Q2 2023 NXP Semiconductors NV Earnings Call
Speaker 1: Good day, and thank you for standing by. Welcome to NXP's second quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you'll need to press star 1-1 on your telephone. You will then hear...
Speaker 2: And good morning everyone. Welcome to NSP semiconductor's second quarter earnings call. With me, I'm a call today is Kurt Tvers, NSP's president and CEO of Bill Dutz, RCFO.
Speaker 2: Call today is being recorded and will be available to replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties, that cause NXT's results to differ materially and management's current expectations. These risks and uncertainties include but are not limited to.
Speaker 2: statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for financial results for the third quarter of 2023. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements.
Speaker 2: For a full disclosure on forward-looking statements, please refer to our press release.
Speaker 2: 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 NHTs underlying core operating performance. Pursuant to Regulation G, NHT has provided reconciliations of the non-GAAP financial measures
Speaker 2: to the most directly-comparable GAAP measures in our second quarter, 2023 and Interpress release, which will be furnished to the SEC on Form A.K. and is available on ST's website in the Investor Relations section at nxp.com. Now let's turn the call over to Kirk.
Speaker 2: Thank you Jeff and good morning everyone. We really appreciate you joining our call today.
Speaker 2: I don't start with the review of our quarter two resides and then discuss our guidance for quarter three.
Speaker 3: Now let me begin with quarter two. Our revenue came in at the high end of our guidance.
Speaker 3: or about a hundred million better than the midpoint with the trends in all end-market segments performing better than our expectations.
Speaker 3: Taken together, NXP delivered quarter-two revenue of 3.3 billion, essentially flat year-on-year. While we continue to maintain our distribution channel inventory strictly at a 1.6 month level,
Speaker 3: which remains to be well below our long-term target of two and a half months.
Speaker 3: Long gap operating margin in quarter two was 35%.
Speaker 3: 50 basis points above the midpoint of our guidance. So 100 basis points below the year-ago period.
Speaker 3: of stronger gross margin, offset by higher R&D investments in support of our mid and long term growth targets.
Speaker 3: Now let me turn to the specific trends in our focus and markets.
Speaker 3: In automotive, quarter two revenue was 1.87 billion up 9% versus the year ago period.
Speaker 3: and near the high end of organs.
Speaker 3: In industrial and IoT, quarter two revenue was 578 million, down 19% versus the year ago periods, and near the high end of our guidance.
Speaker 3: In mobile, quarter two revenue was 284 million, down 27% versus the year ago period.
Speaker 3: In the back, eye under home guidance.
Speaker 3: In communications infrastructure and other, quarter two revenue was 571 million, up 15% year-on-year, and at the high end of our guidance.
Speaker 3: During the second quarter we had experienced incremental improvement across all regions.
Speaker 3: with China also gradually improving quarter over quarter.
Speaker 3: Year-on-year growth was led by our direct business.
Speaker 3: While our distribution business continues to grow sequentially from the trough in Q1, so still down on a year-on-year basis.
Speaker 3: Now let me turn to our expectations for Q3 2023.
Speaker 3: We are guiding Q3 revenue to 3.4 billion.
Speaker 3: This is down about 1% versus the year of Opiria and represent sequential growth of about 3% at the midpoint.
Speaker 3: We do anticipate the following trends in our business.
Speaker 3: Automotive is expected to be up in the mid single ditching to send range versus quarter three 32
Speaker 3: end up in the low single digit range to currently.
Speaker 3: Industrial and IoT is expected to be down in the mid-teens percent range versus quarter 322.
Speaker 3: and up in the low single digit percent range sequentially.
Speaker 3: Mobile is expected to be down in the mid-teens to center-drenched versus quarter-322.
Speaker 3: and to be up in the mid 20% range on a sequential basis.
Speaker 3: And finally, communication infrastructure and other is expected to be up above 10% versus quarter 322.
Speaker 3: and fledged sequentially. Our guidance for the third quarter contemplates that we maintain the 1.6 months distribution-trial inventory level.
Speaker 3: and very consistent to our approach in prior quarters.
Speaker 3: We will manage selling for the channel tightly, so we may start to increase channel inventory is and when we see consistent strength in channel sales through for future periods.
Speaker 3: We are well positioned with on-hand inventory to set the aids a possible rebound in demand as it emerges. Furthermore, we continue to experience higher input cost.
Speaker 3: Hence, we stick to our consistent pricing policy, which is to pause along the input cost increases to our customers.
Speaker 3: while not padding our gross margin.
Speaker 3: From a more strategic standpoint, we focus on enhancing how we work with our suppliers and customers.
Speaker 3: in order to enable long-term supply and demand assurance programs, especially in the automotive and poor industrial businesses.
Speaker 3: Now as we progress through 2023, we are gaining confidence that we will be able to return to predictable year-over-year growth of the business. Reminding the automotive and core industrial businesses continues to be solid, with only a few pockets of stubble on supply shortages consisting
Speaker 3: through your end.
Speaker 3: Within the mobile segment, we are seeing the expected strong seasonal trends in the premium portion of the market in quarter three.
Speaker 3: And our consumer IoT business appears to be accelerating from the truck in Q1. However, it does not show signs of a sharp rebound as of yet.
Speaker 3: Finally, in our communications infrastructure segment,
Speaker 3: We see soft and lumpy demand in the cellular base station markets, offset by strength in our secure cards and tagging businesses. So taken together our first pathosites and our guidance for quarter 3
Speaker 3: give us confidence that we are successfully navigating through the cyclical downturn in our consumer exposed businesses.
Speaker 3: while we do see continued strength in our automotive, core industrial and communications infrastructure businesses.
Speaker 3: We believe that Portal 1 was the trust in our business. And we anticipate the second half of 2023 will be greater than the first half of this year.
Speaker 3: And also the second half of 2023 will grow over the second half of 2022.
Speaker 3: And this outlook does not contemplate a strong rebound in the consumer IoT business or the Android handset market, nor does it assume the refill of the distribution channel to our long-term target of two and a half months. So overall, the ability continues to be very, very disciplined, managed what is in our control, and stay within our long-term financial model.
Speaker 3: And before I turn the call over to Bill.
Speaker 3: I'd like to take a moment and thank our automotive processor team for achieving a very significant milestone for the enablement of the software-defined vehicle.
Speaker 3: At the end of June , NXP take-out, the industry's first fully automotive specified states and secure 5-nanometer V-dial computer.
Speaker 3: This is a 4 billion transistor multi-core MPU based on an innovative chip architecture that allows the up-integration of new functions and consolidation of existing EZU functions.
Speaker 3: The vehicle of the future will utilize new software defined platforms to allow easy upgrades and new features to be added through the vehicle lifetime.
Speaker 3: Software-defined vehicles get more performant, more reliable, more functional with time, instead of degrading as is the case today.
Speaker 3: In order to achieve this capability, auto OEMs require both flexibility in their compute architecture as well as the opportunity to tap into a broad ecosystem of application developers.
Speaker 3: At the top of the compute hierarchy in the car is the vehicle computer that runs the vehicle's core services and orchestrates functionality across domains deployed into new solo and edge mode processes.
Speaker 3: With our S32 platform, NXP is the only semiconductor company which offers a complete portfolio to address a wide range of processing requirements across the entire compute hierarchy of the software-defined region.
Speaker 3: The challenge the AutoOAMs are facing with this transformation is the enablement of both software reuse and software scalability.
Speaker 3: And NXP's S32 platform addresses that challenge.
Speaker 3: by enabling software reuse both horizontally across domains as well as vertically from low-end cycle controllers all the way up to the high performance via the computer.
Speaker 3: Over the last several years, we have engaged with and enabled multiple automotive OEMs in their journey towards the software defined vehicle. We have continued to receive significant OEM awards, including the new 5nm vehicle computer, which will help accelerate our automotive growth.
Speaker 3: Congratulations. Very well-beyonds. Track 24
Speaker 3: We are and I am really excited to be on this truly transformational journey with the automotive industry.
Speaker 3: And now I would like to pass the call over to you Bill for a review of our financial performance. Well thank you Kurt and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q2.
Speaker 3: and provided the revenue outlook for Q3, I will move to the financial highlights. Overall, our Q2 financial performance was very good.
Speaker 4: Revenue with at the high end of the guidance range.
Speaker 4: and both non-GAF gross profits and non-GAF operating profits were above the midpoint of the guidance.
Speaker 5: Now moving to the details of 2-2.
Speaker 4: Total revenue was $3.3 billion.
Speaker 4: Essentially flat year on year, while 99 million above the midpoint of the guidance range.
Speaker 4: We generated $1.93 billion in non-gaf growth profits.
Speaker 4: and reported a non-gap gross margin of 58.4%, up 60 basis points year-on-year, and 20 basis points above the midpoint of the guidance range.
Speaker 4: Total non-GAAP operating expenses were $771 million or 23.4% of the revenue.
Speaker 4: which is a 47 million year on year and up 43 million from Q1.
Speaker 4: This was at the high end of the guidance range due to our planned annual merit expenses and higher variable compensation.
Speaker 4: From a total operating profit perspective,
Speaker 4: Nong Gap operating profit was 1.16 billion.
Speaker 4: And non-gas operating margin was 35%.
Speaker 4: This was down 100 basis points year on year, though above the midpoint of the guidance range, which is a reflection of solid fall through on the combination of higher revenue, better growth process, offset by slightly higher operating expenses.
Speaker 4: non-GAAP interest expense was $73 million.
Speaker 4: With non-GAAP income tax provision of $180 million.
Speaker 4: Consistent with better profitability, reflecting a non-GAB effective tax rate of 16.6%.
Speaker 4: Non-controlling interest was $6 million.
Speaker 4: and stop-based compensation, which is not included in the non-GAF earnings, was 102 million.
Speaker 4: Taken together, this resulted in a non-GAF earnings for share of $3.43 near the high end of the guidance range.
Speaker 4: Turning to the changes in our cash and death.
Speaker 4: Total debt at the end of P1 was 11.17 billion flat sequentially.
Speaker 4: The ending cash position was $3.86 billion.
Speaker 4: Downing 67 million sequentially.
Speaker 4: To do the cumulative effect of capital returns.
Speaker 4: Offset by lower cap ex investments, working capital needs, and cash generation doorm to you too.
Speaker 4: The resulting net debt was $7.31 billion.
Speaker 4: And we exit it in the quarter with a trailing 12-month adjusted EBITDA of $5.44 billion.
Speaker 4: The ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.3 times
Speaker 4: And the 12-month adjusted EBITDA interest coverage ratio was 18.2 times.
Speaker 4: During Q2, we repurchased 302 million of our shares.
Speaker 4: and pay 264 million in cash dividends.
Speaker 4: Taking together, we return $566 million to the owners in the quarter, which represents it 102% of non-gap free cash flow generated during the quarter.
Speaker 4: and 80% on a trailing 12-month period.
Speaker 4: Furthermore, subsequent to the end of Q2, we continue to execute our share repurchase program.
Speaker 4: Buying an incremental $69 million are shared through Friday, July 21st.
Speaker 4: Now turning to work in capital metrics.
Speaker 4: Days of inventory was 137 days.
Speaker 4: an increase of two days sequentially, and distribution channel inventory was 1.6 months, or approximately 49 days.
Speaker 4: When combined, this represents approximately 186 days.
Speaker 4: Furthermore, we continue to be laser focused on tightly controlling our channel inventory levels.
Speaker 4: while leveraging our balance sheet shred to hold product in die form for quick turnaround as the man materializes.
Speaker 4: We will only ship products into distribution that has a high likelihood of selling through in the current quarter, or it being pre-stage if needed for specific customer deliveries in the next quarter, and along with any change in market conditions. Days receivable, we're 29 days.
Speaker 4: an increase of five days versus the prior quarter.
Speaker 4: Cash flow from operations was 756 million and net capex was 200 million or 6% of revenue, resulting in non-GAF free cash flow of 556 million or 17% of Q2 revenue.
Speaker 4: On a 12 month basis, this represents a 20% pre-cash flow margin.
Speaker 4: We continue to be focused on driving non-gas, free cash flow margin to greater than 25%. A level we have demonstrated in the past, and a level we believe we can achieve in the future.
Speaker 4: Turning now to our expectations for the third quarter. As Kurt mentioned, we anticipate Q3 revenue to be $3.4 billion.
Speaker 4: plus or minus 100 million.
Speaker 4: At the midpoint of our revenue outlook, this is down about 1% year on year and about up 3% versus Q2.
Speaker 4: Furthermore, given our manufacturing cycle times and the current demand environment, our guidance comes to plants maintaining channel inventories at 1.6 month level.
Speaker 4: Though again, we may move this upward pending improved market conditions and customer requests. We expect non-GAAP gross margin to be flat sequentially at 58.4% plus or minus 50 basis points.
Speaker 4: as we continue to balance our mix and internal utilization.
Speaker 4: However, we do see and expect higher input costs from our suppliers to continue.
Speaker 4: As a result, we remain focused on mitigating the higher input costs through a combination of productivity and higher prices to our customers.
Speaker 4: Operating expenses are expected to be $785 million.
Speaker 4: plus or minus about 10 million
Speaker 4: Taken together, non-gas operating margin...
Speaker 4: will be 35.3% at the midpoint.
Speaker 4: We expect non-GAAP financial expense to be $67 million and non-GAAP tax rate to be 16.6% of profit before tax.
Speaker 4: Non-controlling interest will be 4 million. And for Q3, we suggest for modeling purposes, you use an average share count of 261.3 million shared.
Speaker 4: capital expenditures of 7% of revenue.
Speaker 4: Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.60.
Speaker 4: In closing, I would like to highlight the key themes for this earning cycle.
Speaker 4: I would like to highlight the key themes for this earning cycle. First,
Speaker 4: From a performance standpoint, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model.
Speaker 4: Second, operationally, the Q3 guidance assumes internal factory utilization in the low to mid 70s range.
Speaker 4: Second, operationally, the Q3 guidance assumes internal factory utilization in the low to mid 70s range, similar to this past quarter.
Speaker 4: and a level we expect to hold until internal inventory normalizes. Lastly, we continue to hold more cash on the balance sheet to enable greater flexibility. Options include reinvestment in the business.
Speaker 4: continued share repurchases, growth of the dividend, and reduce debt levels.
Speaker 4: Similar to last quarter, we continue to remain active repurchasing our shares.
Speaker 4: I would like to now turn it back to the operator for questions.
Speaker 1: Thank you. As a reminder, to ask a question, you'll need to press star 11 on your telephone. To withdraw your question, please press star 11 again. Please wait for your name to be announced. We ask that you limit yourself to one question with one follow-up. Please stand by while we compile the Q&A roster.
Speaker 1: One moment for our first question. And our first question comes from the line of Gary Mobley with Wells Fargo. Your line is now open.
Speaker 4: Hey guys, thanks for taking my question and let me be the first to extend my congratulations on good execution. You guys have been consistent in your communication about keeping distribution inventory low until you see better sell out of the distribution channel, but per your 10-Q filing your inventory sales were up 13.5% sequentially.
Speaker 3: Yeah, good morning. Thanks, Gary, also for the feedback.
Speaker 3: Yeah, we have indeed, and that's a good thing, increased our distribution performance in the second quarter, which is also why I said in my prepared remarks that we saw the truck in our consumer exposed businesses, which are the main users of the distribution channel, already back in Q1. So we went up into Q2. We already set up Q2.
Speaker 3: However, at the same time we do not see a real rebound in China. So I think that the main trigger point for us would be the upper rebound in China, which in our case would both be relevant to the Android handset business.
Speaker 3: as well as to the consumer exposed IoT business. That hasn't really happened to the extent that we would consider it consistent and persistent enough in order to move up with the distribution of entry. And that's why we tried to confirm indeed that all the numbers we just gave you for the guidance.
Speaker 4: you dropping some bread crumbs as to how we should think about the second half of the year. And based on those bread crumbs, we have to infer that your fourth quarter will be flat sequentially. Is there a proper read or is there a possibility it may be even some sequential growth in the fourth quarter?
Speaker 3: I let you draw your conclusions about the fourth quarter which we don't guide here. But clearly what I did repeat and I think I said this last earnings already that the second half is going to be larger than the first half. Now we are adding indeed.
Speaker 3: that the second half is also going to grow over the second half of last year. We don't want to tell it closer than this at this point. It's just hard in the current environment to do so. But I think the key point here is that it is really based on two separate legs, which are very important to contemplate. One is consistent strength in the automotive core industrial and content for our business.
Speaker 3: pulling just continued to pull ahead while at the same time we left this trough in the consumer exposed businesses into one behind us which then also helps indeed in the second half to resume that growth which I which I was describing now for the fourth quarter specifically let's see when we get there hold it goes
Speaker 1: Thank you. Thank you. One moment for our next question, please. And our next question will come from the line of Joshua Buchholder with TD Cowen. Your line is now open. Hi, good morning. Congratulations on the results, and thanks for taking my question. Last quarter, you called out pockets of inventory at tier 1s in the auto business from Southern California Flash Data
Speaker 3: mentioned that there were about two, actually we said European auto tier ones, which seemed to have some over inventory. In the meantime this is all contemplated in the guidance you just heard. It is still a, I would say, an unstable situation because in the meantime...
Speaker 3: strict inventory targets from the tier ones, but that hasn't settled in all cases. So what we are seeing here is that in several cases there is a bit of a tense situation between the OEMs, the auto OEMs and the automotive tier ones in how much inventory they should actually hold.
Speaker 3: And that mixed with those golden screw leftovers is indeed leading to a somewhat uneven situation. Which in the end, and I mean I've seen this two, three times before in those cycles, it is now the normalization of what we've had over the past two and a half years with not much more normal lead times. And in that sense I think everything is contemplated. I'd say the situation has normalized relative to what I did say last time.
Speaker 1: through greater than selling in the back half of the year and you're confident you can keep margins at this level as utilization rates stay in the 70s. Thank you. Yes Joshua, this is Bill. A couple questions in there mixed around.
Speaker 4: So first let me talk about utilization. We expect those to be very similar in our Q3 in the mid to low 70s. And again, what we've guided is our improved mix, a bit higher revenues offsetting those utilization very nicely of everything we can see.
Speaker 4: On inventory, we expect inventory to go down from a day standpoint internally, assuming the channel stays at the 1.6, right? So we're not counting on those 25 days to deplete our internal inventory. That'll be at a later date when we feel confident in the market.
Speaker 4: So remember, so we're holding about 25 days of extra inventory internally on our balance sheet and prepared for that. I think overall longer term, I would say we're more comfortable holding about 105 days. I would call it a bit more normal than the 95 day target that we set about a year and a half ago. We've learned a lot over the last couple years. And it's just good to have a little bit more inventory so you can really turn.
Speaker 4: any orders inside the quarter under lead times and be able to upside revenue. And clearly we've demonstrated that the past two quarters by upsiding our revenue, having the material in our die bank and being able to fast turn them through our back end and deliver. So the team is doing a great job here.
Speaker 1: Thank you. Thank you. One moment for our next question.
Speaker 1: And our next question will come from the line of Ross Seymour with Deutsche Bank. Your line is now open, sir.
Speaker 6: Hi guys, thanks for letting me ask a question. Kurt, first one for you. I just wanted to dig a little deeper into the automotive side. People have been waiting for another shoe to drop in that space for a couple of years' time and you guys have been kind of flat to up solidly on a sequential basis and much better than that on a year over year basis for nearly four quarters now including your guide.
Speaker 6: So I just wanted to go into the covers. Are you still limited by supply? If I put content together with some unit growth, you don't seem to be doing anything better than star right now. So just if you could go into where supply and demand are relative to one another, content gains, any of those sorts of details.
Speaker 3: don't see it dropping because things are largely normalized by now, which means indeed, we only have a few actually stubborn pockets of supply constraints left, but in the biggest team of things, I mean, they are nasty for customers from a revenue perspective or from an oversized perspective, those are actually quite...
Speaker 3: You remember back to the SARS forecast at the beginning of the year, they were more in the 3% range. I think last quarter we talked about 4%.
Speaker 3: We keep quoting S&P and now they say 5%. And that's also the numbers which are being reported from the different regions. So SAR itself is on a solid path for this year. Yes, it still only returns then for the full year with 87 million units.
Speaker 3: to a number which is still lower than the 2019 peak oil. The more important part of it obviously is the part how many electric vehicles and hybrid vehicles are amongst them and also they're very consistent. Any forecast we have says that about a third
Speaker 3: of the global status here is going to be either hybrid or fully electric vehicles, which is a 31% year-on-year growth in absolute terms of those kind of vehicles, which from a content increase perspective is of course a fantastic opportunity for the semiconductor business.
Speaker 3: So also here nothing to worry about. Now the whole turmoil I would say, which clearly we have been witnessing, isn't the supply chain. There was this complete supply crisis over a very extended period of time which would totally drain supply chain.
Speaker 3: which has now normalized and then with the golden screw that normalization has been a bit uneven in cases but I think that's all coming to a point that that things are more normal. Now when you say growing just around far well we look at our training 12 months growth which I think sits at 12%
Speaker 6: I mean, that just never happens. It always moves around the corner. So I say with more mobile lead times now, things are in the right place. Thank you for all that colors. I guess for my follow up one on the Gross Margin side for Bill, you guys have done a great job. You're at the high end of your long-term target for your last analyst meeting. And you've done that.
Speaker 6: and the next quarter of the mobile business to come back, does mix become less of a tailwind? And if so, how do you handle that? And how does it show itself on Gross Margin? Sure, thank you, Ross. And let me try to share additional color for our Gross Margin performance for Q2. The guidance we just provided.
Speaker 4: talk about the next several quarters of what we can see after Q3 and even more longer terms of beyond the next year. And again, for Q2, the guidance, we did slightly better because of that productment. Now, if you look at our distribution,
Speaker 4: Distribution represented about 51% of our sales, and this is up nicely from 48%. And again distribution, Long Tail has higher margin, lower volume type of customers, and richer mix. And again, still not where it used to be, more in the mid 50s. says this,
Speaker 4: kinda is offsetting us very nicely as we really work our internal inventory down and adjust our Foundry purchase orders. It just takes time to do that. And so we feel good at the right balance. You know these two offsetting each other. Q3 guidance, more of the same. And again as I mentioned earlier in another question, a response to a question is...
Speaker 4: I think and we are planning for inventory days to go below the current levels as we get that back into control and improve our fruit cash flow. Now, beyond Q3 and next several quarters, we expect to, I'd say, remain at the high end of the Gross Margin model, 58%, plus or minus the 50 basis points. And again, mix, I believe, is more of a talent, not as a headwind.
Speaker 4: because the distribution we're really focusing on that long tail. We expect that to really kick in as we continue to go forward. Now much longer term. So think about beyond next year. I would say our ambitions are to see gross margins to expand further, driven by higher revenues. You know, you have to remember this falls through on our 30% fixed cost structure that we have talked about.
Speaker 4: business. And lastly, you've heard us talk about this, how our new product introductions become accretive over the long term as they ramp up. It just takes time. So overall, we feel quite good to improve gross margins over the longer term above the current levels. Obviously, the next couple quarters we think will be in this zip code of what we just shared.
Speaker 4: And lastly, you've heard us talk about this, how our new product introductions become accretive over the long term as they ramp up. It just takes time. So, overall, we feel quite good to improve gross margins over the longer term above the current levels. Obviously, the next couple quarters we think will be in this zip code of what we just shared. Thanks, Bill.
Speaker 1: Thank you. One moment for next question, please. And our next question comes from the line of Stacy Raccid with Bernstein Research, Jalana's now open. Hi, guys. I think you're taking my questions. First one, I had some more questions on the DST cells. I'm a little bit confused. So the DST cells went up, but the months didn't change. So that means the cell out.
Speaker 2: was people to the increase in cell in, but that's not a recovery. I guess you can explain that. And what are you assuming that DISTY cells doing Q3 in, I shall and then sell out in order to keep that the months of inventory flat in Q3? So let's face it, let me take that one. So, selling one.
Speaker 2: you didn't think that that was a recovery. So this is like a few quarters now where it looks at the shelters going up.
Speaker 4: We've talked about a normal steady recovery but no sharp rebalance that many are anticipating, specifically out of China.
Speaker 4: about a normal steady recovery but no sharp rebounds that many are anticipating specifically out of China. Okay, and thank you.
Speaker 2: For my second question, I want to follow up on just it was an op-hand comment you just made with friend of one of the other questions
Speaker 2: He talked about you know controlling your internal majorities and adjusting your foundry purchase orders.
Speaker 4: What about last statement, when you're reducing your Foundry purchase orders in order to help bring your internal inventories down? You know, it's, again, as you can imagine, six months ago, we have found your purchase orders. We have internal utilization that we're in, I don't know, in the 90s, right? So naturally, as we adjust our inventory levels to real demand,
Speaker 4: overall higher revenues or is it, I mean, can 50 sales or lower? I guess, how are you actually getting the margins to where they are? Sure, I think there's a combination of tailwinds offsetting those internal utilization. First off, the internal utilization and our factory footprint is much lower than it was three or four, even six years ago, during different cycles.
Speaker 4: and I can hit your repeat on this, distribution represents the long tail, which carries a richer mix because it's low volume compared to more of your direct customers, which tend to be higher volumes and a bit lower margin.
Speaker 4: There's really no difference between segment mix. We really look at product mix because all the segments are very close to the corporate average. That's what we drive. So we feel very comfortable where we are with these utilization rates to focus on our free cash flow and bring in slight little bit back and bounce. Again, we're holding 25 days of that distribution inventory.
Speaker 4: And then maybe we'll get another five or 10 days internally to get that back into the home to feel very comfortable to support the growth of our long-term business. But I would say we have quite a number of, you know, talent and headwinds that can offset each other.
Speaker 1: Got it. That's helpful. Thank you, guys. Thank you. You bet. One moment for next question, please. And our next question will come from the line of the VEG ARIA with Bank of America's Security. Your line is now open.
Thank you for taking my question. Kurt, how is NXB's content different in a hybrid or full-easy versus a traditional ISTR? And I asked that because when I look at your automotive business, so you mentioned itself about 13% in the first half. But it is slowing down towards kind of a mid-singer to edge of the range and execute.
Yeah, thanks, Vivek. So the content or our exposure to electric and hybrid vehicles is extremely creative to us. And that is products which are specific to the electric drive frame like battery management.
that it just doesn't work. You can never take a single quarter and compare the star which you see to our revenue. The products which are now getting into cars we probably shipped two quarters ago. Maybe in some cases longer. It's a very deep supply chain which has been the whole reason for the drama over the last two and a half years.
It doesn't work that way. It's not like mobile where we ship and then it sits in the smart phone four weeks later. That's not the rhythm and the cadence in automotive. So some of this on a more say normalized basis over several quarters certainly has to do that finally the supply chain is now stabilizing which is a good thing.
So we are very happy with how it's moving because it looks like the drama comes behind us, while at the same time we are now in a position, and it's very different to pre-crisis days, we are in a position now to have much longer-term demand and supply assurance programs in place with our customers, which means we have a much longer forward visibility.
on our revenue stream and on our reply product. All right. And then cut on, you know, as the supply environment and automotive normalizing.
How are the discussions with your customers changing as you look over the next three, four quarters? Are they less willing to accept higher prices? Are they less willing to take on and hold inventory? Then they didn't pass. Like how is this environment going to transition as we go from a very supply constraint?
you know, environment to something that is more, you know, towards a normal environment. But I have to repeat what I said last call because that really hasn't changed from that perspective. Our pricing follows the increased input cost. And unfortunately, we continue to have increased input cost through this year. So NXD pricing, including automotive, will be up this year.
For next year, we see the same signs again of increasing input cost. A few other elements in our input cost seem to look a little bit better for next year. So it's hard for me to say what exactly the mix of our manufacturing and input cost is gonna be next year. If it is up again, and unfortunately there are signs, it could be up again. Then we will follow the same policy we have so far.
else gets the socket, that doesn't work in the industry. It's actually much more the opposite through what is done over the last two, three years. We have a much bigger number of very long term agreements with our customers on demand assurance, which is to our benefit. But we also find out for supplier assurance to their benefit, which is a pretty symmetric model. But that model.
with UBS. Show on is now open. Hi, thank you very much. I have two quick questions. The first one is on the automotive and Kurt, I think you have been very clear on the solid outlook for automotive. I just wanted to check on all the behavior that you have in the automotive in a way that you don't see anything on the piano side. In the inside, but I'm...
But I just wanted to check with you if you see any impacts on the order behavior, although it doesn't impact your piano because of your backlog yet, is there anything happening on this order that you see coming through?
Hi, thanks for the question. I actually like the question because it helps me to clarify something. We never worked on the backlog. We never had that concept of looking at the big backlog, which is like 10-dopped demand and then working it down.
We did these NCNR agreements, which we continue to do with our customers in order to have a long-term perspective on what the true demand is. Nothing about backlog. It's really about true demand and how we can best serve that over an extended period of time. So, therefore, no, there is no negative or positive impact from working.
I'm not
I can't completely see what you said about the the negative macro impact on automotive. So clearly I agree with you on the one hand that of course the macro is very uncertain and there is a lot of concerns about consumer behavior. At the same time if you look at the facts then as I said earlier the star for this year is consistently every water upgraded.
So it's now at the 5% growth forecast for this year. That's all NXC, it's third party research companies. The electrification penetration is consistent with what people said before.
The, and I just checked this data yesterday, the dealer inventories are now Below the long-term average in China, so they are lower than what they used to be in the US They are lower than what they used to be only in Europe dealer inventories apparently have kind of normalized now So while I totally agree with you that the macro is certainly not more the great place to be currently, but
The auto consumption per se is actually not in a bad shape. Maybe some OEMs were much more ambitious in the first place. That may be. But if you look at the numbers which are actually happening month on month, quarter on quarter, it's not degrading.
Very good, thank you, Kratra, you answered my quick follow up with B on the pricing, obviously, to concern for investors. I mean, that is a big focus. And we are seeing some sort of pocket of pricing pressure from local Chinese.
for vast range of products. So I was wondering, you talked about the input cost increasing and that's putting the pricing up for your business. How do you see the behavior of some local Chinese, of some discount that we see, seems to be on the low end side of the spectrum.
But I just wanted to be wondering if you see anything on your side. And maybe it would be great to have a quantification of how much of your business you would consider as low-end versus high-end. Maybe it would be very helpful. Thank you.
Yeah, I mean, there was already a quarter ago that some of our peers apparently spook the market a bit with this with what you say. I mean, I can only I can only report here what we are witnessing. The only one place where we see more extended pricing pressure is low end microcontrollers in China.
which is something which we have almost abundant already a while ago. I mean, we are still witnessing it because it's of course, we speak to our distribution partners there and the end customers. But that's not a place where NXP ever really wants to be because the main philosophy of our businesses to be differentiated.
by product, by the product, value, and its performance, and its specification. So wherever we would be in something you call low end, or a commoditized replaceable product, is actually not the place where NXP is normally overriding. Now, that doesn't mean it's zero.
also because things over time might commoditize. So we are always having some of this. I cannot qualify it, but it's actually quite small because the whole philosophy of NXP is to not compete on price.
Thank you. Thank you. Thank you. One moment for our next question, please.
And our next question will come from the line of C.J. Muse from Evercore ISI. Your line is now open. Yeah, good morning. Thank you for taking the question. I guess Kurt was hoping you could spend a little time discussing the trends that you're seeing in China, whether there's any green shoots at all, whether it's Neil and B.I.D. or...
Android or other would love to hear your thoughts. Yeah, thanks, DJ.
I'm hesitating a little because I wish I could say we see the rebound which maybe everybody was hoping for and bottom line is what I will give you a few more details but we don't see a rebound and that's also not contemplated in any of our numbers or remarks. Now in our specific case I would maybe highlight two things we have
exposure to Android phones is now such that if there is a demand increase from the from the consumer side we will immediately have it also in our numbers no more no more inventory sitting there which and that could be company specific so I can only say that for NXP at the same time