Q4 2022 NXP Semiconductors NV Earnings Call
Yeah.
Hello, Thank you for standing by and welcome to the NXP fourth quarter 2022 earnings Conference call. At this time, all participants on a listen only mode. After the prepared remarks, we will conduct a question and answer session and instructions will be given at that time.
I'd now like to hand, the conference over to your Speaker today, Jeff Palmer Senior Vice President of Investor Relations. Please go ahead.
Thank you Michele good morning, everyone welcome to <unk> fourth quarter and full year 2022 earnings call with me on the call today is Kurt Sievers, Nxp's, President and CEO Bill <unk>, our CFO . The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward looking statements.
Involve risks and uncertainties that could cause nxp's results to differ materially from management's current expectations.
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 first quarter of 2023, please be reminded that NXP everything.
There's no obligation to revise or update publicly any forward looking statements for a full disclosure on forward looking statements. Please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to nxp's underlying core operating performance.
Pursuant to regulation G. NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2022 earnings press release, which will be furnished to the SEC, our form 8-K and available from Nxp's website in the Investor Relations section at NXP Dot com.
Now I'd like to turn the call over to Kirk.
Hey, Thanks, Jeff and good morning, everyone.
We really appreciate you joining our call this morning.
I will review, both our quarter four.
And our full year 2022 performance and then I will discuss our guidance for quarter one.
Beginning with quarter four our revenue was 12 million better than the midpoint of our guidance.
The trends in the mobile and industrial and Iot markets performing better than our expectations.
While automotive was in line.
Communication infrastructure below our expectations.
Taken together NXP delivered quarter four revenue of $3 three 1 billion.
An increase of 9% year on year, while maintaining channel inventory at a $1 six months level well below our long term targets.
non-GAAP operating margin in quarter four was a strong 36, 5%.
<unk> hundred 60 basis points better than the year ago period.
And about 50 basis points above the midpoint of our guidance.
Year on year outperformance was a result of good flow through on the higher revenue.
Better gross margins due to higher factory utilization.
Disciplined expense management.
Now, let me turn for the full year performance revenue was a record 13, two 1 billion an increase of 19% year on year.
When passing the revenue growth approximately 14%.
Due to higher pricing.
Yeah.
Well, it's due to a combination of volume and mix.
And here as a reminder, we have executed a consistent pricing policy to pass along the inflationary increases of our input costs.
While not depending on our gross margin.
Throughout 2000 training to be consistently found ourselves in a situation where robust demand across automotive and core industrial markets outstripped available supply even as production levels, both internally and from our supplier partners improve through the year.
And now we do see a continuation of input cost inflation in 2023.
However, not at the same pace and level, we experienced in trade training too.
The full year non-GAAP operating margin was solid at 36, 3%.
340 basis point improvement versus the year ago period.
As a result of higher revenue improved factory loadings and positive operating leverage.
Now, let me move to the specific trends in our focus end markets.
First automotive.
Revenue was $6 8 billion up 25% year on year.
Flexion of higher pricing, our strong company specific product drivers.
The accelerated content increases thanks to the secular growth in sales of SUV vehicles.
It's prioritization by Oems of premium class vehicles in the limited supply environment.
For the fourth quarter automotive revenue was 181 billion up 17% versus the year ago period.
In line with our guidance.
Now moving to industrial and Iot.
Full year revenue was $2 71 billion.
Up 13% year on year.
Primarily due to higher pricing and the strong competitive positioning of our solution offering comprising industrial processes analog attach connectivity and security.
For the fourth quarter, industrial and Iot revenue was $605 million.
One 8% versus the year ago period.
So better than our guidance.
Mobile.
Full year revenue was $1 six 1 billion.
Up 14% year on year, primarily due to higher pricing and continued traction of our secure mobile wallet.
For quarter, four mobile revenue was $408 million.
Up 9% versus the year ago period, and better than our guidance.
Lastly, communication infrastructure and other.
<unk> revenue was $2 billion up 15% year on year.
The year on year growth was due to higher pricing and a combination of sales growth of network processors, RFID tagging solutions secure transit and access products and RF power products for the cellular base station market.
Four corner for communication infrastructure, and other revenue was $494 million up 8% year on year and below our guidance.
Now as discussed earlier I also would like to provide you a progress update on our accelerated growth drivers.
At our analyst day on November 21.
We highlighted our expectation to grow total company revenue to approximately $15 billion of trade 24 coming from $11 billion in train to anyone within the compound annual growth range of 8% to 12% over that period.
Embedded within this outlook, we highlighted six company specific revenue drivers.
Across all of our served end markets.
We anticipated to grow in aggregates to about $6 billion in 'twenty four from a $3 billion level in 'twenty, one representing about a 25% three year compound annual growth range.
Additionally, we shipped a few that are higher relative market share core business.
Would grow to $9 billion to 24 from $8 billion in 'twenty, one reflecting about a 5% three year compound annual growth range.
Overall, our confidence to achieve the anticipated growth rates for both our accelerated growth drivers as well as our high relative market share core business.
Moving to the segments within automotive the accelerated growth drivers, our 77 gigahertz radar.
<unk>.
NPS 32, due to maintenance total processes all of which are tracking ahead of plan.
According to market Research company go with it.
NXP has confirmed ethically.
Number one revenue market leader in automotive radar solutions as well as individually in radar RF transceivers and radar processes.
Furthermore, we just announced the industry's first 28 nanometer RFC most radar one chip IC family for the next generation Adas and autonomous driving systems.
Turning to our efforts in electrification.
Our sales, including battery management solutions, and better control and other FCB control processes.
<unk> doubled year on year and achieved record customer design wins.
Finally within automotive.
Customer enthusiasm for the F 30 to do maintenance solar process Assembly, enabling the software defined vehicle are far in excess of our expectations. This includes the award by a major automotive OEM, which selected the <unk> two family of automotive processors and micro controllers to be used across its fleet of future vehicles.
Beginning mid decade.
Moving to industrial Iot, we are in line with our expected growth range of about 25% three year CAGR for our accelerated growth drivers.
Both our crossover and idled <unk> application process assemblies grew nearly 50% year on year and transferring it to however.
However, we did see a deceleration in revenue and the consumer Iot portion of the end markets during the second half of Treasury trading too.
And finally, we announced our new MTX microcontroller portfolio that is scalable optimized.
Patients for NFC efficient industrial and Iot edge applications.
Addressing the heavy real time Brook loads for the next wave of innovation.
In addition, we recently announced our new analog product family for high precision data acquisition and condition monitoring systems for factory automation.
Moving to mobile.
We are below our expected revenue growth range for the accelerated growth driver ultra wideband due to the best documented weakness in the Android handset markets, which is this focused mobile market for our ultra wide band solutions.
However forward provide bends the ecosystem build out and design win activity and traction in both mobile and auto are going well and we believe as the Android market rebounds awarded design wins will result in the expected revenue growth for <unk>.
Lastly, within communications and infrastructure, we are in line with our expected revenue growth range for RF power amplifiers.
The industry transition to gallium nitride from L. B. Most technology has appeared faster than expected the revenue for our gallium nitride based solutions has doubled year on year and demand continues to outstrip, our increasing supply capability.
In review training training too was a very good year for NXP with strong execution, resulting in record revenue solid profit growth and a healthy free cash flow generation.
Additionally, we experienced unprecedented year on year design win traction across the entire portfolio.
Now, let me turn to our expectations for quarter one 2023.
We are guiding quarter, one revenue to $3 billion down about 4% versus the first quarter of 'twenty two.
From a sequential perspective this represents a deceleration of about 9% 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 mid teens percent range versus quarter, $1, 22, and flat versus quarter for train two.
Industrial and Iot is expected to be down in the low 30% range year on year.
And down in the low 20% range versus quarter four training too.
Mobile is expected to be down about in the mid 40% range, both on a year on year and sequential basis.
And finally communication infrastructure and other is expected to be about flat both on a year on year and sequentially.
In summary, as we have been to train 23.
Our automotive and core industrial businesses remain supply constrained in select areas.
Within automotive the increase of global production levels.
And the secular adoption of FCB are tailwind to continued content increases.
In industrial and Iot, we expect relative strength in the core industrial Submarkets.
As our products enable critical infrastructure companies to be more efficient.
However, the consumer Iot and the mobile segments will continue to be dependent on a cyclical rebound.
And lastly in communications infrastructure, we expect our supply capability to improve against pent up demand specifically in our RFID tagging solutions secure access products and E government identification.
Within the <unk> base station markets growth in 'twenty, three will be dependent on the build outs, especially in India.
At the same time, we do believe from an external macro perspective, the general demand environment is offering much higher levels of uncertainty than last year.
And in the very short term, we are expecting a dip in China due to the spike in infection rates following the policy shift related to Covid.
Additionally, we expect continued cyclical weakness in demand for consumer oriented products.
And a potential correction of customer inventory.
In this more uncertain demand environment, we will focus on prudently managing what is in our control.
And especially that we have plenty of all ex vivo continue to very vigilantly manage channel inventory to a $1 six months level.
Which is about amongst below our long term targets.
Equaling approximately $500 million of revenue.
We intend to maintain that $1 six months channel inventory in the first quarter, while we are well positioned with our on hand inventory to increased channel inventory, if and when the market China rebounds.
So far quarter to date, our distribution sell through in China is off to a slow start.
<unk> incorporated in our guidance.
Over the mid term, we are cautiously optimistic given customer engagement levels.
Design win momentum in our strategic focus areas.
A potential rebound in China.
And now I would like to pass the call to you Bill for a review of our financial performance.
Thank you Karen and good morning to everyone on today's call.
As Kurt has already covered the drivers of revenue during Q4 and provided our revenue outlook for Q1, I will move to the financial highlights.
Overall, our Q4 financial performance was very good revenue.
Revenue was slightly 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.
I will first provide full year highlights and then move to the Q4 results.
Full year revenue for 2022 was $13 two 1 billion up 19% year on year.
We generated 764 billion and non-GAAP gross profit and reported a non-GAAP gross margin up 57, 9%.
180 basis points year on year as a result of higher internal factory utilization and fall through on higher revenue.
Which is at the high end of our long term financial model.
Total non-GAAP operating expenses were $2 86 billion or 21, 6% of revenue.
Although our long term financial model.
Total non-GAAP operating profit was $4 79 billion.
32% year on year.
This reflects a non-GAAP operating margin of 36, 3%.
340 basis point year on year and above our long term financial model.
non-GAAP interest expense was $386 million.
Cash taxes for ongoing operations were $558 million.
Non controlling interest of $4 6 million and stock based compensation, which is not included in our non-GAAP earnings was <unk>.
$364 million.
Full year cash flow highlights include $3 9 billion in cash flow from operations.
106 billion in net capex investments or 8% of revenue, resulting in $2 83 billion of non-GAAP free cash flow.
23% year on year, or a healthy 21% of revenue.
During 2022.
We repurchased 833 million shares for $1 43 billion and paid cash dividends of $815 million or 21% of cash flow from operations.
In total we returned $2 $2 billion to our owners, which was 79% of the total non-GAAP free cash flow generated during the year.
Now moving to the details of Q4 total revenue was $3 three 1 billion up 9% year on year in line with the midpoint of our guidance range.
We generated $1 92 billion and non-GAAP gross profit and reported a non-GAAP gross margin of 58% up 70 basis points year on year and consistent with the midpoint of our guidance range.
Total non-GAAP operating expenses were $713 million.
Our 21, 5% of revenue, which is up $32 million year on year and down $17 million from Q3 slightly favorable to the midpoint of our guidance.
From a total operating profit perspective, non-GAAP operating profit was $1 two 1 billion.
And non-GAAP operating margin was 36, 5%.
160 basis points year on year.
Above the midpoint of our guidance range, reflecting solid fall through and operating leverage on the increased revenue level.
non-GAAP interest expense was $95 million.
With cash taxes for ongoing operations of $126 million.
And noncontrolling interests was $12 million.
Stock based compensation, which is not included in our non-GAAP earnings was $97 million.
Now I would like to turn to the changes in our cash and debt.
Our total debt at the end of Q4 was 11 $1 7 billion essentially flat sequentially.
Our ending cash position was $3 85 billion up $86 million sequentially due to the cumulative effect of capital returns Capex investments and cash generation during Q4.
The resulting net debt was 732 billion.
And we exited the quarter with a trailing 12 month adjusted EBITDA of 5.4 dollars 7 billion.
Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q4 was one three times and our 12 month adjusted EBITDA interest coverage.
Was 14 nine times.
Cash flow generation of the business continues to be healthy and our balance sheet continues to be very strong.
During Q4, we paid $221 million in cash dividends.
And repurchased $475 million of our shares.
Additionally, the NXP board of directors has approved a 20% increase in our quarterly cash dividend, bringing.
Bringing the quarterly cash dividend dividend to approximately $1 per share.
These actions are all aligned with our capital allocation strategy.
Turning to working capital metrics.
As of inventory was 116 days, an increase of 17 days sequentially and distribution channel inventory was $1 six months.
As we mentioned on our last quarter's call given the uncertain demand environment, we made the intentional choice to limit the months of inventory in the channel, while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed.
Furthermore, given our manufacturing cycle times combined with the uncertain demand environment in the first half of 2023.
We will continue with this approach in Q1, and we expect <unk> to increase in the quarter.
Days receivable were 26 days down one day sequentially.
And days payable were 105 days, an increase of nine days versus the prior quarter due to the timing of material.
Taken together, our cash conversion cycle was 37 days an.
An increase of seven days versus the prior quarter.
Cash flow from operations was one to the Euro <unk> 8 billion and net Capex was $233 million, resulting in non-GAAP free cash flow of $843 million.
Approximately 25% of our revenue.
Turning now to our expectations for the first quarter.
As Kurt mentioned, we anticipate Q1 revenue to be 3 billion, plus or minus about $100 million.
At the midpoint this is down 4% year on year.
And down 9% sequentially.
We expect non-GAAP gross margin to be about 58% plus or minus 50 basis points driven by favorable mix offset by the lower revenue.
Operating expenses are expected to be about $710 million.
<unk> or minus about $10 million.
Taken together, we see non-GAAP operating margin to be 34, 3% at the midpoint.
We estimate non-GAAP financial expense to be about $77 million.
We anticipate the non-GAAP tax rate to be 16, 5% of profit before tax.
Noncontrolling interest and other will be about $10 million.
For full year 2023 modeling purposes.
We suggest for a non-GAAP tax rate you use a range between 16% to 17%.
This is lower than our previous we anticipate our effective cash tax rate of 18% and is based on current tax legislation.
For stock based compensation, we suggest you used 410 million no change from the model.
For Noncontrolling interest, we suggest you use $30 million to $40 million lower than 2022.
And for capital expenditures, we expect to invest approximately 8%.
Of our revenue.
In closing looking ahead into 2023.
I'd like to highlight a few focus areas for NXP.
First we plan to execute and drive our six company specific accelerated growth drivers.
Second we will manage our internal and channel inventory thoughtfully based on market conditions.
Thirdly, we will continue to be disciplined with our operating expenses, while protecting our long term R&D investments.
Taken together, we plan to operate within our long term financial model ranges.
What is a dynamic macro environment.
Like to now turn it back to the operator for our questions. Thank you.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one one.
Your question has been answered or you wish to remove yourself from the queue. Please press star one again, we ask that you. Please limit yourself to one question and a follow up.
Our first question comes from Christopher Queso with Credit Suisse. Your line is open.
Yes. Thank you good morning.
I guess I'll start Kurt.
If you could speak to your comments on managing the channel inventory.
And of course, one of the concerns investors naturally have is the worry that customers.
Quarter more than they need given the constraints that are present over the last year and then potentially you over shipped that can you speak to how you're ensuring.
That what Youre shipping to customers now is actually on a real demand revenues inventory and I guess thats, particularly as some of the foundry capacity loosens up gives you a little a little more access to wafer supply.
Yeah. Thanks, Thanks, Chris and thanks for taking the first correction.
Yes.
Very very vigilant management of the channel inventory is a very deliberate choice Bill and I took.
And we do this while we have more than enough orders attempt to actually ship say another $500 million in the quarter into the channel and still hitting our target of $2 four to five months of inventory.
Let me take that choice, because we specifically now in China see a weakness.
Actually we think the weakness in China, which for US is almost entirely distributions. We see this connected to the change of corporate policy, which they took it early or first half of December and the spike of infection rates. Following this.
And we just want to be responsible through this period of weakness in China, but watching the situation very carefully so as soon as we would see.
Science of consistent rebound in China, we have both the audience, but also the product of hands to actually fill back the channel. So it's kind of our choice, which we took here and I have to say this is across all segments, so that weakness, which we see in China is not really segment specific it is.
Distributions specific across the board related to this policy change and infection Spike in China may be important to highlight that at the very same time.
We are seeing across the board very strong depth trends in our direct customers.
If you have a very diverging.
Last quarter, we spoke about the dichotomy very diverging picture now that's from our segments.
Perspective auto and core industrial remains strong.
Now we have an additional effect here that you see this short term weakness in China.
Which we tried to be prudent about the choice of the channel inventory stayed open.
Got it thank you.
Question is what's a reasonable expectation for auto revenue.
The year.
If not quantitatively at least qualitatively and it was flat last quarter, you're managing to be flat again.
Is it should it stay flat from here.
Are you trying to get additional capacity in the process nodes.
Needed for autos.
That quarterly revenue would at one point ryzen and catch up on that backlog.
Yes, let me let me give you some color on Q4, two one of them directionally for the year.
Indeed, Q4 was flat from a quarter on quarter perspective, followed by the way nicely up year on year.
Really because of supply constraints I mean, we just didn't we couldn't ship more because we didn't have more product in Q4.
In Q1, it's a bit more of a mixed bag, we are getting more products, but at the same time.
Automotive in China distribution flows onto what I said earlier, so we have a bit of a decline when you think about automotive distribution, China, while the rest is actually going up at the same time in the mix it turns out to be them flat quarter on quarter, and again nicely up from a year on year perspective, maybe more importantly for the full year.
We are optimistic Chris.
We see.
According to IHS or <unk> increased to about $85 million. So I think $82 million cost last year going to 85% this coming year, which is three and a half or so percent increase.
And more importantly, definitely a continued increase of X EV electric vehicle penetration again, according to IHS, I think going to 35% off the total car production, having hybrid or fully electric drivetrains, which is significant and continues to be a significant boost from a co.
<unk> perspective for us.
At the same time.
We are gradually as through the last quarter getting access to more supply.
I also say from today's perspective.
Probably through the end of the Kevin Let me go 'twenty three I hope we have most of default interest behind us I mean that will never be totally complete but I think we are getting closer to a better balance towards the end of the year and finally pricing continues to play a role I think I've talked about the pricing.
Specifics for last year in my prepared remarks, but when you think about this year input cost continues to go up especially in those areas, which continue to be tight from a supply perspective. So there is also specific specifically in automotive have continued pricing tailwind to be expected.
Our next question comes from Vivek Arya with Bank of America. Your line is open.
Thanks for taking my question good when I look at the two areas facing the most had been consumer Iot and mobile.
I think there could be below 20% of sales as you get into Q1 should we assume that is sort of the cycle look when I look at mobile I think it's back to like Q1 19 level.
So do you think you won kind of marks a cycle low for these do most problematic areas or do you see them slipping further in Q2.
Honestly Vivek, we don't know I would go over my skis too to make a firm a firm statement here, but indeed mobile of course of a couple of specifics.
You are driving at really low.
There is a seasonal element to this obviously.
Secondly, we do have in mobile.
Executed our NC in our orders last year, which gives us a headwind from an inventory perspective, if you will.
We firmly executed these empty and our oldest because these are accustomed specific products, where we have no chance otherwise too.
To move them around and give them to other customers.
And then finally, there is the well known and documented Android weakness.
Which continues to be.
I'd say the following the <unk> CVR very disciplined with.
Customer inventory and mind, you that our mobile business to the largest extent is going.
Yeah.
So if and when demand picks up rebounds, which I think it will at some point, we should indeed very quickly see it is that exactly for the second quarter I don't know, but we are very close to the pause given the way <unk> treatments.
I'm glad you're asking vivek, because this whole thing around our almost brutal discipline on the one six channel inventory moves us very close to as soon as there is a pickup in demand. We will also see it in our numbers.
Got it and then on.
Gross margin I think Bill you mentioned something about mix that is helping you keep gross margins at the high end of your targeted range.
So conceptually, let's say if your Q1 is the bottom in sales and sales are flat to up from here and do you think gross margins can stay at 58% or do you think that is something it makes our utilization in the following quarters that Ken.
Gross margins below the Sabalo audits, 58%.
Now the new baseline of gross margins for NXP.
Thank you for your question, let me talk about Q4, and the Q1 guide and also looking ahead.
As you know, we did slightly better than our guidance and I mentioned it was improved by product mix for Q4 again as we look into Q1. Despite those lower revenues, we see this positive product mix offsetting the lower fall through on the revenue.
Also we have lowered our internal front end utilization rates in Q3, we were running in the high 90 percents.
In Q4 were about 90%.
And again remember this is all linked to that non auto industrial type of products because of market softness we're seeing.
For Q1, we do expect to lower our front end utilization again to about 85%, which is where we still remain constrained in our internal auto processing technologies, and so forth and again I'd say looking ahead, we expect to stay within our long term gross margin forecast of 55 to 50.
<unk>.
As our cost structure today is more variable.
In nature than the past.
Also our factories, if you think about it become more efficient when they were run that normal utilization and we have a disciplined inventory approach with our channel. So.
We're going to stay with that range, we're not revising it but we feel very good about our gross margin performance.
Our next question comes from Ross Seymore with Deutsche Bank. Your line is open.
Hey, guys. Thanks for let me ask a question Curt I wanted to go back to your core automotive and core industrial business not the consumer Iot side. I believe you said the demand was largely holding in well there except for some of the channel dynamics in China.
Overall is that true is the core industrial, especially are holding in and how do you delineate between the channel weakening and isolating that to a variable other than demand. Obviously, you can see that it's coming out of China, and we know the COVID-19 policy, but.
To the extent its weakening people aren't really going to care, if the sources coming from Disney's having too much inventory or Oems slowly.
Either way, it's kind of a slowing even though the ladder by some sort of a temporary aspects. So any sort of color you can give on your core demand would be helpful.
Yes, Thanks Ross.
It is actually easier to speak to this in automotive because we have a much larger portion of direct customers, where we can also triangulate with the demand from the Oems from the end customers and we have these discussions actually with all three parties on the table. So we cannot be misled by inventory builds or anything from trumpf.
<unk>, because we really cleaned this all in all all the way to the Oems and I think what I said to Chris earlier about the optimism on the auto business for the year is the answer to your question. So there is a short term disturbance in China, but thats really more about the distributors than anything else when it comes to automotive.
In core industrial Ross It is indeed harvest to be that specific because.
Majority of our business goes through the channel. So it is much harder to say from the perspective of what do we know from end customers.
Which is also why into Q1 I would say also core industrial probably drops sequentially, but again it is very hard.
To decompose this from the China situation. So it could just be because of this particular, China situation since we have such a high.
Exposure in industrial and also our core industrial to AUM to China.
10, However, tell you that the direct accounts in the core industrial business, but they are a minor portion of our business. They are holding up quite well so for that reason.
You could say there is there is some data points, which would which would tell us that also core industrial is robust.
But I have it's less certain given the given the channel exposure, which we have in that segment now from a content increase perspective from if you. If you think more from a macro perspective, what these applications are doing in credit or infrastructure and driving efficiency of industrial customers.
I think there is any reason to believe that we should also for core industrial continue to be optimistic for the year finally, what I've said about pricing earlier.
Pricing for automotive.
Holds true also for core industrial similar technologies similar continued pressure on their own supply, which is very different obviously to the consumer and mobile businesses.
Thanks for the color on that and then I guess, one kind of on the utilization inventory and gross margin all tied into one for bill.
Impressive to see that your utilization is dropping in your gross margin is still staying at 58% I guess in the <unk> is there a limit to which you would go on the upside there I know your long term target of 95 I also know that you've been very clear as to why you're going above that right now but is there an <unk>.
A limit to how high you would go on days of inventory internally before you would really have to ratchet the growth the utilization down and if so how does that fold into what the gross margin that would be the outcome in that scenario.
Thanks, Ross, Yes, you are correct in a way that when we look at inventory, we look at both the internal and the channel together. So if you can imagine right. The channel inventory today is at $1 six months basically we can move that up by about another 25 days, if we wanted to to our target.
Two five months of sale.
Clearly with the softness in several of the areas. We are monitoring this we're keeping it strategically on our channel.
And as Curt mentioned as conditions do improve we will release some of that and watch it go sell through one to one.
Now the good news is the inventory we have on hand is all all long lived and has very low obsolescence risk.
At the same time I'd say Unfortunately, we're still constrained in several selective nodes remember we by about 60% externally, we do about 40% internally that 40% really to more than two thirds of that internal capacity is linked to auto and industrial so thats, there and keep us at nice levels of utilization for the rest of the.
A year.
So again, we're going to be more flexible yet disciplined to support our customer service levels and the potential for future growth, but to give you. An example, right.
If we have the orders as Curt mentioned.
And we ship that $500 million and went to two five months of sales assuming none of itself through this would basically have an effect on our revenue and our Cogs and basically say nxp's internal inventory would have been below 90 days. So you have to look at them combined.
We're doing this very proactively and intentionally to direct prevent inventory buildup. So I think from an internal vil, if we kept the channel at one six.
Our next question comes from C. J Muse with Evercore. Your line is open.
Yes. Good morning. Thank you for taking the question I guess a follow up question on gross margins you started the call talking about expectations for higher Asps, given higher input costs. It sounds like you're very optimistic around accelerated growth areas that should benefit mix.
Cut back utilization and it sounds like that should trend higher over time, and that's focused more on proprietary mixed signal, which I assume again is better mix and then you guided capex essentially flat to down year on year, which means depreciation shouldnt be moving higher. So the question is this I guess are there any kind of headwind.
Headwinds to gross margins that we should be thinking about in 'twenty three.
I mean, the only thing I would say that could cause gross margin to go below the long term model of that $55 to 58 is probably a prolonged global recession.
All of US right, but if we're having the what we're seeing right now.
We think we will we will and plan to stay within that $55 to 58 C. J.
Okay. Thank you and I guess as my follow up on the Comms infrastructure and other line can you just give a little more color on what led to the weakness.
In December and how we should be thinking about the different moving parts for that business for all of 'twenty three thanks, so much.
Yes, sure I'm happy to do that.
Q4 was purely supplier and we were a bit ahead of our skus with the guidance because we know that more supply is coming up and Thats also why Q1 is going much better.
There were some operational issues and we didn't get it going in Q4, so Q4.
Fail against guidance has nothing to do with demand that was purely about a supply base.
Now going forward. It is indeed, such that I would say we are.
Our.
Cautious when it comes to the radio power part of the business.
The one area, where we see.
Build outs in network infrastructure. This year that it's India. So it's all about to what extent at what pace is this going to happen through the year.
What is for sure is that it is much more and much faster leading to <unk> AUM nitrates versus LTE.
L demos, which is favoring us.
Just have to do a good shop, and increasing our supply capability to actually run up here.
The one other piece within this content.
And other segments, which bill metal this year is actually the RFID tagging.
Secure access comps and government identity products.
There is a significant amount of pent up demand Cta, which we could not serve the last two years, which was our choice I mean, it is a technology, which we have to use for other segments and other products.
That is a classic demand, which doesn't disappear because it is about infrastructures.
This is about.
Government, Ids, which people needs around the world. So the demand is still there now we are actually moving the supply capability from other areas of spirit that demand has softened into this and we are starting to serve it.
So from a <unk>.
<unk> segments dynamic perspective, Ctrip think about this path being the one which is actually going to generate a nice growth this year.
Thank you.
Our next question comes from Joseph Moore with Morgan Stanley . Your line is open.
Great. Thank you I think you've talked about being for your auto business, having backlog coverage for the year.
With the disruption in China.
Or would you still say, that's the case and as a follow up.
Uh huh.
How are you guys thinking about <unk> on your backlog this year, how flexible are you going to be.
For example, the China situation causes people to want to reschedule deliveries.
Yes, so so first of all.
The supply capability through the year.
Clearly the the number of Escalations has moderated.
Still have a.
A number of knobs to be short technologies in I would call out.
80 nanometers 90 55.
AUM nitride, hence the high voltage analog mixed signal, which is proprietary to NXP.
This is of course in size less than it used to be but it's still leads to significant customer escalations and shortages, which we think will go through the year, but hopefully be moderating towards the end of the year.
If we translate this back into supply capability.
I think we said on the last call, we would be able to serve about 85% of kind of risk adjusted backlog for the year.
For this year for 23. This is now more like 90% to 95%. So you'll see it's better it's not yet on target BP are not yet in a position that we have visibility to serve everything we want but we are we are coming closer.
Now you might be confused with the Hyatt <unk> and still me, saying that we can serve automotive <unk>.
The matter of the effect this debt.
If you will deposits the tio into segments and I mean, I will not give you numbers, but the auto part of it.
So the product, which is specific to the recent automotive is actually well below targets.
So.
It is just very variable between the segments and this is not fungible as you know all of that.
That leads me to the second part of your questions around <unk>.
I gave you. One example earlier, where we have very strictly executed MTN ours and that was the mobile last year, which indeed is a bit of a headwind now getting into into this year.
Because product wasn't acceptable.
It's customized and software. So there was no way to to look to let customers off the book.
Going through this year there is not a.
One fits all answer Joe So I'd say.
We are flexible.
The product is fungible I mean.
Do not force one customer to absolutely take it if we can at the same moment. So the same product to somebody else.
That wouldn't make sense.
We are very strict.
If it would go against any take or pay liabilities, which we have to our suppliers I mean that there was no way we would we would let our customers are stable.
Then it depends on overriding commercial agreements, which we have with customers in some cases, which which might be a forcing functions.
And then.
And that's especially in automotive, which is a large part of our NC in our backlog.
Working with Oems, So if a tier one comes to me and SaaS.
We want to discuss about the <unk> level I would say, okay. Then be discussed together with your end customer.
We want to understand if that isn't the best interest also for the end customer.
Which puts quite a bit of pressure on the system and actually enforce the sum of <unk> through that channel.
You will see I cannot say, 100% always enforced beef would not do this very would see that would be create appropriate for Oss layer. I mean, that's the same philosophy, which we are plagued with particularly inventory buy would be I mean, that's that wouldn't be smart, but in many cases, we are still do given the dynamics such as mentioned.
Very helpful. Thank you.
Okay.
Okay.
Thank you and our next question comes from William Stein with <unk>. Your line is open.
Great. Thanks, So much just last couple questions in particular were very helpful.
Understanding this sort of shape of demand.
Hoping maybe we could talk a little bit about longer term competitive dynamics in particular in the automotive end market.
You seem to be doing very well in these growth areas.
But Curt I'm, hoping you can talk more about your position with the emerging Chinese Oems, which especially in evs.
Started to deliver some very strong growth can you compare your competitive positioning with those Oems relative to how you've done historically with the bigger global one thank you.
While bill while I cannot speak on a customer specific level obviously.
I dare to say when I look at the win rates and the shipment rates.
We are very well balanced.
When it comes to Evs both geographically.
But also between say big Oems and startups.
<unk>.
That has been an attention point for me right from the start because actually many years already.
I always thought that China might become a leading force in electrification.
Given that they didn't have the legacy to change their their companies from combustion engines to electric Drivetrains.
As a significant advantage.
And so for many years already we tried to stay very close to.
Two startup companies, which by the way is not just in China, but thats often between China in California, I mean, there is a lot of.
Our combined companies there.
No I would not say that we have a if you will negative by us only to the big guys and would not participate in the growth provided by by startups, which largely are in China.
It has also to do with our product portfolio will be are so broad and so leading in automotive how would we how would be only work with one part of the market it's almost impossible.
So no thats not the case im optimistic here.
Great. Thank you.
Thank you.
And our next question.
Comes from Matt Ramsey with Cowen Your line is open.
Okay.
Thank you very much guys for squeezing me in.
Kurt in your prepared script.
You referenced the <unk>.
The model from the analyst day sort of the $15 billion.
<unk> revenue in 2024 and sort.
You reiterated the targets for sort of the core business and the new growth areas, but.
As we start on a sort of $12 billion run rate and I know a couple of the segments are really down in the first quarter, but just on an annualized basis, I think we need to get to 67% growth or something like that for this year and next to hit that target.
Maybe you could just give us a little more color on the specific drivers not just in the next quarter or two given the volatility but over the next 24 to 36 months of how you see getting there from where we're starting.
Yes.
So indeed, I mean, the Q1, given China on everything we discussed in the last 25 minutes is indeed, a bit of a probably a bit of an outlier.
I think the growth rates, which which contribute to the 8% to 12%.
For the company.
Being led by automotive and industrial Iot is still how we look at the world for the next three years. So we do believe that if you look across NXP.
The content increases and our strong position in automotive Bill Lyft automotive growth above corporate average I think we said at 9% to 40% relative to the eight to 12 for the total.
Since this is half the company Matthew will offset that that has had a significant dynamic for us.
And in automotive.
It's also fair to say and I gave you. Some details for last year that pricing is a is a positive further contributing element, which may be not always fully comprehended in the initial in the initial forecast.
And in a similar way.
Would speak to core industrial mind, you that is 60% of the industrial Iot segment.
They are indeed, and Thats, maybe where your question was going to the more cyclical businesses.
Being being the consumer Iot as part of the industrial Iot segment as well as mobile.
Derek will all depend on timing I mean, do you really have to see what the timing of a rebound is going to be very at the same time. If you look at history of these segments. They are very fast moving I mean, you can you can very quickly have significant changes for the quarters, especially been China, China makes a move against strategic.
Typically I think the growth algorithm guiding us to the eight to 12 for the company is pretty much intact, there, possibly automotive has a bit more momentum even than we would have anticipated in the first place.
Got it. Thanks, Thanks, Curt just a quick follow up for Bill you guys.
Pretty tight on Opex in the first quarter, I think maybe a tiny bit above the.
16% and 7% of revenue that you sort of laid out in the model bill, but on a pretty big down revenue quarter and a couple of segments.
We potentially reaccelerate off the bottom and a couple of them.
Segments that are challenged in China do you are you going.
To Reaccelerate opex at the same rate or is there sort of how should we think about that into the back half.
The revenue potentially recovers thank you.
Thanks, Matt Let me, let me address operating expenses I think we continue to manage our operating expenses.
Pretty well with the uncertainty in the macro markets. So in Q4, we were a bit more favorable than our guidance driven by the lower variable compensation and we managed our discretionary spend in Q1, we're keeping our opex relatively flattish I would say despite you all know the typical headwind that we experienced.
In the U S employee benefit rates and so forth. So so we're doing a good job there and as I mentioned in my opening remarks, we are going to navigate and control our spend it's one of those levers that we have.
And for 2023, I would say, we would plan for the full year to make sure that we're below that 23%.
For modeling purposes, so maybe a quarter here may go out of bounds, but for the full year, we expect to be within 23%.
Our next.
Great question Steve.
Yes, Sir.
It will be our last question, we would like to pass it over to Kirk for some final remarks.
Again.
Yes. Thank you. Thank you very much ship now.
As we have discussed clearly the level of uncertainty currently is higher than what we've had for the past couple of quarters.
The stance, we take is that we want to be prudent and disciplined to those elements, which are in our control. We just discussed about opex, but much more importantly, I think this is all about inventory management.
There, we don't want to be.
<unk> blocked by a lot of work by over shipping into the channel and not not not having a few learning more about the true end demand is.
So that's why we focused in this call and also for our guidance very much on that approach.
For the channel, which my view is more than 50% for NXP more than 50% of our revenues are going through the channels. So that discussion is a very important piece for us with that we are actually.
<unk> decision to certainly navigate in a good way through this period of uncertainty and at the same time remain very prepared for a potential rebound, which we think could happen in the types of coffee, especially in China when the when the infection rates come down again after this policy change.
With that thanks for your attention. Thank you very much I speak to you. All soon thank you. Thank you everyone. We can disconnect now.
Thank you for your participation. This does conclude the program you may all disconnect everyone have a great day.
The conference will begin shortly.
Lower Johan during Q&A, you can dial one one.
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Okay.
Okay.
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