Q3 2022 NXP Semiconductors NV Earnings Call

Okay.

Hello, Thank you for standing by and welcome to the <unk> third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to.

Star one on your telephone please be advised that today's conference maybe recorded I would now like to hand, the conference over to your Speaker today, Jeff Palmer Senior Vice President of Investor Relations. Please go ahead.

Thank you Josh and good morning, everyone welcome to the NXP semiconductors third quarter 2022 earnings call with me on the call today is Kurt Sievers, Nxp's, President and CEO and Bill Burke, 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.

They 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 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 2022, please be reminded that.

<unk> undertakes 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 operate.

Performance.

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

Turn the call over to Kurt.

Thank you, Jeff and good morning, everyone.

We appreciate you joining our call today.

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

Our revenue was $20 million better than the midpoint of our guidance.

The performance in the mobile automotive and communications infrastructure markets, all better than our expectations.

For the consumer exposed Iot subset of the industrial and Iot markets.

We started to experience weaker sell through in the channel.

And let me remind you that our consumer Iot exposure is approximately 40% of the industrial and Iot segment revenue.

It is made up of thousands of customers, primarily in China and serviced through our distribution partners.

Taken together NXP delivered quarter three revenue of 345 billion, an increase of 20% year on year.

Our non-GAAP operating margin in quarter, three was a record 36, 9% three.

340 basis points better than the year ago period, and 80 basis points above the midpoint of our guidance.

Our results reflect strong execution.

Versus solid profit flow through on the incrementally higher revenue and better than guidance operating leverage.

Notwithstanding our results, which surpassed our guidance.

We are facing a tricky market environment.

On the one hand, the demand trends from automotive and core industrial customers.

It's very resilient.

And as we continue to face supply constraints across multiple microcontroller and advanced analog products.

And on the other hand, we see weakness in the broad consumer Iot and in the Android mobile markets.

Given that unbalanced dynamic of the demand environment.

We are going to pull those levers that are in our control.

Namely strengthened channel inventory management and disciplined discretionary operating expense.

In terms of inventory, we have decided to take a draconian approach to managing our distribution channel inventory.

Specifically our quarter four guidance contemplates a channel inventory at the one six months of supply level.

Which is in line with quarter, three and well below our long term model.

We prefer to keep any incremental inventory on our balance sheet, where we have the ability to control and redirect shipments as needed.

And in terms of discretionary spending amongst others VR slowing the rate of hiring.

All in all we believe these measures are a prudent approach until such time as we see a clearer and more consistent view of the demand environment.

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

In automotive revenue in Q1 was one eight in Q3 was $1 8 billion up 24% year on year near the high end of guidance.

In industrial and Iot revenue was $713 million up 17% year on year $32 million below our guidance.

And mobile revenue was $410 million.

Up 19% year on year $30 million better than our guidance.

And lastly, communication infrastructure and other revenue was $518 million up 14% year on year slightly above our guidance.

Now, let me look at the key operating indicators relative to the notice.

Demand dynamics, where we see the following.

In terms of coated product lead times overall, we dropped to just below 70% of our portfolio with lead times that are greater than 52 weeks.

This metric was greater than 80% a quarter ago.

While this is an aggregate an improvement from prior periods, we continue to be sold out through 'twenty three in the automotive and core industrial end markets.

In terms of our <unk> program, most of our automotive and core industrial customers continue to demand a short supply for train train III.

Our 23, <unk> and our order book continues to surpass our 23 supply capability as well as the level of <unk> orders, which have been requested for train train two.

And in terms of inventory as noted previously our Q4 guidance contemplates distribution channel at $1 six months well below our long term target of two five months.

With respect to on hand inventory at NXP.

Our DSO has increased five days sequentially to 99 days.

And it will increase further.

Given the application specific nature of our product portfolio, we are comfortable with this direction.

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

We are guiding revenue at $3 3 billion up about 9% versus the fourth quarter of 2021.

Within a range of up five two up 12% year on year.

And from a sequential perspective this represents a decline 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 high teens on a percent basis versus quarter for 'twenty one.

And flattish versus quarter 322.

Industrial and Iot is expected to be down in the low double digit range on a percentage basis year on year and down in the high teens range versus quarter $3 22.

Mobile is expected to be up in the low single digit range year on year and down in the upper single digit range versus quarter three train two.

And finally communication infrastructure and other <unk>.

<unk> is expected to be up in the low teens range versus the same period, a year ago and flattish on a sequential basis.

Now in summary.

There is a real dichotomy in the various end markets that we serve.

The potential for some demand destruction in the consumer end markets that we know that as a concern last quarter has materialized.

While we could ship more into the channel.

We are taking a proactive stance to limit channel inventory buildup.

And Conversely, we're seeing very resilient customer demand in the automotive and core industrial segments.

Where demand continues to outpace supply, which hinders us from shipping to the true end demand.

So overall, we remain cautious in the near term.

Due to the uncertainties in the macro environment.

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

Thank you Terry 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, I will move to the financial highlights.

Overall, our Q3 financial performance was very good.

Revenue was $20 million above the midpoint of our guidance range.

And both non-GAAP gross profit and non-GAAP operating profit were above the midpoint of our guidance.

Now moving to the details of Q3.

Total revenue was 345 billion.

Up 20% year on year, notwithstanding weakness in the consumer centric portion of the industrial and Iot segment.

We generated 1.9 dollars 9 billion and non-GAAP gross profit.

And reported a non-GAAP gross margin of 58%.

Up 150 basis points year on year, and both above the midpoint of guidance range as a result of higher factory utilization and higher sales volume.

Total non-GAAP operating expenses were $730 million.

Or 21, 2%.

Up $73 million year on year, and up 6 million from Q2, better than our guidance range and below our long term model.

From a total operating profit perspective.

non-GAAP operating profit was $1 two 7 billion.

And non-GAAP operating margin was 36, 9% up 340 basis points year on year and.

And both above the midpoint of the guidance range.

non-GAAP interest expense was $91 million.

With cash taxes for ongoing operations of $160 million.

Or 13, 6% effective cash tax rate.

And Noncontrolling interest was about $12 million.

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 Q3 was 11, one 6 billion.

Flat sequentially.

Our ending cash position was $3 76 billion.

Up $214 million sequentially, thanks to improved operating performance.

The resulting net debt was 740 billion.

And we exited the quarter with a trailing 12 month adjusted EBITDA of $5 3 billion.

Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q3 was one four times and our 12 month adjusted EBITDA interest coverage was $13 eight times.

Turning to working capital metrics.

Days of inventory was 99 days, an increase of five days sequentially as we continued to experience incrementally improve supply trends.

The increase in on hand inventory was evenly split between raw materials and work in process to support revenue growth in subsequent periods.

And an increase in finished goods due to the noted weakness in the Android mobile market and the consumer centric portion of industrial and Iot.

As Curt mentioned.

We continue to tightly manage our channel inventory.

Inventory in the channel was $1 six months and continues to be well below our long term target.

Days receivable were 27 days flat sequentially.

And days payable were <unk> 96, an increase of two days versus the prior quarter.

Taken together, our cash conversion cycle was 30 days.

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

Cash flow from operations was $1 4 billion.

Net capex was $281 million or eight 2% of revenue, resulting in a non-GAAP free cash flow of $863 million or 25% of revenue.

During Q3, we paid $223 million in cash dividends.

And we repurchased $400 million of NXP shares.

In addition, since the beginning of Q4 through October 28, we purchased an additional $260 million of shares under our established <unk> Dash one program.

On a trailing 12 month basis through the end of Q3, we have returned 98% of our non-GAAP free cash flow back to the owners of the company consistent with our capital allocation strategy.

The cash flow generation of the business continues to be excellent.

Now turning to our expectations for Q4.

As Kurt mentioned, we anticipate revenue to be about $3 3 billion.

Plus or minus about $100 million.

At the midpoint this is up 9% year on year and down 4% sequentially.

We expect non-GAAP gross margin to be about 57, 8% plus or minus 50 basis points.

Operating expenses are expected to be around $720 million, plus or minus about $10 million, which is down about 1% sequentially driven by lower incentive compensation and discretionary spending.

Taken together, we see non-GAAP operating margin to be 36% at the midpoint.

We estimate non-GAAP financial expense to be about $81 million driven by higher interest income and we anticipate cash tax related to ongoing operations to be about $140 million or about a 13% effective cash tax rate.

Which is below our communicated model leading to a full year effective tax rate of 13%.

Noncontrolling interest should be about $12 million and for Q4, we suggest for modeling purposes, you use an average share count of 262 million shares.

For Capex, we suggest you use 8%, bringing total year capex to 8% versus our prior expectations of 10% due to delays in equipment deliveries.

Finally, I have an update to our reported financials.

Beginning with our guidance for Q1 2023.

We will begin to apply an estimated annual tax rate to our GAAP and thus our non-GAAP profit before tax.

This change will enable NXP to report a non-GAAP earnings per share on a go forward basis consistent with SEC guidelines.

Given current tax legislation, we believe our new effected estimated tax rate will be consistent with our long term cash tax rate of 18% as provided at our analyst day in November of 2021.

Overall, despite the uncertain macro economic conditions, which are impacting some of our more consumer oriented markets as Curt mentioned.

We will navigate what is in our control such as channel inventory and discretionary spending.

Furthermore, over the foreseeable future, we will continue to operate within our long term financial model.

Thank you and we now can turn the call back over to the operator for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please stand by while we compile the Q&A roster.

Our first question comes from Ross Seymore with Deutsche Bank You May proceed.

Hi, guys. Thanks for letting me ask a question.

I wanted to ask about the inventory slightly the equation both on the channel and your balance sheet on the channel side of things you guys are like you said well below target about one six months well below.

Where you were at similar points, where people are worried about us being at a peak cycle.

So I guess the question is could you ship more into the channel. If you wanted to and what's led to the philosophical shift to significantly lessen the channel and more on your balance sheet.

Prior cycles, it seems to be the opposite prioritization.

Yes, good morning, and thanks Ross.

Yes, the answer is a plump yes.

We could have shipped more into the channel against open orders actually in this fourth quarter.

And that is especially into the.

Consumer Iot part of all of our segments.

But as I mentioned, given the the whole macroeconomic uncertainty.

Just feel it is a much more prudent approach to actually limit. This channel inventory at this very low level of $1 six months in my view.

The Delta to two five months in terms of revenue would be about $500 million.

And thats the level of open orders, which we would easily half, which we could serve.

But we think it's more prudent because it's unclear how the macro is going to further develop and hold the demand in that part of the market is going to develop so we feel it's a better idea to keep what we have already in the pipeline to keep in house and on the balance sheet.

Also for eventually being in a position to redirect it to other customers.

Now that's the one side of the house I just have to also remind you that at the same time Ross we ask this weird situation that in the auto at core industrial side of the house.

We have the opposite to delivery situation, we do not have enough suppliers. So we continue to be sold out and also there we could actually if only we have the supply we could we could make more revenue in quarter. Four we have a lot of open orders, which are very real we checked all of them.

But <unk> really serve them, but again back to your initial question is yes, we could sell more but we found it is much more wise to stick to this very low channel inventory of $1 six months at this time, so the long term targets, but this at this particular period.

And besides that we feel is the best.

And we should do.

Thanks for that color I guess as my follow up one for bill on the gross margin side of things.

With the gross margin being flat, maybe surprise would be the word more than impressive given that the revenues are dropping 4% or so your predecessor had a very rough rule of thumb at a 5% drop in revenue was a 1% drop in gross margin. So how are you able to keep that flat and whats the sustainability of that.

<unk> ability to keep the gross margin of just general level.

Yes, Thanks, Ross for your question and Youre right, we did slightly better than our guidance driven by the higher revenues and fall through one area I think we need to understand a little bit better is that our internal utilizations remain in the high ninety's.

We are still well constrained our specifically in our auto and if you think about internally more than two thirds of our capacity is just pinpoint it to our IP proprietary mixed signal auto centric capacity internally and we are constrained as you heard Kurt mentioned we are.

Hold out and we expect this to be well utilized all throughout 2023.

Second as mentioned on previous calls you are right we met with.

We mentioned, we stay in a tight range delivering towards the high end model and I think we demonstrate that and it's incorporated in our Q4 guide.

And more longer term what gets us to 58%.

It's really those new product introductions, which are further out in the journey.

I would say.

Thank you.

Thanks Ross.

Thank you one moment for questions.

Our next question comes from C. J Muse with Evercore. You May proceed yes. Good morning. Thank you for taking the question I guess the follow on Ross's question.

I guess can you comment on the ability at all to repurpose wafers capacity.

Our senses.

Internal versus external the answer is no.

And then as part of that before coming into the recovery you had a gross margin construct I think of every 5% change in top line 100 bps growth and gross margins now that you see a clear mix shift here in terms of auto core industrial holding strong at consumer weaker is there kind of a thought process or model we.

Should be thinking about on the gross margin side as we push forward.

Sort of further correction on the consumer side.

Hey, good.

Good morning.

Let me first go at the at the Repurposing or the potential for Repurposing of capacity.

So first of all yes, I can confirm directionally that indeed, repurposing between internal and external is very limited.

Really how we build our supply strategy.

When you then think about within internal and within external repurposing between the different segments, which we serve and thats not specifically between the more consumer oriented versus the more auto or core industrial or exit markets.

Two a limited level. It is possible. It is typically not at all possible on the finished product level. So once the product is completely.

Manufacturers.

And sometimes programs.

We have hardly any products, who trust <unk>.

However, if you still speak about buyback.

Inventory for example, we do have the opportunity with several process nodes to actually swap between those markets, but not all not all of them I'll.

Ill give you. One example, which is which is quite sizable for us we have a lot of product going into 55 nanometers with embedded non volatile memory.

That for example is very very purely automotive.

Which means VR, so adult VR short in that technology.

That same technology is ultimately used for any of the consumer applications. So the demand drop in consumer doesn't really help us there. However, there with other technologies.

Mike and 90 nanometers over 180 nanometers.

We can do that.

If the product is not yet finished our finished goods. So it's a bit it's a bit of an in between but we have we have some liberty here.

And that is also the reason why amongst others for example in parts of our <unk> markets in Q4, we start to see acceleration in our revenues because we actually put swap some of our existing capacity into those markets like the government markets or RFID markets, which we are super cost.

Strength over the past eight quarters.

On the margin side.

Say David.

There is quite some variation of margin.

Within each of the segments. So you cannot easily draw conclusions between before revenue segments, both their mixes and what that means to the margin of the company. It is more sophisticated to be fair.

Bill I'm not sure you want to if you want to go a little bit deeper about Mds.

You cannot draw conclusions on the level of the total segment.

Nothing else that.

C. J D. Do you have a follow up yes, hey, thanks, guys just a quick follow up.

The China Iot piece.

I would have thought that that would've shown weakness earlier. So I guess are there particular kind of sub end markets.

That have proven to be more resilient at least until today.

Kind of enabled that to hold up or or kind of can you give us a little more color on how to think about the key drivers within that bucket.

Yes, it really started in I'd say August than going into September two quite significantly drop.

But again of course, our approach to stick to the one six level.

Level of months of channel inventory gifts theres a different currency.

And former base honestly, we would just have kept shipping so it would have felt like <unk>. Finally, we get the channel inventory up now.

Much our choice that we said we don't want to do this.

And Thats why it <unk> quite a harsh decline, but again as I explained earlier, we think thats, a better way to do it but again it started in August timeframe.

I would say, it's the consumer Iot market globally.

Softening is just such that we have a relatively sizable exposure.

To China, but it's not that the non Chinese.

Consumer Iot customers would be still very resilient I think this is globally weakening.

But it hits us harder from a China perspective, and this is also where we have a very large channel exposure, which is why this general approach, which I explained earlier I think makes a significant difference.

To deal with it.

Very helpful. Thank you.

Thanks.

Thank you one moment for questions.

Our next question comes from Vivek Arya with Bank of America You May proceed.

Alright, Thanks for taking my question. So my first one.

Yes.

To get your perspective on just the supply demand equation in the automotive industry at your OEM and tier one customers do you think they are still under supplied or oversupplied or just kind of ranking supplied and just what are the hotspots.

Under supply right now and just how is your visibility.

Into the first half of next year, and I think you've added Q4, flattish, which I assume is motor supply.

But just what's your perspective and do the supply demand balance at your auto customers right now.

Thanks Vivek.

First of all let me just indeed, unfortunately confirm that the the sequential flipped in auto into Q4 is purely a function of supply.

It was different but it is it is trade functional supply, while we still have a nice year on year growth by the way.

But the sequential is.

As the supply limitation.

In general.

Many microcontrollers if not all in our portfolio and the large part of the analog products, which we have continued to be significantly supply constrained in automotive.

This is after a very careful and very thorough analysis of the demands in this whole rep from the Oems through the tier ones. So I think we have we have more transparent and more detailed discussions than ever before in trying to understand this and it really shows.

So given the MTA.

<unk> order levels, which we are getting in automotive for for all of next year that those constraints will continue to be in place.

Through a large part of next year, depending of course on how the supply, possibly further improves above the visibility we have today, but with our current supply visibility. We will continue to be sold off in the automotive markets through next year.

If you would ask me how much what's the gap to true demand.

Probably it is in the order of that behalf of supply coverage of 85% next year in automotive and core industrial versus versus true demand.

Now there is still this golden screw problem. So I don't want to I don't want to take this off the table. So sometimes one component is indeed missing from us or from from from another peer in the market.

And then it takes a few weeks until until.

Stuff is being flushed through.

Doesn't take away that there is overall shortage.

In the in the key Microcontrollers and analog products.

Okay. So my follow up.

You continue to build inventory on your balance sheet and.

Then I couple that with the fact that you mentioned you're sold out in automotive and core industrial that's almost two thirds of your business is it fair to assume that you're planning for next year I know youre not giving guidance, but are you planning for next year sales to be at least flattish year on year, but.

Auto and industrial growth.

Setting any weakness on the consumer side or is that just catching.

Alright.

The conclusion from the mining the fact that you still continue to build inventory and your.

Auto and core industrial demand as sort out for next year.

Hey, Vivek. This is bill let me let me take this one first off we're not guiding 2023, but let me go into the internal inventory and try to summarize for everyone.

Yes, we've increased five days, which is about 50% raw material and work in process and the remainder was in finished goods from a quarter over quarter perspective.

Clearly as Kirk mentioned a portion of its finished goods was driven primary by NXP, preventing inventory buildup in the channel as we reroute this material to other customers in need.

Some of it's fungible and some of it is not.

Areas, where we have higher consumer or mobile inventory levels. We.

Hold the wafer is in die Bank as Curt mentioned before completing assembly and test in our back end facilities.

At the same time, we remain highly constrained and the wafer areas of 28.

40, 50, 565, 90, and our auto and core industrial segments.

And again as we mentioned in both our remarks opening remarks.

Better to keep control of your own inventory and putting it into the channel, which will just create future issues if demand falls and again majority of what we build is very application specific and long lift which gives us confidence to hold and be ready to service future demand.

Thanks, Bill and let me maybe just at.

That one view on next year when it comes to automotive since since you were asking earlier.

We see no reason why the strong trend of content increase following amongst other electrification and Adas.

I would break I think every quarter, we look at the.

The ratio of electric cars of total Saar, it's higher than before the quarter before for this year, we've seen our 27% of the of the total Saar being <unk> excellent next year is forecast to be 34% and you know what that means for the for the semiconductor content in a car.

So from that perspective, I think there is from a from a demand fuel certainly good reason to believe that it continues to be a very strong and very resilient markets. While at the same time the extended supply chain in our fuel continues to be on Brookfield. It is still.

Actually dysfunctional because it is still too low to low level. So those two perspective, maybe.

Two pretty healthy view from an automotive demand.

<unk> on tray in tray and freedom.

Thank you.

Thank you one moment for questions.

Okay.

Our next question comes from Stacy <unk> with Bernstein Research you May proceed.

Hey, guys. Thanks for taking my questions. The first one.

I get the issues in consumer and mobile will.

Those seem to be in the numbers now at this point, but auto and industrial look really resilient youre sold out you've got these <unk>.

Why do you sound, so worried given that long term support.

In those core markets and presumably given how sustainable that is like are you seeing any signs at all.

Weakness, even even small tiny tiny uptick in cancellations or anything like that in those core markets.

Thank you, we have no cancellations or push outs in auto or core industrial at the same time I don't have a crystal ball and I don't want to take a position here to be vehicle nomex present settlement for the macro for next year.

So this also this guidance here is based on the orders at the supply capability, which we have at hand for quarter four.

Can absolutely confirm though no push outs no no compensation for core industrial and auto.

<unk>.

The one indicator, which gives maybe a somewhat better feel on the longer term.

The level of inventory sitting in the extended supply chains and those two markets.

Yes.

From anything we can check and see their debt level continues to be Super law and Thats why we continue to believe it should stay very resilient.

Got it thank you.

For my follow up question I wanted to again, I guess dig into the channel inventories.

So a lot of the consumer stuff, which is week goes through the channel it sounds like youre not shipping that into the channel, but the channel inventories are still flat. So are you shipping other stuff into the channel.

Making up for it like how is the mix I guess.

End markets within that channel changing as the consumer stuff is weakening.

We will not be will not speak about the mixed because then it really becomes complicated but it is not that.

We do not ship at all in the channel would be shipped into the channel to keep a steady level of one six months of inventory. So it's not spaces are busy so dramatic that we have to stop our shipments that's not how it works.

We are very disciplined bill and I are actually sitting every week and we look at the sell through and selling them data with each of our distribution partners by segment and then we make sure every week is not only at the end of the quarter, but through the quarter that it doesn't surpass the one six <unk>.

The change we wanted to communicate today is only that so far obviously for eight quarters in a row.

I was desperate to get it up I mean, I would have wished we could have shipped more into it in order to have a higher channel inventory.

Not.

Given those consumer trends VR actually more disciplined to make sure. It doesn't go higher, especially in those pops, where actually this month.

It doesn't meet the receiver shipments.

I understand that I guess, what I'm asking is it fair to say, even if you don't want to go to the mix.

The detailed mix that the consumer mix within the channel is lower and mix of other stuff is higher.

Now versus maybe a couple of quarters ago.

No.

No okay.

Okay.

I'm not sure why you would think it should be no. It is not.

Well I mean, if the consumer stuff is so much weaker you said, 40% of your industrial business a lot of it goes through the channel and clearly demand is weakening.

And it sounds like the limiting shipments of that stuff into the channel, but the total inventories look the same.

Yes, basically you are limiting shipments but I.

I mean think about it this way the industrial and Iot segment is 18% of the total revenue of the company and 40% of that is the consumer Iot and there is still not at a zero shipment levels. So it isn't it is not that dramatic from a change perspective.

Got it okay. That's helpful. Thank you guys appreciate it.

Thank you one moment for questions.

Our next question comes from William Stein with <unk> you May proceed.

Starting with muted thanks for taking my question.

Im hoping you might have some discussion in terms of the difference in demand levels in lead times.

<unk> constraints between automotive on the one hand and industrial on the other I think in prior quarters. You've noted that industrial is even more constrained than automotive, but didn't quite get the same level.

The kitchen can you update us on that dynamic please.

We really don't have it broken down that way, but it's still.

The the key shortages in the core industrial R&D Kantar.

Continuing to be highly escalated quite painful.

I think.

I can repeat the statement I made earlier.

While there continues to be a lot of public reports about the shortages in auto and much less noise about industrial.

Our case in the core industrial we continue to be as short as we as we used to be before.

I said it earlier I think in the context of a different question.

Save for the next couple of quarters to think about four or five quarters.

We believe after risk adjusting our demand.

We should have about 85% coverage.

On the call.

That used to be 80%.

Youll see <unk>.

Five percentage points higher.

There is not necessarily because the the supply capability in auto for industrial has gone up so much. It is just that the consumer Iot demand would be helpful.

Total company has dropped such that in aggregate for the total become up to 85% of it.

Continues to be equally painful.

Australia than used to be.

I appreciate that.

I'd like to linger on this.

Yes.

Small pivot youre, making in terms of the.

The way you are dealing with the channel and your inventory and I Wonder if the company has evaluated potentially.

Potentially moving to a consignment oriented model, which would allow you to make even more control.

There is only one company that I'm aware of.

You bet.

It's sort of an outlier in terms of the deal with distributions.

Wonder if that's.

Our growing soft given your approach that you're discussing today. Thank you.

Yes.

Thanks for that but that's a quick answer no we are not contemplating that.

Okay. Thanks.

Okay.

Thank you one moment for questions.

Our next question comes from Gary Mobley with Wells Fargo. You May proceed.

Hey, guys. Thanks for taking my question.

Two.

Talk about one of your smaller businesses for a second and that is the mobile side of the business.

You highlighted what sounds like 8% upside to your Q3 revenue forecast for that particular business and we step back and look at the full year based on your Q4 guide here you can see is going to grow that business by close to 10%, which is counterintuitive given some of the weak mobile handset related data points. So what's helping you.

Form there is it is the content growth or is it inventory channel related.

It's got nothing to do with channel inventory, because we put the same discipline on all segments.

No it has to do with our strategy.

Which is really on content growth.

Think about the mobile wallets Singapore.

Think about be kicking in ultra wideband.

And we also have I would say directionally, it's not black and white, but we have a bias to higher end.

Mobile apps mobile phone.

Markets, which reached comparably is doing better this year than the very low end Android. So I would say therefore to harms us our company's specific content increase in share gains are working all of that I mean that is very much in line with how we put it a year ago at our investor.

And secondly, you might say VR, we are in a good position because we are somewhat more exposed to the higher end rather than the future for the Android phones.

Thanks for that.

As my follow up I wanted to ask about the latest U S. Export restrictions by my Hunch is you're not so much directly impacted from these U S export restrictions that.

I guess indirectly can you speak to how it may result in some kitting issues in certain end markets.

Or whether it requires you to change your manufacturing footprint.

Yes.

First of all of.

Of course at all times female 100% make sure that we are in total compliance with any export control regulations and so we are also after these latest changes.

All of our assessment so far of these latest changes in the regulations show that if anything we have super immaterial impact on our revenues.

When it comes to second or third order effects, which you wish you were hinting to also there I must admit we haven't you haven't really found anything which looks like being being.

Issue for us.

Of course, we keep researching it but at this point I can only say no.

If anything only super immaterial impact.

Thanks Kurt.

Thank you one moment for questions.

Our next question comes from Matt Ramsey with Cowen You May proceed.

Good morning, Thank you very much Curt.

My first question.

You were very clear about the trends in your automotive business.

Business continues to do quite well and I think to an earlier question you mentioned that.

Sort of on a quarterly basis.

So our numbers and <unk>.

<unk> penetration number to date has continued to kind of go higher than your own estimates.

Have you guys made any changes to those kind of mix and content assumptions in the next year or two just based on interest rates I think a lot of that externally thoughts some of the data carmax and some other sources.

The auto on.

New car purchases, obviously finance.

Pretty heavily so.

Is there any assumptions that might have changed recently.

Based on some of the interest rates that would be interesting.

Yes, Matt so we.

I guess youll get two ounces to one is the short term so when it comes to the guidance for Q4 is really based on orders in hand.

Got.

<unk> picked up but we don't make these strategic considerations for the next three months. This is really about orders and supply capability.

Longer term say next year.

Again, I don't want to say I have the crystal ball is there'll be huge views IHS typically for the SAR.

Think just updated their forecast for next year for a 4% Saar growth too I believe something like 85 million units.

However.

It really isn't that important at all.

What really metals, it's the content increase which has a lot to do with the mix to E vehicles.

Premium vehicles in the future.

So.

Think the whole discussion around interest rates.

Recession looming left and right.

I agree with you that could have impact on the demand behavior of people buy cars.

But unless that drops incredibly far down.

I believe that the content of semiconductor content per car, it's actually trumping the.

The moves on the fiber itself.

And that is for us much more relevant but again I mean, we don't guide next year I don't know what its going to be.

We really should more and more start to look at this as a semiconductor company and industry from a content perspective, rather than a unit perspective in automotive.

Thanks, Curt I realize it's a tough big picture question, but it's one that we're getting.

As my follow up I wanted to ask in the automotive sector you guys, obviously have a.

Our strong position in BMS, so managing the battery, but theres sort of two sides to managing the battery.

Yes.

Actually running the car and then there's the.

Charging side.

Lots of conversation on white wine.

<unk> and what it means we're faster and onboard Chargers and I wonder.

As the full BMS solution, managing the charging and discharging the battery is that something that you guys are looking into not the manufacturer or anything of what gain bank app, but buying it from someone else and doing a fully integrated both sides of the battery type solution and any thoughts there would be helpful really appreciate it.

Well actually we not only look at but we worked our system and so we are also very busy.

With <unk>.

Companies building and providing the charging infrastructure I think we have revealed earlier. So I may use the name we work closely with <unk> for example in the U S.

And that is not only on the charging but even includes payment to make this a very seamless process for the consumer so our payment that identification.

And security technologies are also being Intuitiveness. So yes, we look at it.

At a total from a total end to end basis.

However, I have to say this still means we are not going into discrete power. So whenever these systems and wherever they need discrete power solutions, so like silicon carbide.

This is not our focus our focus remains on the advanced analog and logic products, which we think is about 50% of that opportunity.

Josh will take the next.

<unk> please.

Thank you one moment for questions.

Our next question comes from Joseph Moore with Morgan Stanley You May proceed.

Great. Thank you.

I know last quarter, you guys had talked about the desire of the automotive companies to build up safety stock.

Tier one levels I think you talked about six months.

Where are they in that process and it definitely sounds like things are still pretty tight but is there any indication that theyre able to putting your ad inventory into place.

Yes.

And this is.

As a.

Strategic requirements.

Which in many cases, the Oems are and have been putting on tier ones.

Yes.

Yes.

My guess is it's very hard to get the flow picture. This but my guess is that in some cases, they start to be able to stop building somewhat.

On a lot of those core products, which are plaguing us an office from from a from a sheer built performance perspective.

They are very very far from achieving anything in this bill.

Because again, even before that would happen the whole supply chain the whole extended supply chain needs to build a higher a higher inventory level, that's about trusted by company, but it's just that the whole trade becomes more and more functional so I would say given the end demand trends.

I would <unk> to supply capability of us in the industry.

This will take all of all of next year still before we come even close to that to that requirement.

Great. Thank you very much.

Thank you Jeff.

Joe did you have a follow up or is that it.

No I'm good thank you.

This will probably be our last question.

Operator.

Thank you one moment for questions.

Our next question comes from <unk> Hari with Goldman Sachs. You May proceed.

Hi, good morning. Thanks, so much for squeezing me in I had two questions first one is on pricing.

If we take the midpoint of your Q4 revenue guidance youre going to be growing around 19% for the full year.

You gave really good color last quarter on how significant the tailwind from pricing. If we can get an update on 22 pricing that would be great and then your preliminary thoughts into 'twenty three again from a pricing perspective, particularly given.

I think the intent on your foundry supplier delays pricing next year as well.

Yes, Trisha so as a good practice as we've as we've done for the last year, we will provide the full year pricing impact for calendar year 'twenty two in quarter one of 23.

It's still a very very dynamic.

Almost eight day in day out so.

So we will give you and provide you the aggregates pricing impact on our revenue growth for this year in Q1 of next year.

From an overall dynamic perspective.

We continue to see quite sizable.

Cost input cost decreases to us.

That is from the foundry partners, but there's also a lot of inflationary cost increases.

And of course be absolutely walk the talk that we stick to our strategy to PRASM those input cost increases to our customers to exactly that level that we can protect our gross profit percentage.

And seeing how the supply demand imbalance in our core markets is moving into next year.

I guess it is reasonable to assume that we will continue to raise prices also next year.

Viviano, so much to the end of 'twenty two with it I think it's fair to say, it's highly likely that <unk>.

We will also continue next year surprises just following those those input cost increases.

That's helpful. Thank you.

Sorry.

No go ahead.

Sorry about that.

As my follow up.

Just on how youre thinking about utilization rates in capex going forward.

Bill you talked about utilization rates being in the high <unk>.

Given your comment on inventory growing into quarter. My guess is youre keeping utilization rates, where they are but just wanted to clarify that and then on Capex you mentioned.

You've had the equipment delivery delays.

Should we expect capex to be elevated into 'twenty three.

There is a little bit premature to say at this point. Thanks, so much.

So, let's let me quickly take the utilization and bill is going to speak about capex.

The utilization, yes, we will stay very very highly utilized because as bill put it earlier the majority of our internal front end factories are working for automotive and core industrial so thats exactly there, where we see the strong demand continuing and thats why the utilization rates their booths they vary.

Hi, Bill over to you for Capex, yes, as it relates to the Capex.

As I mentioned, we will do better this year.

10% to 8% and net share we will be in the range between 6% and 8%.

Thanks, so much.

Yes, I guess that gets us to the to the end of the call. So in summary, I would say.

We are cautious in the near term given all the macro uncertainty however, under the surface, we see what I call the dichotomy.

This is really a very disciplined approach to a weakening consumer Iot market.

We want to stay ahead of the game is not trip the channel while at the very same time, we continued to be supply constrained quite significantly in our core industrial and automotive markets, where we've tried to do everything in house and with our property partners to get the supply the soonest in line with the previous.

Billions demand signals, which we are having.

And that sets up for the call today and thank you all very much. Thank you. Thank.

Thank you Josh I appreciate everybody's attendance that ill conclude the call today.

Yes.

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

[music].

[music].

Hello, Thank you for standing by and welcome to the NXP third quarter 2022 earnings Conference call. At this time all participants are in a listen only mode. After the speaker presentation. There will be a question and answer session to ask a question. During this session you will need to press star one one on your telephone please be advised that <unk>.

<unk> Conference maybe recorded I would now like to hand, the conference over to your Speaker today, Jeff Palmer Senior Vice President of Investor Relations. Please go ahead.

Thank you, Josh and good morning, everyone and welcome to the NXP semiconductors third 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.

<unk> 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 not are not limited to statements regarding the continued impact of the COVID-19 pandemic on our business the macroeconomic impact on 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 2022, please be reminded that.

NXP undertakes 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 op.

Rating performance.

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

I'll turn the call over to Kurt.

Thank you, Jeff and good morning, everyone. We appreciate you joining our call today.

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

Our revenue was $20 million better than the midpoint of our guidance.

With performance in the mobile automotive and communications infrastructure markets, all better than our expectations.

For the consumer exposed Iot subset of the industrial Iot markets.

We started to experience weaker sell through in the channel.

And let me remind you that our consumer Iot exposure is approximately 40% of the industrial and Iot segment revenue.

It is made up of thousands of customers.

Primarily in China, and serviced through our distribution partners.

Taken together NXP delivered quarter, three revenue of $3 $4 5 billion.

An increase of 20% year on year.

Yeah.

Our non-GAAP operating margin in quarter, three was a record 36, 9%.

340 basis points better than the year ago period, and 80 basis points above the midpoint of our guidance.

Our results reflect strong execution.

Our solid profit flow through on the incrementally higher revenue and better than guidance operating leverage.

Notwithstanding our results, which surpassed our guidance.

Our phasing a tricky market environments.

On the one hand, the demand trends from automotive and core industrial customers are very resilient.

And as we continue to face supply constraints across multiple microcontroller and advanced analog products.

And on the other hand, we see weakness in the broad consumer Iot and then be Android mobile markets.

Given that unbalanced dynamic of the demand environment.

We are going to pull those levers that are in our control.

Namely strengthened channel inventory management and disciplined discretionary operating expense.

In terms of inventory, we have decided to take a draconian approach to managing our distribution channel inventory.

Specifically our quarter four guidance.

Contemplates a channel inventory at the one six months of supply level.

This is in line with quarter, three and well below our long term model.

We prefer to keep any incremental inventory on our balance sheet.

Where we have the ability to control and redirect shipments as needed.

And in terms of discretionary spending amongst others VR slowing the rate of hiring.

All in all we believe these measures are a prudent approach until such time as we see a clearer and more consistent view of the demand environment.

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

In automotive revenue in Q1 was one <unk> in Q3 was $1 8 billion up 24% year on year near the high end of guidance.

In industrial and Iot revenue was $713 million up 17% year on year $32 million below our guidance.

And mobile revenue was $410 million up.

Up 19% year on year $30 million better than our guidance.

And lastly, communication infrastructure and other revenue was $518 million up 14% year on year slightly above our guidance.

Now, let me look at key operating indicators relative to the noted.

Demand dynamics, where we see the following.

In terms of coated product lead times overall, we dropped to just below 70% of our portfolio with lead times that are greater than 52 weeks.

This metric was greater than 80% a quarter ago.

While this is an aggregate an improvement from prior periods, we continue to be sold out through 'twenty three in the automotive and core industrial end markets.

In terms of our <unk> program, most of our automotive and core industrial customers continue to demand a short supply for train train III.

Our 23, <unk> and our order book continues to surpass our 23 supply capability as well as the level of <unk> orders, which have been requested for train train II.

And in terms of inventory as noted previously our Q4 guidance contemplates distribution channel at $1 six months well below our long term target of two five months.

With respect to on hand inventory at NXP.

Our DSO has increased five days sequentially to 99 days.

And it will increase further.

Given the application specific nature of our product portfolio, we are comfortable with this direction.

Now, let me turn to our expectations for quarter four we.

We are guiding revenue at $3 3 billion up about 9% versus the fourth quarter of 2021 within a range of up 5% to up 12% year on year.

And from a sequential perspective this represents a decline 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 high teens on a percent basis versus quarter for 'twenty one.

And flattish versus quarter 322.

Industrial and Iot is expected to be down in the low double digit range on a percentage basis year on year and down in the high teens range versus quarter 322.

Mobile is expected to be up in the low single digit range year on year and down in the upper single digit range versus quarter three tranches.

And finally communication infrastructure and other.

<unk> is expected to be up in the low teens range versus the same period, a year ago and flattish on a sequential basis.

Now in summary.

There is a real dichotomy in the various end markets that we serve.

The potential for some demand destruction in the consumer end markets that we noted as a concern last quarter has materialized.

While we could ship more into the channel.

Taking a proactive stance to limit channel inventory buildup.

And Conversely, we're seeing very resilient customer demand in the automotive and core industrial segments.

While demand continues to outpace supply, which hinders us from shipping to the true end demand.

So overall, we remain cautious in the near term.

Due to the uncertainties in the macro environment.

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

Thank you Terry 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, I will move to the financial highlights.

Overall, our Q3 financial performance was very good.

Revenue was $20 million above the midpoint of our guidance range and.

In both non-GAAP gross profit and non-GAAP operating profit were above the midpoint of our guidance.

Now moving to the details of Q3.

Total revenue was $345 billion.

Up 20% year on year, notwithstanding weakness in the consumer centric portion of the industrial and Iot segment.

We generated 1.99 billion and non-GAAP gross profit.

And reported a non-GAAP gross margin of 58%.

Up 150 basis points year on year, and both above the midpoint of guidance range as a result of higher factory utilization and higher sales volume.

Total non-GAAP operating expenses were $730 million.

Or 21, 2%.

Up $73 million year on year, and up $6 million from Q2, better than our guidance range and below our long term model.

From a total operating profit perspective.

non-GAAP operating profit was $1 two 7 billion.

Our non-GAAP operating margin was 36, 9% up 340 basis points year on year.

And both above the midpoint of the guidance range.

non-GAAP interest expense was $91 million.

With cash taxes for ongoing operations of $160 million.

Or 13, 6% effective cash tax rate.

And Noncontrolling interest was about $12 million.

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 Q3 was 11, one 6 billion.

Flat sequentially.

Our ending cash position was $3 76 billion.

Up $214 million sequentially, thanks to improved operating performance.

The resulting net debt was 740 billion.

And we exited the quarter with a trailing 12 month adjusted EBITDA of $5 3 billion.

Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q3 was one four times and our 12 month adjusted EBITDA interest coverage was $13 eight times.

Turning to working capital metrics.

Days of inventory was 99 days, an increase of five days sequentially as we continued to experience incrementally improve supply trends.

The increase in on hand inventory was evenly split between raw materials and work in process to support revenue growth in subsequent periods and an increase in finished goods due to the noted weakness in the Android mobile market and the consumer centric portion of industrial and Iot.

As Curt mentioned.

We continue to tightly manage our channel inventory.

Inventory in the channel was $1 six months and continues to be well below our long term target.

Days receivable were 27 days flat sequentially.

And days payable were <unk> 96, an increase of two days versus the prior quarter.

Taken together, our cash conversion cycle was 30 days.

Our working capital management balance sheet and channel metrics continued to be very strong and well managed.

Cash flow from operations was $1 4 billion and.

And net Capex was $281 million or eight 2% of revenue, resulting in a non-GAAP free cash flow of $863 million or 25% of revenue.

During Q3, we paid $223 million in cash dividends.

And we repurchased $400 million of NXP shares.

In addition, since the beginning of Q4 through October 28, we purchased an additional 260 million of shares under our established <unk> Dash one program.

On a trailing 12 month basis through the end of Q3, we have returned 98% of our non-GAAP free cash flow back to the owners of the company.

<unk> with our capital allocation strategy.

The cash flow generation of the business continues to be excellent.

Now turning to our expectations for Q4.

As Kurt mentioned, we anticipate revenue to be about $3 3 billion.

Plus or minus about $100 million.

At the midpoint this is up 9% year on year and down 4% sequentially.

We expect non-GAAP gross margin to be about 57, 8% plus or minus 50 basis points.

Operating expenses are expected to be around $720 million, plus or minus about $10 million, which is down about 1% sequentially driven by lower incentive compensation and discretionary spending.

Taken together, we see non-GAAP operating margin to be 36% at the midpoint.

We estimate non-GAAP financial expense to be about $81 million driven by higher interest income and we anticipate cash tax related to ongoing operations to be about $140 million.

Or about a 13% effective cash tax rate.

<unk> is below our communicated model, leading to a full year effective tax rate of 13%.

Noncontrolling interest should be about $12 million.

For Q4, we suggest for modeling purposes.

Use an average share count of 262 million shares.

For Capex, we suggest you use 8%, bringing total year capex to 8% versus our prior expectations of 10% due to delays in equipment deliveries.

Finally, I have an update to our reported financials.

Beginning with our guidance for Q1 2023.

We will begin to apply an estimated annual tax rate to our GAAP and thus our non-GAAP profit before tax.

This change will enable NXP to report a non-GAAP earnings per share on a go forward basis consistent with SEC guidelines.

Given current tax legislation, we believe our new effected estimated tax rate will be consistent with our long term cash tax rate of 18% as provided at our analyst day in November of 2021.

Overall, despite the uncertain macroeconomic conditions, which are impacting some of our more consumer oriented markets as Curt mentioned.

We will navigate what is in our control such as channel inventory and discretionary spending.

Furthermore, over the foreseeable future, we will continue to operate within our long term financial model.

Thank you and we now can turn the call back over to the operator for questions.

Thank you as a reminder to ask a question you will need to press star one one on your telephone please stand by while we compile the Q&A roster.

Our first question comes from Ross Seymore with Deutsche Bank You May proceed.

Hey, guys. Thanks for letting me ask a question.

Wanted to ask about the inventory side of the equation both on the channel and your balance sheet Omnichannel side of things you guys are like you said well below target about one six months well below.

Where you were at similar points, where people are worried about us being at the peak cycle.

So I guess the question is could you ship more into the channel. If you wanted to and what's led to the philosophical shift to significantly lessen the channel and more on your balance sheet as in prior cycles. It seems to be the opposite prioritization.

Yes, good morning, and thanks Ross.

Yes, the answer is a blunt yes.

We could have shipped more into the channel against open orders actually in this fourth quarter.

And that especially into the consumer.

Consumer Iot parts of our of our segments.

Thus as I mentioned, given the the whole macroeconomic uncertainty.

Just feel it is a much more prudent approach through actually limit. This channel inventory at this very low level of $1 six months and mind you that.

The Delta to two five months in terms of revenue would be about $500 million.

And thats the level of open orders, which we would easily half, which we could serve.

But we think it's more prudent because it's unclear how the macro is going to further develop and hold the demand in that part of the market is going to develop so we feel it's a better idea to keep what we have already in the pipeline to keep in house and on the balance sheet.

Also for eventually being in a position to repay records to other customers.

Now thats the one side of the house I just have to also remind you that at the same time Ross we ask this weird situation that in the auto and core industrial side of the house.

We have the opposite to dilution situation, we do not have enough suppliers. So we continue to be sold out and also there we could actually it won't be behalf of supply we could we could make more revenue in quarter. Four we have a lot of open orders, which are very real we checked all of them.

<unk> country to serve them, but again back to your initial question, yes, we could sell more but we found it is much more wise to stick to this very low channel inventory of $1 six months at this time, so the long term targets thought but at this particular period.

And besides what we feel is the best.

And we should do.

Thanks for that color I guess as my follow up one for bill on the gross margin side of things.

The gross margin, you're saying flat, maybe surprise would be the word more than impressive given that the revenues are dropping 4% or so your predecessor had a very rough rule of thumb about a 5% drop in revenue was a 1% drop in gross margin. So how are you able to keep that flat and whats the sustainability of that.

<unk> ability to keep the gross margin at this general level.

Yes, Thanks, Ross for your question and Youre right, we did slightly better than our guidance driven by the higher revenues in fall through.

One area I think we need to understand a little bit better is that our internal utilizations remain in the high 90 needs as we are still well constrained our specifically in our auto and if you think about internally more than two thirds of our capacity is just pinpoint it to our IP.

Near term mixed signal auto centric capacity internally and we are constrained as you heard Kurt mentioned, we are sold out and we expect this to be well utilized all throughout 2023.

Second as mentioned on previous calls you are right. We met with we mentioned we stay in a tight range delivering towards the high end model.

And I think we demonstrate that and it's incorporated in our Q4 guide.

And more longer term what gets us to 58%.

It's really those new product introductions, which are further out in the journey.

I would say.

Thank you.

Thanks Ross.

Thank you one moment for questions.

Our next question comes from C. J Muse with Evercore. You May proceed yes. Good morning. Thank you for taking the question I guess the follow on Ross's question.

I guess can you comment on the ability at all to repurpose wafers capacity.

Senses.

Internal versus external the answer is no.

And then as part of that before coming into the recovery you had a gross margin construct I think of every 5% change in top line 100 bps growth and gross margins now that you see a clear mix shift here in terms of auto core industrial holding strong at consumer weaker is there kind of a thought process or model we.

Should be thinking about on the gross margin side as we push forward into some sort of further correction on the consumer side.

Hey T J.

Good morning.

Let me first go at the at the reprieve.

Repurposing or the potential for repurposing of capacity.

So first of all yes, I can confirm directionally that indeed, repurposing between internal and external is very limited I mean, thats really how we build our supply strategy.

When you then think about within internal and within external repurposing between the different segments, which we serve and ethanol specifically between the more consumer oriented versus the more auto or core industrially oriented markets.

Two a limited level it is possible.

Is typically not at all possible on the finished product level. So once the product is complete.

Manufacturers and sometimes programs.

We have hardly any products with trucks.

However, if you still speak about buyback.

Inventory for example, we do have the Apis.

The opportunity with several process nodes to actually swap between those markets, but not all not all of them.

Give you. One example, which is which is quite sizable for us we have a lot of product going into 55 nanometers with embedded non volatile memory.

For example is very very purely automotive.

Which means we are sole adult VR shorts in the technology, but that same technology is also not used for any of the consumer applications. So the demand drop in consumer doesn't really help us there. However, there with other technologies.

And 90 nanometers over 180 nanometers, where we can do that.

If the product is not yet finished our finished goods. So it's a bit it's a bit of an in between but we have we have some liberty here.

And that is also the reason why amongst others for example in parts of our <unk> markets in Q4, we start to see acceleration in our revenues because we actually could swap some of our existing capacity into those markets like the government markets or RFID markets, which we are super concentrate.

Over the past eight quarters.

Sure.

On the margin side.

I'd say there is a.

It's quite some variation of margin within each of the segments. So you cannot easily draw conclusions between the four revenue segments, both their mixes and what that means to the margin of the company. It is more sophisticated to be fair.

Bill I'm not sure you want to if you want to go a little bit deeper about Mds.

You cannot draw conclusions on the level of the total segments.

No nothing else then.

C. J D. Do you have a follow up thanks, guys just a quick follow up.

The China Iot piece.

I would have thought that that would've shown weakness earlier. So I guess are there particular kind of sub end markets.

That have proven to be more resilient at least until today, that's kind of enabled that to hold up or or kind of can you give us little more color on how to think about the key drivers within that bucket.

Yes, it really started in August .

August than going into September two quite significantly drop.

But again of course, our approach to stick to the one six.

Level of months of channel inventory gifts theres a different currency.

And former base honestly, we would just have kept shipping so it would've thought like old finally, we get the channel inventory up now it's very much our choice that we said we don't want to do this.

And Thats why it <unk> quite a harsh decline, but again as I explained earlier, we think that's the better way to do it but again it started in August timeframe.

I would say it.

The consumer Iot market globally.

Softening is just such that we have a relatively sizable exposure.

To China, but it's not that the non Chinese.

Consumer Iot customers would be still very resilient I think this is globally weakening.

It hits us harder from a China perspective, and this is also very have a very large channel exposure, which is why this general approach, which I explained earlier I think makes a significant difference and all we want to deal with it.

Very helpful. Thank you.

Thanks.

Thank you one moment for questions.

Our next question comes from Vivek Arya with Bank of America You May proceed.

Alright, Thanks for taking my question. So my first one can you guys.

To get your perspective on just the supply demand equation in the automotive industry at your Oems and tier one customers.

They are still under supplied or oversupplied or just kind of ranking supplied and just what are the hotspots.

Over or under supply right now and just how is your visibility of growth into the first half of next year and I think you've added Q4, flattish, which I assume there's more supply.

But just what's your perspective into the supply demand balance after your auto customers right now.

Yeah. Thanks Vivek.

First of all let me just repeat unfortunately confirm that the the sequential flipped in auto into Q4 is purely a function of supply.

Wish it was different but it is it is trade functional supply, while we still have a nice year on year growth by the way.

The sequential.

As the supply limitations.

In general.

Many microcontrollers if not all in our portfolio and the large part of the analog products, which we have continued to be significantly supply constrained in automotive.

And that is after a very careful and very thorough analysis of the demands in this whole web from the Oems through the tier ones. So I think we have we have more transparent and more detailed discussions than ever before in trying to understand that and it really shows.

Also given the.

MTN, our order levels, which we are getting in automotive for for all of next year that those constraints will continue to be in place.

Through a large part of next year, depending of course on how the supply, possibly further improves above the visibility we have today, but with our current supply visibility vivo continue to be sold off in the automotive markets through next year.

If you would ask me how much what's the gap to true demand.

Probably it is in the order of that behalf of supply coverage of 85% next year in automotive and core industrial versus versus true demand.

Now there is still this golden screw program. So I don't want to I don't want to take this off the table so sometimes.

One component is indeed missing from us or from from from another peer in the market.

And then it takes a few weeks until until.

Toughest being flushed through.

Doesn't take away that there is overall shortage.

In the in the key Microcontrollers and analog products.

Alright.

And then my follow up.

You continue to build inventory on your balance sheet and.

Then I couple that with the fact that you mentioned youre slowdown in automotive and core industrial that's almost two thirds of your business is it fair to assume that you're planning for next year I know youre not giving guidance, but are you planning for next year sales to be at least flattish year on year, but.

Auto and core industrial growth.

Setting any weakness on the consumer side or is that just catching.

Alright.

The conclusion from the mining the fact that you still continue to build inventory and your.

Auto and core industrial demand as sort out for next year.

Hey, Vivek. This is bill let me let me take this one first off we're not guiding 2023, but let me go into the internal inventory and try to summarize for everyone. Yes, we've increased five days, which is about 50% raw material and work in process and the remainder was in finished goods from a quarter over quarter perspective.

Clearly as Kirk mentioned a portion of its finished goods was driven primary by NXP, preventing inventory buildup in the channel as we reroute this material to other customers in need.

Some of it's fungible and some of it is not.

Areas, where we have higher consumer or mobile inventory levels. We hope the wafer is in die Bank as Curt mentioned before completing assembly and test in our back end facilities.

At the same time, we remain highly constrained and the wafer areas of 28.

40, 50, 565, 90, and our auto and core industrial segments.

And again as we mentioned in both our opening remarks.

Better to keep control of your own inventory and putting it into the channel, which will just create future issues if demand falls and again majority of what we build is very application specific and long lift which gives us confidence to hold and be ready to service future demand.

Thanks, Bill and let me maybe just add.

One view on next year when it comes to automotive since since you were asking earlier.

We see no reason why the strong trend of content increase following amongst other electrification and Adas.

Would break I think every quarter, we look at the.

The ratio of electric cars of total Saar, it's higher than before the quarter before for this year, we've seen our 27% of the of the total Saar being X Cvs and slow next year is forecast to be 34% and you know what that means for the for the for the semiconductor content in a car.

So from that perspective, I think there is from a from a demand fuel certainly good reason to believe that it continues to be a very strong and very resilient markets. While at the same time the extended supply chain in our fuel continues to be on Brookfield. It is still.

Actually dysfunctional vehicles.

To to low level, so those two perspective, maybe.

Two pretty healthy view from an automotive demand.

Spectacle franchise III.

Thank you.

Thank you one moment for questions.

Okay.

Our next question comes from Stacy <unk> with Bernstein Research you May proceed.

Hi, guys. Thanks for taking my questions. So the first one.

I get the issues in consumer and mobile will seem to be in the numbers now at this point, but auto and industrial look really resilient youre sold out you've got these <unk> I guess.

Why do you sound so worried.

Given that long term support.

In those core markets and presumably given how sustainable. It is are you seeing any signs at all.

Weakness, even even small times any tiny uptick in cancellations or anything like that in those core markets.

Thank you, we have no cancellations or push outs in auto or core industrial at the same time I don't have a crystal ball and I don't want to take a position here to be vehicle nomex present settlement for the macro for next year, but so this also this guidance here is based on the orders.

The supply capability, which we have at hand for quarter four.

I can absolutely confirm though no push outs no low concentrations in core industrial and auto.

The one indicator, which gives maybe a somewhat better fuel.

On the longer term is is the level of inventory sitting in the extended supply chain and those two markets.

From anything we can check and see their debt level continues to be super low and Thats why we continue to believe it should stay very resilient.

Got it thank you.

For my follow up question I wanted to again dig into the channel inventories.

So a lot of the consumer stuff, which is week goes through the channel it sounds like youre not shipping that into the channel, but the channel inventories are still flat. So are you shipping other stuff into the channel.

Making up for it like how is the mix of I guess <unk> and.

End markets within that channel changing as the consumer stuff is weakening.

We will not be will not speak about the mixed because then it really becomes complicated but it is not that.

We do not ship at all in the channel would be shipped into the channel to keep a steady level of one six months of inventory. So it's not spaces of business. So dramatic that we have to stop shipments that's not how it works.

We are very disciplined bill and I are actually sitting every week and we look at the sell through and sell in data with each of our distribution partners by segment and then we make sure every weakness not only at the end of the quarter, but through the fourth quarter.

It doesn't surpass the one six <unk>.

The change we wanted to communicate today is only that so far obviously for eight quarters in a row.

I was desperate to get it up I mean, I would have wished we could have shipped more into it in order to have a higher channel inventory.

Not.

Given those consumer trends VR actually more disciplined to make sure. It doesn't go higher especially in those pops, we're actually to come up with.

With the receipt of our shipments.

I understand that I guess, what I'm asking is it fair to say, even if you don't want to go to the mix.

The detailed mix that the.

Tumor mix within the channel is lower and mix of other stuff is higher.

Now versus maybe a couple of quarters ago.

No.

No okay.

Okay.

I'm not sure why you would think it should be no. It is not.

If the consumer stuff is so much weaker you said, it's 40% of your industrial business a lot of it goes through the channel and clearly demand is weakening.

And it sounds like the limiting shipments of that stuff into the channel, but the total inventories looks the same.

Yes, Stacy if you are limiting shipments but.

I mean think about it this way the industrial and Iot segment is 18% of total revenue of the company and 40% of that is the consumer Iot and Thats still not a zero shipments level. So it isn't it is not that dramatic from a change perspective.

Got it okay. That's helpful. Thank you guys appreciate it.

Thank you one moment for questions.

Our next question comes from William Stein with <unk> you May proceed.

Starting with muted thanks for taking my question.

I'm, hoping you might have some discussion in terms of the difference in demand levels in lead times and the level of constraints between automotive on the one hand and industrial on the other I think in prior quarters. You've noted that industrial is even more constrained than automotive, but didn't quite get the same level of attention.

Can you update us on that dynamic please.

We really don't have it broken down that way, but it's still.

The key shortages in the core industrial R&D.

<unk> to be highly escalated.

Quite painful.

But I think I can.

Repeat the statement I made earlier that while there continues to be a lot of public reports about the shortages in auto and much less noise, both industrial and in our case in the core industrial we continue to be as short as we as we used to be before.

I said it earlier I think in the context of a different question.

Save for the next couple of quarters to think about four or five quarters.

We believe after risk adjusting our demands.

We should have about 85% coverage.

And all that.

It used to be 80%, so you'll see.

Five percentage points higher.

It is not necessarily because the the supply capability in auto or industrial has gone up so much. It is just that the consumer Iot demand.

Total company has dropped such that in aggregate for the total become up to 85%.

Continues to be equally painful.

Oster than used to be.

I appreciate that.

So I'd like to linger on this.

Small pivot youre, making in terms of the.

Youre dealing with the channel and your inventory and I Wonder if the company has evaluated Patel.

Potentially moving to a consignment oriented model, which would allow you to make even more control.

There's only one company that I'm aware of.

In a big way as sort of an outlier in terms of the deal with distributions.

Wonder if that's.

Our growing soft given approach that you're discussing today. Thank you.

Yes.

Thanks for that but that's a quick answer no we are not contemplating that.

Okay. Thanks.

Yes.

Okay.

Thank you one moment for questions.

Our next.

Comes from Gary Mobley with Wells Fargo You May proceed.

Hey, guys. Thanks for taking my question.

<unk>.

Talk about one of your smaller businesses for a second and that is the mobile side of the business.

You highlighted what sounds like 8% upside to your Q3 revenue forecast for that particular business.

We step back and look at the full year based on your Q4 guide here you are going to grow that business by close to 10%, which is counterintuitive given some of the weak mobile handset related data points. So what's helping you outperform there is it is the content growth or is it inventory channel related.

No. It's got nothing to do with channel inventory, because we put the same discipline on all segments.

No it has to do with our strategy.

<unk> is really on content growth.

Think about the mobile wallet.

Think about the kicking in ultra wideband.

And we also have I'd say directionally, it's not black and white, but we have a bias to higher end.

Mobile apps mobile phone.

Markets, which reached comparably is doing better this year than the very low end Android. So I would say therefore, two arms us our company's specific content increase in share gains are working all of that means that it's very much in line with how we put it a year ago at our investor.

And secondly, you might say VR, we are in a good position because we are somewhat more exposed to the higher end rather than the future phones, the Android phones.

Thanks for that.

As my follow up I wanted to ask about the latest U S. Export restrictions by my Hunch is you're not so much directly impacted from these U S export restrictions that.

Guess indirectly.

Speak to how it may result in some <unk> issues in certain end markets.

Or whether it requires you to change your manufacturing footprint.

Yes, so first of all.

Of course at all times, we will 100% make sure that we are in total compliance with any export control regulations and so we are also after these latest changes.

All of our assessment so far of these latest changes in the regulations show that if anything we have super immaterial impact on our revenues.

When it comes to second or third order effects.

<unk>, which you were hinting to also there I must admit we haven't you haven't really found anything which looks like being being an issue for us but of course, we keep researching it but at this point I can only say, though.

If anything only super immaterial impact.

Thanks Kurt.

Thank you one moment for questions.

Our next question comes from Matt Ramsey with Cowen You May proceed.

Good morning, Thank you very much.

My first question.

You were very clear about the trends in your automotive business that business continues to do quite well and I think to an earlier question you mentioned that sort.

Sort of on a quarterly basis.

The Saar numbers and <unk>.

<unk> III penetration numbers that <unk> has continued to kind of go higher than your own estimates.

Have you guys made any changes to those kind of mix and content assumptions in the next year or two just based on interest rates I think a lot of us externally thought some of the data carmax and some other sources.

The auto on.

New car purchases, obviously finance.

Pretty heavily.

Is there any assumptions that might have changed recently.

Based on some of the interest rates that would be interesting.

Yes, so we.

I guess you get two ounces to one is the short term so when it comes to the guidance for Q4, it's really based on orders in hand.

Got.

<unk> picked up but we don't make these strategic considerations for the next three months. This is really about orders and supply capability.

Longer term say next year.

Again, I don't want to say I have the crystal ball. So we huge views IHS typically for the SAR.

Think just updated their forecast for next year for a 4% Saar growth too I believe something like 85 million units.

However.

It really isn't that important at all.

What really metals, it's the content increase which has a multitude with the mix to E vehicles.

Premium vehicles about the future.

So I think the whole discussion around interest rates.

Recession looming left and right.

I agree with you that could have impact on the demand behavior of people buy cars.

But unless that drops.

It will be far down I believe that the content of semiconductor content per car exceptionally trumping.

The moves on the Saar itself.

And that is for us much more relevant but again I mean, we don't guide next year I don't know what its going to be but we really should more and more start to look at this as a semiconductor company and industry from a content perspective, rather than a unit perspective in automotive.

Got it thanks, Thanks, Curt I realize it's a tough big picture question, but it's one that we're getting.

As my follow up I wanted to ask in the automotive sector. You guys. Obviously have a strong position in BMS, so managing the battery, but theres sort of two sides to managing the battery.

Actually running the car and then there's the charging side and.

Lots of conversation on why that one Dan.

<unk> and what it means for faster onboard Chargers and I wonder.

As a full BMS solution, managing the charging and discharging the battery is that something that you guys are looking into not the manufacturer or anything or why can't bank app, but.

Buying it from someone else and doing a fully integrated both sides of the battery type solution and any thoughts there would be helpful really appreciate it.

Well actually we not only look at but we booked a system <unk>. So we are also very busy.

With <unk>.

Companies building and providing the charging infrastructure I think we have revealed earlier. So I may use the name we work closely with <unk> for example in the U S.

And that is not only on the charging but that even includes payment to make this a very seamless process for the consumer so our payment and identification.

And security technologies are also being Intuitiveness. So yes, we look at it.

At a total from a total end to end basis.

However, I have to say this still means we are not going into discrete power. So whenever these systems and wherever their needs discrete power solutions, so like silicon carbide.

This is not our focus our focus remains on the advanced analog and logic products, which we think is about 50% of that opportunity.

Josh will take the next question please.

Thank you one moment for questions.

Our next question comes from Joseph Moore with Morgan Stanley You May proceed.

Great. Thank you.

I know last quarter, you guys had talked about the desire of the automotive companies to build up safety stock.

Tier one levels I think you talked about six months.

Where are they in that process.

Like things are still pretty tight but is there any indication that theyre able to putting the AD inventory into place.

Yes.

Indeed that is.

Hey.

Our strategic requirements.

In many cases, the Oems are and have been putting on tier ones.

Hi.

My guess is it's very hard to get the flow picture. This but my guess is that in some cases they see.

Start to be able to stop building somewhat.

On a lot of those core products, which are plaguing Austin office from from a from a sheer built performance perspective.

Very very far from achieving anything in this.

Because again, even before that would happen the whole supply chain the whole extended supply chain needs to build a higher a higher inventory level, that's about trusted by company, but just with the whole trade becomes more more functional so I would say given the demand trends and how I would shocks to the supply.

Capability of us in the industry.

This will take all of all of next year still before we come even close to that to that requirement.

Great. Thank you very much.

Thank you Jeff.

Joe did you have a follow up or is that it.

Jeff Thank you.

Yes.

This will probably be our last question operator.

Thank you one moment for questions.

Our next question comes from <unk> Hari with Goldman Sachs. You May proceed.

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

Two questions first one is on pricing.

I think if we take the midpoint of your Q4 revenue guidance youre going to be growing around 19% for the full year.

I think you gave really good color last quarter on on how significant the tailwind from pricing. If we can get an update on 22 pricing that would be great and then your preliminary thoughts into 'twenty three again from a pricing perspective, particularly given.

The intent on your foundry supplier delays pricing next year as well.

Yes Trisha.

<unk> as a good practice as we've as we've done for last year, we will provide that.

Full year pricing impact for calendar year 'twenty two in quarter one of 23.

It's still a very very dynamic.

With almost $8 billion.

So we will give you and provide you the aggregates pricing impact on our revenue growth for this year in Q1 of next year.

From an overall dynamic perspective.

We continue to see quite sizable.

Cost input cost decreases to us.

It is from the foundry partners, but also a lot of inflationary cost increases.

Of course be absolutely walk the talk that we stick to our strategy to problem those input cost increases to our customers to exactly that level that we can protect our gross profit percentage.

And seeing how the supply demand imbalance in our core markets is moving into next year.

I guess it is reasonable to assume that we will continue to raise prices also next year.

<unk> so much to the end of 'twenty two with it I think it's fair to say, it's highly likely that people will also continue next year's prizes just following those those input cost increases.

That's helpful. Thank you.

Yes, sorry.

No go ahead.

Sorry about that.

A follow up.

Just on how youre thinking about utilization rates in capex going forward.

Bill you talked about utilization rates being in the high <unk>.

Given your comment on inventory growing in the quarter. My guess is youre keeping utilization rates, where they are but just wanted to clarify that and then on capex.

Mentioned.

You've had equipment delivery delays.

Should we expect capex to be elevated into 'twenty three.

Or is a little bit premature to say at this point. Thanks, so much.

So, let's let me quickly take the utilization and bill is going to speak about capex on the utilization, yes, we will stay very very highly utilized because as bill put it earlier the majority of our internal front end factories are working for automotive and core industrial so thats exactly.

There, where we see the strong demand continuing and Thats why the utilization rates there will stay very high bill over to you for Capex, yes, as it relates to the Capex.

As I mentioned, we will do better this year.

10% going to 8% and net share we will be in the range between 6% to 8%.

Thanks, so much.

Yes, I guess that gets us to the to the end of the call. So in summary, I would say.

We are cautious in the near term given all the macro uncertainty however, under the surface, we see what I call the dichotomy.

This is really a very disciplined approach to a weakening consumer Iot market.

We want to stay ahead of the game and not travel the travel while it's a very big.

We continue to be supply constrained quite significantly in our core industrial and automotive markets, where we've tried to do everything in house and with our property partners to get the supply the soonest in line with the previous resilient demand signals, which we are having.

And Thats set it for the call today. Thank you all very much. Thank you.

Thank you Josh I appreciate everybody's attendance fell ill conclude the call today.

Yes.

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