Q1 2023 NXP Semiconductors NV Earnings Call

Speaker 2: Good day and thank you for standing by. Welcome to the NXP First 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 will need to press star 11 on your telephone.

Speaker 2: You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Palmer. Please go ahead.

Speaker 3: Thank you, LaTanya. Good morning, everyone. Welcome to NXP Semiconductor's first quarter earnings call. With me on the call today is Kurt Siebers, NXP's President and CEO , and Bill Vets, our CFO .

Speaker 3: The call today is being recorded and will be available for replay from our corporate website.

Speaker 3: Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations.

Speaker 3: These risks and uncertainties include, but are not limited to, statements regarding the continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the second quarter of 2023.

Speaker 3: which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance.

Speaker 3: Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2023 earnings press release, which will be furnished to the SEC on Form 8K and available on NXP's website in the investor relations section.

Speaker 4: then discuss our guidance for the second quarter.

Speaker 4: So let me begin with quarter one. Our revenue was 121 million better than the midpoint of our guidance.

Speaker 4: with the trends in all the end market segments performing better than our expectations.

Speaker 4: Taken together, NXP delivered Q1 revenue of 3.12 billion, essentially flat year on year, while we continue to maintain our distribution channel inventory at a 1.6 months level, which is well below our long-term target.

Speaker 4: 90 basis points below the year ago period.

Speaker 4: combined with better gross margin offset by higher operating expenses.

Speaker 4: Now let me turn to the specific trends in our focus and markets.

Speaker 4: In automotive, quarter one revenue was 1.83 billion, up 17% versus the year ago periods, and above the midpoint of our guidance.

Speaker 4: In industrial and IoT, quarter one revenue was $500.4 million.

Speaker 4: down 26% versus the year ago period.

Speaker 4: and near the high end of our guidance.

Speaker 4: In Mobile, Quarter 1 revenue was 260 million.

Speaker 4: of our guidance.

Speaker 4: And finally communication infrastructure and other.

Speaker 4: Court of One Revenue was 529 million, up to 7% year-on-year, and above the midpoint of our guidance.

Speaker 4: During that first quarter, after a slow start, we had seen modest incremental improvement in our China exposed businesses.

Speaker 4: which are primarily served through the distribution channel.

Speaker 4: And this was particularly true for our industrial and IoT and mobile businesses. At the same time, we saw solid demand in our North American and European business across all market segments.

Speaker 4: Now I will turn to our expectations for the second quarter 2023. We are guiding Q2 revenue to 3.2 billion.

Speaker 4: While this is down about 3% versus the year ago periods, it represents a sequential resumption of growth to about 3% at the midpoint.

Speaker 4: At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the high single-digit percent range versus quarter two 2222.

Speaker 4: and up in the low single-digit range with the Squad of 1, 223.

Speaker 4: In DUPSTRAIL and IOT is expected to be down in the mid-20% range year and year and up in the high single-digit percentage range versus quarter one in 2023.

Speaker 4: Mobile is expected to be down in the low 30% range year-on-year and to be flat on a sequential basis. And finally, communication infrastructure and other is expected to be up about 10% year-on-year and up in the mid-single-digit range sequentially.

Speaker 4: In summary, as we progress through 2023, we do see a continued solid demand environment in our automotive.

Speaker 4: core industrial and communications infrastructure businesses.

Speaker 4: While our consumer IoT and mobile business are stabilizing.

We believe the severe shortages which we have experienced over the last two years should subside as we progress toward the end of this year, with now only about a third of our portfolio with lead times greater than 52 weeks.

This is done substantially from prior periods.

However, we continue to still be supply constrained in several specific technology notes.

primarily for the automotive and core industrial segments. In addition, we are experiencing higher input cost.

Hence, we continue to execute our consistent pricing policy, which is to pass along the cost increases to our customers while not padding our gross margin.

Within our notice, we see a combination of positive tailwinds continuing throughout the year.

These include the ongoing sexual adoption of ACSIV drivetrains and ADAS, as well as NXP-specific content and price increases.

Third party research firms anticipate a more best increase year-on-year of global car production.

While at the same time we believe there are pockets of elevated inventory held at some select T-1 auto suppliers due to the golden screw issues which have plagued the extended auto supply chain.

In industrial IoT, we expect relative strength in the core industrial submarkets as our products enable critical infrastructure and companies to be more efficient. However, while the consumer IoT business is stabilizing, a more significant growth will be the dependent on a cyclical rebound.

especially in China. In the mobile segment we continue to navigate through a sub-seasonal trough in the first half of this year. However, we do anticipate normal premium model releases in the second half to help resume growth.

And lastly, in communications, infrastructure and other, we are further improving our supply capability against growing secular demand specifically in our RFID tagging solutions and against pent-up demand for secure car solutions.

On the other hand, our RF power business remains lumpy and growth this year is limited to 5G buildouts in India.

Our guidance for the second quarter contemplates that we maintain the 1.6 months channel inventory level.

And yet, we may start increasing this level if and when we see consistent strength in channel cell through into the second half of this year.

And overall, we are very well positioned with on-hand inventory to setate a possible rebound in demand as it emerges.

In summary, the combination of our first quarter resides.

In summary, the combination of our first quarter resides. The guidance for the second quarter?

and our early views into the second half of the year leads us to believe that total revenue for the second half of the year will be greater than the first half.

Despite our cautious optimism, we do acknowledge the ongoing uncertainty in the demand environment.

Therefore, we will continue to be very disciplined and manage what is in our control and stay within our long-term financial model.

And with that, I would like to pass the call over to you, Bill, for a review of our financial performance. Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q1 and provided our revenue outlook for Q2, I will move to the financial highlights. Overall, our Q1 financial performance was very good. Revenue was above the high end of our guidance range.

and both non-gap growth and operating profit were above the midpoint of the guidance.

Now moving to the details of Q1, total revenue was 3.12 billion. Essentially flat, year on year.

while 121 million above the midpoint of the guidance range.

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Bill, why did you continue? Sorry about that, folks. So let me start now moving to the details of T1, total revenue was 3.12 billion, essentially flat year on year, while 121 billion above the midpoint of the guidance range. We generate 1.82 billion in non-gab gross profit and reported a non-gab gross margin of 58.2% of 60 basis points year on year and 20 basis points above the midpoint of the guidance range.

Total non-GAF operating expenses were 728 million or 23.3% of revenue. Up 40 million year-on-year and up 15 million from 2.4 modestly above the high end of the guidance range driven by variable compensation and slightly higher R&D investments.

From a total operating profit perspective, non-GAAP operating profit was $1.09 billion and non-GAAP operating margin was 34.8%, down 90 basis points year on year, though above the midpoint of the guidance range.

Non-controlling interest was 8 million and stock based compensation, which is not included in the non-gap earnings was 99 million. Taken together, this resulted in a non-gap earnings per share of $3.19, which is near the high end of our guidance range. Turning to the changes in our cash and debt, total debt at the end of Q1 was 11.17 billion flat sequentially. The ending cash position was 3.93 billion.

up 85 million sequentially due to the cumulative effects of higher working capital, CAPEX investments, capital returns, and cash generation during Q1. The resulting net debt was $7.24 billion.

And we exited the quarter with a trailing 12-month adjusted EBITDA of $5.46 billion. The ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.3 times.

and the 12-month adjusted EBITDA interest coverage was 16.4 times. During Q1, we paid 219 million cash dividends.

which represent 35% of cash flow from operations. Due to the uncertain macro environment and the recent liquidity issues in the regional banking sector, we paused our share repurchases door-in-two-one.

However, we plan to resume buybacks in Q2 and our capital allocation strategy has not changed.

We plan to return 100% of excess free cash flow back to the owners of the company. Turning to working capital metrics.

Days of inventory was 135 days, an increase of 19 days sequentially, and distribution channel inventory was 1.6 months or 49 days.

When combined, this represents approximately 184 days.

As mentioned during the last earnings call, our inventory strategy is to manage both on-hand.

and channel inventory together to better serve our customers and prevent access finished goods inventory on our balance sheet and or in the distribution channel.

Our goal is to only ship products into the distribution channel that have a high likelihood of selling through in the current quarter or as being pre-staged if needed for customer deliveries in the next quarter. From an internal standpoint, we are comfortable supporting

approximately 140 days of inventory on the balance sheet. So long as we hold the channel at 1.6 months or 49 days.

As the channel inventory returns to the long-term target of two and a half months or 75 days, we would correspondingly lower our balance sheet inventory. In Q1, the inventory flexibility on the balance sheet enabled us to deliver an extra 120 million to the long-term target of two and a half months or 75 days, we would correspondingly lower our balance sheet

decrease of nine days due to timing of material receipts.

Please note, beginning in 2-1, we reclassified certain payables amounts to other current liabilities to better reflect true payable trends.

Taken together, the cash conversion cycle was 98 days, an increase of 33 days, versus the prior quarter as we leveraged the balance sheet to avoid overshipping into the channel.

Cash flow from operations was $632 million, and net cat-backs was $251 million, resulting in non-gap free cash flow of $381 million or 12% of revenue.

The reduction in free cash flow quarter on quarter is primarily due to increased working capital needs as previously noted.

Our long-term target has not changed and we are focused on driving non-GAB free cash low margin to greater than 25%.

A level we demonstrated in the second half of 2022. Turning now to our expectations for the second quarter, as Kurt mentioned, we anticipate Q2 revenue to be 3.2 billion plus or minus 100 million. Furthermore, given our manufacturing cycle times, we have a number of

and the current demand environment.

Our guidance contemplates maintaining channel inventory at a 1.6 month level.

Though, we may move this upward pending improved marking conditions.

At the midpoint of our other new outlook, this is down 3% year on year and up 3% versus Q1.

We expect non-gap gross margin to be flat sequentially at 58.2% plus or minus 50 basis points.

Operating expenses are expected to be $760 million, plus or minus about $10 million, reflecting annual merit increases.

We expect non- GAAP financial expense to be $69 million, and the non-gap tax rate to be $16.5% of profit before tax. Non-controlling interest will be $7 million. For Q2, we suggest for modeling purposes you use an average share count of 261.2 million shares in a cat-x rate of 8% of revenue.

Taken together at the midpoint, this implies a non-gap earnings per share of $3.28. In closing, I would like to highlight the key themes for this earning cycle. First, we will continue to manage our inventory as a combination of internal and channel inventory.

This enables us to better serve our customers' requirements, prevent access inventory build up in the channel, and support our outlook for the second half revenue of 2023 to be greater than the first half.

Second, the Q2 guidance contemplates internal factory utilization to be in the mid-70s range, which is modestly down from the low 80s and Q1.

We believe operating our factories at a more reasonable utilization level enables better flexibility and improved throughput. Despite the lower utilization level, we anticipate our growth margins to remain at the high end of our long-term model for the remainder of 2023.

driven by improved product mix. Thirdly, we are holding more cash on the balance sheet to enable greater flexibility. This includes options around the timing and magnitude of share repurchases.

cash dividends or the ability to retire debt early, as well as any small tuck-in acquisitions.

All of which can be funded with cash on hand. Finally, we will continue to be very disciplined to manage what is in our control and stay within our long-term financial model.

I would like to now turn it back to the operator for questions. Certainly as a reminder to ask a question, please press star 1-1 on your telephone. And wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to one question and a follow-up.

to be authorized for questions. Certainly as a reminder to ask a question, please press star 1-1 on your telephone. And wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to one question and a follow-up. One moment for our first question.

And our first question will come from CJ Muse of Evercore. Your line is open.

Yeah, good morning, good afternoon. Thank you for taking the question. I guess first question was hoping you could speak to perhaps pricing tailwinds in 2023. You told us in January that you saw 14% increase for the overall business and obviously you're not going to update each quarter. I get that but just curious.

Embedded in your outlook for stronger second half versus first half, how are you thinking about the impact of higher pricing as it relates to your higher input cost? And is that something that is broad-braced across all segments or is that something that we should be thinking about to just specific segments?

Hi, thanks, thanks, TCH. So no, we don't see headwinds from pricing throughout this year. I would actually indeed say it's probably on the other side of that since we continue to experience growing input cost.

and we stay absolutely rock solid with our pricing policy, which has been and continues to be to pass on all of the increased input costs in order to keep our growth margin percentage protected. So from that perspective, there will continue to be price increases.

this year. So no, no headwinds here. It's actually a tailwind. And yeah, we will only detail out how big that tailwind is going to be by, by early next year. So just like we did this year and the year before. Now, when you think across the segments, I think that was the second half of your question. How does it, how does it go into the different...

persistent in automotive and core industrial. So those are then also the two segments where the pricing sees the biggest tailwind continued into into this year or throughout this year.

In general, it's also important to note, CTA, that a large part of our business is actually anchored on annual price negotiations, which is anyway an annual price for the whole year where we don't touch that through the year. So in short, no advent from pricing, what is contemplated in what we said about the second number .

industrial or is this a permanent shift that we should be thinking about for next day.

No, that was actually a function of the weakness of China in Q1. As we spoke on the last call, we had this significant weakness to start with in the quarter one in China. China is largely distribution for us and a large part of our China business is then again with the industrial IoT and also automotive business.

And this is why the distribution part of the business came out so much weaker, relatively speaking, through the first quarter. So no, this is not going to be a permanent thing, but it's been a direct impact in consequence of this two-one weakness in China.

why the distribution part of the business came out so much weaker relatively speaking through the first quarter. So no, this is not going to be a permanent thing, but it's been a direct impact in consequence of this 2-1 weakness in China. Thank you.

In one moment for our next question.

And our next question will come from Ross Seymour of Dochi Bank, Yaline's Open Ross.

Hey guys, thanks for letting me ask a question. I want to just talk about the auto segment. I heard you just mentioned about still some shortages there. It's great to see significant upside in everything other than auto. Can you just talk about a little bit of what you're seeing in the demand side in auto? Is it really just supply limited? Is that the reason that it was a great quarter, but didn't upside as much as the others?

new growth guidance. Indeed, the upside in Q1 in Auto was all gated by supply capability. That's indeed a matter of effect. Going forward, the remaining shortages which we see across the company are largely in automotive. A little bit also in core industrial, but the

which follows the the ACV penetration and ADOT's penetration. I'm pretty damn sure that NXP continues to gain share in automotive.

It is pricing as I talked to a C.J. earlier, which is an automotive quite vivid. And going forward, I hope that the supply demand situation will normalize through the second half of this year, including automotive.

That's the perfect segue to my second question. And that's on the utilization rate in the inventory. I was a little surprised that the inventory did what you guys expected it to despite revenues beating so nicely. And then you're talking about taking utilization down while you're simultaneously sounding significantly more optimistic about the demand conditions you're ability to grow half over half, etc.

Can you help us reconcile how the utilization has left the inventory versus conservatism versus more optimism on demand balanced out? Sure, Ross, let me take that. So our utilization, as I mentioned, are running now in the mid-70s versus again.

last quarter low 80s, then there were the 90s and Q4 and high 90s, and we think the sweet spot is around probably 80, 85%. We're a bit below that at the moment as we're trying to make sure we have rebuilt several of our buffer areas where we get inventory or produce inventory internally. So we have that all in strategic die bank form and ready to take on any new orders within the quarter.

We're being very cautious here. We're only looking at when product sells through and when the market improves. So again, that's about 25 days off of that 135 or off that 140 days. Then we have another 10 days I would say internally, which we call our strategic inventory.

as we continue to align our internal factories. The cat that we're spending today is around 8%, and 75% of that cat that is linked to our internal factories as we get them really focused on our IEP proprietary technology. And finally, to be honest with you, we like to hold another 10 days.

To be able to service the customer offside orders within the quarter and we feel comfortable with that versus the 95-day target that we sent out during Analyst Day. So I think the way to think about our internal inventory will probably work it down throughout 2023 by running our front-end internal utilization in the mid-70s.

will continue to adjust some of our Foundry purchase orders and obviously servicing the higher revenue in Kurtz comment that the second half of 2023 will be larger than the first half.

Thank you. One moment for our next question.

And our next question will come from Stacey Raskin, heartless visitor ?? concerts.

And our next question will come from Stacey Raskin, Dr. Blastkin Researcher Lines Open. Thanks for taking my question.

I also wanted to ask about auto. So I know you're talking about shorter distal, but you also mentioned pockets of inventory out in the channel. I think this is the first time I've actually heard you directly mention auto buildouts in the channel. Could you give us a little more color on that? What kind of products?

How much of your revenue is in those categories? Are you seeing any pause in those areas given where those inventory level are? I hate Stacy. No. The way you phrase it now sounds much, much larger than what I tried to describe.

What we do see at a very few select tier 1s, there's not about OEMs, it's about the tier 1 suppliers, is pockets of inventory on those products which we are suffering as a surplus from the Golden Screw Problem. You remember that over the past two years we consistently had those situations where

One part was missing, other parts were available and then those parts were piling up a bit more before they got flushed through when the missing part came on.

And from that period, there seemed to be a few pockets, but it's not structural that I could say it's certain products or a certain amount, but there seemed to be a few products at the few select tier ones which see somewhat elevated inventory.

Now, at the same time, there is now more and more of a discussion in the industry about the target size of inventory, which the T01s should hold. And from what I'm witnessing is that the automotive OEMs, so the car companies, are actually quite diligent in asking for...

elevated inventory levels to the tier ones anyway going forward. So now we have to figure out to what extent actually maybe these elevated pockets which I talked about are actually used to just satisfy what is being needed going forward anyway.

in terms of somewhat elevated inventory levels for safety reasons, for supply chain safety reasons in the industry. So it's a little bit stacy at a very few customers. So nothing dramatic. I mean, I just mentioned this because we talk about the SAR growing by, I think, close to 4% this year. And I just wanted to put it in balance because there might

about China. So it does sound like you work through the China DISTY issues that you'd mentioned on last quarter's calls. Would you characterize this as a China recovery or are you actually seeing recovery or is it maybe a little too early to jump that far? Is it more just like little green shoots? Or like what exactly are you seeing in China?

relative to what you were seeing last quarter? Yes, Stacey, I think it's too early to make such a statement. We've seen a modest gradual improvement throughout the first quarter from a very slow start, I mean through Chinese New Year and these elevated infection levels in the first few weeks. It just came modestly up.

I would clearly not say and none of our forecasts and guidance comments we are making today would be based on that. I would clearly not see a sharp rebound. We don't see this and again our numbers are also not based on that. But by the way, Stacy, just also connecting this to your first question.

Mind you that our automotive business is also 40% in distribution. So when I talked about these pockets of inventory, they are in the 60% of the automotive business which goes through direct, but another large charge trunk is actually the 40% through distribution. And that is controlled through what Bill explained earlier, through our disciplined smartphone cameras.

Thanks for taking my questions. My first one, Kurt is about half over half growth because you mentioned it in your remarks. So if I exclude 2020, second half sales for NXB have grown at least around 5% to 6% half on half. Is that the kind of expectations we should have about second half? And what do you think is driving that? Is it just seasonality? Is it China coming back? Is it pricing increasing half on half? Just if you could help us set the models in the right place on a conceptual basis about what kind of expectation and more importantly, what is driving that growth in the second half?

So, wait a minute, I need to just point you a little, I will not size it here. I mean, you know that we only got the next quarter. Yet I want to give you a few, maybe a few anchor points. Clearly the seasonality in mobile.

with the premium models ramping in the second half, will support that growth of half two over half one. I mean, that's one element.

The other element I would mention here is indeed increasing supply capability. And it is clearly an auto and core industrial as we discussed earlier. But it is also in COMSINFRA. Within the COMSINFRA segment.

We have this RFID teching and secure card business which continues to benefit this year massively from finally supply becoming available. We had actually de-prooritized the business through the past two years.

And now we can finally serve that secular demand in RFID and quite a bit of pent up demand in the secure car business. So that's together with the mobile seasonality will drive the half to over half one growth.

And then just one more on automotive and then just a set of play. When we look at the end market, we see a premium USDB maker cutting prices, the here of sluggish demand in China. So how should we reconcile all those end market data points, Kurt?

are content increase in the first place. And the latest data I have about XIV switches, which is one of the two main drivers for content increase, is that the number of XIVs in absolute terms globally this year will grow like 34% over last year. And it will then hit the 34% portion of the total size.

or 86 million or somewhere in that neighborhood, which is a growth of about 4% over last year. So even the underlying, sorry, if you take it all together, XIVs and combustion engine cars is also growing. And that's actually the reason why this business keeps going, Vivek. So I don't find it that's surprising.

millions of somewhere in that neighborhood, which is the growth of about 4% over last year. So even the underlying, sorry, if you take it all together, XIVs and Combustrian Engine cars is also growing. And that's actually the reason why this business keeps going, Vivek. So I don't find it that's surprising. Thank you, Fred.

One moment for our next question. And our next question will come from Matt Ramsey of TD Cohen. Your line is open.

Yes, thank you very much. Good afternoon. Good morning, everybody. Kurt, I wanted to revisit quickly the question of pricing. You were very clear on your comments, particularly in the auto business, so what pricing will do for, or you expected to do for the remainder of the year, but I think though,

The question I get a lot is eventually when we get a point when lead time stabilized input costs stabilize and maybe come down a little bit. How are you thinking about long-term pricing in your auto business? Are we going back to the normal price downs from a much, much higher base and a lot of these input cost increases you view as permanent? There's a little bit of an angst in the system. I think that what goes up must come down.

And I just wanted if you get a address on that, please. Yeah, so on the pricing, especially in Auto, I would actually extend this question to all those areas where we've had the most significant shortages. It is important to understand where the pricing increases came from in the first place. They came from a...

No, thank you for that card, very clear. Bill, for my follow-up, I wanted to ask about inventory levels. I've kind of made the observation that oftentimes your channel inventory being below the long-term target. And then the on-books inventory may be increasing. Those get discussed kind of in isolation. And I wonder if you could talk a little bit about it holistically just that roughly speaking the inventory days of full-NXP inventory are roughly flat. Just more on books than in channel and gives you a bit more flexibility. And I get the long-term question is what's the real incentive to go back to the old mix? Why not just keep?

The ratio is relatively close to where they are today given the flexibility it gives you. Thanks. Yes. The whole idea of managing the channel is really through understanding real demand and the market. At the end of the day, what you want to do is put inventory on the shelf that's going to fast-term. The next thing you want to do is put your inventory on the shelf that's going to fast-term.

versus if you put inventory on the shelf, it stays there, then eventually has to get discounted. It uses real good real estate and so forth. So what we want to do is making sure we are only shipping product into the channel that is fast turning is the way to think about it. And you are right, the way you think about it is the same way we do. We combine both and it is basically holding the same amount of inventory combined. And we are just trying this new strategy, actually we changed this strategy from lessons we have learned in the past.

And mind you, we speak about the $500 million Delta when we would go from 1.6 to 2.4 or 5 months.

And again, we are having the attention to fill back to that level, but again in line with industry demand coming back. But those 500 million, we basically have that and we will get it into the channel as soon as the demand is coming. In the end, that will be required to make sure we can gain market share through distribution the moment the industry ticks up.

Thanks, guys. Very clear. And one moment for our next question. And our next question will come from Gary Mobile of Wolf Fargo. Your line is open. Hey guys, thanks for taking my question.

I presume that your backlog continues to trend down, but I was hoping that you can give us an update where you stand today with weeks of backlog, the durability of that backlog, and whether or not you're still sold out in automotive based on your available supply, sold out through the remainder of the year I should add.

Hey Gary, so no, we never talked about the size of the backlog because I really tried to be sure.

You all understand that we consider that backlog number Misleading and that it's been misleading since the beginning of this supply chain situation Because sure we and I guess everybody else has had double in trouble orders in there So I felt it never made sense to speak about that backlog

the size of that backlog as a metric to get a feel for future growth. So that's why we will not speak about the backlog. What however comes back to what I think you're asking for is in automotive the NCNR orders. So yes, the largest part of our automotive business has been and continues to be covered by NCNR orders for this year.

The size of that NC&R order backlog has not changed at all. We also cannot ship more. I mean, it is what it is. And there is always mixed changes from left to right and stuff, but the size of it is the same it has been before, and we just executed it done.

Thanks, Kurt. My follow-up, I want to ask about changing behavior following a three-year period of supply chain shortages in the automotive end market.

And so under the idea that the automotive OEMs have learned a lesson and will work more collaboratively with chip companies like yourself, perhaps that they get bigger and perhaps you can expand further your market share lead by collaborating more closely with these automotive OEMs.

Is there any way to quantify or qualify the impact to that and whether or not that has any validity?

I think you have a really good point here. Very clearly, the rate of collaboration and also the depth and intensity of collaboration from logistics all the way to innovation and new design wins has significantly jumped up between us and the auto OEMs.

That indeed also leads to direct deals which we are cutting with these companies on a very long-term basis. Where the principle is often that we give supply assurance against the very long-term demand assurance from the OEMs. And yes, I believe there is a bit of a winner-takes-it-all game here because...

And our next question will come from Blaine Curtis of Barkley, The Your Line is Open.

Hey guys, thanks for taking my question. Bill, I want to just double click on the Gross margins. It's actually quite impressive that your utilization is down that much and it's flat. So maybe just walk us through the pieces again. Obviously, mixed for segment, I wasn't sure if Auto is a creative that mix. I think mobile going down probably helps, but I also kind of want to understand your external loadings. You kind of mentioned that you might selectively bring that down. If you can come on that as well. Next Ben YouTube video gameplay.

Sure, let me, the major drivers, as first again, what we expect favorable product mix, what we see obviously and what we're building to is favorable and we see that in our forecast. Then it's, you know, clearly being driven by the customer orders we are serving.

And then, you know, we talked about this new product introduction. We're starting to see some of that. But again, longer term, that'll kick in a couple years out to continue that richer mix for the company. Now second, you have to remember our fixed variable cost structure.

which is approximately 30% fixed and 70% variable. And this has significantly improved versus the last down cycle and over the last decade. And then finally, we are realligning our internal factories. And you have to remember we service about 40%.

of our wafers, which two-thirds of our internal factories support auto and industrial IP proprietary technologies. Versus the past, we would build bulk CMOS and so forth, which would disturb the utilization of our factories. So, think about the equipment that we're putting in, very sticky, very specific.

to our core IT technologies that service, basically auto and industrial, the two fastest growth markets over the next decade that we're gonna serve. Okay, and then I wanted to ask you on the comm segment. I think Kurt mentioned RFID being the big driver for the year, but is that the same driver for the strength you're seeing in Martin, June off the bottom?

Yes, it is RFID and secure cards, which are really leading here from a growth perspective. That doesn't mean that the other stuff is not growing, but say the incremental additional growth really comes from supply into RFID and secure cards. But again, the difference between the two is that in RFID, it's really secular growth, which we've been working towards for many, many years and now a lot of these projects are . . .

And our next question will come from William Steen, or sign of Drostear Linus Open.

Great. Thanks for taking my question. Congrats on a very good results and good outlook. The results came better than you expected and I want to make sure I understand. I think at the beginning of the call you said that the primary driver was

an improvement in China. Is that correct? And I'm trying to reconcile this with the idea that distribution was down as a percent of sales because I thought most of what goes on in China for you guys is through the channel. Is it just that expectations in the channel and in China were so low?

It still came in low, but that's what improved through the quarter. Am I getting that right? Yeah, so I'd say it's one part of it is China. Very indeed, it was less bad than feared in mobile and industrial IoT. That's pretty much what you said. We took a cautious stance here because we had a really slow start in the beginning of the quarter. And then gradually it improved a bit more than what we were fearing it would.

However, the other side is more supply which came into Auto and Coms Infra. So Coms Infra, as I just explained to Blaine, and then also in Auto on a more broad-based, that also helped the outperformance. At the same time, it's really important to see here that this 121 million more revenue we did.

did not move the channel MOS up an inch. So that was really true good revenue, all the 121 billion. But yeah, a part of it in China was a better performance than we were fearing how China's demand would develop.

I'd like to follow up with giving you an opportunity to talk about some of the growth drivers that I don't think have been as prominent in this call as in the past. Any highlights in terms of adoption of some of these new technologies and autos you've talked about, high-def radar?

domain and zonal controllers. You've talked about ultra wideband and a couple different end markets. Maybe highlight some of the more significant content drivers in the near term and I think in radar and I think it's also in our press release. We are very properly launched and all the industries first 28 nano-vita-based one-trip radar for automotive.

which is moving in production now, which is great progress. I think this one market research company which covers automotive radar clearly presented us now as the number one in automotive radar for last year. So the numbers are out. So now this whole thing is who is leading in automotive radar is clear now. It's documented via number one.

Then today we had a very nice press release together with NIO, which is one of the smart electric car startups between California and China, which is using our 4D imaging radar, which is the high end of radar, which is a 300 mm distance measurement.

the growing strength of China OEMs when it comes to electric cars. That is very good for our battery management business because we have strong bias to winning designs in China. So that fast turning business, fast turning means for automotive standards, they go pretty quickly from design into production.

Woodrow-wide bend is a mixed picture of the Android adoption. Continuous in the ecosystem to be slower than we have anticipated. So that's a little, I think we said this in the last fall already. It's a little later. That doesn't mean it doesn't happen but it's a little later. While the automotive side of woodrow-wide bend is actually picking up the pace now enormously.

So we see very, very nice growth on the Woodrow-White Bend side in cars, where we also haven't seen a single competitor yet. So it's really an NXP-only story. Great. Thank you.

And one moment for our next question. And our next question will come from Tishia Hari of Goldman Sachs.

And our next question will come from Tishia Hari of Goldman Sachs. dage di

Hi, good morning. Thank you so much for taking the question. I wanted to follow up on China Kurt, you talked about a modest recovery in the region. I was hoping you could speak to linearity in the quarter from either bookings or revenue recognition perspective. And then I guess more importantly, when you guys talk about...

the second half recovery in your overall business, the second half being hired in the first half. Does that contemplate an increase in channel inventory from 1.6 months to something above two, or do you have visibility in half over half growth without any increase in channel inventory? Yeah, Toshio. So on the first half of your question, we will not provide any within quarter details. So it has...

again on 1.6 months of channel inventory.

However, we will take the liberty to increase the channel inventory if and when we see a trend that the self-rule goes strong into the third quarter in order to prepare for that uptick. But then we will also make more than 3.2 billion revenues. So the 3.2 billion which are in the guidance...

are connected with 1.6 months. We might still go higher, but then we will also print a higher revenue.

Understood. Thank you. And then as my follow-up, I just wanted to clarify on lead times. You mentioned that in Q1, I think roughly a third of your products had lead times of 52 weeks or longer. Where do you expect that number to be exiting the year?

And I was hoping you could speak to average lead times for your portfolio as well. You know what your target is, I guess, coming out of this pandemic. Yeah, this is a tricky question because the lead times are a function of the amount of NC and R orders we have.

I spoke earlier about the fact that our automotive business, which is the lead example for this, is largely covered by NCNR orders.

And that simply means that whole product portfolio for these customers, if they now ask for an additional order, of course they get only a confirmation for next year because it's already ordered out. So the way you got to think about this is if all of our business was covered by NCNR orders,

All of our business would have 52 weeks later. Now we don't have that, it's only a part of it, but that's why as long as we stick to the concept of annual, they are based on calendar years, annual NCR orders, we will have a sizable part of our portfolio sitting on 52 plus weeks, each time. It's just the consequence of the NCR orders. So that's why to answer your question, it depends.

If again for calendar 2024 we will enter into the concept of NCNR orders. If we do that, and by the way I expect that we will do that, we will have still a sizable part of the portfolio with lead times above 52 weeks too.

Now, operator, I think we got to terminate the call here. We are at the top of the hour. So I just want to thank you all for your attention through today's call. I trust you felt that we are at a pivotal point in navigating through this cycle.

where we see that we are successfully navigating the consumer oriented weakness in our business and seeing a change in slope of that business.

while the core industrial automotive and also large parts of consinfra continue to be resilient and strong. And then if we put all of these pieces together that leads us then to what we said today, which is the second half of this year revenue being above the first half, and now also a guidance into the second quarter, where each of our four segments is actually...

And excuse me, this is your operator. He may now disconnect.

And excuse me, this is your operator. He may now disconnect.