STMicroelectronics ended its third quarter with a gross margin of 37.3%, four points higher than the same quarter a year earlier. Ask what produced that jump and the answer is not the AI boom. It is factories that are no longer running half-empty, plus a richer mix of chips leaving them.
That distinction matters, because ST is one of the few European companies with a real, disclosed AI data-centre business - and it is small next to the story it sits inside.
What the quarter actually says
The Franco-Italian chipmaker reported net revenue of $3.76 billion for the three months to 26 September, up 17.9% year on year and 7.7% on the previous quarter, which was 150 basis points above the midpoint of its own guidance. Gross profit rose to $1.40 billion.
Operating income was $367 million on a US GAAP basis, a 9.8% margin; strip out one-offs and it was $429 million, or 11.4%, against the $400.5 million analysts polled by LSEG expected. Net income came in at $291 million. Free cash flow was $351 million, nearly triple the year-ago figure, and operating cash flow was $1.02 billion.
For the fourth quarter ST guided to $4.15 billion of revenue, plus or minus 3.5%, and a gross margin of about 39%. At the midpoint that makes 2026 a $14.5 billion year, up 22.8%.
The margin came from utilisation, not from a premium product
ST's own explanation for the four-point margin gain is unglamorous: lower charges for unused capacity, and a better product mix. Idle-factory costs were the accounting trace of the long downturn, when demand fell and ST's manufacturing footprint did not. As fabs fill, those charges unwind and margin returns without a single new customer.
The reshaping is not finished. The fourth-quarter gross margin guidance still carries about 40 basis points of unused-capacity charges, and ST's intermediate target is a 44-46% margin as the manufacturing programme runs into 2027 and 2028.
Where the AI money lands: photonics, not GPUs
The AI part of the business is real, and it grew into a bigger number this quarter. ST now expects about $1.3 billion of data-centre revenue in 2026, up from the "above $1 billion" it guided in July, and repeats an ambition of well above $2 billion in 2027.
Chief executive Jean-Marc Chery told analysts the demand is driven mainly by silicon photonics chips - optical interconnects that move data between servers as light rather than electricity - alongside electronic ICs, microcontrollers and power solutions. Communications equipment and computer peripherals, the segment that carries most of it, grew 14% sequentially and 64% year on year, and the company said book-to-bill in that segment was well above 2.0.
Two details from the call are worth keeping. Chery said the data-centre business is tied to the top five hyperscalers rather than the smaller "neo-cloud" operators whose debt has drawn scrutiny. And chief financial officer Lorenzo Grandi said ST is raising prices on selected products, with stable or slightly higher prices possible next year - a supplier with pricing power, which is not the usual European chip story.
What is not confirmed
ST does not break the $1.3 billion into photonics, microcontrollers and power, and it names no customers. The 2027 figure rests on one condition the company states plainly: "assuming the current dynamic continues". Automotive demand, its largest end market, was described as stable rather than recovering. And the market's first reaction was not applause - the shares opened 3.7% lower before recovering to roughly flat.
So the honest reading is narrower than "ST is an AI company". AI data centres are roughly 9% of this year's revenue. What AI has done is fill the fabs, tighten supply across ordinary product lines, and let ST push through price increases - which is how a cyclical recovery becomes a margin story.
This post will be updated when ST reports fourth-quarter results in late January, and if the company ever discloses what sits inside that data-centre number.
No comments yet