Q3 2021 NXP Semiconductors NV Earnings Call
Good day and thank you for standing by welcome to the NXP third quarter 2021 earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there'll be a question and answer session. Domestic question you will need to press star one on your telephone.
During the conference you need to reach an operator, Please press star zero and now I would like to turn the conference over to Mr. Jeff <unk> Senior Vice President of Investor Relations. Please go ahead Sir.
Thank you Dexter and good morning, everyone welcome to the NXP semiconductors third quarter 2021 earnings call with me on the call today is Kurt Sievers, Nxp's, President and CEO and Bill bets our CFO.
Paul Today is being recorded and will be available for replay from our corporate website. Today's call will include forward looking statements that involve risks and uncertainties that could cause nxp's results to differ materially from management's current expectations.
These risks and uncertainties include but are not limited to statements regarding the continued impact of the COVID-19 pandemic on our business the macroeconomic impact on the specific end markets in which we operate the sale of new and existing products and our expectations for the financial results for the fourth quarter of 2021, please be reminded that NXP.
It takes no obligation to revise or update publicly any forward looking statements for a full disclosure on forward looking statements. Please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to nxp's underlying core operating performance.
Pursuant to regulation G. NXP has provided reconciliations to the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2021 earnings press release, which will be furnished to the SEC form 8-K and is available on Nxp's website in the Investor Relations section at NXP Dot com.
Before we start the call today I'd like to remind everyone of our upcoming analyst day on Thursday November 11th 2021 we're hosting a hybrid of that will be in person in New York City, but also simulcast in the event from a website for virtual attendees. After the event concludes we will post the slides to the Investor Relations website I'd like to turn the call over to <unk>.
Kurt.
Yeah. Thanks, so thanks, very much Jeff and good morning, everyone.
We appreciate you joining our call this morning.
I will review our quarter three results and then discuss our guidance for quarter four.
Overall, our quarter three results were better than the midpoint of our guidance.
With the mobile end market stronger than planned as a result of improved supply.
At the same time.
Trends in the auto industrial and Iot and communication infrastructure markets were all in line with our guidance.
Taken together NXP delivered quarter, three revenue of 2.86 billion and.
An increase of 26% year on year.
And $11 million above the midpoint of our guidance range.
These are very good results given the constrained supply precision we knew we would face entering the quarter.
And we continue to view, our channel and on hand inventory metrics below our long term targets.
We exited quarter three with our distribution channel supply metrics at 1.6 months.
Almost a full months lower than our long term targets and we expect this to be the situation in quarter four again as well.
Our non-GAAP operating margin in quarter, three was a strong 33, 5%, which is 770 basis points better than the year ago period.
50 basis points above the midpoint of our guidance.
Operating profit dollars were $19 million better than guidance driven by higher revenue.
And lower expense.
Now, let me turn to the specific trends in our focus end markets.
Starting with automotive quarter, three revenue was $1 46 billion.
51% versus the year ago period and in line with our expectations.
In industrial and Iot quarter, three revenue was 607 billion.
Up 18% versus the year ago periods.
And again in line with our expectations.
In mobile quarter, three revenue was $345 million.
Up about 2% versus the year ago period.
And the bus or expectations.
Lastly.
In communications infrastructure and other.
Quarter, three revenue was 454 million.
Flat versus the year ago period.
And in line with our expectations.
With this let me move straight to our outlook for quarter four.
We expect the midpoint of quarter four revenue to be 3 billion up 20% versus the fourth quarter of trade 20.
Within a range of up 17, two up 23% year on year.
From a sequential perspective, this is up 5% at the midpoint versus the prior quarter.
And we again anticipate demand outstripping available supply in our quarter four okay.
At the midpoint of this range, we anticipate the following trends in our business.
Automotive is expected to be up in the high 20% range year on year and up in the mid single digit range versus quarter $3 21.
Industrial and Iot is expected to be up in the high 20% range year on year.
And up in the mid single digit range versus quarter 321.
Mobile is expected to be down in the mid teens range year on year.
And up in the low single digit range versus quarter 321.
And finally communication infrastructure and other is expected to be up in the high teens range versus the same period, a year ago and up in the low single digit range versus quarter 321.
Over the course of the last few quarters investors continue to ask how to reconcile the revenue performance of Nxp's automotive business with that of the global vehicle production numbers as they are reported by IHS.
Specifically Nxp's automotive segment revenue is expected to be up over 40% in 2020 one.
Against this the auto Oems continue to struggle to match supply to strong consumer demand with.
With the auto industry likely not able to meaningfully grow unit production versus 2020.
Now, let me make a few observations, which may help you understand.
This divergence.
First.
The auto supply chain is very extended and complex with multiple points of product transformation across the globe.
This extended supply chain needs to coordinate the timing and delivery of up to 30000 parts.
And up to 1500 different semiconductors.
From hundreds of suppliers to build just one single car.
During normal periods from the time it bitch NXP ships. The finished components to when the final assembly is fit it into a finished car it takes up to six months.
And this is on top of the moment semiconductor manufacturing cycle times of three to six months.
At each step of the transformation with thousands of pumps move through a complex global network of suppliers.
For the process to work efficiently. It is essential that all of the components needed to complete a car are available exactly there and when they are required.
Now we believe the extended auto supply chain significantly depleted on hand inventory of all types of products, including semiconductors.
Already by the beginning in the second half of 2018, and continuing through 2019 and most of <unk> 'twenty.
Thats depletion was a result of global car production declining 6% in 2019 and another 16% in trade 'twenty.
While nxp's auto business despite content increases.
Clients by 7% into 2019 and by another 9% into 2020.
So let me illustrate the impact by using the NXP distribution channel as a proxy for overall auto supply demand trends and how we have been directly affected.
We consistently monitor and measure all component movements and inventory data at our distribution partners.
And market level.
Throughout 2021 these metrics for automotive have been at record low levels.
With on hand inventory being about a one month below our long term target of two and a half months.
With demand in the intermediate term being consistently greater than our ability to rebuild inventory back to normalized levels.
In our in my personal daily discussions with our customers throughout the auto supply chain, we heal the consistent message that they want significantly more product.
And in some cases tier ones are struggling to assemble flu kits and in other cases, the Oems choose to build partially completed cars or hold that production lines altogether.
For NXP lead times for about 75% of our automotive products.
To be above 52 weeks.
Against this backdrop, our customers are placing MTN, our orders to assure long term supply.
We in turn are making long term supply commitments to our supply partners.
In summary, we think the automotive supply demand equation will continue to be out of balance through 'twenty train two.
In addition, as a learning out of the current material shortage situation and in order to mitigate the impacts of the auto Oems are experiencing today.
Our tier one partners explicitly demands that more supply and inventory will be needed in the extended supply chain.
We believe kept most people broadly achieved before 'twenty to 'twenty three.
No with this currently dysfunctional supply chain as a backdrop.
There are very clear and very positive trends that have simultaneously increased the demand for auto semi conductors industrywide.
As a consequence of content growth.
We have seen multiple Oems prioritize to production of premium vehicles.
Require upwards of twice the semiconductor content from NXP and others.
And another clear and emerging secular content driver for the auto semiconductor market.
Is the fast acceleration of full electric and hybrid electric vehicles.
Which combined have moved from 8% of global production in 19.
To about 20% of production in 2021.
This is very impactful.
The average semiconductor content in an SCB is about $900, which is roughly two times that of an equivalent ice's vehicle.
These trends have resulted in industry wide content per vehicle, increasing a 10% per year over the last three years.
And on top of all of this NXP is consistently gaining share in our focused growth areas and increasing content.
These content gains include 77 gigahertz radar safety systems.
Multiple electrification system opportunities beyond just battery management.
And new domain, and social processing as well as others.
Now for NXP is of course, not just automotive driving our performance.
Within the industrial and Iot markets, we see our ability to provide complete turnkey connected edge processing solutions, consisting of processes connectivity security and analog all leading to increased customer traction.
These are all just a few examples that underpin our confidence in our company specific growth.
As Jeff mentioned earlier, we plan to go into much greater detail.
At our Investor Day on November 11th next week in New York.
In summary.
We continue to execute very well in a strong demand environment, notwithstanding the industry wide supply charges.
From a company specific perspective, NXP is experiencing very positive customer traction of our newest products and solutions.
Putting it all together we are highly confident that the company specific drivers within our strategic end markets Bill.
We will continue to build also beyond Q4 into Q1.
As well as over the intermediate term through train in 'twenty two.
Now before we move to the financial details of the quarter.
I'd like to make a few remarks in the context of our recent announcement of build bets as our new CFO.
I have personally worked with bill as a business partner in one of Peter Kelly as key finance leaders.
For over eight years.
Bill brings both a strong track record and career in the semiconductor industry.
As well as truly intimate knowledge of NXP and consistency to his new role.
I personally drove the evaluation of the interview process interviewing a wide number of external candidates as well as bill.
And I concluded Bill is the right person to lead our NSP finance organization and I'm personally truly excited to work with Bill and drive Nxp's profitable growth going forward.
At the same time I'd like to highlight the outstanding contribution Peter Kelly has played in the strategic evolution of NXP.
Peter first came into the company operations role over a decade ago, and then quickly move into the CFO role to drive the financial discipline, our stakeholders have all come to expect.
He has been a clear thinking strategic advisor to myself.
And the highly valued mentor to many on the NXP management team, obviously, including both Bill and Chuck.
We wish Peter are the very best in the next phase of his life.
And hope he gets to spend more quality time with his family.
And with that I would now like to pass the call to you Bill for a review of our financial performance.
Bill.
Thank you Karen and good morning to everyone on today's call.
As Kurt has already covered the drivers of the revenue during Q3 and provided our revenue outlook for Q4.
Moving to the financial highlights.
Overall, our Q3 financial performance was very good revenue was above the midpoint of our guidance range and we drove an improvement of non-GAAP gross profit and non-GAAP operating profit.
Of which were at the high end of our guidance range.
Now moving to the details of Q3.
Total revenue was $2 86 billion.
Up 26% year on year and above the midpoint of our guidance range.
We generated 162 billion and non-GAAP gross profit and reported non-GAAP gross margin of 56.
8%.
640 basis points year on year and near the high end of our guidance.
Total non-GAAP operating expenses were $657 million up $107 million year on year and up $31 million from Q2.
This was $8 million below the midpoint of our guidance due to lower material and mass spend during the quarter.
From a total operating profit perspective.
Non-GAAP operating profit was $959 million.
Non-GAAP operating margin was 33, 5% up 770 basis points year on year. This was also at the high end of our guidance range as a result of better fall through on higher revenues.
Non-GAAP interest expense was $94 million with cash taxes.
Boeing operations of $86 million and Noncontrolling interests was $7 million taken together the below the line items were <unk> 8 million better than our guidance.
Stock based compensation, which is not included in our non-GAAP earnings was $81 million.
Now I would like to turn to the changes in our cash and debt.
Our total debt at the end of Q3 was 959 billion flat on a sequential basis, our ending cash position was $2 3 billion down $607 million sequentially due to higher capex and robust capital returns during the quarter.
The resulting net debt was $7 billion to $9 billion and we exited the quarter with a trailing 12 month adjusted EBITDA of $3 19 billion our ratio of debt to trailing 12 month adjusted EBITDA at the end of Q3 was one nine times and our 12 month adjusted EBITDA interest coverage ratio was 11 times.
Our liquidity continues to be excellent and our balance sheet is very strong.
During Q3, we repurchased one $1 6 billion of our shares and paid $152 million in cash dividends for a total of 131 billion of capital return to our owners Subsys.
Subsequent to the end of Q3 between October.
And November one we've repurchased an additional $300 million over shares via a <unk> one program.
<unk> and a total of $4 billion returned to our owners year to date.
Turning to working capital metrics days of inventory was 85 days a decline of three days sequentially. Our <unk> continues to be below our long term target of 95 days.
We continue to closely manage our distribution channel with inventory in the channel at one six months.
Sequentially and below our long term target.
Both metrics reflect the continuation of strong customer and.
In a tight supply environment continued to believe it will take multiple quarters before we're able to rebuild on hand and channel inventories to our long term target leverage.
Days receivables were 31 days down four days sequentially and days payable were 80.
Decline of nine days versus the prior quarter.
Taken together, our cash conversion cycle 33 days, an increase of two days.
Cash flow from operations was $924 million and net Capex was $200 million, resulting in non-GAAP free cash flow of $724 million.
Turning to our expectations for Q4 as Kurt mentioned, we anticipate Q4 revenue to be 3 billion plus or minus $75 million at the midpoint. This is up 20% year on year and up.
5% sequentially, we expect non-GAAP.
Gross margin to be about 56, 5% plus or minus 50 basis points.
Operating expenses are expected to be about $680 million, plus or minus about 10 million.
With our long term model taken together, we see non-GAAP operating margin to be about 33, 8% at the midpoint.
We estimate non-GAAP financial expense to be about $94 million.
Anticipate cash tax related to ongoing operations to be about $100 million.
Non controlling interest will be about $9 million for Q4, we suggest for modeling purposes, you use an average share count of 270 million shares, which is down 15 million shares from a year ago period as a result of the consistent execution of our communicated capital return policy.
Finally, I have a few closing comments I'd like to make.
First.
Demand trends continue to be strong across our target end markets and customer interest in our newest products continues to be very robust.
At the same time, we are closely working with their customers and our suppliers to address order requests in a timely manner.
Second our Q4 guidance reflects the clear potential of our business model. Both in terms of revenue growth as well as the significant profit fall through which will enable us to consistently drive our non-GAAP gross margin above the midpoint of our gross margin targets.
Thirdly, our business continues to generate significant free cash flow and we are committed to our capital return policy and we'll return all excess free cash flow to our owners. So long as our leverage ratio remains at or below two <unk> net debt to trailing 12 month adjusted EBITDA.
I'd also like to take this opportunity to thank Peter Kelly for his significant contributions to NXP since he joined the company in 2011.
Not only did Peter guide NXP from a financial perspective, but he truly help lead the company and drive the strategy that made NXP. What it is today and on a personal note I can see it or Peter a great leader, a mentor and a friend and I will always be grateful for his support and then finally I would like to thank.
All my colleagues across NXP for their outstanding work and dedication we shouldn't forget that we are all still working under strict pandemic protocols, so with that I'd like to turn it back to the operator for questions.
In Q as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key again Thats Star then the number one to ask a question.
Our first question comes from the line of Ross Seymore. Your line is open.
Thanks for letting me ask question and Bill Congratulations on the new role of CFO. My first question is for Curt and it's one on customer behavior, you gave a great deep dive into the apparent disconnect between the auto revenue you have in production and all of those explanations.
Really wanted to get into our the customers changing their behavior and if so is it just with longer visibility for you greater certainty, whereas the profitability that all the auto semi production.
Companies are going to be able to garner from this sector starting to improve as well.
Yeah, Hey, good morning Ross.
Indeed, a couple of a couple of changes so first of all very tactically and I just have to highlight that because it sits on top of my agenda every day in and out.
There continues to be no change in pressure to get more product so expedites escalation calls.
All sorts of weird actions to try to get product faster to their manufacturing locations has not slowed down plan and so we see it we see that continuing.
From a more strategic and say luening perspective.
I would say clearly the whole auto industry has realized small and that's for me a step function in the reset at the same time has realized now how big the significance and importance of semiconductors.
For their future.
Today, but also years old I mean, that's about innovation, but obviously, it's also about being able to to build complete cars.
And that has led to much closer and better relationships between us and directly with the Oems in terms of understanding both their innovation needs, but also the from a more tactical perspective, there the product supply needs in the in the deal.
In midterm.
All of that leads then to a number of significance I would say quite significant changes we are seeing longer term orders. So we get these so-called MTN, our orders, which easily reach out for the entire Mexico Linda year.
These are coming from the tier one.
Customers of us but of course, they do this.
They've got similar behavior from the from the Oems.
But we also get greater visibility into the longer term.
Which I find that very very.
Important.
Perspective.
Which reaches been overseen away because the.
<unk>, which we can build with the OEM small to think about future systems is a great help for us to construct the right roadmap.
Great. Thank you for that color and I guess as my follow up just shifting gears quickly to a little bit of a nearer term potentially question. That's on the mobile business. It's good to see that had upside surprises in the third quarter versus your original guidance, but I guess, if I put the two quarters together I know supply is tight and maybe youre just doing some allocation.
But the mobile business is a bit weaker seasonally than we would've expected and the combination of the quarters and I had thought that that was supposed to snap back a little bit in the third or fourth quarter. Excuse me. So can you just talk about what's driving the relative weakness on a year over year basis in that business.
Well, it's clearly supply, although although the lack there of.
So as we when we went into quarter three I think we talked about.
A sequential decline, which we could to which we could avoid.
So we could pull in some supply and that's the whole reason why we actually ended up in mobile is better than or better than guidance. So there is no difference in sockets or anything it was just that we had the somewhat federal supply capability and.
We continue to forecast a similar thing into the fourth quarter, but overall if you take the full second half of this year. We are unfortunately significantly constrained in supply into the into the mobile market is gradually getting better which is why we have this this performance I just quoted but if you.
If you hold it just in total it is it is it.
It is pretty significantly suffering now from a year on year perspective for us.
That it's a more difficult compare.
Last year Q3, we had the ban on Huawei coming into play.
Which artificially bumped up quarter three.
Quarter, four one of our very large mobile customers needed a lot of product.
Which also has to do with the with the phasing of the quarters last year, which was which was later the enrollment. So that's why the year on year comparisons both for Q3 and Q4.
<unk> saw breeching given those two specific.
Customer events.
All in all I, just want to absolutely reconfirmed, we haven't lost a single sockets. There. So everything is going as we as we had planned the our supply constraints, but the bigger drivers being the.
Adoption of mobile wallets attach rates and also the the early penetration of ultra wideband secure ultra wideband solutions are fully on track with early or pockets of earlier planning.
Thank you.
Okay.
Next we have civic ARIA Your line is open.
Alright. Thank you for taking my question and good luck to vote PJM Bill.
Kurt on the automotive industry if Barnett.
Where do you that auto production would be flat this year, but auto sands would have been up 40%.
Would that have been predictable and if not what do you think surprised NXP other than some of the bad bad debt in the fab shutdown effect was it mix that surprised you or was it pricing was it content what specifically.
And it wasn't a surprise this year to create this big gap between production and sales.
Yeah, Hi, Vivek, I mean, very transparently and honestly with the knowledge of today of course, we could have predicted it.
With the knowledge at the time no. So no we didn't know.
What you call surprises is bookable are actually happened so.
A few things one clearly.
The the mixed change to premium vehicles.
Which is on optimizations to our higher profit on the OEM side clear.
Clearly, it's something we had not foreseen.
I think nobody had anticipated and that has a significant impact on semiconductor consumption given the premium vehicles can easily have twice the semi content of a mass.
William car.
And on the same note again.
C V penetration, which I think is a result of.
The big focus in the girls on C. O two targets, but also a lot of government subsidies in various countries to boost actually.
More electric vehicles.
Those two elements so the mix to premium and the much stronger penetration with Fox the penetration of Suvs those have significant positive impacts on the content increase for semiconductor. So even if the car production is flat the content goes up massively again think about that both of these elements.
Each one on its own right are potentially bringing the semi content of a car to a factor of <unk>. So that's the I mean this is just outstripping any car production by far.
The third element, which I would say.
I use your language surprised us.
We'd rather save we gained more insights.
Is the enormous depth and complexity of the extended automotive supply chain.
Which means how many stages and companies sometimes are between us after the ship a product before that product ends up in the car.
And if that supply chain is enormously depleted as it has been the case after 2019 in 2020. It becomes incredibly dysfunctional and we are still in the process of refilling that supply chain just to normalized levels. So really important this is not about building any strategic inventory.
Just getting back to more normalized levels, which allow for appropriate operational supply chain and that's.
We didn't we didn't see either I would say if you had no idea of how far it has been depleted how deep it has been depleted nor how deep it is which means how much elasticity in there to be to be rebuilt in the first place they could.
We'll make it functional again it is still dysfunctional at this stage.
Got it and for my follow up Kurt just to kind of continue with that line of discussion. So you mentioned over the last few years that content Delta.
Between units and sales have been for the industry has been about 10 points with NXP doing better.
If I look at the current IHS production forecast for next year, and I know that they keep on changing all the time, but right now its about 10% to 11% unit growth.
Assuming that happens what is the crystal ball, saying in terms of that rough delta for the industry next year do you think it'll be that at that 10 points or it'll be closer.
So to the much bigger number than we saw this year. Thank you.
Yeah. So first of all you just mentioned another very important element, which is obviously our performance in all of this I mean, what I would describe to your earlier question was is how we think the industry surprised us all.
The third element clearly see NXP specific company specific content gains, where we grew share which makes it even foster now how that all goes into what it means for the for the next year end of next year from both a content growth perspective, as well as a NXP specific revenue most effective I just.
Ask you to wait for a week next next week when we have our Investor day in New York, We will give you.
The detail you were looking for so we will devote guide for next three years, both how we think the semi market and although it's going to develop as well as the old performance relative to that.
Please hold your horses until next week.
Thank you.
We have a question from John Pitzer Your line is open.
Yes. Good morning, guys. Thanks for let me ask the questions and congratulations on the solid results.
I think we all appreciate all the details you gave in your opening comments about the complexity around the auto supply chain I'm kind of curious if you could spend a couple of minutes just talking about your ability to grow supply from here, both both internally externally, but both on the wafer side and on the backend and Tessa I'm assuming that the nice.
I'll jump in autos means that some of the weather events in the first half of the year have reversed themselves, but specifically as you look over the next several quarters would you expect your ability to grow supply to be relatively linear or is it going to be chunky and is there a point in time, where your ability to grow supply kind of accelerates in 2022.
Yes, Thanks, Tom.
Let me, let me give you a few pieces on this.
The one is indeed the.
The negative impact from the <unk>.
Which we which we had some I think early Q2.
In <unk>.
Next up is indeed behind us so I mean, just put this to file.
Both factories, which were impacted are running very much at pre storm levels and we are good.
Another element I have to mention here because it has impact on the industry.
You've seen that over the summer.
Have been quite a few factory shutdowns effect back end test and assembly sites in Malaysia.
It's just one of the highlights that we have been in a very disciplined decision to organize them in <unk>.
Manage our own factories in such a way that our shutdowns were very immaterial. So we had a few days.
But by and large we have we had very little negative impact from those shutdowns on our revenue, but when you think about what we shipped in Q3.
Assume there was there was hardly any negative impact from from call. It the factory shutdowns from Southeast Asia, and more specifically Malaysia.
Now going forward.
We will clearly see improvement on the vapor side, we talk.
About earlier that we are entering into long term supply commitments with our supply partners.
That's largely on the vapor side, which is going to stop benefiting us next year, but also the year softer on the gun business is balanced against the MTN, our orders, which we are which we are collecting from our customers.
The back end.
Test and assembly, which largely is in house for NXP, We'll force put all the Capex and all the investments in place to make sure that any way prove we get our hands around Bill also find enough capacity in house to be tested and assembled into a into finished product.
So think about the test and assembly increase in capacity is pretty gradual because.
It is something which we are putting in Q1 with the with the with the wafers coming in.
On the vapor side it is in a way more discrete but it's not something because you have obviously several wafer suppliers and they don't improve all at the same time, so from that perspective what comes out.
Into the revenue think about something which is gradual.
Which doesn't have huge huge step functions at any specific point in time. However.
However, the result of all of business that really our supply capability as it has some who this year really continues to grow also through next year.
Finally, I should say this is really not a comment which is in any way or form specific to automotive business of both common because the supply shortage, which we are facing is across all markets. We discussed earlier briefly mobile.
Anyway anyway anybody knows about automotive, but we have we have the same negative impact on our industrial Iot business and partially in the content for our business. So all of these improvements.
Will help and build support revenue growth across all of our end market segments.
That's really helpful color, Kurt and then maybe for my follow on one for Bill first congratulations looking forward to working with you and.
In your new role I'm, just kind of curious on the gross margin line.
Another really solid gross margin quarter, given some of the logistic inflationary costs out there oftentimes, it's hard to it within a quarter to get all of that rate relative to pricing. It was there anything holding back gross margins from a cost side in the quarter and I guess more importantly, as you look out across these L.
Can you help us understand how they are being constructed relative to kind of your gross margin goals I would assume it's much easier to price to value and this sort of environment does that mean, we could see some some ticks up tick ups here in gross margins over the next several quarters.
Yes. Thank you for your question, let me give you the bigger picture on the margin and more color about it.
So as mentioned on our previous calls our gross margin had improved drastically versus last year, driven by the higher volumes and improved internal utilizations from our factories for.
For example, if I if I if I try to remember I think Q3 utilization.
Last year, we are in the mid Sixty's and today, we're in the high 90.
And from a guidance standpoint, as you saw we were slightly better and from a quarter over quarter basis by 2030 bps related to the improved product mix now as we move forward over the next several quarters, it's going to be really difficult to have that additional fall through on our internal factories as basically they're running full out.
To address your question on pricing, we are only passing on the increases of our input costs from our suppliers to our customers and we're not having any of our margins in this process as we value on a long term relationships with our customers I would say and we're really equally sharing the pain together as you can see.
In Q4, we are guiding our gross margins to be flat quarter over quarter and any additional margin expansion I'd say will come in the short term will be journalism by that continued product mix and more longer term will be really driven by the expansion of our new MPI.
I'd say overall, we're very proud of achieving these levels and we look forward to continue delivering toward that higher end financial state of Marvel 57% as we go forward.
Thanks, guys.
Our next question is from Stacy Raskin Your line is open.
Hi, guys. Thanks for taking my question.
I wanted to follow up on that pricing question I know.
You are not trying to extract more but I think to play Devil's advocate a little bit like given the shortages out there why not I mean, you're in a period of time right now where the supply chain is probably tighter than it ever has been an EVAR will be.
And there is demand for your products that's off the chart youre locking customers seem like at this point like why why is this not the time, even on a selective basis to try to extract more.
Especially given it seems like some of your peers actually are going down that path like why why not you guys.
Yeah, Hi, Stacy.
There is a very clear answer to this which is we are not in the commodity business.
The very very vast majority of our portfolio is application specific and with that portfolio. We are in very deep longer term relationships with our customers.
So what we do is as Bill said the pause on the input cost which is already in some cases are pretty significant.
Element to digest for our customers.
But we want to be transparent and we want to have long term relationships, which are built on trust with our customers and in that context to be absolutely consider it's the right thing to pause on the input cost, but multi use it to pet on all of our margins.
I I would personally say from from being in different markets in the past in the commodity market that looks different.
But that's not the kind of market environment, we are moving in and I'm very very sure that this will pay off positively in the long term relative to the customer relations, which we need to continue to build our business.
In that context. It is also important to note that the.
The whole the whole environment clearly has a lot of input cost, which is going up for our customers I mean, it's not just on <unk>.
All of these things are also moving so it's a tough environment for all the participants.
Think consistency transparency and trust into the long term relationships is a big value and that's something we're going to differentiate.
Got it. Thank you I guess for my follow up even to follow up on that a little bit.
The historical pricing practices at least at a high level, especially in automotive.
Long term price downs that we're sort of built in built into the contracts and you'd be sort of fighting that every year.
I guess understanding that were maybe coming off a higher base now we start raising price because of the input cost increases do you foresee like a similar type of long term.
Pricing behavior that are built into those long term contracts, where we are we are you still going to be fighting.
A couple of hundred basis points of margin compression year over year, just off the higher base like as part of these long term contracts or is the general <unk>.
Pricing structure like long term of these contracts are different than it was in the past.
Yes, Stacy that's indeed, the other side of this of this discussion.
I mean, I can't discuss any customer or very segment specific trends here, but the overall situations. Indeed is a reset and that is important and positive and with reset what I mean is that the step functions, which we have to take.
Is something which is here to last year.
And that comes with I think I made the comment earlier with the.
With the realization of all the industries, we are serving that's not just for automotive.
How important semiconductors are it just represents a different value to them and from that perspective, I think we we we make a step here.
Which is a reset which is here too but she is here to stay how old it goes to an individual cases on individually with prices year on year is hard to anticipate but I don't think it will go backwards.
Got it thank you.
Yes.
Your next question is from William Stein Your line is open.
Great. Thanks for taking my questions.
First I think you just spoke about this a moment ago, but can you talk about the magnitude and duration of your purchase commitments to foundry and your customer purchase commitments to <unk>.
NXP.
Well.
Bill Bill fill in maybe with a bit more detail, but I.
I'd say in general it really varies I mean, we have some of them.
On the NCR side, which is which is the customer orders. They would typically easily covered next year. So now getting on the order, which stretches all the way until the until the end of next year.
If you think that all the other sites, which is the.
The agreements with our foundry and supply partners.
I think we actually published a new number which if I remember right. It's between four three and $4 $4 billion.
Agreed and signed supply commitments, which we have entered into.
With our supplier.
Supplier base.
Majority of it is obviously in wafers, but mind you. This is not just for one year. This stretches out over multiple years to come $4 4 billion to.
To give you to give your appeal.
That helps thank you and bill I want to offer some congratulations on your new role of course, you have some pretty big shoes to fill given peters.
Very strong performance and.
The company's strong performance in the last 10 years or so im.
I'm, hoping you might.
Give us a preview of what you might say next week at least in terms of your priorities as the new CFO. Thank you.
Yes. Thank you for your question first off I'm, very honored and thankful to the role.
Been in the semi industry for about 20 years prior to NXT have worked for Fairchild LSI and your systems.
And really no change as you have to remember I've been with NXP for about eight years supporting the company's financial strategy, alongside with Peter and Jeff and the entire management team.
I would say my style is a bit different in Petersburg principles are the same focus on delivering like you mentioned those commitments and driving long term value to our customers our employees and shareholders.
Related to analyst day, Yes, I'll share that next week relate to our long term financial model, but.
But we really like to save that for next week and not addressed that in this call.
We have a question from Chris Catherine Your line is open.
Yes. Thank you good morning.
First question I Wonder if I could just ask about those long term agreements that you're signing with your customers now can you tell us what what sort of commitments.
Customers need to you under those agreements, although it sounds like you're using those agreements from your customers to backstop. The agreements that you are making what's your suppliers is that for specific volume commitments over.
Certain amount of time.
Is pricing committed to those agreements as well such that you have visibility on both volume and pricing.
So since I really can't go into great detail on this as you will understand Chris.
But the headline is indeed in line with what you were saying.
Those customer agreements would typically cover volume and price.
Say for example, a period until end of next calendar year.
And they even fix it by quarter. So it's not just one number for the whole year.
And in many cases, it even goes to them two binding it two quarters.
It was very helpful and if I could follow up pricing as well and.
Clearly.
Over the past couple of quarters, you've been passing along as you said those those price increases you've gotten some suppliers can you give us a sense of the magnitude of the pricing benefit you've seen out of the sort of 26% year on year increases in revenue.
How substantial has price been in that calculation and then as you go forward.
Are you expecting as you go into next year, there is still to be a pricing tailwind as the input costs rise.
Well generally.
As we discussed before.
We will continue to match the rising input cost with adjusting the prices accordingly.
Such that yet.
Since input cost will continue to go up also next year.
They will also continue to be a pricing adjustments into next year in general in general terms.
For the rest of your question I really cannot and don't want to go into greater detail in how much is wolf piece.
It's really just important that the leading concept and philosophy of all of this is that the price increase it's just matching the input cost increase and that's it but that is something which indeed, we have this year and which is called a follow up next year too.
Thank you.
Next question's from Blayne Curtis your line is open.
Hey, Thanks for taking my question I'll offer my congrats to Peter and Bill as well just going back on the auto side I just wanted to be clear. So you've heard from some other companies that they are seeing the customers start to be more selective trying to get kids together you. Thanks for all the detail occurred on that supply chain seems very complex. So I'm just kind of curious are you seeing that.
Same behavior, maybe seeing offsetting strength elsewhere or are you a bit different given the company's specific the weather in Texas et cetera, and kind of secular growth.
That youre not seeing that selective behavior on third party.
Blaine I think what you tried to ask me is seeing a slowdown.
And the clear answer is no we absolutely don't see a slowdown.
And Joe Kennedy mentioned that that's that especially the car companies with a pretty <unk>.
This is currently a negative impact to their car production numbers of this year and the ambition to grow them next year by I don't know 10 plus percent over over this year.
They clearly need more semiconductors and that is not limited to one product or one technology I think I also made the.
They're very open comment earlier that.
75% of the product portfolio in our automotive business.
Still has a lead time of about 52 weeks.
I think that says it all.
There's an amazing stat.
Maybe you can just we don't want to ask on the industrial Iot.
Maybe just kind of a discussion about what areas of strength are for you and maybe you can just describe the supply chain as well for the back half of the year here.
Just as tight.
It'd be helpful. Thanks.
Yeah.
It is it is there.
Very tied to I would say no different to automotive.
Also by the way the impact of Mark shipping enough product.
At least as significant as in automotive it just catches less headlines in newspapers, but if you think about the impact on industrial automation, which are huge which is huge machinery, which cannot be built if if there is not simply not enough semiconductor supply.
Or in the smart home.
It's equally drastic as it is in the automotive just catching less headlines now our big differentiator more and more is our capability to offer complete solutions complete solutions around the process. We've had that leadership in the in the in the very wide ranging portfolio a processor.
<unk> solutions into our into industrial, but its not very nicely complemented by connectivity.
Security and analog attach which really differentiates us from or.
From our competitors I would I would dare to say, it's a very unrivaled position in offering here, which by the way is also going to be very much in the spotlight of our of our Investor Day next week to give you much more detail what we have and why we think it makes us grow so much in the time to come.
Now from a from a supply chain or channel perspective, a lot of that business. Indeed is going through distribution.
Vicious because it goes to thousands literally thousands of small customers and this is exactly why the solution capability of NXP make such a big difference because many of these companies, which we are serving their through distributions don't have the capability of themselves to deal with the complexity of these <unk>.
<unk> edge applications, so when and if we can offer them a complete solution then that has a huge advantage for both time to market, but also from an R&D perspective for them. That's actually what I think is really a very.
Very very significant differentiator for us.
Another element in the in the equation is we do have a relatively strong exposure to China. So if you think about the industrial business a lot is going through distribution.
The largest going into them into China.
And just to anticipate the question, we do not see.
A slowdown there in China.
But again mind you. It's also that we are continued to be supply kept so.
As I said earlier also in industrial we could certainly run higher revenues, if only we had more supply.
Good news is also there our supply capability as we discussed with them.
This chart earlier.
Improving every month, so that overtime also there'll be hopefully get into a better place.
Okay.
Okay I was asking passenger we'll take one last call.
Okay.
And our last question is from C. J Muse your line is open.
Yeah. Good morning, Thanks for squeezing me in I guess first question for you in your prepared remarks, you talked about.
Auto supply demand balance probably not achieved until 2023, and so curious as you contemplate that.
Kind of assumptions are you, making in terms of what kind of a future inventory management will look like.
Both of the tier ones and Oems I imagine, there's there's more of a just in case as opposed to just in time. So we would love to hear your thoughts on on kind of that evolution.
As likely coming for.
For the auto industry.
Yes C J, absolutely I I did indeed say that I don't think there is broadly speaking enough supply next year.
Two already stopped building those additional inventories because that's exactly what you're asking for yes, we clearly see a demand by the Oems to the tier ones and the other participants in the extended supply chain explicitly not the semi companies, but in between between us and deal with that.
That demand and the requirements.
<unk> built more inventory.
Typical if.
If you wanted to slice this a typical ask us.
Somewhere between three and six months sometimes longer.
And it has a very simple reasoning that's that's the manufacturing cycle time for a for a semiconductor product.
In a very simple simple way they say okay. If this is the additional inventory then that puts us may be on the safe side for more for more flexibility.
Yep. This is something which I don't see the industry has the capability to build that next year.
It's time for them for 23.
Very helpful. And then I guess my follow up question.
Obviously, we've seen positive mix shift.
On the EV side, which you spoke to earlier I'm curious as you as we're seeing more and more Oems target kind of full platforms moving over to EV or hybrid as well I'm curious how that has kind of played with your full solution.
Which kind of I would think would fit nicely into that would love to hear your thoughts there.
We we love it C. J I mean, we've talked a lot about our capability from a actually also from a solution perspective, and battery management solutions, which is greatly benefiting from this foster and accelerate the penetration.
We will open the kimono next week, a little bit more in the Investor day, and give you insight in what else we do in electrification because we are not only with BMS.
Post to this accelerated trend so it's a very good thing for NXP and if it goes it goes beyond battery management by battery management itself, obviously is benefiting very very greatly.
I guess with this we come to the end of the call.
Rich maybe it gets me in a position just to summarize very briefly.
I mean, it's a it's a it's a turbulent time out there, but I'm I'm really proud that we could deliver what I think is a very good quarter three.
A strong guidance into quarter four.
But even more so we continue to have excellent momentum also into next year, which means continued strong demand across our end markets.
No inventory build out there.
And we see that our supply capability is getting better and better and better to stopped matching that demand in the future.
So with that I. Thank you very much for your attendance today and I hope to hear and see quite a few a few also next week when behalf or much more extends its investor day in New York. Thank you.
Ladies and gentlemen, this concludes today's conference call. Thank appropriate sweeping you may now disconnect.
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Yeah.
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