Q1 2022 NXP Semiconductors NV Earnings Call

Good day and thank you for Sandy by welcome to the NXP first quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation there'll be a question and answer session to ask a question during the session you'll need to press star one on your telephone.

Please be advised that today's conference is being recorded I would now.

Now like to hand, the conference over to your Speaker today, Jeff Palmer Senior Vice President of Investor Relations. Please go ahead.

Thank you Catherine and good morning, everyone. Welcome to NXP semiconductors first quarter 2022 earnings call with me on the call today is Kurt Sievers, Nxp's, President and CEO and Bill <unk>, our CFO . The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward looking statements that involve.

<unk> 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 macro economic impact on specific end markets in which we operate the sale of new and existing products.

And our expectations for financial results for the second quarter of 2022.

Please be reminded that NXP undertakes no obligation to revise or update publicly any forward looking statements for 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.

Pursuant to regulation G. NXP has provided reconciliations of the non-GAAP financial measures and the most directly comparable GAAP measures in our first quarter 2022 earnings press release, which will be furnished to the SEC on form 8-K and is available on Nxp's website in the Investor Relations section at NXP Dot Com I would now like to.

Turn the call over to Kirk.

Thank you, Jeff and good morning, everyone.

We appreciate you joining our call today and I can tell you. After two years finally, I do very much look forward to a series of in person investor meetings through the rest of this week.

Now, let me begin with a review of our quarter one performance.

Revenue was 36 million better than the midpoint of our guidance.

With automotive industrial Iot and mobile apps or above our guidance.

So trends in the communication infrastructure markets were just slightly below our expectations due to supply issues.

Taken together NXP delivered quarter, one revenue of 3.14 billion, an increase of 22% year on year.

non-GAAP operating margin in quarter, one was a strong 35, 7%.

480 basis points better than the year ago period and.

And about 70 basis points above the midpoint of our guidance.

Our results reflect strong execution with good operating leverage and profit flow through on higher revenue improved gross profit and modestly lower operating expenses.

Now, let me turn to the specific trends in our focus end markets.

In automotive revenue was $1 56 billion up 27% year on year in line with our guidance.

In industrial and Iot revenue was $682 million up 19% year on year better than our guidance.

In mobile revenue was $401 million up 16% year on year better than our guidance.

Lastly, communication infrastructure and other revenue was $496 million up 18% year on year, just modestly below guidance as a result of ongoing supply challenges.

Overall, the demand in our strategic end markets continues to be robust.

Putting our customers requirements in excess of our improved supply capability.

And in that context, let me provide some data points of what we see in our daily engagement with our customers.

In the distribution channel, which services about half of our total revenue.

Inventory remains stubbornly below our long term targets.

During quarter, one the months of supply in the channel Whats why don't I'll have months.

Which is about the months below our long term targets.

And it isn't all the sixth consecutive quarter of an exceedingly tight supply situation in the channel.

Internal inventory days continue to be below our long term targets of 95 days.

In quarter, one increased by six days with all of the increase in support of our growth outlook for the second quarter.

Lead times across the board continue to be extended.

With more than 80% of all of our product being quoted at 52 weeks or greater.

Essentially we are supply constrained for all of train train two.

The level of inbound supply related customer Escalations continues to be elevated across all focus end markets and regions.

And lastly, let me zoom in on the trends, we see in the automotive market.

In the U S. New car inventory at dealers is substantially below historic levels at 27 days versus the historic metric of 64 days.

The pace two <unk> vehicle penetration globally continues to rapidly accelerate hitting 19% of global production in 2021.

And as expected to hit 23% penetration in train train two and moving to 30% next year in 2023.

With <unk>, having roughly two X the semiconductor content.

This is another strong secular tailwind to semiconductor content growth.

The <unk> has disrupted predominantly European tier, one suppliers and Oems with shortages of wiring harnesses.

In China, the Covid related shutdowns are creating yet another level of significant supply uncertainty.

The extended auto supply chain continues to be very lean with reported days of inventory at the tier ones and that the auto Oems out of sync with each other.

And lastly, based on our very frequent and detailed customer conversations across the supply chain.

<unk> and Oems continued to be challenged by kitting issues to complete module and vehicles assemblies.

These kitting issues are not due to one semi supplier or shortage of just one comment on Gordon's crowdy wise.

Against all of this dynamic backdrop, our first quarter was a very good beginning to what we view will be a positive year for NXP.

In the face of the Lauder customer Escalations and elevated lead times, we are proactively and relentlessly working with our customers to redirects material to assure that customers get what they need where they need it and when they need it.

And assuming out customers has begun to much better appreciate and embrace the strategic value of semiconductors play in their long term success, both from an innovation as well as a supply perspective.

Hence as a result of our adaptability the level of engagements with strategic customers is resulting in unprecedented levels of customer intimacy.

Our engagements are unlocking new and significant long term customer arrangements and cooperation that is closer than ever which will enhance our relative market share over the longer term.

Now, let me turn to our expectations for quarter two.

We are guiding revenue at 328 billion up about 26% versus the second quarter of Twilio train to within a range of up 22, two up 30% year on year.

From a sequential perspective this represents growth of about 4% at the midpoint versus the prior quarter.

At the midpoint, we anticipate the following trends in our business.

Automotive is expected to be up in the low 30% range versus quarter, two 221 and up in the high single digits range with quarter, one train of train two.

Industrial and Iot is expected to be up in the low 20% range year on year.

And up in the low single digits range with this quarter one 2022.

Mobile is expected to be up in the low double digit range year on year and down in the low single digit range with this quarter one train train two.

And finally communication infrastructure and other is expected to be up about 20% versus the same period, a year ago and flattish on a sequential basis.

Our guidance incorporates several items to be aware of.

First the year on year comparison of our auto business.

In the second quarter benefits from the easy compare versus quarter. Two 2021, when we were impacted by the effects of the winter storms on our vapor manufacturing facilities in Texas.

Second.

Our attention back end facility in China is fully running at maximum capacity.

Remember, we lost about one to two weeks of output during the early part of quarter one.

And lastly.

Our guidance does contemplate several tens of millions of dollars of potential supplier and logistical disruptions due to the lockdowns curing in China related to Covid outbreaks.

Now before I pass the call to Bill I would like to provide an update on our ESG journey, something our management team and I are personally committed to.

On April 1st we published our annual corporate sustainability report, which included the achievement of several goes.

On a year over year basis, we have reduced our normalized carbon footprint by 11%.

And have increased the use of renewable electricity in our facilities to 31% of our total consumption.

Additionally, we have realized an 11% normalized decrease in our water consumption and 76% increase in our recycling efforts.

These are all solid and positive steps.

But I believe we can and should do more.

Looking forward, we have committed to achieve carbon neutrality by 2035.

<unk> formally committed in the science based targets initiative.

And we are transitioning towards 100% renewable energy sources hit all of our facilities.

This will all be significant task for our organization and we are committed to providing regular updates documenting our progress.

From a global employee perspective, we grew by 8% during 2021, despite a difficult talent markets.

Women now represent 37% of our total employee population.

To keep the organization focused on the sustainability journey I am proud to announce China for walnuts.

Our general Counsel has been named Nxp's, Chief Sustainability officer, and she will oversee our sustainability program.

Finally to demonstrate that we as an organization are all responsible to improve the impact we have on our environment. The NXP Board has approved that a portion of our employee annual incentive compensation will be tied to achieving progress towards long term sustainability goals.

Now in summary, the robust growth we have anticipated for 2022 is materializing in spite of all of the supply challenges.

We do continue to see strong customer demand, especially our company specific accelerated growth drivers.

Overall demand continues to outstrip increased supply and inventory across all end markets remains very leading.

And with that I would like to pass the call over to you Bill for a review of our financial performance.

Yeah.

Thank you chair and good morning to everyone on today's call.

Kurt has already covered the drivers of the revenue during Q1.

And provided our revenue outlook for Q2.

Move to the financial highlights.

Overall, our Q1 financial performance was very good.

Revenue was $36 million above the midpoint of our guidance range.

And both non-GAAP gross profit and non-GAAP operating profit.

Were near the high end of our guidance.

Now moving to the details of Q1.

Total revenue was $3, one 4 billion up 22% year on year.

Above the midpoint of our guidance range.

We generated $1 eight 1 billion and non-GAAP gross profit and.

And reported a non-GAAP gross margin of 57, 6%, which is up 340 basis points year on year and both above the midpoint of our guidance range driven by the improved utilization higher revenue and positive product mix.

Total non-GAAP operating expenses were $688 million or 21, 9% of sales.

Up $88 million year on year, and up $7 million from Q4, which was below our midpoint of guidance and below our long term model.

From a total operating profit perspective, non-GAAP operating profit was 112 billion.

And non-GAAP operating margin was 35, 7%.

Up 400 basis points year on year.

And both at the high end of our guidance range, reflecting solid fall through and operating leverage on the increased revenue levels.

non-GAAP interest expense was $103 million.

With cash taxes for ongoing operations of $122 million.

And Noncontrolling interest was $9 million.

Furthermore, our stock based compensation, which is not included in our non-GAAP earnings was $89 million.

Now I would like to turn to the changes in our cash and debt.

Our total debt at the end of Q1 was 10, five 7 billion flat sequentially.

Our ending cash position was $2 $6 8 billion.

$147 million sequentially due to capital returns and increased Capex investments during Q1.

The resulting net debt was 789 billion.

We exited the quarter with a trailing 12 month adjusted EBITDA of $4 $5 8 billion.

Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q1 was one seven times and our 12 month adjusted EBITDA interest coverage was 12 times.

Turning to working capital metrics days of inventory was 89 days, an increase of six days sequentially the increase.

<unk> inventory was all in raw materials and working process to support revenue growth and 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 five months.

Well below our long term target.

We anticipate the coming year will be very similar to 2021.

Customer demand is in excess of incrementally improving supply.

Days receivable were 27 days down one day sequentially.

Days payable were 93 days in.

An increase of six days versus the prior quarter as we continue to increase orders with their suppliers.

Taken together, our cash conversion cycle was 23 days, an improvement of one day versus the prior quarter, reflecting strong customer demand solid receivable collections and positioning for customer deliveries for future periods.

Our working capital management and balance sheet metrics continue to be very strong.

Cash flow from operations was $856 million and net Capex was $279 million, resulting in non-GAAP free cash flow of $577 million.

During Q1, we paid $149 million in cash dividends and repurchased $552 million of our shares.

Overall, we returned 121% of our non-GAAP free cash flow back to the owners of the company consistent with our capital allocation strategy.

And again, the cash flow generation of this business continues to be excellent.

Turning now to our expectations for the second quarter.

As Kurt mentioned, we anticipate Q2 revenue to be about $3 to 8 billion plus or minus about $100 million at.

At the midpoint this is up 26% year on year.

Up about 4% sequentially.

We expect non-GAAP gross margin to be about 57, 6% plus or minus 50 basis points.

Operating expenses are expected to be about $720 million, plus or minus about $10 million, which is up about 5% sequentially driven primary by our annual merit increases.

Taken together, we see our non-GAAP operating margin to be 35, 7% at the midpoint.

We estimate non-GAAP financial expense could be about $103 million.

And anticipate cash tax related to ongoing operations to be about $154 million or about 14, 5% effective cash tax rate.

<unk> with what we communicated during analyst day up 15%.

Noncontrolling interest will be about $13 million for Q2, we suggest for modeling purposes, you use an average share count of 265 million shares.

Finally, I have a few closing comments I'd like to make.

First as Curt mentioned in his prepared remarks, we have attempted to derisk, our Q2 outlook given the uncertain macro economic environment and the potential impact on our supply chain.

Despite these potential risks customer demand for NXP products remained very strong in the markets we serve.

Secondly from a revenue standpoint, we expect our second half revenue to be greater than our first half on an absolute basis.

As we continue to work on improving supply.

From a modeling perspective think of a gradual quarterly improvement sequentially through the remainder of 2022.

But this improvement is still well short of the demand signals, we're seeing constantly monitoring from our customers.

Overall, we believe supply will remain constrained and challenging throughout 2022.

Lastly, barring any significant supply disruption, we believe our gross margin should trend in a fairly tight range consistent with our performance in the first half of the year.

We continued to see the business is generating strong cash flow and we will continue to execute to our well communicated capital allocation strategy consistent with past periods.

With that thank you and we can now turn it over to the operator for questions.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key.

Our first question comes from Gary Mobley with Wells Fargo Securities. Your line is open.

Good morning, everybody. Thank you for taking my question.

I noticed in the 10-Q filing that your purchase commitments were down about 10% from fiscal year 'twenty one and.

Was that the high watermark fiscal year, 'twenty, one and or should we think about NXP, perhaps reloading on the purchase commitments.

Yes.

So indeed, it came down somewhat which is simply a consequence of selling that part of it. So it's just the regular revenue, which so it whats comfort.

On the convert into revenue.

Going forward.

Would not exclude that we might enter into into longer term.

Obligations with our suppliers.

Since the context in the environment of the.

Supply demand situation has not fundamentally changed which means we are effectively sold out for the rest of this year.

And in certainly in certain technologies and capacity buckets. We also see that demand will continue to outstrip available supply.

Further into the future. So also going into next year and with that yes.

Would not exclude that we also enter additional and separate supply commitments to the ones, which are in place already.

Thank you for that Kurt.

I think you mentioned previously that.

The supply chain increases were a headwind to gross margin our tailwind to gross excuse me headwind to gross margin in fiscal year 'twenty, one, but you would expect it to be a tailwind.

Rice increases that has to be a tailwind for fiscal year 'twenty. Two is that still the case and perhaps if you can quantify that tailwind.

Sure what we've mentioned related to pricing from our customers is that we're only passing on the higher input costs and inflationary costs that we're seeing onto our customers.

Related to it if I look internally.

We do about 43% in house on our front end manufacturing side and we are running in the heightened.

Prior to a year ago, when we were in the probably the mid eighties. So we're maxed out internally from a utilization standpoint, we expect our margins to be as I indicated in my prepared remarks to be at these levels plus or minus 50 basis points, we talk about mix in any given quarter. Our number one priority is really servicing our customers with.

At lines are down Escalations are occurring and we're doing everything possible.

Handful of customers.

Got it thank you guys.

Thank you. Our next question comes from Vivek Arya Ara.

With Bank of America. Your line is open.

Alright. Thank you for taking my question Kurt I had a question about just the quality of the demand signals is that youre getting from automotive customers. I believe you mentioned that the days of inventory at tier one and Oems is out of sync because it's getting issues I was hoping you could expand on that and how does that impact your.

Visibility and confidence in shipping to the automotive end market.

I will give you the confidence you are shipping in line with demand because when I look at auto semiconductor sales and auto unit production.

It is kind of consistent almost 40 point Delta, which was there last year and it's probably been in Q1 also so.

So just what is giving you the confidence that you are shipping in line with demand right and that they are not over shipping just given the state of flux.

Your tier ones and Oems.

Yes, good morning Vivek.

Indeed, I mean, that's that question.

We also watched it very carefully and I can tell you from continued very personal experience. So I continue to spend a good time of my work week.

Escalation clause, especially with automotive and industrial customers. It is actually to the point now on this kidding.

We are here and they are re directing product because it is falling so show up in places that we actually go back to other customers and asked if not stay have a fuel pumps, which they only maybe needs. A week later and then we used that week to redirect depart to somebody else.

So I think we are extremely close to the pulse of the production of our customers and our customers' customers sorry. This is a triangular.

<unk> relationship with the tier ones and the Oems.

Which is why I have a very very high confidence that we are not at all over shipping, but actually bally meeting the demand.

I would actually say vivek.

The reduction we have now seen from IHS in the forecast for the <unk> for this year I think it came down from something like 8% to 9% in the last quarter to now a forecast of only four 5% so almost half.

A good part of that is due to semiconductors again, so all of these modulations youll see there in terms of possible demand is is actually above what we can surface anyway.

So that's why we still fight day in day out to try to fill the hole.

And actually meets mid production demand.

Got it.

From a bigger contextual perspective, because you mentioned again this striking delta between SAR.

So it's a semi shipments into automotive.

<unk> to the same points, we had mentioned earlier, which is a massive and accelerated content increase thanks to the penetration of Suvs and I have to mention also premium vehicles. So what we what we didn't always we looked at the combination of premium Ice's vehicles plus X Tvs.

And if you put that in one basket because it has similar levels of semiconductor content.

You actually find its about 30% of the global car production already.

And alone desk is double from the levels, we had in 2017 or 2018 pre pre this whole turmoil. So content increase continues to be an accelerating very strong sector.

Then there is certainly a portion of pricing.

There are the NXP specific share gains, which continue to be very much.

In check I would say with our planning.

And finally.

There is this inventory situation across the extended supply chain to actually keep it functional and I can only say it continues to be dysfunctional. So the overall inventory level across the extended automotive supply chain is still too low which means the whole thing is totally dysfunctional.

Got it and for my follow up Kurt.

Many investors are worried about some kind of demand slowdown right <unk> been talking about recession at some point over the next one or two years.

How do you think about your trough gross margins if that were to happen.

Have a very interesting hybrid model. So what steps would you take let's say semiconductor sales were to go down 5% to 10% Hypothetically next year, what steps would you take and then how should we think about the bottom in gross margins. Thank you.

Look I would say in principle, we don't guide here next year.

In Indiana, both conscious to model, which we have given you in our Investor day back in November of last year.

Yes, I think I can give you a few bits and pieces to this question.

Clearly our gross margin benefits from utilization of our internal facilities at the moment, we are running full out.

Secondly.

And Bill just replies this to a different question.

We are comping.

Compensating our input cost increases with price increases to our customers.

And I, absolutely do not believe.

That pricing legal backwards going forward I think the environment is simply such that.

We move now to a higher level of pricing.

And this is to stay there.

Doesn't mean that there are not ASP erosion again going forward, but from that higher level. So don't worry about that impact on the gross margin I think the pricing is a step function, which has been or is being achieved.

And then we operate from the new level for the next years.

But the bottom of your range to $55 to 58 is that the right way to think about trough gross margins correct.

Given this given the model as we have the absolute attention to stick to our model yes.

Thank you.

Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is open.

Hi, guys. Thanks for asking the question I wanted to ask one short term one and then my follow up will be a longer term one.

The shorter term I, just wondered you talked about derisking due to a lot of the macro events.

Seen different companies say basically it's not having any impact others take a big haircut with little precision just wondered where you fall in that that spectrum kind of any more details on what youre seeing on China, and maybe is it a bigger or smaller cuts than what you experienced.

Experienced in the first quarter.

Well so in the first quarter I think we actually quantified it I think I remember, we said about $50 million, which is really what it was which was this one to two week shutdown of our own attention facility.

In the neighborhood of bridging.

For the second half what I've, just said is a couple of tens of millions.

Which we see as impact which is baked into the guidance, which we just gave you.

Now what I think how I would qualify this ross is.

This is <unk>.

Entirely our supply discussion.

I say that because I know that some of our peers talked about demand issues.

I want to highlight that in our case, we clearly talk about.

De risking from a supply perspective.

And that has to do with logistics issues integrator Shanghai area and it also has to do with all sorts of suppliers from the Shanghai area into our own operations.

Think about a proxy supplier substrate suppliers et cetera.

And thats, the impact which is baked into our <unk>.

Our guidance from a demand perspective for us.

It's a little different in the meantime, I have numbers that.

Solidly more than half of our customers in the Shanghai area are fully operational again, so theyre running 100% of their operations again.

And another third is save partially operational.

And rapidly coming back now.

And during their shutdown periods, they pulled all the product because they all knew they would come back very quickly we have been under shipping them anyway for one and a half years mall. So thats why that doesn't have any demand impact on us. So all of this derisking Ross is a is a supply of consideration and a couple of tens.

Of millions so.

I'll leave it to you how you want to interpret this profit from an exact number perspective, but it is about our supply situation out of the Shanghai area.

That's very helpful. Thank you for that.

Longer term question. This kind of goes back to what if the world isn't as good at some point in the future earlier.

Earlier in your narrative for can you talked about the.

Closer relationship with your customers more intimate relationship value add et cetera, et cetera. I was wondering does that change your inventory strategy.

The last couple of downturns, you guys were very aggressive to cut your utilization.

I know you don't have standard products are very application specific et cetera.

But to the extent your customers are giving you more visibility.

You have that more intimate relationship is.

Is your willingness to go above the 95 days in a downturn and that cut utilization as your willingness for the channel to hold more inventory in that at all different from prior cycles or do you think that you will run it with just as abruptly changes with your factory utilization as you have in the past.

Yes.

We've been looking into this very carefully because indeed, we have certainly lots of discussions with our customers about longer term supply assurance programs et cetera.

The solution to this is not to increase our internal inventory. So I have a clear cut answer Ross No 95 days stent I'm actually glad when we get there again, because you'll see that we are still below that but no. We have we don't have an intention to change that because we kind of re modeled how we went into this.

Crisis, and what we find out is that even if we have more inventory. It would have it wouldn't really have made a significant difference to those situations at all.

However, we are of course working with customers on all sorts of different models their inventory.

Our customers in the chain.

May be it distribution partners in cases is part of an overall package to have better supply assurance going forward.

But one big element that you said it yourself is actually the transparency and knowledge.

About the ultimate end customer demand I think in the past we end.

Would they have to say the whole industry.

Have too much reliance on demand signals of our direct customers not fully understanding and not having full transparency to the end customers and that is something which over in there.

This relationship concept, which I mentioned, which has significantly changed over the last one and a half to two years. So that gives me some confidence that we are in a better position to handle this going forward again internal inventory is not going to be the one which is going to be changed.

Thank you.

Thank you. Our next question comes from Stacy <unk> with Bernstein Research. Your line is open.

Yes.

Hi, guys. Thanks for taking my questions. So my first one you talked about revenues kind of like ramping incrementally sequentially into the second half as supply improves.

Are there any end markets, where you think supply is getting better or worse than your prioritizing any particular end market in the second half like how should we be thinking about.

That trend like spread across your end markets, just given the supply trends in demand transition.

Stacey.

I think we are across the board.

Obviously short of supply so that applies to all of our four revenue segments.

If I have to qualify it and I would say the worst case, we have in industrial and automotive.

To continue to have probably the biggest steps between supply and continued growth in demand and I also see that in those two.

This is a longer term or longer term situation that ahead of us.

Can you speak about the gradual increase of revenue through the year.

At least for this year I would indeed say that is largely a function of supply becoming available Stacy. So it isn't that much a question of what is the demand pattern in those four different buckets.

It is much more via RV coming closer through the year to the to the demand signals from a supply perspective and as we discussed earlier. This is something it comes from different factories. It's in total supply ramping up it is external foundry supply going going up et cetera. So it's a pretty and it's also not the same each quarter.

So I cannot quantify the revenue the gradual revenue growth through the year by segment.

From a demand perspective, because all of our supply is still under the demand signal anyway.

Okay. Thank you. Thank you. So my follow up I wanted to revisit the China Covid situation.

I heard what you said.

In a prior question, but at the same time like Youre, calling for you'll maybe 1% or less overall impact.

Next quarter from China Your bigger your competitor, obviously was calling for 10% I know you talked about maybe differences in what youre seeing in terms of demand versus supply, but I think both of you have more than 50% of your revenue is going into China.

How can that be that one of them is seeing demand issues, but I think the demand issues were also logistics related.

Why do you think youre not seeing anything along those lines and they are or is it just the nature. You know you have a channel so theres a bigger buffer in China or what are some of the differences you think youre going on that actually could be driving you did not see an impact along the lines that like some of the others in the industry is seeing just just given the amount of your revenue that's actually going into that.

Good.

So Stacy I.

Obviously, I really cannot speculate and don't want to speculate about the specific strategies in situations of one or more of our peers.

Cannot.

However, I can assure you that we put a lot of rigor and a lot of tension.

Pension into assessing this particular question because it's been obviously very important for us to understand how to how to safely and confidently guide.

For this quarter in this turmoil environment.

Given that this is very near term. It is it really has to do with your order patterns, we have on the books.

And with this particular customer situations, we've talked to so this isn't much of a strategic consideration Stacy it's really about what are we still getting out. The next the next eight weeks of this some of this quarter.

The bottom line of the analysis it is not about demand.

It is all about the supply disturbances from this situation and they are I feel we took a very balanced risk balanced approach to to figure that in but again I can't hold it against competitors, because I really don't know what to what Eric Suntrust.

And all the policies are.

Got it would you have the supply to ship the extra if if there was no impact.

Yes so.

Well.

The impact is on the supply side, that's the problem. So we if we did not have the COVID-19 related shutdowns in the Shanghai area, We had a higher guidance absolutely. That's the answer so that's what I tried to say the whole reason of de risking is supplied out of out of China.

And that's a couple of tens of millions and if the China zero covet policyholders hitting wouldn't be hitting our Shanghai and possibly building later in the quarter, we would have our higher guidance yes.

Got it thank you guys.

Thank you. Our next question comes from C. J Muse with Evercore. Your line is open.

Yes. Good morning. Thank you for taking the question I guess first question I was hoping you could discuss plans for Capex I know, you're 100% sticking with the hybrid model.

But your Capex intensity is now up to I think eight 9% in the quarter I'm curious if that's sustainable through 'twenty, two and how should we think about beyond 2022.

Sure C J.

This is bill as mentioned during last quarter, and our Investor Analyst day, our long term model of 6% to 8%.

However, we do expect 2022 will be a bit higher around that 10% and then come back within the range in 2023 and beyond.

And then just to look back again in 2020, we spent about four and a half four 6% 20, 169% and as you can see you're right in Q1, we spend about eight 9%.

Very helpful. I guess as my follow up question mobility was unusually strong in Q1, and then U K or Q rather.

Adjusted strength in China secure mobile wallets as well as early adoption of UW be curious, how we should think about kind of those drivers into the second half of 'twenty two.

Is it U W. B that that really is the incremental driver or or just overall handset units. Thanks.

It isn't it isn't really units.

I think the mobile market as we can all read.

<unk> is well, it's a bit patchy maybe globally.

But we are still on this content growth strategy I mean Indians. It is indeed about mobile wallets and.

Early stages of ultra wideband penetration and both are very much on track the fluctuations between quarters is really supply related.

No.

Talked painfully about very very tough.

Supply cost trends in mobile in quarter, three and quarter four of last year.

And I was anticipating it would get better it got better now in Q1, but.

But it's not perfectly permanent so I think this is a it was a bit of a catch up from a supply perspective in Q1.

Not perfect going forward since you sold it would be guided single digit don't actually sequentially into the second quarter.

Again, we also have to and this is a constant process.

We have to balance our available supply very fungible between segments to the extent possible. So we every quarter again in this current environment, we have to see where we have the possibility to debt. We are rebalancing between the segments via technology.

Or capacity buckets are fungible with each other and this is where it hits a bit to the mobile one in the second quarter. So don't read too much into it. This is all it all has to do with supply between Q1 and Q2.

Very helpful. Thank you.

Thank you. Our next question comes from William Stein with <unk> Securities. Your line is open.

Thanks for taking my question and congrats on the strong results and outlook.

Like to ask if you could remind us of your capacity expansion plans overall, what are you telling your customers in particular as to how youre going to recover from the current situation and meet their demand.

So that's a big question Bill.

So what we what we clearly communicate and break also to customers of course, a bit more out in more detail as we can do it here is a what we do with the 10% Capex, which of which bill will speaking of Baltimore, and let things still 6% to 8% probably in the coming years against a significantly.

Revenue. So this is from an absolute amount of significant capex increase to fulfill that demand.

Secondly, and I think that was one of the first questions. In this call. We have these long term purchase agreements with foundry partners, which are assuring us capacity corridor going forward.

Now the way.

How it plays out is that indeed, we see this year, but especially the next year we see.

More strong increments coming online from our internal capacity expansions.

In the front end.

We have this all the time and the backend because you'll know that the.

The cycle time to from putting towards and cutting capacity out as much faster in the background.

This is an ongoing process, but if you think about the investments into the front end, which is specifically in our mixed signal and.

Analog processes in house.

We see the positive impact from those coming late this year and especially next year.

And we work continuously with our foundry partners.

To.

Give us more access to capacity in the end Bill that is why bill highlighted in his prepared remarks.

That we will grow second half revenue of this year over first half revenue.

With gradual increase quarter on quarter.

You know that normally we don't do this full year kind of directional.

Guidance is but.

Since we have that supply in line of sight.

Unbroken demand signals.

This is.

But it's going to yield.

Mid term I think.

Will the industry will continue to have.

Quite significant capacity constraints, especially in the field of trailing edge.

So if you think about technologies say above 16 nanometers, so, especially in the area of 28 40 to 90 I do believe that the industry, Indiana Hasnt invested that much capex most of the Capex went really into the leading edge, while the demand for those notes, which is especially from automotive.

And industrial continues to be super robust through the coming periods.

That's very helpful. Appreciate it one more if I can.

How much of the year over year growth achieved in Q1 and guiding for Q2.

Approximately comes from units versus pricing versus mix.

Well I think bill Bill kind of hinted to this earlier, we are not pausing.

Price and units on a quarterly level we.

I think we gave you the information for last year very sets that.

Pricing was very low single digit element to our growth in revenue.

And you will get a similar information for the full calendar year 2022 at the beginning of next year.

Great. Thank you.

Thank you. Our next question comes from Blayne Curtis with Barclays. Your line is open.

Thanks for taking my question I'm, just curious when you talked about.

Going forward you would pass through additional cost gross margin kind of stable here. So I guess it isn't imbalance just curious as you look at the rest of the year do you foresee any increase.

Going forward their wafer backend.

Well Bill Bill can go into more detail and I think he also in his prepared remarks, he hinted to how we see this so blayne yeah I.

Unfortunately, given this this inflationary environment, we cannot of course not exclude.

Continued input cost increases.

But our principal stance that if that happens.

We will.

<unk> prices to protect our gross margins accordingly.

Bill I'm not sure you want to have.

Add a little bit.

Nothing more.

Great and then I just wanted to ask you said channel inventories about a month below where they should be.

When you look at sequential growth at the end of the year. It does box and seasonality in your core markets. I was wondering if you thought you could make any improvement in that gap in channel inventory.

Yeah, Blayne I wish we could.

Again.

This is really the target of two five months, which we had held over years in the past is still our targets I am personally deeply convinced that it is a disadvantage that we currently do not have this two and a half months. So I wish we could get there.

<unk> just held back by supply I mean, the more of a ship into the channel it's being pulled through immediately so it immediately translates into Pos so.

Again, this is not a guidance, but I I see little chance that we get this any way near back to our target in the course of this year.

Thanks Kurt.

Okay.

Thank you. Our next question comes from Chris Caso with Raymond James Your line is open.

Yes. Thank you good morning.

On cash return.

And last quarter you did return.

More of a 100% of free cash flow could you give us an update of kind of what youre thinking is you're obviously the cash flow is very strong in this environment.

What are the plans for that.

Sure I'll take that again no change in our policy and we continue to execute our capital allocation strategy. As you mentioned, we returned 121%.

Look at the trailing 12 months I think we returned 185% we will continue to do so we raised our dividend in Q1 as you all saw.

And we also got approval for buybacks again.

We've been very consistent here and we'll continue to execute to that strategy.

Thank you and as a follow on just just another question on the Opex and you talked about the 5% ish.

For this quarter on the merit raise does that tend to flatten out as you go through the year and just generally are you.

Comfortable with the level of spending that you're at right now and some others have spoken about just kind of difficulty in hiring and getting access to talent.

Yes related to Opex, we continue to do very well here and as you can see we're operating below the 23% long term model.

Q1 finished at 21.9 themselves.

And then what we guided at 22.4, we also guided 22% of sales again, which incorporates that higher annual merit increases and project spend as we continue to manage and execute our portfolio to our strategy very well.

I'm not going to guide the second half, but with all the different signals. We just provided on revenue gross margin and we should be probably trending below our long term model of 23%.

So we're not going to get to 23% probably in the second half.

Got it thank you.

Yes.

Thank you. Our next question comes from Matt Ramsey with Cowen Your line is open.

Thank you very much good morning, everybody.

Kurt there's obviously been a lot of conversation on this call about visibility and whatnot, but that one data point that really stood out to me was I think you mentioned, 30%.

EV penetration this year in the auto market in terms of units of production and that was quite a quite a bit higher than what we were modeling. Despite the bullish trends in evs. So I wonder if you could give us a little context there is that.

Supply constraints that are hitting ice vehicles.

Maybe more disproportionately than in Evs is this.

New regulatory push is it infrastructure, that's being built out more quickly for charging I'm just trying to get an idea of why sort of a step up with some bullishness on next EV penetration. Thanks.

Yeah, Thanks, Matt and thanks for maybe them, giving me the.

The opportunity to to correct what at least you understood I'm not sure exactly what I said, the 30% I quoted in that.

Is the sum the integral some of ex Evs and premium Ice's vehicles. This year.

And to break it out it's about 23% <unk>.

And 7% premium vehicles, but I put them together into this 30% number because from a semi content perspective, they are in a similar ballpark.

Which is at least two to three sometimes three ex of the of your average car. So sorry, if that was not clear. So the 30% is the sum of premium.

ICD and <unk> together.

Yes, the principle holds which use sets because.

The <unk> I think they were more like 19% last year and moving to 23 of this year. So this is a significant increase and I think next year, it's going to be another significant step up.

But again it is important to understand that concept of lumping into this also the premium ice's vehicles, because that number that 30% I quoted there is actually almost doubled from what it was between 2017 and 18.

Barrett was more in the ballpark of 15%.

And so there is an accelerated trend both to premium cars.

<unk>.

Normally strong drive it to them to a semi content the ex TV trends by the way is clearly put by China and Europe . It is a little lower it's still I think it's also going to come but it's a little lower still in the U S.

And as you rightfully said in Europe that has a lot to do with legislation.

Tax incentives and stuff.

And in China, I think it has to do with in a way and the ideal situation for the industry because they don't have a lot of legacy from combustion engine cars I mean, many many startup companies theyre jump right away into into Suvs.

Thank you for that card and for clearing up the assumptions.

As my follow up there's a lot of the call here, it's been focused on on supply demand and visibility in the auto business, maybe you could compare and contrast, where you are a closeness to customers visibility in autos versus what youre seeing in industrial and comms.

Yeah.

Yeah.

Auto is very hard to serve because of the supply constraints, but the transparency is actually in the meantime, very good I mean, it's a complicated supply chain, but I think we have now after exercise more than run off yields very close and.

And standing relationships to the tier ones and the Oems when it comes to these supply challenges. So I think the transparency is good and that's why also.

Probably radiated here a solid confidence that we know that we don't over ship because we have very clear visibility.

In industrial and Iot.

It is obviously more complicated.

Because a solid part of the business there is going through the channel.

Such that the channel inventory, which we discussed earlier, the one and a half months switches, which is stubbornly low is probably the best indicator we have there.

That doesn't exclude the effects that also in industrial and Iot we are serving.

Well known.

Very big customers I mean, it doesn't harm to mention names like maybe honeywell or Schneider or Siemens.

Kind of customers. We of course also surfing that's more direct.

We have a similar visibility level like in like in automotive.

I'm afraid I have to say I fear at the moment at least for us for NXP.

The shortages in industrial are even worse than in automotive.

Thank you and our last question comes from <unk> Hari with Goldman Sachs. Your line is open.

Hi, good morning, Thanks, so much for squeezing me in.

In response to a question you talked about your wafer processing capacity.

Actually taking kind of a leg up in 2023.

Can you help us quantify you know.

How much.

So you could increase there.

And related to that.

Consistent with what you said at your analyst day.

The capital intensity of the business should should revert lower in 2023.

Throughout the call you sounded really really confident about the sustainability of demand here and now.

And some of the more mature nodes youre kind of in a structural under supply why not keep investing at a high level in 'twenty three and beyond.

Yes that is actually because the.

The level, we need to achieve to share with our.

One wafer facilities will build that'd be satisfied through the possibilities. We have so that doesn't necessarily mean it clauses all the gaps to them to demand, but it's as much as we can do.

With the four walls.

The facilities we have.

It does not mean of course that we would not continue to push very hard to get a higher supply from our foundry partners.

Because in the end.

Within our hybrid manufacturing strategy.

Share of X total foundry suppliers for NXP is only going to grow I think we are currently at a 55% to 45% levels of 55 banks totaled 45 in total.

And I would dare to forecast at this it will not take that long its going to be more like 60 40.

Et cetera. So that's why if you think about a revenue generation and customer satisfaction from that perspective than the internal pumped on the midterm is actually the smaller part of this and the bigger part is coming from the from the foundries and of course, they keep investing and keep getting their moral.

Got it that's helpful. And then finally as my follow up I think in your prepared remarks, you talked about supply issues in Q1.

Driving the very slight missing comps can you sort of elaborate on that but.

Has that been resolved at this point thank you.

Yes, that's just it's just a moment stuff I mean, we have our our LD mass production in the.

RF comms business, which is running in those facilities, which are also serving automotive and industrial customers.

Just for <unk>.

So we we were too ambitious to be honest I mean, it's just a couple of million dollars at the end, but people are too ambitious in what we could get out to two of these.

Comps customers so nothing dramatic in the end because you saw it also it still continued to grow very nicely from a from a year on year and quarter on quarter perspective.

Just had a two ambitious platform from an output perspective, but nothing special in a way.

Now with that I guess, we got to the end of the call. So many thanks for attending this morning in summary, I would say that would be very rigorously reviewed.

Quarter two guys.

Certain situations out of China, I want to highlight again, we see this as a pure supply challenge, but we feel very confident with the forecast, which we have given you that this is this is in line with what we will achieve.

And from a more longer term perspective, I think the anticipated strong growth for the year is materializing second half ahead of first half and we see a continued imbalance between supply and demand through the whole year, especially in our strategic segments of automotive and industrial which have very secular growth.

Spreads with many things and I look forward to seeing some of you in person later through the week. Thank you.

Okay.

This concludes today's conference call. Thank you for participating you may now disconnect.

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