STMicroelectronics Doubles Down on AI Data Center Bet, Sees Revenue Above $2 Billion in 2027 as Silicon Photonics Ramps
Q2 2026 earnings call, July 23, 2026
STMicroelectronics delivered a second quarter that beat the midpoint of its own guidance, with revenue of $3.49 billion and non-GAAP gross margin of 35.2%, but the real story for investors was a sharp upward revision to the company's AI data center ambitions and a book-to-bill ratio that CEO Jean-Marc Chery described as close to 2 across the board. The chipmaker now expects data center revenue above $1 billion in 2026, up from prior guidance, and "well above $2 billion in 2027," a target management said is underpinned by both demand strength and ST's ability to expand capacity rather than being demand-constrained.
Silicon Photonics Emerges as the Real Growth Engine
The most important new disclosure was the granularity around what is actually driving the data center ramp. Remi El-Ouazzane, President of the Microcontrollers, Digital ICs and RF Products Group, explained that ST is benefiting from what he called a "triple effect": a large market share in microcontrollers that manage the control plane for 800-gig and 1.6-terabit pluggable optics, a growing share in electronic ICs built on the company's BiCMOS process, and, critically, an accelerating ramp in silicon photonics ICs manufactured at the Crolles fab. "We are not right now gated by capacity expansion to go and capture revenue at this stage," El-Ouazzane said, a notably confident statement given how tight supply has become elsewhere in the portfolio. Communication Equipment & Computer Peripherals revenue is expected to grow roughly 60% year-over-year in Q3 and accelerate to approximately 90% in Q4, a trajectory that management attributed directly to optical connectivity rather than the broader cyclical recovery.
Gross Margin Target Pushed Out, Not Abandoned
CFO Lorenzo Grandi provided an important recalibration on the path to the company's long-stated model of above 40% gross margin at $4 billion in quarterly revenue. Analysts including Domenico Ghilotti of Equita pressed on why Q4 revenue is expected to exceed $4 billion without the corresponding margin. Grandi's answer was blunt: the model was always conditioned on two variables, revenue scale and completion of the manufacturing reshaping program, and the latter "will be at the end of 2027, not before." In the interim, ST is absorbing extra costs tied to transferring production from 200-millimeter to 300-millimeter silicon and from 150-millimeter to 200-millimeter silicon carbide, including requalification and mask redo costs. Grandi confirmed the 40% target still holds once the transition completes, and separately reaffirmed the $18 billion revenue target for 2028, but declined to engage on the previously discussed $20 billion, 50%-margin scenario, saying "let's reach together the $18 billion target, then we speak about the $20 billion."
Capacity Tightness Is Selective, Not Systemic
Responding to a question from UBS's Francois-Xavier Bouvignies referencing supply tightness flagged by Texas Instruments, Chery gave a granular breakdown of where ST is genuinely constrained. General purpose microcontrollers face the tightest supply, driven by the combined success of optical connectivity demand and an industrial recovery that has pushed distribution inventory below normal targets. ST's answer is its own 300-millimeter fab reaching full build-out "pretty soon before 2028" alongside a "China for China" strategy using a 14-nanometer node qualified with a local partner. Separately, the transition in silicon carbide from 6-inch to 8-inch wafers, and analog from 8-inch to 12-inch, is creating temporary bottlenecks as products require requalification with customers. Notably, Chery said the constraint on AI data center-related technology is not capacity but rather the pace at which ST can scale, calling Crolles, which is on track to reach 15,000 wafers per week, the "key success factor."
Automotive and Industrial Outperform, Personal Electronics Diverges
Automotive revenue rose 14% sequentially and 16% year-over-year in Q2, helped by the integration of the NXP MEMS sensors business acquired in February, which management said is already generating design wins in active safety and tire pressure monitoring. Industrial grew 20% sequentially and 34% year-over-year, with distribution inventory now below target and demand linked to factory automation, robotics and what ST calls "physical AI." Personal Electronics, by contrast, is expected to turn slightly negative year-over-year in the second half after a positive first half, a seasonality pattern management flagged in the prior quarter and attributed to memory pricing pressure on low-end smartphones. Silicon carbide, meanwhile, returned to growth with revenue up in the low teens year-over-year in Q2 and quarter-over-quarter growth in the mid-30s, which Marco Cassis, President of the Analog, Power and Discrete, MEMS and Sensors Group, tied to Chinese EV adoption of 800-volt architectures and said should translate into double-digit full-year growth for 2026.
New Space and Quantum Computing Add Optionality
ST reiterated its Low Earth Orbit satellite communication opportunity, expecting cumulative space revenue well above $3 billion over 2026 through 2028, with El-Ouazzane calling the business "launcher dependent" but noting "an even stronger '27" ahead despite some competing constellations hitting delays. Grandi confirmed the segment is gross-margin accretive on average, echoing the data center business. Separately, ST disclosed a EUR 115 million Series A investment in quantum computing startup Quobly, aiming to industrialize silicon-based quantum systems using ST's FD-SOI technology and 300-millimeter fab infrastructure, with a first commercial product targeted by the end of 2026, a small but strategically notable bet on next-generation compute.