Q3 2023 NXP Semiconductors NV Earnings Call
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Good day and thank you for standby welcome to the NXP third 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 this session you will need to press star one on your telephone you will then hear an automated message fits in your hand this phrase.
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I'd like to hand, the conference all participant occur Jeff Palmer Senior Vice President Investor Relations. Please go ahead.
Thank you Shannon and good morning, everyone welcome to NXP Semiconductor's third quarter earnings call.
With me on the call today is Kurt Sievers, Nxp's, President and CEO and Bill that's our CFO call today is being recorded for.
A replay from our corporate.
Website today's call will include forward looking statements involve risks and uncertainties and cross connects these results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the macroeconomic impact on specific end markets in which we operate the sale of new and existing broad.
And our expectations for the financial results for the fourth quarter.
Please be reminded that NXP undertakes no obligation to revise or update publicly any forward looking statements or full disclosure on forward looking statements. Please refer to our press release.
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 <unk> underlying core operating performance research regulation G. As we have provided reconciliations of non-GAAP financial measures to the most directly comparable GAAP measures.
Quarter 2023 earnings press release, which will be furnished to the SEC form 8-K and available on its website the investor Relations section at NXP.
<unk> Dot com now I would like to turn the call over to Kurt.
Thank you very much Jeff and good morning, everyone.
We appreciate you joining our call today.
I will start with a review of our quarter three results.
Discuss our guidance for quarter four.
And provide our early views of 2024.
Now, let me begin with quarter three.
NXP delivered quarterly revenue of $3 four 3 billion.
$34 million above the midpoint of guidance and essentially flat year on year.
Revenue trends in our mobile industrial and Iot and automotive end markets, all performed in line or better than anticipated.
Our communication infrastructure and other end markets was slightly below our expectations.
Our distribution channel inventory during the third quarter declined slightly to a one five months level well below our long term targets.
Two and a half months.
non-GAAP operating margin in quarter three was 35%.
30 basis points below the midpoint of our guidance.
This is primarily due to forecasted potential legal liability of approximately $14 million.
Which is reflected in SG&A.
non-GAAP operating margin was down 190 basis points versus the year ago period, primarily as a recycled higher R&D investments.
And the noted potential legal expense.
Now, let me turn to the specific trends in our focus end markets.
In automotive quarter, three revenue was $1 89 billion up 5% versus the year ago period and in line with the midpoint of our guidance.
In industrial and Iot quarter, three revenue was 607 billion down 15% versus the year ago period.
So above the midpoint of our guidance.
In mobile quarter, three revenue was 377 billion down 8% versus the year ago period.
And above the high end of our guidance.
In communications infrastructure and other quarter three revenue was $559 million.
Up 8% year on year, so slightly below the midpoint of our guidance.
During the third quarter from a geographic perspective, we experienced incremental improvement across most regions with.
With China solid improving quarter over quarter.
So our shift to rates in China are still down versus the year ago periods.
From a channel perspective sequential growth was led by improved sell through in our distribution business.
At the same time, our direct business sequentially declined.
Reflection of NSP actively managing inventory digestion at our direct customers.
Overall, our distribution business represented 57% of sales up from 51% in the second quarter.
And now I will turn to our expectations for quarter four 2023.
We are guiding quarter for revenue to $3 4 billion. This is about 3% versus the year ago period.
And represents a sequential decline of approximately 1% at the midpoint.
We anticipate the following trends in our business.
Automotive is expected to be up in the mid single digit percent range versus quarter four territory and.
And flattish sequentially.
Industrial and Iot is expected to be up in the higher single digits on a percentage basis versus both quarter for train two and quarter three trains regulatory.
Mobile is expected to be down in the mid single digit percent range versus quarter, four 2022 and.
And up in the low single digit range on a sequential basis.
And finally communication infrastructure, although it is expected to be down mid single digits on a percentage basis versus quarter four train train two and down in the upper teens percentage sequentially.
Our guidance for quarter, four contemplates ending the fourth quarter at a $1 six months of distribution channel inventory.
Assuming all the combination of our third quarter results and the midpoint of our fourth quarter guidance.
Indicates the full year 2023 revenue will be flattish versus territory too in a challenging and cyclical market environments.
When we now turn to our early views on trailing 24.
We continue to see an operating environment with a number of cross currents clearly the macro environment remains weak, including subdued demand in China geopolitical challenges and elevated inflation, which is constraining demand.
At the company level lead times have normalized and we anticipate a more neutral pricing environment going forward.
And already since early this year, we have actively engaged with our large direct customers to drive a reduction in one hand, the inventory where needed rather than just lightly enforcing NCR commitments.
Furthermore, we have demonstrated over several quarters proactive management of our distribution channel, resulting in a very lean channel inventory decision of one five months at the end of quarter three.
Our long term targets to have a half months.
Through all of these proactive actions, we believe we will enter 2024 with a comparatively balanced customer inventory precision with some remaining pockets of inventory digestion yet to offshore.
We will also begin to replenish the channel some time in 2024.
In terms of Nxp's focused end markets for 2024.
We're assuming global auto production to be up 1% as anticipated by S&P.
We assume the mix shift towards semiconductor content rich hybrid and battery electric vehicle continuous and reaches about 40% before cost produced in 'twenty four.
Up from 33% in 2023.
This is very supportive of the NXP specific spectrum, our content drivers such as radar systems electrification solutions and high performance processors for saw 55 vehicles.
Turning to core industrial we see the trends, including especially content growth to be pretty similar to automotive.
In our consumer Iot and mobile business.
After over a year of weak demand, we see in incrementally improving environment.
Yes.
Finally, we do believe the weak demand in communications infrastructure and other likely continues.
As we have separated pent up demand in our secure card business.
We anticipate the weak environment in mobile base station build out.
And we expect end of life and some of our network edge products.
When putting it all together netting the positives against the known headwinds.
We continue to navigate a soft landing for the business.
And anticipate a return to year on year revenue growth throughout 2024.
For the first quarter, we expect seasonality to return more to the typical pre COVID-19 seasonal patents in a range of down mid to upper single digit sequentially.
And now I would like to pass the call to you Bill for a review of our financial performance.
Well, thank you Curt and good morning to everyone on today's call.
As Kurt has already covered the drivers of the revenue during Q3.
And provided the revenue outlook for Q4.
I will move to the financial highlights.
Overall, our Q3 financial performance was good.
Revenue and non-GAAP gross profit were modestly above the midpoint of guidance with solid gross profit fall through.
Now moving to the details of Q3.
Total revenue was $3 4 billion.
$34 million above the midpoint of the guidance.
Essentially flat year on year.
We generated 2.01 billion and non-GAAP gross profit.
And reported a non-GAAP gross margin of 58, 5%.
50 basis points year on year.
And 10 basis points above the midpoint of the guidance range driven by the fall through on higher revenues.
Total non-GAAP operating expenses were $803 million or 23, 4% of revenue.
Up 73 million year on year.
And up $32 million from Q2.
When compared to the midpoint of guidance.
This is a miss of $18 million.
Were $14 million.
Potential and forecast that legal liability and.
And the remainder from higher variable compensation.
From a total operating profit perspective.
non-GAAP operating profit was $1 2 billion.
And non-GAAP operating margin was 35%.
This was down 190 basis points year on year and slightly below the midpoint of the guidance range due to the previously noted potential legal liability, which created a 40 basis point headwind to non-GAAP operating margin.
non-GAAP interest expense was $65 million.
With non-GAAP income tax provision of $168 million.
Reflecting a non-GAAP effective tax rate.
14, 8%.
Which is favorable versus our guidance range of 16% to 17%.
Noncontrolling interest was $5 million.
Stock based compensation, which is not included in the non-GAAP earnings was $103 million.
Taken together this resulted in a non-GAAP earnings per share of $3 70.
10 cents above the midpoint of the guidance.
Now turning to the changes in our cash and debt.
Total debt at the end of Q3 was $11 $1 7 billion flat sequentially.
The ending cash position was $4.04 billion.
$179 million sequentially due to the cumulative effect of capital returns.
Improved working capital metrics.
<unk> Capex investments and positive cash generation during Q3.
The resulting net debt was 713 billion.
And we exited the quarter with a trailing 12 month adjusted EBITDA of $5 three 8 billion.
The ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q3 was one three times.
And the 12 month adjusted EBITDA interest coverage ratio was $19 nine times.
During Q3, we repurchased $306 million of our shares and paid $262 million in cash dividends.
Taken together, we returned $568 million to our owners in the quarter.
This represented 72% of non-GAAP free cash flow.
And 81% on a trailing 12 month period.
Furthermore, subsequent to the end of Q3.
We continue to execute our share repurchase program buying.
Buying an incremental $124 million.
Or approximately 658000 shares through Friday November 3rd.
Now turning to working capital metrics.
Days of inventory was 134 days in.
A decrease of three days sequentially.
In distribution channel inventory was one five months or approximately 45 days.
Down about four days from the second quarter.
When combined this represents approximately 179 days.
We're a seven day decline from the prior quarter.
We continue to be laser focused on tightly controlling our channel inventory levels.
While leveraging our balance sheet strength to whole product in die form for quick turnaround as demand materializes.
Days receivable were 25 days down four days sequentially.
And days payable were 60 days, a sequential decrease of three days.
Taken together, our cash conversion cycle was 1990 days.
An improvement of four days versus the prior quarter.
Cash flow from operations was $988 million.
And net Capex was 200 million.
Or approximately 6% of revenue.
Slightly better than our guidance of 7%.
Resulting in non-GAAP free cash flow of $788 million or 23% of Q3 revenue.
Which is up from 17% in the prior quarter.
On a trailing 12 month basis.
This represents a 20% non-GAAP free cash flow margin.
Overall, we continue to be focused on driving non-GAAP free cash flow margin to greater than 25%.
A level, we have demonstrated in the past.
In a level, we believe we can achieve in the future.
Turning now to our expectations for the fourth quarter.
As Kurt mentioned, we anticipate Q4 revenue to be $3 4 billion.
Plus or minus $100 million.
At the midpoint of our revenue outlook. This is up about 3% year on year.
And down about 1% versus Q3.
Furthermore, given our manufacturing cycle times.
The current demand environment in our lean channel inventory.
Our guidance contemplates improving the channel inventory to one six month level for Q4.
We expect non-GAAP gross margin to be flat sequentially at.
At 58, 5% plus or minus 50 basis points as we continue to downward mix.
And internal Utilizations.
However, we do see slightly higher input costs from our suppliers.
As a result, we remain focused on mitigating these higher input costs through a combination of productivity.
And higher input costs along to our customers.
Operating expenses are expected to be 785 billion plus.
Plus or minus about $10 million taken.
Taken together non-GAAP operating margin will be 35, 4% at the midpoint.
We expect non-GAAP financial expense to be $69 million.
And the non-GAAP tax will be $180 million.
<unk> non-GAAP tax rate of 15, 9% of profit before tax.
Noncontrolling interest will be $6 million.
For Q4, we suggest for modeling purposes, you use an average share count of 260 million shares.
And capital expenditures of 6% of revenue.
We expect stock based compensation.
Which is not included in our non-GAAP guidance to be $106 million.
Taken together at the midpoint.
Implies a non-GAAP earnings per share of $3 65.
Now for 2024 non-GAAP modeling.
We propose you to assume the following.
We expect to increase channel inventories sometime in 2024 to support anticipated growth in.
Ensure proper customer stock levels.
And to support our long tail customers.
We expect non-GAAP gross margin.
To remain at the high end of our long term model plus or minus the normal 50 basis points.
non-GAAP operating expenses, we plan to manage the business at or below the 23% of sales.
For capital expenditures.
We expect to stay within our long term model of 6% to 8% of sales.
For stock based compensation, which.
Which does not include air and our non-GAAP results, we suggest using approximately $450 million.
And for non-GAAP taxes.
We expect a 17% rate.
Versus the prior view of 18%.
So in closing I would like to highlight what we shared last cycle.
First <unk>.
From a performance standpoint.
As we navigate a soft landing through a challenging and cyclical demand environment.
We will continue to be disciplined to manage what is in our control and stay within our long term financial model.
Second operationally.
Q4 guidance assumes internal factory utilization will be in the low to mid <unk> range.
Level, we expect to hold until internal inventory normalizes.
And lastly.
We plan to hold more cash on the balance sheet to enable greater flexibility.
We also plan to retire the $1 billion March 2024 debt tranche when it comes due with our cash on hand, which will result in an improved gross debt leverage ratio below the carrying two one times level today.
Finally, we will remain active repurchasing our shares.
I would like to now turn it back over to the operator for your questions.
Thank you as a reminder to ask a question. Please press star one on your telephone and wafer your name to be announced.
To withdraw your question. Please press star one again please.
Please standby, while we compile the Q&A roster.
Sure.
Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.
Hi, guys. Thanks for let me ask a question congrats on navigating the choppy times Curt for my first question I just wanted to talk about the linearity of demand that was very helpful. That you gave for the fourth quarter and so much details on the first quarter in 2024, but in general it seems like Youre refilling, the channel a little bit and your outer quarters.
Guide in the channel was a big driver sequentially in the third quarter. So how are we to think about the channel directionally from here.
Appreciating of course that it's already at the low end of the range what are the puts and takes on your decisions to seemingly slowly refill that.
Alright. Thanks, Thanks, Ross, let me indeed first of all say that these fluctuations between one five and one six.
Partially beyond our control to be honest I mean.
It just ticked down a little in the third quarter. We think we are anyway sitting at the absolute minimum beverage should be so we felt that it's appropriate to move it back to the to the $1 six level.
I think it's more important in the in the bigger context of that channel management is that's over one half years ago I would say we have kept it.
Intentionally very very lean always the wrong. This one chip in five or one six level.
Robbing environments.
<unk> bear.
Demand was weak.
Robert.
Going forward.
As I said in my prepared remarks, we think the environment is more stable or up again.
Which is why we did say that.
At some point through next year, we will also start to refill the channel again.
The speeds of that.
At the magnitude.
Bill really depends on the environment, we will not go higher than the two four or $2 five level, which is our long term targets and which has been our long term target in the past.
If there was a sharp rebound in China, and we set the same last quarter. Then of course, we would probably go back relatively quickly but in a more stable.
Environment as we anticipate into next year, we will start to refill next year Ross because we think that is important to make sure we hold.
<unk> in the channel four hour long tail customers. So there will be a moment, where it will be just important legal stable environment to have enough product on the shelf to remain competitive.
Thanks for that color I guess as my follow up one for Bill on the gross margin side, you guys have done a great job keeping it at the high end of the range. Despite all the puts and takes on the end markets and the weakness overall what are the puts and takes for next year and you said that you would stay at the high end of the range plus or minus still through that period also impressive.
Is that just the structural new base for the company. How are you able to keep it at the 58% range versus the $55 to 58 that you had given at your last analyst meeting.
Sure. So let me address the current the last couple of quarters as mentioned, our internal Utilizations are running call it low to mid seventies.
And that headwind is being offset by our distribution mix is a bit richer.
Richer in margin and that represented about 57%.
Our composition of revenue this quarter, which is up from 51%. So there is sort of offsetting each other in the short term and we see the same to occur in Q4 now if we look ahead what are some of the levers that perhaps can drive gross margin higher over the long term and I think we've talked about this.
In the past, but again higher revenues over our fixed cost structure is one off.
Obviously, we're going to have continued productivity gains.
Clearly eventually we're going to.
Demand from our internal factory standpoint, so think about higher utilizations.
Kurt talked about next year, we're seeing neutral pricing.
And then really I think our focus more longer term is expanding our long tail customers in the mass market and then eventually what we've always talked about with where are our R&D investments Gal is that is that ramp of our new product introductions. So some of those sort of levels levers that we have.
Get us comfortable on continuing to bring gross margin above our current high end of our model again, 58% is not yangel not our final destination, we're going to continue to work on this from our company initiatives.
Thank you.
Thank you.
Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.
Thanks for taking my question Curt you mentioned, you expect to grow through 'twenty, four, but how do we square that with just.
1% or so auto production growth.
That is lower than the mid single digit auto production growth that we saw in 2003 when your overall sales are about flat.
So I guess the question is what content lift did you see in 'twenty three and what are your assumptions for automotive content growth in 2004.
Hey, Thanks, good morning Vivek.
Yeah.
Clearly.
The revenue is driven and the demand is driven by content increase much more so than Saar.
At the same time you are of course right.
Labour Star update for this year, which I saw there's actually almost 8% over 2022, which is by the way every quarter that was taken up further so.
Alright.
Especially through this year and the F&B. It's also the forecast, which we use from S&P for next year I think is just 1% up so it's almost flat next year.
Now if you take NXP automotive revenue Vivek.
If you take our Q4 guidance and this year's annual revenue growth of NXP will be like 90% or so so 9% automotive NXP in 'twenty three over 22.
With that number I believe we are under shipping demand.
And we are actually intentionally under shipping demand because as we've always said that we did not want to create this wave of inventory ahead of us, which will lead to a cliff to propel trial.
That's why since early in the year, we have tried to make sure to Martin <unk>.
To the extent that it would most built excess inventory and as we discussed with Ross just a minute ago.
The channel very lean in my view also in automotive 40% of our revenue goes through the channel. So the channel it's a pretty significant part also of the automotive business.
So what I mean to say here is that we think we are through this inventory.
And at some point next year, which means the revenue growth in our automotive business will return more to levels, which are reflecting the true after March.
I can't tell you when exactly thats going to be next year, but maybe it's safe to assume that's through the first half we are still a little bit working ourselves through this.
Inventory digestion button, the second partnership B as it should be clean from that.
Including then the replenishment of the channel and Thats why.
I make that statement of growing year on year throughout the year.
Every quarter by the way that statement was relative to the whole company.
We discussed it now for automotive, but in principle that hole.
<unk>, which I've just explained is also true for Empire, NXP and Thats why.
We continue to be confident that we are appropriately managing that so called soft landing since we have just anticipated. This inventory issue relatively really have proactively managed it which means we will not run into this cliff and then resume into year on year growth as early as August next year.
Thank you Kurt.
A follow up just on 24, thanks for giving us the high level views so Q1.
You mentioned normal seasonal what is normal seasonal for your automotive business sequentially.
Q1, and if I kind of just expand that question overall to 'twenty four.
Your presentation Youll get your 'twenty, one to 'twenty four models that suggest that even at the low end of that 8% to 12% CAGR.
For sales should be in the neighborhood of 14 billion or so.
Is that.
Useful assumption as we think about overall 24, so just Q1 auto as an overall 24 sales. Thank you.
Yes look Vivek I think we really went quite far in this call given the turmoil around us and some of the uncertainty created by some of our peer companies.
Went quite far here in order to give quite some color on next year, we really don't want to go down the path of providing the colored by by segment by revenue segment by quarter that won't be just one short too far so stay with me with what I said before of a more seasonal pattern for Q1 for the whole company, which was a miss.
To offer a single digit sequential decline, which is by the way with people with pre COVID-19. So that's nothing nothing really strange about this in a moment pricing environment with more or less be parts everything pretty much back to normal.
The other half of your question was about the.
Commitment, which we have given and I think in November 21 in our Investor day about the three year growth, which indeed was the 8% to 12%.
Corridor, and yes, Vivek, we stand behind that corridor, we reduced debt behind hitting the corridor of 8% to 12% like all the rest of the mobile by the way I mean, Bill just talked about the gross margin being more at the high end of the model.
On the revenue we will also be in the corridor of eight to 12 JMP there'll be in the corridor.
It depends on.
A couple of macroeconomic factors, including especially.
More of a return of China and the <unk>.
Having thereof, which is very hard to charge. So we can't we just can't go there, but that should not get us either way almost all of the core but we should hit it.
Thank you Pat.
Thank you. Our next question comes from the line of William Stein with <unk> Securities. Your line is now open.
Great. Thank you so much for taking my questions.
First <unk>.
I think it was in your comments I'm not sure if it was restricted to your.
Your outlook of Evs, specifically, but maybe more electrified.
Drivetrain sort of hybrid maybe as what you were talking about but it still seemed like a big jump to me next year and.
Would we consider the overall EV market is going.
North America, it's been growing very quickly and Theres, one Chinese or may be many but one really big Chinese Oems, it's been doing very well.
But among the sort of traditional multinational Oems their EV sales have been really weak.
And I Wonder if your outlook for next year.
Embeds a view that the multinationals theyre going to do better in this category or if the.
The companies that have had success only get bigger and then I have a follow up thank you.
Okay.
Thanks Bill.
I see where you're going and let me, let me try to be as clear.
As possible.
First yes, I did talk about.
<unk> called ex Evs that is a combination of the hybrid electric and the fully battery electric vehicles.
It's a category used by a by S&P. So it slowed our invention, but it's basically every car, which has only a electric drivetrain or also a electric drivetrain next to a combustion engine and drivetrain.
Metals for us because that is the stock with Chevron, which calls for more semiconductors and yes.
We do believe it continues to grow quite sharply.
So this year the latest forecast isn't since we are in November I guess, it's quite accurate 33% of the total cost reduction which is in the order of I think 89 billion units. This year, 73% of that 89 million cost produced this year are FCB.
And that number is forecast to grow to 41%.
Which is a 29% year on year growth. So if you go in absolute terms, then there will be 29% more of these Suvs next year.
Then this year now where does it come from.
Look well I think it is a little misleading to look at this from a U S perspective.
The U S. Corporate users are actually from a global perspective relatively small.
Europe is a little better.
But we are really the main volume has driven that is China.
And on top of that China is the one which is also driving the dynamic knowing the electric vehicle space.
So I think if you just take some of the commentary and some of the adjustments in investment programs, which were published of U S companies.
Then that is not representative of what is going to happen on a global level, but long story short, yes, we do believe.
This SUV categories moving to solid 40%, 41% of the global SAR next year, which is obviously very supportive to our semiconductor content growth by the way beyond pure electrification systems as we discussed earlier those cars tend to be higher featured in electronics.
Above everything so auto Adas systems like our radar at the whole STB.
About 55 billion introduction happens faster, but these costs, which is why it is so important to our revenue we believe in that.
We do not see a message slowing in the electric vehicle penetration.
That's really helpful. Thank you and you sort of led me into the follow up which is ultra wide band I think you were.
Early to see this among other trends, but I'm, hoping you can update us as to how.
You are seeing.
Uptake in that product both in automotive and handsets. Thanks, so much.
Yes.
On the handset side.
Nothing really new.
Still waiting for a bit more dynamic in the Android space.
The bridge has nothing to do with ultra wideband, which is more a.
Mobile wide industry situation, there you might have seen an hour.
In our guidance for mobile for the for the first for the fourth quarter excuse me.
We are again sequentially up a little in mobile, which is also driven by Android So given our very lean inventory also in Android space. We think if there is now a bit more dynamic in the Android space, We got a benefit from it and breadth that will draw, but that's because it's going to grow proportional debt.
Yes.
In the oral space.
We feel very good so we are happy with what we what we wanted to achieve in ultra wideband.
So we have.
I think something like seven platforms in production. So there was seven car platforms.
<unk> are in production with our ultra wideband automotive parts.
To my knowledge, something like 18 to 20, new platforms are awarded.
Or ATM of 'twenty, our rewards to NXP.
Two small platforms, which have not gone to NXP.
Out of 'twenty.
Actually be rejected them because they were under the security standards, which we want to ship and would have been margin dilutive. So that means overall the momentum in ultra wideband automotive is very very good.
Thank you.
Thank you.
Our next question comes from the line of Stacy <unk> with Bernstein Research. Your line is now open.
Hi, guys. Thanks for taking my question I wanted to go back to the channel inventory.
The amount that you have to ship still $500 million and would you still grow year over year in 2024, if you didnt decide to fill up the channel next year.
So the answer is yes, and yes.
That delta between well now, it's actually even a little bit bigger because.
To be perfectly precise the $500 million I think came from $1 six months going to $2 four.
Since now we are at one five it's probably even a little more than 500, but it's immaterial.
So the answer is yes that is.
Secondly, no we do not need the $500 million grow last year, because that whole channel replenishment and next year is something we will do some time to some amount so that cannot be the basis of our guide for next year.
Thank you.
For my follow up I, just wanted to ask you about some of the geographical macro trends that you mentioned that sounded a little confusing it sounded like.
You thought China was getting better.
But then you said next year like where you land.
In the guidance for the full year depends on China and getting better.
We're not hearing from any of your competitors that like China or anything else is getting better I'm. Just can you give us a little more color on what you're seeing.
By geography, and maybe like what is what do you think the sources of the discrepancy why do you guys see things improving.
<unk> market, where you still sound like fairly cautious and your competitor certainly all sound fairly cautious.
Okay. So let me Peel the onion Stacey principal maybe really owned company level the reason why.
We do comparably better if you look at the quarter.
To our peers is again, a soft landing navigation, which we have entered into already early this year and when you think about the channel already mid of last year, we have simply shifted less over the periods Stacey.
And you find that if you compare our growth rates.
Say, a three year CAGR over the last three years versus some competitors, especially in auto and.
And you'll see that even more sharply if you look at this years auto growth as I said earlier, which I think is 9%.
Yes.
We have undergone competitors.
Net undergrowth assembly that we shipped less inventory than we believe almost appeals desktop that of course also explains that going forward. We don't see this sharp decline, it's just a softer a soft the management through this through this cycle now we do it very very intentionally because we believe this is very beneficial to our growth.
Margin trajectory, which is not going to stop a bit from the.
From under under loading factories too hot so that's actually Vivek.
The other direction.
Been coming from.
Now on the geographic side Stacy.
You'll have to ask this because I do know that won't be just guidance, especially industrial Iot intended largely relative to China is very different to what you've heard from a lot of peers. So I just want to repeat we have both sequentially and year on year, we adjust guidance quarter four up by Hyatt.
Single digit percentage.
Which is in sharp contrast to what several of our competitors have said.
We simply think business, because we saw and have our trucks in industrial Iot already in quarter, one of this calendar year.
If you look at the numbers, we had a sharp drop there we have made absolutely sure we will not increase inventories from there. So we are very close to the pulse of the demand. Since then since Q1, we have been rapidly growing up.
And therefore, no my messaging, which might've been a bit confusing around China, what I meant to say is we keep moving up incrementally quarter to quarter to quarter, while it's still down from a year on year perspective.
So we are still waiting and we don't put those in any of our numbers on the big rebound in China. So that's not there, but incrementally sequentially. It keeps improving it hasnt roof. The past couple of quarters and it does improve again now into quarter four.
There was the commentary on China. So it's cautiously positive, but again it is simply because we have our truck theyre already in quarter, one and deposit tough trough I mean, you just just to the market. It was it was really deep.
Did it much earlier than many others.
Got it that's clear thank you guys.
Okay.
Thank you.
Our next question comes from the line of Gary Mobley with Wells Fargo. Your line is now open.
Hey, guys. Thanks for taking my question.
Clearly China is.
Is it the market the China automotive market is it market, where you can be quite vertically integrated from the chip supply chain perspective markets large enough in terms of volumes and there seems to be some ability to invest in that area by domestic China competitors. So my question for you is how are you planning to retain your business with China.
Automotive brands when you probably long term see increasing competition from the domestic players.
Yes, Gary first of all it's our business. It has been in our business and will continue to be our business to be competitive.
I come back to your specific points, but in itself, it's nothing new our our whole game overhaul our priority in life is to be competitive wherever we play.
So in China, Indeed, so far.
Competitors, which we do see in the automotive space with you.
Focus on.
I have been largely our western competitors, plus relieves us from from Japan.
Obviously in any local competition. So that's absolutely right now over the past I'd say a couple of quarters.
Local competition in China came more often low end microcontrollers, however, not in automotive, we haven't seen that entering into automotive.
At all.
Sure.
We also don't play that much in the low end microcontroller space.
Been seeing it but it's been a big event for us at all secondly, we do see a significant focus of local Chinese ovens coming semiconductor companies on silicon carbide.
I mean, I just spent a one and a half weeks in China. It was obvious that there is message investment in method focus both in factory engineering and device engineering on Silicon carbide in China the <unk>.
Good news if you will is that this doesn't really matter for us because that's one of the businesses, we do not do.
I think it takes some of the focus away from the things we do.
My personal take would be that probably going forward, we will see.
Staff of more competition in the simpler analog mixed signal growth in China, which looked at probably also touch automotive.
Don't see it getting maybe half of it yes.
Yes, it's not like we are losing or or being under pressure there today, but my take would be.
Robbie that's that's the one segment, where local Chinese semiconductor competitors Bill will also focus on going forward, but again I mean, we've seen this in Korea, we've seen this in Japan in the past. So it's first time that we are comfortable with local competitors.
Yes stay paranoid about it and we'll make sure that we have mid and long term strategies, which are which are on top of that.
Thanks for the detailed Kurt if I follow up I wanted to ask about your purchase commitments they've been running just below $4 billion four.
The past year, which is consistent with your flattish revenue.
Seems counterintuitive to the maybe the market dynamics that we're in we're seeing.
Seemingly you'd have to put lots of the commitment with your foundry partners. So maybe if you could just speak to the trends that you expect in your purchase commitments given the things get dynamics through 2024.
Well those are multiyear commitments. So I guess you referred to I think in the Q, we have something like a $3 9 billion.
Commitment sitting which is a multiyear commitment.
Badly required and badly needed.
To support our growth over the next five plus years, which is what this is referring to so nothing unusual nothing to worry about is just needed for those.
Third party foundry basis.
<unk> continued to be very tight from a supply perspective, and where we are glad we have this commitment to support actually the customer growth.
This this whole supply situation lead times have normalized.
That does not mean, however that.
We are in every place completely out of the woods. So there is still a couple of technology notes, where we are.
We sought.
And which are also leading to quite a few compensations and there was quite a few other and thats actually quite a bit quite a few very up just fine.
But where we have.
Very stringent discussions with our customers that they need to make sure. They give us mid to long term forecast because once the business comes back all of this inventory digestion cycle.
You really have to make sure we don't enter into a similar period like we did in the second half of 2020. This is not that's not far away from our supplier capability versus demand perspective. So that's why those long term agreements, which we have there are really needed in the mix of our future revenue growth.
Thanks, Ken.
Thank you. Our next question comes from the line of Joshua bus shelter with TD Cowen. Your line is now open.
Hey, guys. Thanks for taking my question and good morning.
So I wanted to ask about the auto outlook for next year, if we sort of lay out the puts and takes production growth will be lower pricing neutral it sounds like.
But.
You mentioned that 2023, there was some element of digestion.
Etsy stack up the curve and growth in sort of flat to up production and flat pricing is there a reason how should we think about 'twenty 'twenty four auto growth for your business compared to 2023 is there a reason it should be less than 23. Thank you.
Hey, Josh.
Trial.
As I have to say too I think vivek earlier I.
We'll not guide now on a segment level 2024.
But I can give you at least some of the dynamics at work here.
Yes, the Saar underlying Saar growth next year is going to be less than it was this year.
I think the.
Mix or the penetration to ex EV vehicles is better.
We discussed earlier, so going to the 40 plus percent level. So that's supportive relative to this year. So it price further content from where we are.
I agree with your statement about more neutral pricing I think that's a fair assumption across the board.
And having said all of that the only remaining piece next to our company specific growth drivers, which are well in.
And place the only remaining piece is the.
This cycle of inventory digestion, and going back to mobile and demand, which is which is kicking through to our revenue.
Currently I can only repeat it we are under shipping demand and again, we do this intentionally we've done it for a few quarters already it's going to be another couple of quarters, but maybe it's fair to assume by by Middle of next year that it's behind us.
And then the revenue growth rates in automotive and everything else will go back much closer to book the real end demand.
Think about it this way, but so it is really misleading to just look at annual revenue growth in automotive against Saar because there is so many other things that work, especially this inventory cycle.
Understood I cannot could try I guess I could ask another way you guys used to give a metric about I think it was 70% of your auto business was tied to star and the balance sort of tip more content growth drivers. Maybe you can help quantify that mix or maybe give some directional drivers of things like radar BMS, Yes, 32 platform.
Alright, thank you.
Yes.
Our moral Josh that might be a mobile unit.
But we haven't we haven't really set that.
So what we do say and what fits also to your earlier question is that we do see a continued strong content increase.
Which is independent of Saar.
And I think that is something which is which is probably in the 5% to 8%.
Brexit.
And that keeps going again, there is no reason why that would be but there could be slowing next year, but again it is overlaid by the inventory cycle.
Got it thank you.
Thank you.
Our next question comes from the line of Toshi Hari with Goldman Sachs. Your line is now open.
Hi, good morning. Thank you so much for taking the question Curt I wanted to ask about the pricing environment to 'twenty four.
Mentioned that you expect a relatively neutral environment when.
When we spoke at our conference a couple of months ago I think at the time, you sort of hinted that youre expectation back then it was for 'twenty for pricing to be up a little bit more than what you saw in 'twenty, one, but a little bit less in 'twenty, two so I guess, yes.
There's been a slight change in how you think about pricing is that correct and b if so.
This is more demand driven or are you, saying lower input costs, that's enabling you to keep pricing a little more flat flattish enter into 'twenty four.
Yeah sure it's indeed slightly.
Better it depends on which perspective, you're willing to take on this.
Relative to the input cost so what we are seeing now.
It's a slight increase in input costs across everything so it's really I mean, there is pieces, which are going up unfortunately quite a bit others are starting to come down so but in the mix we have a slight increase.
Total said, we put our productivity efforts.
That is what we need to pass onto our customers in terms of.
Well it is the new lands in the pretty neutral.
That indeed is a is a touch better than what we discussed when we recently met in your in your conference.
Yes.
It is just important to see this in media in the context of what you mentioned of the past couple of years, because my view in 'twenty. One we increased I think by 2% for the whole company.
<unk> grew by 14%.
This year, we're going to tell you in the Q4 earnings, but it will be but indeed, it's again, a solid number and that constant down next year to a more neutral.
I actually made the comment in my prepared remarks, because I wanted to make sure. There is no confusion about this positively going back because you have the question very often.
From analysts and investors if not this whole pricing would be reverting back down all the way to the pre COVID-19 levels. It is not I just want to be very clear.
Neutral this coming year, which is fine from our perspective.
Great. That's very helpful. And then as my follow up you're guiding your comms and other business down I guess upper teens on a sequential basis. In Q4 is that primarily the base station business and the weakness in that market sort of catching up to you guys or is there something more to it and is it fair to say that Q4 is the bottom for that Mark.
Or could things stay relatively weak stay relatively weak into the first half of next year. Thank you.
Yeah.
Yes, so into Q4. It is both it is the weak base station demand, which Youre also quoting so I mean, although hopes this year have been on India.
Sure.
As you'd be a lesson right. It's just it's just not growing as strong as people and as we had expected.
But there is a second component index weaker revenue for us in Q4 and that is the decline of the pent up demand and secure cards I think we spoke about this a couple of times for the year.
By favoring mobile demand in 'twenty, one 'twenty two we have brutally under shipped to secure card business.
And the solid part of the pent up demand to be actually satisfied through this year and that starts to go away and so that's plus the weak mobile base station environment.
Explains the downtime into into the fourth quarter, how it all plays out next year.
Go back to my prepared remarks.
Clearly that hold segment next year is not necessarily set up.
A huge victory lap.
Some of these trends, especially in the base station market.
<unk> likely continue into next year, so staying staying relatively speaking with.
So if.
Im looking at a time now I think we are nearing the end of the of the call.
And.
I would like to summarize there bill and I really think the main theme of this of this quarter is especially that since there has been so much so different messaging from from our peers.
We really think that the fundamental content growth drivers in our key businesses in automotive and the industrial Iot space are in place.
All of this has been massively overlaid by to what extent people have proactively on or not proactively managed the inventory cycle.
We have tried to do this as proactively as we could.
Most notably for all of you in the reported channel inventory numbers, which for six quarters now we have capital regime.
And also earlier this year, we started to try and do a similar thing on our direct customers by more than 14, <unk> by being reasonable by finding alternative commercial solutions.
Putting up actually in a situation, where we think we have due to this somewhat under shifts the demand more than our competitors.
Which leads US now go forward in a situation, which is less less much less pronounced relative to the bid.
And it's much more realizing.
The intended envisaged.
Envisaged soft landing, which we wanted to have that as the main the main points here other than that business really going back to a more normal pricing environment.
Good times being normalized.
All reasons to believe that this growth our quarter.
From a quarterly year over year perspective through all of next year resuming growth Youll see this in Q4 already behalf year on year growth and that should continue through towards all of next year with that thank you all for the attention today. Thank you very much bye bye. Thank you all will call here.
This concludes today's conference call. Thank you for participating you may now disconnect.
Okay.
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Okay.
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