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

Well, here, it's clear that when we have completed our overall sales and operating plan constraints, I can confirm to you that the perspective, OK, the feedback we have today, that we have constraints first, OK, in equipment delivery. So process equipment delivery, assembly and test. Basically now if you want to have a slot for a scanner, I think you have to wait by Christmas 2022. More or less, OK, for, let's say, other process tool, it's maybe a little bit shorter in term of lead time but not so far. Assembly as well. And why?

Because also, most likely, these equipment, they're also limited by semiconductor supply. So we -- I have managed case, OK, with my team, that, OK, equipment supplier for wafer fab, OK, ask ST support, OK, to supply. Well then, OK, material for back end. The situation, OK, for substrate, OK, for frame are quite stretched. And we are in very close discussion with our supplier, OK, to provide long-term forecasts, but, OK, quite long-term engagement. It is valid as well on, let's say, process materials. So gases, chemicals. And last but not the least, the silicon.

Clearly, OK, the demand on the 300-millimeter silicon for 2022 and 2023 is quite strong. So now as a semiconductor company, it is clear that we have to be, let's say, very accurate and attentive building our sales and operating plan, OK, to check, OK, our full supply chain because a big mistake would be to think that we operate at infinite capacity. So it is not the case. And now semiconductor is not only the bottleneck. So you have the full supply chain under stretch, and that will, let's say, increase capacity smoothly, OK, in 2022, and then, OK, coming back to expected situation where you will have a balanced inventory, lead time and flexibility not before 2023.

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

The question about depreciation. This year or in 2021, our depreciation and amortization, mainly depreciation, I would say, we are in the range of slightly above $1 billion, $1.05 billion. I do expect with our plan and -- let's say, of investment that we are doing -- we have done in -- this year, let's say, 2021, and then we will continue to invest also next year, there will be a similar increase. In 2020, we had around $900 million of depreciation, and they will increase in 2022 in a similar way, slightly, well.

Sandeep Deshpande -- JPMorgan -- Analyst

Understood. Thank you so much.

Celine Berthier -- Group Vice President, Head of Investor Relations

Thank you very much. I think this was the last question. And that will conclude our call.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

Thank you.

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

Thank you very much.

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

Thank you. Bye-bye.

Duration: 63 minutes

Call participants:

Celine Berthier -- Group Vice President, Head of Investor Relations

Jean-Marc Chery -- President and Chief Executive Officer & Member of Managing Board

Lorenzo Grandi -- President, Finance, Infrastructure and Services Chief Financial Officer

Stephane Houri -- ODDO--- Analyst

Matt Ramsay -- Cowen -- Analyst

Johannes Schaller -- Deutsche Bank -- Analyst

Didier Scemama -- Bank of America -- Analyst

Jerome Ramel -- Exane BNP Paribas -- Analyst

Francois Bouvignies -- UBS -- Analyst

Sandeep Deshpande -- JPMorgan -- Analyst

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