Q4 2023 NXP Semiconductors NV Earnings Call
Okay.
Operator: Good day, and welcome to the NXP 4Q23 earnings conference call. At this time, all participants are in a listen-only mode.
Speaker Change: Good day and welcome to the NXT for Q3 earnings Conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given at that time.
Operator: Later, we will conduct a question and answer session, and instructions will be given at that time. As a reminder, this call is being recorded. I would like to turn the call over to Jeff Palmer, Senior Vice President of Investor Relations. You may begin. Thank you, Michelle, and good morning, everyone.
Speaker Change: As a reminder, this call is being recorded I would like to turn the call over to Jeff Palmer Senior Vice President of Investor Relations you may begin.
Jeff Palmer: Thank you Michelle and good morning, everyone welcome to NXP Semiconductor's fourth quarter earnings call with me on the call today is Kurt Sievers, Nxp's, President and CEO and Bill Burke our CFO.
Jeff Palmer: Welcome to NXP Semiconductors' fourth quarter earnings call. With me on the call today are Kurt Sievers, NXP's president and CEO, and Bill Betts, our CFO. The call today is being recorded and will be available for replay from our corporate website.
Jeff Palmer: Today is being recorded and will be available for replay from our corporate website.
Jeff Palmer: 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. These risks and uncertainties include but are not limited to statements regarding the macro impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for financial results for the first quarter of 2024. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statement. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-gap financial measures to the most directly comparable gap measures in our fourth-quarter 2023 earnings press release, which will be furnished to the SEC on Form 8K and available Now I'd like to turn it over to Kurt.
Speaker Change: Today's call will include forward looking statements.
Speaker Change: All risks and uncertainties that could cause nxp's results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the macro impact on the specific end markets in which we operate the sale of new and existing products and our expectations for financial results for the first quarter of two.
Speaker Change: 24.
Speaker Change: Please be reminded that NXP undertakes no obligation to revise or update publicly any forward looking statements.
Speaker Change: Our full disclosure on forward looking statements. Please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to nxp's underlying core operating performance.
Soon to regulation G. NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2023 earnings press release, which will be furnished to the SEC on form 8-K and available on Nxp's website in the Investor Relations section.
Speaker Change: Now I would like to turn it over to Kurt.
Kurt Sievers: Thank you, Jeff. And good morning, everyone. We really appreciate you joining our call this morning. I will review both our quarter four and our full year 2023 performance and then discuss our guidance for quarter one. Beginning with quarter four, our revenue was $22 million better than the midpoint of our guidance, with the trends in the mobile market performing better than our expectations, with automotive and industrial and IoT performance in line with our guidance, and communication infrastructure slightly below our expectations. Taken together, NXP delivered Q4 revenue of $3.42 billion, an increase of 3% year-on-year.
Kurt Sievers: Thank you, Jeff and good morning, everyone.
Kurt Sievers: We really appreciate you joining our call this morning.
Kurt Sievers: I did review, both our quarter four and our full year 2023 performance.
Kurt Sievers: And then discuss our guidance for quarter one.
Kurt Sievers: Beginning with quarter four our revenue was 22 million better than the midpoint of our guidance.
Kurt Sievers: With the trends in the mobile market performing better than our expectations.
With automotive and industrial and Iot performance in line with our guidance.
Kurt Sievers: And communication infrastructure slightly below our expectations.
Kurt Sievers: Taken together NXP delivered quarter four revenue of $3 four 2 billion, an increase of 3% year on year.
Kurt Sievers: Non-GAAP operating margin in Q4 was 35.6%, 90 basis points below the year-ago period and about 20 basis points above the midpoint of our guidance. The year-on-year performance was a result of solid gross profit growth, offset by higher operating expenses as we continue to invest in new product development. From a general perspective, we maintained distribution inventory at a tight 1.5 months level, well below our long-term target of 2.5 months. In addition, we continue to partner with our direct customers on the normalization of their on-hand inventory.
Kurt Sievers: non-GAAP operating margin in quarter, four was 35, 6%.
Kurt Sievers: 90 basis points below the year ago period and.
Kurt Sievers: And about 20 basis points above the midpoint of our guidance.
Kurt Sievers: The year on year performance was a result of solid gross profit growth offset by higher operating expenses as we continue to invest in new product developments.
Kurt Sievers: From a channel perspective, we maintain distribution inventory at a tight one five months level well below our long term target of two five months.
In addition, we continue to partner with our direct customers on the normalization of their on hand inventory.
Kurt Sievers: For the full year, revenue was $13.28 billion, an increase of about 1% year-on-year. Due to the revenue growth, we increased our pricing by approximately 8% in 2023, offsetting our higher input costs to maintain our gross profit percentage. And at the same time, our unit volumes were down by approximately 7% through 2023. We believe this underpins our view that we have intentionally undershipped fundamental end demands in order to limit inventory built in the channel and at our direct customers.
Kurt Sievers: For the full year revenue was $13 two 8 billion in.
Kurt Sievers: An increase of about 1% year on year.
Kurt Sievers: Passing the revenue growth, we increased our pricing by approximately 8% in 2023.
Kurt Sievers: Offsetting our higher input costs to maintain our gross profit percentage.
Kurt Sievers: And at the same time, our unit volumes were down by approximately 7% through 2023.
Kurt Sievers: We believe this underpins our view that we have intentionally under shipped fundamental empty months in order to limit inventory build in the channel and at our direct customers.
Kurt Sievers: Full year non-GAAP operating margin was 35.1%, 120 basis points of compression versus the year-ago period as a result of the improved gross profit performance, offset by increased operating expenses primarily in product and system innovation investment. Now, let me turn to the specific full year 2023 trends in our focus and market. In the automotive business, full year revenue was $7.48 billion, up 9% year on year, which is a reflection of higher pricing, strong company specific growth drivers offset by lower shipment volume. For quarter four, automotive revenue was 1.89 billion, up 5% versus the year-ago period and in line with our guidance.
Full year non-GAAP operating margin was 35, 1%.
Kurt Sievers: 120 basis point compression versus a year ago periods as a result of the improved gross profit performance.
Kurt Sievers: Sets by increased operating expenses, primarily in products in system innovation investments.
Kurt Sievers: Now, let me turn to the specific full year 2023 trends in our focus end markets.
Kurt Sievers: In Automotives.
Kurt Sievers: <unk> revenue was $7 four 8 billion up 9% year on year.
Kurt Sievers: Which is a reflection of higher pricing strong company specific growth drivers offset by lower shipment volumes.
Kurt Sievers: For quarter, four automotive revenue was $1 89 billion up 5% versus the year ago period and in line with our guidance.
Kurt Sievers: Turning to industrial and IoT, full year revenue was 2.35 billion, down 13% year on year, a reflection of our tight channel management in a cyclically weak end market, offsetting pricing. We saw the trough for the industrial and IoT business back in quarter one 2023. For quarter four, industrial and IoT revenue was $662 million, up 9% versus the year-ago period, and in line with our guidance In mobile, full-year revenue was $1.33 billion, down 17% year-on-year because of weak trends and inventory digestion in the handset marketplace. For quarter four, mobile revenue was 406 million, flat versus the year-ago period and better than our guidance. Finally, in Communication, Infrastructure, and Other, full-year revenue was $2.11 billion, up 5% year-on-year. The year-on-year growth was due to a combination of increased sales of secure card and tagging solutions, higher prices, and last-time buys of select legacy network processor solutions. And that was offset by declines in RF power products for the cellular base station market.
Kurt Sievers: Turning to industrial and Iot full year revenue was $2 three 5 billion.
13% year on year, a reflection of our types General management in a cyclically weak end markets offsetting price increases.
Kurt Sievers: We sold a trust for the industrial and Iot business back in quarter, one train training suite for quarter for industrial and Iot revenue was $662 million up 9% versus the year ago period and in line with our guidance.
Kurt Sievers: In mobile where your revenue was 133 billion down 17% year on year because of weak trends and inventory digestion in the handset market place.
Kurt Sievers: For quarter, four mobile revenue was $406 million flat versus the year ago period.
Kurt Sievers: Better than our guidance.
Kurt Sievers: Finally in communications infrastructure and other full year revenue was two point 11 billion up 5% year on year.
Kurt Sievers: The year on year growth was due to a combination of increased sales of secured comps and <unk> solutions.
Kurt Sievers: Higher pricing and last time buys of select legacy network processor solutions.
Kurt Sievers: And that was offset by declines of RF power products for the cellular base station markets.
Kurt Sievers: For quarter four, revenue was $455 million, down 8% year-on-year and below Oregon. Now, like every year, I would like to provide the annual progress update on our six accelerated growth drivers, which we highlighted during our analyst day in November 2021. Starting with automotive, the accelerated growth drivers are radar, electrification, and our S32 processor family for the software-defined vehicle.
Kurt Sievers: For quarter, four revenue was $455 million down 8% year on year and below our guidance.
Kurt Sievers: Yes.
Kurt Sievers: Now like every year I would like to provide the annual progress updates on our sixth accelerated growth drivers, which we highlighted during our analyst day in November 2021.
Kurt Sievers: Starting with automotive the accelerated growth drivers our radar electrification and our S 32 process Assembly for the software defined vehicle.
Kurt Sievers: Looking at our performance in 2023, both the S32 processor family and our electrification solutions are tracking ahead of plan. However, revenue from radar is tracking below plan as we took strong actions to limit shipments to customers who are digesting inventory. Taken together, the automotive-accelerated growth drivers in aggregate are tracking a higher plan. The underlying core auto business grew in line with our longer-term expectations.
Kurt Sievers: Looking at our performance in 2023, both the F 32 process Assembly and our electrification solutions are tracking ahead of plan.
Kurt Sievers: Revenue from radar is tracking below plan as we took strong actions to limit shipments to customers who are digesting inventory.
Kurt Sievers: Together, the automotive accelerated growth drivers in aggregate are tracking above plan the underlying core auto business grew in line with our longer term expectations.
Kurt Sievers: With industrial IoT, we are tracking below our expected growth rate. We believe the underperformance is a reflection of significant cyclical end-market weakness and of our disciplined approach to managing the distribution channel. So, remember, we serve approximately 80% of the industry and the IOT end market through our distribution channel to efficiently address the needs of tens of thousands of small customers, the majority of whom are in the Asia-Pacific and the greater China region. Within mobile, we are below our expected revenue growth range for the ultra-wideband accelerated growth driver due to the well-documented weakness in the Android handset market. However, ultrawideband traction in the automotive market, which is the first well-defined use case for ultrawideband, is progressing very well.
Kurt Sievers: Within the industrial and Iot, we are tracking below our expected growth range. We believe the underperformance is a reflection of significant cyclical end market weakness and of our disciplined approach to managing the distribution channel.
Kurt Sievers: So remember we serve approximately 80% of the industrial and Iot end markets through our distribution channel to efficiently address the needs of tens of thousands of smaller customers. The majority of whom are in the Asia Pacific and the greater China region.
Kurt Sievers: Okay.
Kurt Sievers: Within mobile we are below our expected revenue growth range for the ultra wideband accelerated growth driver due to the well documented weakness in the Android handset market power.
Kurt Sievers: However, we will provide some traction in the automotive market, which is the first well defined use case for ultra wideband is progressing very well.
Kurt Sievers: 18 out of 20 automotive platforms have been awarded to NXP, and another 15 platforms are evaluating NXP solutions as we speak. And at this point in time, the ultrawideband revenue stream is being driven by about seven automotive platforms and a few premier handset OEMs. Finally, for RF power amplifiers within communications infrastructure, we are below our expected revenue growth rate. The challenge we faced was the combination of weaker base station deployments globally in 2023 and the faster-than-expected OEM transition to gallium nitride from LPMOS technology.
18 out of 20 automotive platforms have been awarded to NXP and another 15 platforms are evaluating NXP solutions as we speak.
Kurt Sievers: And at this point in time, the ultra wideband revenue stream is being driven by about seven automotive platforms and the fuel premier handset Oems.
Kurt Sievers: Finally for RF power amplifiers within communications infrastructure, we are below our expected revenue growth range.
Kurt Sievers: The industry faced was the combination of weaker base station deployments globally in 2023, and a faster than expected OEM transition to gallium nitride from LTE most technology.
Kurt Sievers: However, the underlying core portion of communications infrastructure performed very well in 2023 as a result of serving pent-up demand for various secure cards and tagging solutions, including RFID for intelligent labels. Taken together, we are ahead of plan for the communications infrastructure segment. Now let me turn to our expectations for Q1 2024. We are guiding Q1 revenue to $3.125 billion, about flat versus the first quarter of 2023. From a sequential perspective, this represents a deceleration of about 9% at the midpoint versus the prior quarter, which is consistent with our original outlook for quarter one to be down in the mid- to high-single-digit range. Our tempered outlook for quarter run reflects typical seasonality compounded by our continued desire to enable the normalization of on-hand inventories at our direct customers, and we will continue to hold channel inventory in Regarding pricing, we see improving input costs trends versus previous years, which allows us to assume flat pricing for 2024. So at the midpoint, we anticipate the following trends in our business during quarter one. Automotive is expected to be down in the low single-digit percent range versus Q1 2023, and down in the mid-single-digit percent range was a score of 4-2023.
Kurt Sievers: However, the underlying core portion of communications infrastructure performed very well into 'twenty three as a result of serving pent up demand for various secure comps and taking solutions, including RFID and intelligent labels take.
Kurt Sievers: Taken together, we are ahead of plan for the communications infrastructure segments.
Speaker Change: Now, let me turn to our expectations for quarter one 2024.
Speaker Change: We are guiding quarter, one revenue 2312 5 billion.
Speaker Change: <unk> flat versus the first quarter of 2023.
Speaker Change: From a sequential perspective this represents a deceleration of about 9% at the midpoint versus the prior quarter.
Speaker Change: Consistent with our original outlook for quarter, one to be down in the midst to high single digit range.
Speaker Change: Our tempered outlook for quarter run reflects typical seasonality compounded by our continued desire to enable the normalization of on hand inventories at our direct customers and we will continue to hold channel inventory in a tight range.
Regarding pricing, we see improving input cost trends versus previous years, which allow us to assume flat pricing for 2024.
Speaker Change: So at the midpoint, we anticipate the following trends in our business during quarter one.
Speaker Change: Automotive is expected to be down in the low single digit percent range versus quarter, one 2023.
Speaker Change: And down in the mid single digit percent range versus quarter four 2023.
Kurt Sievers: Industrial and IoT is expected to be up in the mid-teens percent range year-on-year and down in the low double-digit percent range with a score of 4 in 2023. Mobile is expected to be up in the lower 30% range year-on-year and down in the mid-teens percent range versus quarter four in 2023. Finally, Communication, Infrastructure, and Other is expected to be down in the mid-20% range year-on-year and down in the low double-digit percent range versus Q4 2023. In review, during 2023, thanks to our company-specific end market exposure, we experienced the variations of the semiconductor cycle at distinctly different points of time for the various parts of our portfolio. On the one hand, full-year revenue performance in our more consumer-oriented segments of industrial and IoT, and mobile was underwhelming. However, following our tight channel management, these businesses trust were already back in quarter one 2023 after experiencing a dramatic post-COVID reset. Ever since, we have seen gradual improvement.
Industrial and Iot is expected to be up in the mid teens percent range year on year and down in the low double digit percent range versus quarter four 2023.
Speaker Change: Mobile is expected to be up in the low 30% range year on year and down in the mid teens percent range versus quarter four to <unk> 23.
Speaker Change: Finally communications infrastructure and other is expected to be down in the mid 20% range year on year and down in the low double digit percent range versus quarter four 2023.
Speaker Change: In review during 2023, thanks to our company's specific end market exposure, we experienced the variations of the semiconductor cycle.
Speaker Change: Plea different points of time for the various parts of our portfolio.
Speaker Change: On the one hand full year revenue performance in our more consumer oriented segments of industrial and Iot and mobile was underwriting.
Speaker Change: However, following our tight channel management these businesses trust already back in quarter, one two and 'twenty three.
Speaker Change: After experiencing a traumatic post corbett reset.
Speaker Change: Ever since we have seen a gradual improvement.
Kurt Sievers: And we do think these growth trends should continue throughout 2024. On the other hand, within automotive and core industrial, we experienced solid trends in the early part of 2023 but entered the multi-quarter inventory correction phase with our direct customers starting in the second quarter of 2023. This should continue through the first half of 2024.
Speaker Change: And we do think these growth trends should continue throughout 2024.
Speaker Change: On the other hand within automotive and core industrial base Purion solid trends in the early part of 223.
Speaker Change: <unk> entered the multi quarter inventory correction phase with our direct customers starting in the second quarter of 2023.
Speaker Change: This should continue through the first half of 2024.
Kurt Sievers: In the second half of 2024, we expect the automotive and core industrial segments to shift to end demand and resume growth. Regarding our communication infrastructure and other business, we expect 2024 revenue to decline over 2023, consistent with our prior view we shared on the Q3 earnings call. So as we look ahead to 2024, we do think the macro has deteriorated from our view 90 days ago.
Speaker Change: In the second half of 'twenty 'twenty four we expect also in the automotive and core industrial segments to shift to empty month and resume growth.
Speaker Change: Regarding our communication infrastructure and other business, we expect 2020 for revenue to decline Overtraining train three consistent with our prior view, we shared on the Q3 earnings call.
Speaker Change: So as we look ahead to 2024, we do think the macro has deteriorated from our view 90 days ago.
Kurt Sievers: We now expect the first half of 2024 to decline versus the first half of 2023 due to longer than anticipated inventory digestion at our direct automotive customers. However, we expect our company revenue in the second half of 2024 will grow over the first half of 2024 as we believe we will be shipping again to end demand by then. Overall, we have and will continue to manage everything in our control to navigate a soft landing for our business. As such, we have kept a very tight handle on our distribution channel, and we are supporting our direct customers to facilitate inventory digestion as appropriate.
Speaker Change: We now expect the first half of 'twenty 'twenty four will decline versus the first half of train 23 due to longer than anticipated inventory digestion at our direct automotive customers.
Speaker Change: However, we expect our company revenue in the second half of 'twenty 'twenty four will grow over the first half of 'twenty 'twenty four as we believe we will be shipping again to EMS demand buyback.
Speaker Change: Overall, we have and will continue to manage everything in our control to navigate a soft landing for our business.
Speaker Change: As such we have kept a very tight handle on our distribution channel and.
Speaker Change: And we are supporting our direct customers to facilitate inventory digestion as appropriate.
Kurt Sievers: This enables us to take advantage of the cyclical improvement as soon as it materializes per segment. And based on everything I have said, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline. So now I would like to pass the call to you, Bill, for a review of our financial performance. Thank you, Kurt, and good morning to everyone on today's call.
This enables us to take advantage of the cyclical improvement as soon as it materializes per segment.
Speaker Change: And based on everything I have set the potential outcome for 'twenty 'twenty four should be in the range of a modest annual revenue growth or decline.
Speaker Change: So now I would like to pass the call to you Bill for a review of our financial performance.
Bill Burke: Thank you Karen and good morning to everyone on today's call.
Bill Betts: As Kurt has already covered the drivers of revenue during Q4 and provided our revenue outlook for Q1, I will move to the financial highlights. Overall, our Q4 financial performance was good, and revenue was slightly above the midpoint of our guidance range. And non-GAP gross profit was above the midpoint of our guidance range, driven by a higher mix from sales into the distribution channel, even as months of supply in the channel remained flat at 1.5 months or about six weeks. I will first provide full year highlights and then move to the Q4 results. Full year revenue for 2023 was $13.28 billion, or 1% year on year.
Bill Burke: As Kurt has already covered the drivers of the revenue during Q4.
Bill Burke: And provided our revenue outlook for Q1.
Bill Burke: I will move to the financial highlights.
Bill Burke: Overall, our Q4 financial performance was good.
Bill Burke: Revenue was slightly above the midpoint of our guidance range and.
Bill Burke: non-GAAP gross profit was above the midpoint of our guidance range driven by a higher mix from sales into distribution channel.
Bill Burke: Even at months of supply in the channel remained flat at one five months or about six weeks.
Bill Burke: I will first provide full year highlights and then move to the Q4 results.
Bill Burke: Full year revenue for 2023 was $13 8 billion are up 1% year on year.
Bill Betts: We generated $7.76 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.5%, up 60 basis points year on year. Total non-GAAP operating expenses were $3.09 billion, or 23.3% of revenue, slightly above our long-term financial model as we continue to invest in our strategy supporting long-term profitable growth. Total non-GAF operating profit was $4.66 billion, down 3% year-on-year. This reflects a non-GAAP operating margin of 35.1%, down 120 basis points year-on-year, and in line with our current long-term financial model. Non-Gas Interest Expense was $283 million. Taxes related to ongoing operations were $693 million, or a 15.8% non-GAAP effective tax rate, non-controlling interest, or $25 million. And stock-based compensation, which is not included in our non-GAAP earnings, was $411 million.
Bill Burke: We generated $7 76 billion and non-GAAP gross profit.
Bill Burke: And reported a non-GAAP gross margin of 58, 5%.
Bill Burke: 60 basis points year on year.
Bill Burke: Total non-GAAP operating expenses were 3.09 billion or 23, 3% of revenue.
Bill Burke: Slightly above our long term financial model as we continue to invest in our strategy supporting long term profitable growth.
Bill Burke: Total non-GAAP operating profit was $4 66 billion down 3% year on year.
Bill Burke: This reflects a non-GAAP operating margin of 35, 1% down 120 basis points year on year and in line with our current long term financial model.
Bill Burke: non-GAAP interest expense was $283 million.
Bill Burke: Taxes related to ongoing operations were $693 million.
Bill Burke: Or a 15, 8% non-GAAP effective tax rate.
Bill Burke: Noncontrolling interests were $25 million.
Bill Burke: Stock based compensation, which is not included in our non-GAAP earnings was $411 million.
Bill Betts: Turning to full-year cash flow performance, we generated $3.51 billion in cash flow from operations and invested $826 million in NetCapEx, or 6% of revenue, taken together. This resulted in $2.69 billion of non-GAAP free cash flow, or 20% of revenue. During 2023, we repurchased 5.46 million shares for $1.05 billion and paid cash dividends of $1.01 billion, or 29% of cash flow from operations. In total, we returned $2.06 billion to our owners, which was 77% of the total non-gap-free cash flow generated during the year.
Bill Burke: Turning to full year cash flow performance.
We generated $3 five 1 billion in cash flow from operations.
And invested $826 million and net capex.
Bill Burke: Or 6% of revenue.
Bill Burke: Taken together.
Bill Burke: This resulted in $2 $69 billion of non-GAAP free cash flow or 20% of revenue.
During 2023.
Bill Burke: Three we repurchased $5 $4 6 million shares.
Bill Burke: For 1.05 billion and paid cash dividends of 1.01 billion or 29% of cash flow from operations.
Bill Burke: In total we returned $2 6 billion to our owners, which was 77%.
Bill Burke: The total non-GAAP free cash flow generated during the year.
Bill Betts: Now moving to the details of Q4. Total revenue was $3.42 billion, up 3% year-on-year, and modestly above the midpoint of our guidance. We generated $2.01 billion in non-GAP gross profit and reported a non-gap growth margin of 58.7%, up 70 basis points year-on-year and 20 basis points above the midpoint of our guidance range driven primarily by mix. Total non-GAAP operating expenses were $791 million, or 23.1% of revenue, up $78 million year-on-year, though down $12 million from Q3 and within our guidance range. From a total operating profit perspective, non-GAAP operating profit was $1.22 billion, and non-GAAP operating margin was 35.6%, down 90 basis points year on year above the midpoint of our guidance. Non-GAAP Interest Expense was $69 million.
Bill Burke: Now moving to the details of Q4.
Bill Burke: Total revenue was $3 41 billion.
Bill Burke: Up 3% year on year.
Bill Burke: Modestly above the midpoint of our guidance range.
Bill Burke: We generated 2.01 billion and non-GAAP gross profit and.
Bill Burke: And reported a non-GAAP gross margin of 58, 7%.
Bill Burke: 70 basis points year on year, and 20 basis points above the midpoint of our guidance range driven primarily by mix.
Bill Burke: Total non-GAAP operating expenses were $791 million or 23, 1% of revenue.
Bill Burke: $78 million year on year, though down $12 million from Q3 and within our guidance range.
From a total operating profit perspective.
Bill Burke: non-GAAP operating profit was $1 two 2 billion.
Bill Burke: And non-GAAP operating margin was 35, 6%.
Bill Burke: Down 90 basis points year on year above the midpoint of our guidance range.
Bill Burke: non-GAAP interest expense was $69 million.
Bill Betts: Taxes for ongoing operations were $178 million, or a 15.5% non-GAAP effective tax rate. Non-controlling interest was $6 million, and stock-based compensation, which is not included in our non-GAAP earnings, was $107 million.
Bill Burke: With taxes for ongoing operations were $178 million.
Bill Burke: Or a 15, 5% non-GAAP effective tax rate.
Bill Burke: Noncontrolling interest was $6 million.
Bill Burke: Stock based compensation, which is not included in our non-GAAP earnings was $107 million.
Bill Betts: Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q4 was $11.17 billion, essentially flat sequentially. Our ending cash balance, including short-term deposits, was $4.27 billion, up $229 million sequentially due to the cumulative effect of capital returns. CapEx Investments, and Cash Generation during Q4. The resulting net debt was $6.9 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.41 billion.
Bill Burke: Now I would like to turn to the changes in our cash and debt.
Bill Burke: Our total debt at the end of Q4 was 11 $1 7 billion essentially flat sequentially.
Bill Burke: Our ending cash balance, including short term deposits was $4 $2 7 billion up $229 million sequentially due to the accumulative effect of capital returns.
Bill Burke: Capex investments and cash.
Bill Burke: Cash generation during Q4.
Bill Burke: The resulting net debt was $6 9 billion and we exited the quarter with a trailing 12 month adjusted EBITDA of 5.41 billion.
Bill Betts: Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q4 was 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 21.6 times. During Q4, we paid $261 million in cash dividends, and we repurchased 434 million of our shares.
Bill Burke: Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q4 was one three times.
Bill Burke: And our 12 month adjusted EBITDA interest coverage ratio was 21 six times.
Bill Burke: During Q4, we paid $261 million in cash dividends.
Bill Burke: And we repurchased $434 million of our shares.
Bill Betts: Turning to working capital metrics, days of inventory was 132 days, a decrease of two days sequentially, while we maintained distribution channel inventory at 1.5 months, or about six weeks, as we have highlighted throughout the previous year. Given the uncertain demand environment, we continue to make the intentional choice to limit inventory in the channel while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed. Days receivable were 24 days, down one day sequentially, and days payable were 72 days, an increase of 12 days versus the prior quarter due to increased external material sourcing. Taken together, our cash conversion cycle was 84 days, and an improvement of 15 days versus the prior quarter. Cash flow from operations was $1.14 billion.
Bill Burke: Turning to working capital metrics days of inventory was 132 days a decrease of two days sequentially.
Bill Burke: While we maintain distribution channel inventory at one five months or about six weeks.
Bill Burke: As we have highlighted throughout the previous year.
Bill Burke: Given the uncertain demand environment, we continue to make intentional choice to limit inventory in the channel, while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed.
Bill Burke: Days receivable were 24 days down one day sequentially and days payable were 72 days, an increase of 12 gains versus the prior quarter due to increased external material sourcing.
Bill Burke: Taken together, our cash conversion cycle was 84 days and an improvement of 15 days versus the prior quarter.
Bill Burke: Cash flow from operations was $1 4 billion.
Bill Betts: And net capex was $175 million, resulting in a non-GAAP free cash flow of $962 million, or 28% of revenue. Turning now to our expectations for the first quarter. As Kurt mentioned, we anticipate Q1 revenue to be $3.125 billion, plus or minus about $100 million. At the midpoint, this is flat year on year and down 9% sequentially. We expect non-GAF gross margin to be about 58% plus or minus 50 basis points driven primarily by lower distribution sales as we maintain our months of sales in the channel at 1.6 or below. Operating expenses are expected to be about $755 million, plus or minus about 10 million. Taken together, we see the non-GAAP operating margin to be 33.9% at the midpoint. We estimate the non-GAF financial expense to be about $66 million.
Bill Burke: Net capex was $175 million, resulting in non-GAAP free cash flow of $962 million or 28% of revenue.
Speaker Change: Turning now to our expectations for the first quarter.
Speaker Change: As Kurt mentioned, we anticipate Q1 revenue to be $3, <unk> 5 billion, plus or minus about $100 million.
Speaker Change: At the midpoint this is flat year on year and down 9% sequentially.
Speaker Change: We expect non-GAAP gross margin to be about 58% plus or minus 50 basis points, driven primarily related to lower distribution sales as we maintain our months of sales in the channel at one six or below.
Speaker Change: Operating expenses are expected to be about $755 million, plus or minus about $10 million taken together, we see non-GAAP operating margin to be 33, 9% at the midpoint.
Speaker Change: We estimate non-GAAP financial expense to be about $66 million.
Bill Betts: We anticipate the non-GAAP tax rate to be 16.9% of profit before tax, non-controlling interest, and other will be about $3 million for Q1. We suggest for modeling purposes, you use an average share count of 259 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $127 million, higher than normal driven by our restructuring activities undertaken in Q4 as we continue to refine the portfolio. For capital expenditures, we expect to be around 7%. Taken together, at the midpoint, this implies a non-GAF earnings per share of $3.17.
We anticipate the non-GAAP tax rate to be 16, 9% of profit before tax.
Speaker Change: Noncontrolling interest and other will be about $3 million.
Speaker Change: For Q1.
Speaker Change: We suggest for modeling purposes, you use an average share count of 259 million shares.
Speaker Change: We expect stock based compensation, which is not included in our non-GAAP guidance to be $127 million.
Speaker Change: Higher than normal driven by our restructuring activities taken in Q4, as we continue to refine the portfolio.
Speaker Change: Our capital expenditures, we expect to be around 7%.
Speaker Change: Taken together at the midpoint this implies a non-GAAP earnings per share of $3 17.
Bill Betts: For full year 2024 modeling purposes, we expect non-gap gross margin to be around the high end of our long-term model of plus or minus the normal 50 basis points. We expect operating expenses to stay within our long-term model and fluctuate by quarter driven by annualized merits occurring in the second quarter and variable compensation movements pending actual performance. We suggest for the non-GAAP tax rate, use a range between 16.4% to 17.4%. For stock-based compensation, we suggest using $480 million, where Q1 is the peak for the year. For non-controlling interest, we suggest using $25 million.
Speaker Change: For full year 2020 for modeling purposes, we expect non-GAAP gross margin.
Speaker Change: To be around the high end of our long term model of plus or minus the normal 50 basis points.
Speaker Change: We expect operating expenses to stay within our long term model and fluctuate by quarter, driven by annualized merits occurring in the second quarter and variable compensation movements pending actual performance.
Speaker Change: We suggest for non-GAAP tax rate use a range between $16 four to 17, 4%.
Speaker Change: Stock based compensation, we suggest to use $480 million, where Q1 is the peak for the year.
Speaker Change: For Noncontrolling interests, we suggest to use 25 million for.
Bill Betts: For capital expenditures, we expect to stay within the long-term target of 6 to 8% of sales. In closing, looking ahead into 2024, I'd like to highlight a few focus areas for NXP. First, from a performance standpoint, we will continue to navigate a soft landing through a challenging and cyclical demand environment. Therefore, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model. Second, operationally, the Q1 guidance assumes internal factory utilization will continue to be in the low to mid-70s range, a level we expect to hold until internal inventory normalizes. Lastly, we will retire the $1 billion 2024 debt tranche when it comes due on March 1st with cash on hand.
Speaker Change: For capital expenditures, we expect to stay within the long term model of 6% to 8% of sales.
Speaker Change: In closing looking ahead into 2024.
Speaker Change: To highlight a few focus areas for NXP.
Speaker Change: First from a performance standpoint, we will continue to navigate a soft landing through a challenging and cyclical demand environment.
Speaker Change: Therefore, we will continue to be disciplined to manage what is in our control and stay within our long term financial model.
Speaker Change: Second operationally the Q1 guidance assumes internal factory utilization will continue to be in the low to mid 70 range a level, we expect to hold until internal inventory normalizes.
Speaker Change: Lastly, we will retire the $1 billion 2024 debt tranche when it comes due on March one March one with cash on hand.
Bill Betts: Finally, there is no change to our capital allocation strategy where we will continue to return all excess free cash flow back to our owners. In addition, since the beginning of Q1 2024, we repurchased $116 million worth of shares under our existing 10B-51 program.
Speaker Change: Finally, there is no change to our capital allocation strategy, where we will continue to return all excess free cash flow back to our owners and.
Speaker Change: In addition, since the beginning of Q1 2024.
Speaker Change: We repurchased $116 million worth of shares under our existing 10, the dash five one program.
Operator: Overall, we will remain active in repurchasing our shares. I'd like to now turn it back to the operator for questions. Thank you. If you'd like to ask a question, please press star 11. If your question hasn't been answered and you'd like to remove yourself from the queue, please press star 11 again.
Speaker Change: Overall, we will remain active repurchasing our shares.
I'd like to now turn it back to the operator for questions.
Speaker Change: Thank you.
Speaker Change: If you'd like to ask a question. Please press star one one.
Speaker Change: Thank you for your question Hasnt answered new like to remove yourself from the queue. Please press star one again.
Ross Seymore: Our first question comes from Ross Seymour with Deutsche Bank. Your line is open. Hey guys, thanks for asking the question. First, on inventory management in general, Kurt, it sounded a lot like you've done a great job on the channel side, but the OEM side has gotten a little bit into the excess category. Can you just talk about, I guess, on the channel side, do you have any plans for that 500 million coming into the plan in 2024, if that's still the number? And on the OEM side, when do you think that normalizes throughout? Yeah, hey, thanks, Ross. Good morning.
Speaker Change: Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.
Ross Seymore: Hey, guys. Thanks for let me ask a question first on the inventory management and general occurred it sounded a lot like you've done a great job on the channel side, but the OEM side has gotten a little bit into the active category can you just talk about I guess on the channel side do you have any plans for that $500 million coming into the plan in 2024.
Ross Seymore: Still the number and on the OEM side, when do you think that normalizes throughout the year.
Yes.
Kurt Sievers: Indeed, I think the color you put on this is what I would concur with. On the channel side, we feel safe and very much under control relative to the inventory. Let me put it that way. For quarter one, we have absolutely no intention to go beyond the 1.6 range. It will hover between 1.5 and 1.6.
Speaker Change: Thanks, Ralph good morning.
Speaker Change: <unk>.
Speaker Change: Think of the color you put on this is what I would concur with all the channel side, we feel safe and very much under control relative to the to the inventory.
Let me put it that way for quarter, one we have absolutely no intention to go beyond the one six range.
Speaker Change: Hoover between one five and $1 six I think we had one five of the past two quarters.
Kurt Sievers: I think we had 1.5 the past two quarters. So, consider for Q1 maybe a 1.6, but that's not an increase. It's more the precision we can hold that. So, no intention to really increase channel inventory in the first quarter. For the rest of the year, Ross, it isn't much different from how we've done this in the past couple of quarters. We will only start to replenish when we see sufficient momentum in the market to justify that. So, that means there is neither a guarantee that by the end of the year, we hit the 2.5 inventory, which is our long-term target, nor will we do any fast or hectic steps here. So, we will possibly start, because I do assume, and we will come back to this later in the call, we do expect that there is some market recovery in the second half of the year. So, that makes it more likely that we will start to replenish the channel by then. But again, it's really something that is a function of the market environment. The size of it is indeed $500 million, which we discussed before, but again, that is not necessarily a part of our considerations for the annual revenue movement.
Consider for Q1, maybe a one six but thats not an increase it's Marty the precision we can we can hope that so no intention to increased channel inventory related to the first quarter for the rest of the year Ross it isn't much different to how we've put this the past couple of quarters, we will only start to replenish when we see sufficient momentum.
Speaker Change: Some in the market to justify that.
Speaker Change: So that means there is neither a guarantee that by the end of the year, we hit the $2 five.
Speaker Change: Inventory, which is our long term targets.
Speaker Change: Nor will we do any fast or hectic steps here, so beeville, possibly stops because I do assume when we come back to this later in the call.
Speaker Change: We do expect that there is some market recovery in the second half of the year. So that makes it more likely that we will start with just two of them to replenish the shuttle by then but again, it's really something which is a function of the market environment.
Speaker Change: The size of it.
Speaker Change: Indeed, the $500 million, which we have discussed before but again that is not necessarily a part of our concentrations for the annual revenue movement.
Kurt Sievers: Now, the inventory or the excess inventory at direct customers, indeed, I think we started to try and correct that one back in the second quarter of last year. I think that was also the first time we talked about it on the earnings call that we did see a few automotive tier one customers where the majority of that was sitting with having excess inventory. And the fact that we knew about them already, Ross, is thanks to our NCNR system. And we discussed these NCNR orders, which, by the way, in our case, are different from the construct which some of our peers have been using. Ours were annual.
Speaker Change: No.
Speaker Change: Inventory or the excess inventory at direct customers indeed.
Speaker Change: I think we started to to try and correct that one back in the second quarter of last year I think that was the first time also talked on the earnings call that we did see.
Speaker Change: A few automotive tier one customers, we have a better maturity of debt is sitting.
Speaker Change: With having excess inventory and the fact that when you buy them already Ross is thanks to our NCI in our system.
Speaker Change: And we discussed about these <unk> orders, which by the way in our case are different to the construct which some of our peers have been have been using our annual annual means tied to the calendar year. So to be very explicit. We currently have no more <unk>. So all of that was running out.
Kurt Sievers: Annual means tied to the calendar year. So to be very explicit, we currently have no more NCNR orders. So all of that was running out at the end of the calendar year 2023. But those NCNR orders, in hindsight, were very good because they let customers call us up and say, "We see a problem." We are building inventory, and since that second quarter of last year, we've been busy to try and normalize this in a reasonable cadence, which is also good for our financials. And coming back to your question, yes, we think we will still be busy with that through the middle of this year, mainly, and I would say almost exclusively, in the automotive sector. So that is something which we only have in the automotive industry.
Speaker Change: At the end of the calendar year 2023.
Speaker Change: But those <unk> orders in hindsight were very good because they let customers call us up and say, we see a problem, we see building inventory and since the second quarter of last year, we've been busy to try and normalize this in a reasonable cadence, which is also good for our financials and coming back to your question, Yes, we think.
Speaker Change: We will still be busy with that through the middle of this year.
Speaker Change: Mainly in <unk> I would say almost exclusively in automotive so that is something which we which we only have an automotive by the middle of this year that should be behind US and then we should move from under shipping empty months with direct customers in automotive to shipping to empty month again in the second half.
Kurt Sievers: By the middle of this year, that should be behind us, and then we should move from under shipping and demand with direct customers in the automotive industry to shipping to end demand again in the second half. Thanks for that color.
Speaker Change: Thanks for that color and I guess as my second question focusing on the auto side. It was helpful to hear about the sixth growth drivers overall, but in automotive.
Ross Seymore: And I guess as my second question focusing on the auto side, it was helpful to hear about the six growth drivers overall, but in the automotive industry, the radar below plan EV above and S32 above, can you just talk about what your expectations are for those growth drivers in fiscal 24? Well, in principle, I would say if there was no excess inventory and we were in a normal world, Ross, we stick to our 9% to 14% long-term growth, which includes the set performance of those growth drivers, which we specified back at the analyst day on November 21. So they are just moving around a little, and that's why we transparently gave them the color for this past year, pending on the speed of inventory control.
Speaker Change: Our below plan EV above and Thats 32 above can you just talk about what your expectations are for those growth drivers in fiscal 'twenty four.
Speaker Change: Well in principle I would say if there was no excess inventory and we would be in a normal world Ross, we stick to our line to 14% long term growth which includes spend.
Speaker Change: Net performance of dose.
Speaker Change: All of those.
Speaker Change: Gross drivers, which we specified back and be in the analyst day in November 21.
Speaker Change: So they are just moving around the level and Thats why we will be transparent VK extra color for this past year.
Speaker Change: Pending on the speeds of.
Kurt Sievers: And I think you might have noticed that I did say that Radar was actually not performing to target. The reason here is really that Radar has a relatively concentrated customer base. It's almost, it's just direct customers, where the inventory control was much easier to exercise because it's a very specified product range with a very non-fragmented customer base, where it was easier to get a handle on the inventory control. So I dare to say inventory control in Radar is already completely behind us, which will make 24 obviously a much better year. So, but on the longer term, on the three-year horizon, Ross, just assume they all come to the targets which we specified back on November 21. Thank you. Thank you. The next question comes from Vivek Arya with Bank of America. Your line is open.
Speaker Change: Inventory control.
Speaker Change: And I think you might have noticed that I did say that radar was actually not performing to target. The reason here is really radar has a relatively concentrated customer base is.
Speaker Change: Its almost its just direct customers.
Speaker Change: There the inventory control was much easier to exercise because it is a very specified product range with a very long.
Speaker Change: Non fragmented customer base, where it was easier to get a handle on the on the inventory control. So I'd have to say inventory controlling radar is already completely behind us.
Speaker Change: Which will make 24, obviously, a much better year so on the.
Speaker Change: Our term on the <unk>.
Speaker Change: Three year horizon.
Speaker Change: Ross just just assume they all come to the targets, which we which we specify it back in.
Speaker Change: In November 21.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Vivek Arya with Bank of America. Your line is open.
Vivek Arya: Thanks for taking my question. Kurt, last quarter you were good enough to kind of give us a little bit of color one quarter ahead, and I was hoping you could share your thoughts on how you see Q2, you know, just generically shaping up, you know, flat up, down sequentially. And then when I take your commentary about the full year, I think you mentioned sort of flattish growth overall. But that still suggests, you know, kind of double-digit growth in the back half. So I realize that visibility is limited and so forth, but any other market color that you can share that gives you confidence about that sort of double-digit growth in the back half would be very helpful. So good morning, Vivek.
Thanks for taking my question Kurt last quarter, you were good enough to kind of give us a little bit of color. One quarter ahead, and I was hoping you could share your thoughts on how you see Q2 genetically shaping up flat or down sequentially and then when I take your <unk>.
Speaker Change: Commentary about the full year I think you mentioned sort of flattish overall that still suggest.
Speaker Change: Kind of a double digit growth in in the back half.
Speaker Change: I realize visibility is limited and so forth, but any other market color that.
Speaker Change: You can share that gives you the confident about that sort of double digit growth in the back half would be very useful.
Speaker Change: So good morning Vivek.
Kurt Sievers: Yeah, apparently I was a good man last time relative to the next quarter. I think you just reiterated the pieces which we gave you, but I'm happy to give you a bit more color around those. So we really see the different parts of our revenue being dependent on the cycle they are exposed to. So all the consumer-oriented businesses, and that's the IoT part of industrial IoT and mobile, we think we left the trough way behind us in the first quarter of last year, and other than some seasonal fluctuations, they will continue to grow throughout the calendar year 2024, which has to do that a large part of that is anyway supplied through the channel, so we are not suffering from excess inventory digestion, so we are pretty positive that that part of the company will grow.
Vivek Arya: Yes, I'd, probably be able to goodbye and lost time relative to the to the next caller.
Vivek Arya: I think you just reiterated the pieces, which we gave you but I'm happy to give you a bit more.
Vivek Arya: A bit more color around those.
We really see the different parts of our of our revenue being dependent on the cycle. They are exposed to.
Vivek Arya: So all the consumer oriented businesses and Thats, the Iot part of industrial Iot and mobile we think we left the trough of way behind us in the first quarter of last year and other than some seasonal fluctuation stay will continue to grow throughout the calendar year 'twenty 'twenty, four which has to do that.
Vivek Arya: A large part of that is anyway suppliers through the channel. So we are not suffering from excess inventory digestion.
Speaker Change: We are.
Pretty positive that that part of the company will grow at the same time I reiterate what I said last time.
Kurt Sievers: At the same time, I reiterate what I said last time, the comms infra and other business will decline from a year-on-year perspective, so 24 revenue for comms infra and other will be down versus the calendar year 23. I think we discussed at length the bits and pieces of why that is, and then you come to the block of automotive and core industrial, where indeed there is something between the first half and the second half which has to do with inventory digestion at the direct customers in the automotive sector, which I just discussed with the question about Ross a minute ago, where we do believe the turning point is somewhere around the middle of the year, when that excess inventory which is still sitting there is being digeste If you put all of these pieces together, Vivek, then obviously half two is going to be bigger than half one; obviously, half one of this year of 2024 is going to be down against half one of last year.
Speaker Change: Comms infra and other business will decline from a year over year perspective, So 24 revenue for content and other will be down versus the calendar year 'twenty three.
Speaker Change: I think we discussed at length, the the bits and pieces in there why that is.
Speaker Change: And then you come to the plug of automotive and core industrial.
Speaker Change: Indeed the.
Speaker Change: There is something between first half and second half, which has to do with the inventory digestion at the direct customers in automotive.
Speaker Change: As I just discussed with with the question of Ross a minute ago.
Speaker Change: We do believe that turning point is somewhere around the middle of the year, that's over inventory, which is still sitting there is being is being digested if.
Speaker Change: If you put all of these pieces together.
Then obviously half two is going to be bigger than half one.
Speaker Change: Obviously half one of this year of 2024 is going to be down against the half one of last year.
Vivek Arya: And that puts it somewhere in this flat plus or minus range for the full year, indeed. So the confidence really comes from the view which we have on the inventory digestion on the automotive and core industrial side. And at the very same time, the continued gradual improvement in the consumer-oriented businesses, where, given our tight channel management, we have no excess inventory. Thank you, Kurt.
Speaker Change: And that puts puts its somewhere in this flat plus minus range for the full year indeed.
Speaker Change: So the confidence really comes from the.
Speaker Change: View, which we have on the inventory digestion.
Speaker Change: On the automotive and core industrial site.
Speaker Change: And at the very same time, the continued gradual improvement in the consumer oriented businesses.
Speaker Change: Given our tight travel management, we have no excess inventory, but this is really where it comes from.
Kurt Sievers: And for my follow-up. You know, your industrial trends are in big contrast to your peers. So I get, you know, what you did, right? You were early to spot it.
Speaker Change: Alright, Thank you Kurt and for my follow up.
Speaker Change: Your industrial trends are in industrial and Iot trends are in Big contrast to your peers. So I get.
Speaker Change: What date, Brian you were early to support it.
Vivek Arya: You were, you know, undergrowing in the first half of last year, and now you're doing much, much better now. But how long can you maintain such a contrast with your peers, right, who are seeing these kinds of 20, 30, 40 percent declines in their industrial and IOT businesses? Is it not an apples to apples comparison? You know, when do you think that there is somewhat of a convergence between what your peers are reporting in terms of their industrial? correction versus the strength that NXP is seeing right now? Look, Vivek, I, of course, don't know and cannot judge what exactly they do.
Speaker Change: Under growing in the first half of last year and now youre doing much much better now, but how long can you maintain such a contrast with your peers, who are seeing these kind of 2030, 40% declines in their industrial and Iot business is it not apples to apples.
Speaker Change: That is then.
Speaker Change: No.
Speaker Change: When do you think that there is somewhat of a convergence between what your peers are reporting in terms of their industrial.
Speaker Change: What is the strength that NXP is seeing right now.
Speaker Change: Look we would like.
Speaker Change: I of course don't know and cannot judge what exactly they do.
Kurt Sievers: But conceptually, the contrast will be alive as long as they need to digest their over-inventory in the channel. That's very simple. We don't have that because we never build it.
Speaker Change: But conceptually the contrast will be alive as long as they need to digest there over inventory in the channel.
Speaker Change: Very simply we don't have that because we never build it.
Kurt Sievers: We actually, back in the second quarter of 2022, mind you, the second quarter of 2022, that's almost two years ago, we started to control the channel and keep it at the 1.6 and 1.5 months level. We, even with that, drafted them in the first quarter of 23. So we even went down from this, and since then, we have kept it very steady. In the meantime, some of our peers kept shipping hot, and they just need to correct this, and that contrast will disappear the moment that the overshipment they have done there is actually behind them. I mean, maybe another number, Vivek, which puts this in perspective. And we gave you that transparency very intentionally. Last year, NXP as a company did grow 1% in revenue.
Speaker Change: We actually back in the second quarter of 2022 mine through second quarter of transferring into there is almost two years ago, we started to control the channel and keep it at a $1 six in one five months level.
Speaker Change: Even with that we trust in the first quarter of training suite. So we even went down from this and since then we kept it we kept it very steady in.
Speaker Change: In the meantime, some of our peers kept shipping hot and stages need to correct. This in contrast will disappear at the moment that over shipment. They have done there is it is actually behind them.
Speaker Change: I mean, maybe another number vivek, which puts us in perspective.
We gave you that transparency very intentionally.
Speaker Change: Last year NXP as a company did grow 1% in revenue.
Kurt Sievers: I also told you that our pricing last year was up by 8%, so that gives you a feeling that we had a pretty significant volume decline last year from a supplier perspective. So plus 1% revenue, plus 8% price gives you a 7% volume decline, which is clearly under shipping, we think, against end demand, but certainly against peers. I mean, if you just take the same numbers from peers, then many of them who are now having a bit more of a hard time, they just shipped harder through the first, at least the first three quarters of last year. So under the curve, in the end, it's going to be the same thing. It's a matter of when did you ship and when do you need to reduce shipments? So that's my answer. I don't think, other than that, there is a fundamental difference, Vivek.
Speaker Change: I also told you that our pricing last year was up by 8%.
Speaker Change: So that gives you a feel that we have a pretty significant volume decline the us last year from a supply perspective, so plus 1% revenue plus 8%.
Speaker Change: This gives you a 7% volume decline, which is clearly under shipping.
Speaker Change: Think against end demand, but certainly against peers.
Speaker Change: Just take the same numbers from peers many of them, who are now having a bit more of a hard time. They just shift harder through the first at least the first three quarters of last year. So under the curve in the end, it's going to be the same thing. It's a matter of when did you ship and when do you need to reduce shipments. So that's why also I don't think other than that.
Vivek Arya: So I don't want to claim we have a much better industrial business. I think we just had a more disciplined handle on it earlier. Thank you. Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is open. Stacy, are you there?
Speaker Change: It's a fundamental difference VIX, so I don't want to claim.
Speaker Change: We have a much better industrial business I think we just had a more disciplined handle on it earlier.
Speaker Change: Thank you Kurt.
Speaker Change: Thank you. Our next question comes from Stacy <unk> with Bernstein Research. Your line is open.
Speaker Change: Okay.
Speaker Change: Stacy are you there Jason your line is open.
Stacy Aaron Rasgon: Stacy, your line is open. Operator, why don't we go to the next caller and we'll circle around with Stacy. Can you, hello?
Operator, why don't we go to the next caller circle around the space.
Operator: Oh, I can hear you, Stacy. Good morning. Yeah, that was, I don't know what was going on there. Thanks for taking my questions. I had a question on the IoT trend. So it obviously bottomed in Q1 last year. Um, I was wondering if you could parse out the recovery trends between the consumer piece and the core industrials. So we all know consumers are getting a little better. Has the increase off the trough from a year ago been all consumer? Or has the general purpose IOTP started to recover as well? Like, what are those trends across those? Yeah, thanks, Stacy.
Speaker Change: Hello.
Speaker Change: Hey, good morning, Yeah that was I don't know what was going on there.
Speaker Change: Thanks, Brian Thanks for taking my questions.
Speaker Change: Had a question on the Io key trends so.
Speaker Change: It obviously bottomed in Q1 last year.
Speaker Change: I was wondering if you could parse out the recovery trends between the consumer piece.
Speaker Change: And the core industrial so we all know consumers getting a little better has been increase off the trough from a year ago, but in all consumer.
Speaker Change: Or has the general purpose Iot piece started to recover as well like what are those trends across those two pieces.
Kurt Sievers: That's that's a fair question because, indeed, the two are trending differently. I'd say the IoT piece, which, by the way, is about 40% of that segment, has indeed gradually improved since that drop in the quarter one of last calendar year. Gradual means it's getting better and better and better, but it's still below the levels it had before the peak, so it's not there where it used to be while it is gradually improving. In our case, and I think we revealed that before, a very good portion But yes, so the trend starting from the bottom of Q1 last year gradually improving, and that's what we see to continue through the rest of this calendar year. The core industrial part, indeed, has taken a somewhat different shape.
Speaker Change: Thanks, Stacy that's a fair question because indeed, the two the two are trending differently.
Speaker Change: I'd say it'd be the Iot piece, which by the way is about 40% of that of that segment.
Speaker Change: Has indeed gradually improved since that drop.
Speaker Change: In the quarter, one of last calendar year.
Speaker Change: Gradual means, it's getting better and better and better but it's still below the levels. It had it had been.
Speaker Change: Before the peak so its way not there where it used to be while it is gradually improving.
Speaker Change: In our case and I think we revealed that before.
Speaker Change: Good portion of that is in China.
Speaker Change: So think about it as a as a largely distributions and largely China oriented Iot business.
Speaker Change: Yes, so the trends.
Speaker Change: <unk> from from the bottom of Q1 last year gradually improving and Thats. What we continue what we see to continue through the rest of this calendar year.
Speaker Change: Core industrial part indeed has taken a somewhat different shape think about it more like like automotive.
Kurt Sievers: Think about it more like automotive, which is now suffering a bit more from over-inventory, not much, and market weakness, so I would say core industrial is, relatively speaking, in somewhat less good shape still, which is just phased into the um, to the um, iot portion. So think about core industrial a bit more similar to what we, what we see in automotive. Thank you. As a follow-up, I wanted to ask you about lead times. Have they normalized to pre-COVID levels, and is that part of what's enabling you to keep prices flat? Do you have better control of pricing because you have better control of lead times? You've got a lot of competitors that are talking about pricing starting to come down. So, the first part of the question, Stacy, an absolute yes, lead times are just normal.
Speaker Change: <unk>, which is.
Speaker Change: Which is now suffering a bit more from over over inventory not much and end market weakness. So I would say core industrial relatively speaking as a somewhat less good shape still which is just phase shifted to the.
Speaker Change: To the Iot portion, so think about core industrial a bit more similar to what we what we see in automotive.
Speaker Change: Got it thank you.
Speaker Change: My follow up I wanted to ask you about lead times have been normalized pre COVID-19 levels and is that part of what's enabling you to keep pricing flat.
Speaker Change: Everybody just like better control of pricing because you have better control of lead times, you've got a lot of competitors have been talking about pricing starting to come down now.
Speaker Change: So.
Speaker Change: First part of the question Stacy absolute yes lead times are just normal.
Stacy Aaron Rasgon: I mean, forget about supply constraints; we have normal lead times, back to the pre-COVID times, which helps a lot also relative to visibility, because all of the double ordering and all of the need for NCNRs and all of these things, just consider them behind us, more back to normal from that perspective. It, there is no, there is no real correlation of that to pricing, Stacy. The pricing, which I quoted to be about flat for this year, from our end, is mainly a function of the input cost. We've been living in that world of sharply rising input cost over the past three years, and now it looks more normal. So any view and handle we have on the input cost for this year is around zero, I would say, and that's also why we put that forward as the pricing for 24, and we found acceptance and buy-in for that with our customers, Stacy. It's not really correlated with lead times. I understand your question if we had more of a commodity portfolio. But since we don't have that, that correlation doesn't really exist. I got it.
Forget about supply constraints, we have normal lead times back to the back to the pre Covid times.
Speaker Change: Rich, which helps a lot also relative to visibility because all of the double ordering and all of the need for <unk> in all of these things it just consider them behind us.
Speaker Change: More back to normal from their perspective.
Speaker Change: There is no.
Rich: There is no real correlation of that to pricing Stacey.
Rich: The pricing, which I quoted to be about flat for this year from our end is mainly a function of the input costs.
Rich: We've been living in that world of sharply rising input cost over the past three years.
Rich: And now it looks more enrollments sold any any view and handle which we have on the input cost for this year is around zero I would say and Thats also why we why we put that forward as the pricing for a 424 and we found acceptance and buy in for that with our customer Stacy that's not it's not really correlated with lead times.
Speaker Change: I understand your question, if we have more of a commodity portfolio. Since we don't have that correlation doesn't really exist.
Kurt Sievers: That's helpful. Thank you, guys. Thank you. Our next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.
Speaker Change: Got it that's helpful. Thank you guys.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from Gary Mobley with Wells Fargo Securities. Your line is open.
Gary Mobley: Hey guys, thanks for taking my question. Kurt, you called out some better than expected revenue on the mobile side, and you appear to be poised for... Pretty significant year-over-year growth in mobile in the first half of fiscal year 24. Is that a function of the Android market being less bad? Is it largely a function of maybe some traction in ultra-wideband, or is it a function of content gains at your largest mobile customer? So, Gary, in full transparency, most of all, it's a function of the weak comparisons of last year. I just have to put it out there.
Gary Mobley: Hey, guys. Thanks for taking my question.
Gary Mobley: Curt you called out some better than expected revenue on the mobile side and you appear to be poised for some pretty significant year over year growth in mobile in the first half of fiscal year 'twenty four.
Gary Mobley: A function of the Android market being less bad is it largely a function of.
Gary Mobley: Maybe some traction and ultra wide band or is it a function of content gains at your largest mobile customer.
Curt: So Gary in full transparency most of all it's a function of the weak compared with last year.
Kurt Sievers: I mean, if you look at our Q1 of last year, it was horrendously low as a function of everything I explained in the last 10 minutes. So, very, very clearly, mainly a function of weak competition. However, you mentioned at least one other thing, which is certainly the case. We clearly see that the Android inventory digestion process is completely behind us. I would almost claim that in Q4, it was largely behind us. So in Android, we are shipping to end demand. And you could also be somewhat hopeful about the Android market development going forward. So that is certainly a case. And our premium handset customer is also, I would say, in decent shape relative to volume developments. But that's it.
Gary Mobley: I just have to pull it out I mean, if you look at our Q1 of last year. It was horrendously low.
Gary Mobley: As a function of everything I explained at the last 10 minutes.
Gary Mobley: So very very clearly mainly a function of weak compares however.
Gary Mobley: However.
Gary Mobley: You mentioned at least one other thing which is certainly the case, we clearly see that the Android inventory digestion is completely behind us.
Gary Mobley: I would almost claim already in Q4. It was it was largely behind us.
Gary Mobley: So in in Android, we are shipping to empty month, and you could also be somewhat hopeful about the Android market development going forward so that.
Gary Mobley: That is certainly a case.
Gary Mobley: And our premium handset customer is also.
Gary Mobley: I would say in a decent decent shape relative to volume developments, but that's it. So again it is very much a function of us trying to get as quickly as possible to true end demand.
Kurt Sievers: So again, it is very much a function of us trying to get as quickly as possible to true end demand and not suffering from excess inventory. I mean, that's a good example of where that also helps you, on the other side of the equation, to quickly come back into growth. Thank you for that, Kurt.
Gary Mobley: Suffering from excess inventory I mean, thats a good example of.
Gary Mobley: That also helps you then on the other side of the equation to quickly come back to growth.
Gary Mobley: And Bill, you seem to be calling out 58% gross margin for fiscal year 24, which is down only 50, basically, from the prior year. And that's quite commendable, considering, you know, what's going on in the industry and whatnot. And it seems like you have a lot of gross margin headwinds from utilization to mix headwinds and whatnot. Maybe you can give us some additional color in terms of the offsets to those headwinds and what's allowing for this gross margin resilience. Sure, let me just use Q4 as an example and Q1 and then talk about some more of those levers, both tailwinds and headwinds.
Speaker Change: Thank you for that Kurt.
Speaker Change: Bill you seem to be calling out 58% gross margin for fiscal year, 'twenty, four which is down only 50 basis points from the prior year.
Speaker Change: And that's quite commendable, considering what's going on in the industry and whatnot.
Speaker Change: Seems like you have a lot of gross margin headwinds from utilization mix headwinds.
Bill Burke: Maybe you can give us some additional color in terms of the offset those headwinds and what.
Bill Burke: This gross margin resiliency.
Bill Burke: Sure. Let me just use Q4 as an example in Q1 and then talk about some more of those <unk> <unk> tailwind and headwinds. So in Q4, we did slightly better as you know 20 basis points and really that was driven by that distribution mix.
Bill Betts: So in Q4 we did slightly better, as you know 20 basis points, and really that was driven by that distribution mix; it represented 61% of our sales, up from 57% in Q3. Now, in Q1, we're guiding down 70 basis points, primarily driven, again, by this lower distribution mix and slightly lower fall through on sales. And because what we're doing there is we're seasonally adjusting distribution sales, so that will be down, but still probably better than a year ago from a mix standpoint.
Bill Burke: It represented 61% of our sales up from 57% in Q3 now in Q1, we're guiding down 70 basis points, primarily driven again by this lower distribution mix and lower slightly lower fall through on the sales and because what we're doing there is were seasonally adjusted adjusting.
Bill Burke: <unk> sales, so that will be down, but still probably better than a year ago from a mix standpoint, you remember distribution sales was about 49% in Q1.
Bill Betts: If you remember, distribution sales were about 49% in Q1. And I think we'll be a bit better than that, which is then offsetting the underutilization. If you recall, in Q1 a year ago, we were running in the low 80s, and now we're running in the low 70s. So you've got some moving parts from a year over year comparison, but from a quarter over a quarter comparison, it's really driven by the mix. Now, talking about tailwinds and headwinds, you're right.
Bill Burke: And I think we'll be a bit better than that which is then offsetting the underutilization. If you recall Q1 from a year ago, we were running in the low <unk> and now we're running in the low 70. So you got some moving parts from a year over year compare but from a quarter over quarter compare it's really driven by the mix now talking about tailwind that headwinds youre right clearly if we go.
Bill Betts: Clearly, if we go below our current utilization levels of the low 70s, that becomes a headwind for us. We know that. We're managing it to this level. And you can see that for the last three quarters, we've been running our internal factories, which represent 40% of our internal source wafers. Another obvious headwind is obviously lower revenues. You have lower fall through over your fixed cost structure.
Bill Burke: Although our current utilization levels of the low 70 that becomes a headwind for us we know that we're managing it to this level. One you can see for the last three quarters, we've been running our internal factories, which represent 40% of our internal source wafers.
Bill Burke: Another obviously headwind is obviously you have lower revenues you have warmer fall through of your fixed cost structure.
Bill Betts: If we do see lower pricing, again, so far, we see that we're able to keep this stable and flat from a year over year comparison standpoint. But again, if we do have lower pricing, it's our job to offset that with lower cost and productivity gains. Again, obviously, this is more of a longer term issue. The delay of any new product introductions could cause an impact in this quarter or that quarter based on timing. But the tailwinds we have, again, are higher revenues if you think about them, over the 30% fixed cost structure we have. So that falls through. If we replenish our channel back to normal levels, again, Kurt talked about that $500 million. It's a richer mix.
Bill Burke: If we do see.
Bill Burke: Lower pricing again, so far we see that we're able to keep the stable and flat from a year over year comparison standpoint, but again, if we do have lower pricing, it's our job to offset that with lower cost and productivity gains.
Bill Burke: Again, obviously this is more longer term the delay of any new product introductions could cause an impact from this quarter or that quarter based on timing, but the tailwind we have again as higher revenues.
Bill Burke: If you think about over the 30% fixed cost structure, we have so that falls through.
Bill Burke: We replenish our channel back to normal levels again, Kurt talked about that $500 million, it's a richer mix and when we decide to do that that becomes a tailwind.
Bill Betts: And when we decide to do that, that becomes a tailwind. And then utilization. If we improve our 70% utilization internally, going back to something in the mid-80s, that's a tailwind. Another one is something that we talked about, and that is we plan to expand our distribution reach and mass market customers. We don't think we're doing as good of a job as some of our peers.
Bill Burke: And then utilization if we improve our 70% utilization internally gone back then more something in the mid Eighty's, that's a tailwind.
Bill Burke: Another one is something that we talked about as we plan to expand our distribution reach in mass market customers. We don't think we are.
Bill Burke: Doing as good a job like some of our peers. So that's something that we're going to focus on and do better at and reach more customers and clearly we're going to continue to execute on our productivity gains and most importantly longer term is to ramp up our new product introductions, which are accretive to the corporate gross margins today. So all in all.
Bill Betts: So that's something that we're going to focus on and do better at, and reach more customers. And clearly, we're going to continue to execute on our productivity gains. And, most importantly, longer term, to ramp up our new product introductions, which are accretive to the corporate gross margins today. So all in all, I think it's how you manage the tailwinds and the headwinds, quarter in and quarter out.
Speaker Change: Thank you.
Speaker Change: How you manage the tailwind and the headwind quarter ending quarter out and we're going to do our best to maintain near the high end of the model is what I said at these revenue levels.
Bill Betts: And we're going to do our best to maintain near the high end of the model, as I said at these types of revenue levels. Helpful. Thanks. Thank you. Thank you. Our next question comes from Francois Bovines with UBS. Your line is open.
Speaker Change: Helpful. Thanks Bill.
Speaker Change: Thank you.
Speaker Change: Thank you. Our next question comes from Francois <unk> with UBS. Your line is open.
Francois Bovines: Thank you very much. I have to maybe follow up to the previous question. The first one is on the automotive front. You mentioned that you are basically managing the channel and the shipping at the moment with a more clear picture in the second half of the year, if I have to summarize. Can you quantify maybe how much you undership the demand, you know, maybe in the last two quarters? Because when I look at your auto revenues, they were up 1% year over year. The production of cars was obviously much higher, but I was wondering if you had any intelligence on how much you are undershipping the automotive industry right now, which basically would go into your way of a soft down cycle, but I was wondering if you had any quantification on that. Yeah, Francois.
Francois: Thank you very much some F. Two maybe follow up to the previous question. The first one is on the automotive I mean, you mentioned that you are basically managing the channel and under shipping at the moment with a more clear picture in the second half of the yearly path to summarize.
Francois: Can you quantify maybe how much do you under shipped the demand maybe in the last two quarters, because when I look at your total revenues.
Francois: It was.
Francois: One person.
Francois: Year over year.
Francois: <unk> was of course was obviously much higher.
Francois: Was wondering should any internal in terms of how much are you you are under shipping.
Francois: The automotive right now, which basically would go into your way of soft.
Francois: Don cycle, but I was wondering if you have any quantification of that would be very helpful.
Kurt Sievers: No exact quantification, but I guess a few pointers. It isn't useful, in my view, to look at one individual quarter, but I think now that the full calendar year 2023 is behind us, you can look at the full year, where I think our auto business did grow by 9%. I also said that the company increased pricing by 8%. So let's just assume for a minute that in the auto industry, we did also increase prices by that order of magnitude, which basically puts you almost on a zero supply increase line last year in the auto industry. So say zero growth in the supply of cars last year in units. And that goes against a, what I would call, super bullish, automotive year last year, with, I think, in the end, a 9% SAR increase to 90 million units, a rocking increase in electric cars. I think the XCV cars last year were growing by 45% year over year. So, I mean, all the good arguments which we've discussed so often for a lot of content increase on top of the 9% SAR. And we shipped zero.
Speaker Change: Yes, Hi, Francois no exact quantification, but I guess a few a few pointers.
Speaker Change: It isn't useful in my view to look at one individual quarter, but I think now since the full calendar year 'twenty three is behind us.
Francois: Look at the full year I think our auto business did grow by 9%.
Francois: I also said that the company has increased pricing by 8%. So let's just assume for a minute that in auto. We did also increase price in that order of magnitude, which basically puts you almost almost zero supply increased slide last year in automotive, so say zero zero growth in automotive last year in supply in units.
Francois: And that goes against a what I would call Super bullish automotive here last year with.
Francois: I think in the end, 9% Saar increased to 90 million units.
Francois: A rocking increase in electric electric cars. So I think the FCB cost last year were growing by 45% year over year. So I mean, all the good arguments, which we've discussed so often four of content increase on top of the 9% <unk>.
Kurt Sievers: I mean, that gives you a feel for why we have a very strong view that we already significantly undershipped through all of last year. But at the same time, I mean, it's obvious we have overshipped in the time before. It's just that I believe we started very early with taking a handle on that and controlling that overshipment and throttling it back. I think through all of last year, we undershipped on the distribution side of the automotive business, which is 40% of the revenue. And I'd say we started to take more stringent action in the second quarter of last year to also control the overshipments on the direct side, but that's one which is not completely done yet. So it's very hard to quantify that, Francois, because you don't know what size of inventory individual tier one customers want to keep in the long run. And it's also not a constant target.
Speaker Change: And we shipped zero.
That gives you a feel why we have a very strong view that we already significantly under shipped through all of last year.
But at the same time I mean, it's obvious we have over shipped in the time before.
Speaker Change: It's just that I believe we started very early with.
Speaker Change: We're taking a handle on that and controlling controlling that over shipment and swapping it back.
Speaker Change: I think through all of last year. If you have other ships in the distribution side of automotive, which is 40% of the revenue.
Speaker Change: And I'd say, we've taken we started to take more stringent action in the second quarter of last year to also control the over shipments in the direct side, but that's the one which is not which is not completely done yet so it's very hard.
Speaker Change: To quantify that for us because.
Speaker Change: You don't know.
Speaker Change: What size of inventory individual tier one customers want to keep on the long run and it's also not a sort of steady target I mean.
Kurt Sievers: I mean, you know, we've discussed with them very often these targets in terms of how many weeks of semiconductor inventory they want to keep. First of all, they range widely between different tiers. I could call the range here between two weeks and 18 weeks. It's really all over the place.
Speaker Change: We've discussed with them very often and these targets in terms of how many weeks of semiconductor inventory. They will achieve first of all they are ranging widely between different tier ones I could call. It a range between two weeks and 18 weeks.
Kurt Sievers: And it also changes over time. As soon as they see a reason to believe that their business is going to grow again, which means the OEM call-offs they are getting, they want to grow their inventory again. So that's why it's a bit of a moving target.
Speaker Change: Really all over the place.
Speaker Change: And it also changes over time as soon as they see a reason.
Speaker Change: A reason to believe that their business is going to grow again, which means the OEM call offs. They are getting that they want to grow their inventory again. So that's why it's a bit of a moving target, but I think for us the symptoms that we believed by the middle of calendar year 'twenty four we have that behind us.
Francois Bovines: But I think for us, the synthesis is that we believe by the middle of calendar year 24, we have that behind us. Thank you, and the second follow-up is on the pricing. I mean, you said flat pricing on 24, and obviously it seems to be better than peers, and I understand the commodity part and also the input cost. If we look at the input cost, the electricity is coming down. I mean, obviously, from the peak, you have the silicon wafers coming down; you have the mature nodes at the foundry level that are coming under pressure for many Tier 2, Tier 3 foundries. I was just wondering, you know, if the input cost is the main tracker of your pricing, how should we think about, you know, 2025 or through the year? As we see, you know, input cost is also coming under pressure, if you understand what I mean. Look, a couple of things. First of all, I'm glad we got well through 24. I can't get my head around 25 yet.
Speaker Change: Great.
Speaker Change: Thank you and the second follow up is on the pricing I mean, you said flat.
Flattish pricing on plans for.
Speaker Change: And obviously it seems to be like better than peers and I understand the commodity part tenders so the input costs.
Speaker Change: If we look at the input cost.
Speaker Change: <unk> is coming down obviously from the peak you'll have the silicon wafers coming down you have the.
Speaker Change: Mature nodes at the foundry level.
Speaker Change: Coming into pressure from many many tier two tier three foundry.
Speaker Change: Foundries.
Speaker Change: Just wondering you know if the input cost is the main tracker of your pricing.
Speaker Change: How should we think about.
Speaker Change: 2025, all through the year as we said.
Speaker Change: Food cost is also coming under pressure if you see what I mean.
Speaker Change: Look a couple of things.
Speaker Change: First of all I'm glad we got well through 'twenty four I can't get my head around 25%.
Kurt Sievers: That's a little early, to be honest. But, at the same time, I think you have put good pieces together relative to input costs. The one you didn't mention is the fact that the Tier 1 foundries are still a bit tight-lipped when it comes to cost decreases. And the biggest part of our input is Tier 1 foundries, not Tier 2 and Tier 3 foundries, because we need these Tier 1 foundries for our automotive and core industrial business. And there, unfortunately, the trends are not quite as ambitious as you mentioned.
Speaker Change: So that's a little that's a little early to be honest.
Speaker Change: At the same time I think you put good pieces together relative to input costs. The one which you didn't put up is the fact that the tier one foundries are still a bit tight lipped, but it is two two.
Speaker Change: Two cost decreases.
Speaker Change: And the biggest part of our input is tier one foundry is not tier two and tier three foundries, because we need these tier one foundries for automotive and core industrial business.
Speaker Change: And they are unfortunately, the trends are not quite as ambitious as you as you mentioned them.
Kurt Sievers: Over time, Francois, I do believe, say, in the mid to longer term, that the industry will return to low single-digit ASP erosion year over year. That is what we had in the pre-COVID period in an application-specific business like ours. And I think it is reasonable to assume that that is also going to happen in the mid to longer-term future. However, this year is a transition year because the input is not yet the input cost, and the inflationary environment is just not yet at that level as it used to be in the past. And very important, and I know it's probably very clear, but I just want to reiterate it very clearly.
Speaker Change: Over time crosswalk.
Speaker Change: I do believe say mid to longer term.
Speaker Change: The industry will return to low single digit ASP erosion year over year.
Speaker Change: That is what we have in the pre COVID-19 period.
Speaker Change: In the application specific business like ours, and I think it is reasonable to assume that that is also going to happen in the mid to longer term future.
Speaker Change: However.
This year is a transition year because the input is not yet the input cost in the inflationary environment is just not yet at that level as it used to be in the past and very important that I know, it's probably very clear, but I just want to reiterate that very clearly this does not mean falling back to the levels, which we had pre COVID-19.
Kurt Sievers: This does not mean falling back to the levels which we had pre-COVID. What I'm saying is, from the levels which we have achieved now, we possibly could have this very low single-digit ASP erosion per year in the mid to longer-term future. But we absolutely see no scenario that falls back to the levels before COVID.
Speaker Change: What I'm, saying is from the levels, which we have achieved now we possibly have done in the mid to longer term future of this very low single digit ASP erosion per year, but we absolutely see no scenario of the full specs to the to the levels of pre COVID-19.
Francois Bovines: Great. Thank you very much. Thank you. Our next question comes from Chris Stanley with Citi. Your line is open. Just in terms of, and a little bit tougher than the last, Kurt, is there any way to tell how much of this... Torrey, which way is the other? Hey, good morning, Chris.
Speaker Change: Alright, Thank you very much.
Speaker Change: Yes.
Speaker Change: Thank you. Our next question comes from Chris Danley with Citi. Your line is open.
Chris Danley: Hey, Thanks, guys just.
Chris Danley: In terms of the things.
Chris Danley: Things getting a little bit tougher over the last three months period is there any way to tell how much of this is I guess worsening demand versus a little more inventory than we thought any any which way or the other on either side of that.
Chris Stanley: Yeah, clearly, first of all, I confirm what you say; it got worse over the last 90 days, or at least our review of what we are exposed to got worse. I would say end demand for the auto has weakened. I mean, the latest S&P data is now almost a percentage point down year on year in terms of SAR, so that's a little less than it was before. The XCV penetration rate is a little slowing.
Speaker Change: Hey, good morning, Chris Yeah, clearly first of all I confirm what you say it got worse over the last 90 days or at least I'll review on what we are exposed to got worse.
Speaker Change: I would say the end demand in auto has weakened.
Speaker Change: I mean, the latest S&P data is now almost a percentage point down year on year in terms of Saar.
Speaker Change: So that's a little that's a little less than it than it was before.
Speaker Change: The <unk> penetration is a little slow in again it is still up but it is a little slowing. So these are just gradual movements to the less positive side than it is than what it was 90 days ago.
Kurt Sievers: Again, it is still up, but it is a little slowing down. So these are just gradual movements to the less positive side than it was 90 days ago. But I think what is probably the somewhat bigger part here is that we just got a better handle now on what is the remaining size of the excess inventory with our tier one automotive customers, which we are working down to the first half. So I cannot pass in percentage which one of the two is contributing how much, but I'd say it is in that, say, combination of the automotive core industrial overstock and, at the same time, a weakening macro.
Speaker Change: But I think what is probably somewhat bigger part in here is that we just got a better handle now.
Speaker Change: What is the remaining sites off the excess inventory with our tier one automotive customers Fitch VR with which we are broken down for the first half so I cannot pass in percentage, which models to too.
Speaker Change: <unk> is contributing how much but I would say it is in that say combination of automotive core industrial over inventory and at the same time a weakening macro.
Chris Stanley: Great. And for my follow-up, Bill talked about sales. You hear that, right?
Speaker Change: Great and for my follow up.
Speaker Change: So bill talked about.
Speaker Change: <unk>, 49% of sales in Q1 of last year and 61% of sales in Q4 did I hear that right or is that wrong.
Kurt Sievers: That's correct Chris. So yeah, okay so my question, Sales grew up about that would. How would that happen if the..., to basically match into the cell through?
Speaker Change: That's correct.
Speaker Change: So yes, okay. So my question is your sales grew about 10.
Speaker Change: 10% from Q1 to Q4, and so that would mean your sales into Disney grew a lot more than that.
Why would that happen if the environment like overall at least outside you guys was a little more difficult.
Speaker Change: Basically the match into the sell through.
Chris Stanley: Yeah, Chris, I think the background here is mainly that the exposure to distribution is larger in our industrial IoT business, and that is the one where we had seen the trough already in the first quarter of last year. So that gradual improvement throughout the quarters I discussed earlier, that shows up more on the distribution side because those are the segments which saw that improvement. Whereas in the automotive industry, where distribution is only 40 percent, as I described, we now have direct customer access inventory digestion, and distribution is a smaller part. So I think it is just a reflection of our exposure to the different end market segments. Thanks for all the color guys.
Speaker Change: Yes, Chris I think the background here is mainly debt.
Speaker Change: Exposure to distribution is larger in our industrial Iot business.
Speaker Change: And that is the one where we had seen the trough already in the first quarter of last year, so that gradual improvement throughout the quarters I discussed earlier that that shows up more on the distribution side, because buildup of segments, which which had that improvement there in automotive for distribution is only 40%.
As I described we have now.
Speaker Change: Direct customer excess inventory digestion and distribution is a smaller part so I think it is just a reflection of our exposure to the different end market segments.
Speaker Change: Got it thanks for all the color guys.
Kurt Sievers: Thanks, Chris. Thank you. Our next question comes from Joshua Bouchard. T.D.
Speaker Change: Thanks, Chris.
Speaker Change: Thank you. Our next question comes from Joshua <unk> with TV Cowen Your line is open.
Joshua Bouchard: Cohen, your line is open. Hey guys, good morning or good afternoon, depending on where you're sitting. Thanks for squeezing me in. In autos, we've heard from a few in the supply chain that there's a bit of a push-pull going on between OEMs and Tier 1s, where the OEMs want the Tier 1s to keep carrying more inventory, while Tier 1s are trying to manage their working capital and carry less. I'd be curious, are you seeing that going on?
Joshua: Hey, guys good morning, or good afternoon, depending on where you are sitting thanks for squeezing me in.
Joshua: In auto as we heard from a few in the supply chain that theres a bit of a push pull going on between Oems and tier ones, where the Oems want that you wanted to keep carrying more inventory tier ones are trying to manage their working capital and carry less I'd be curious are you seeing that going on is that some.
Joshua Bouchard: Is that some, the Tier 1s wanting to lower their levels, is that playing into what's going on with some of the digestion you're seeing now? Thank you. Oh, Joshua, absolutely. That's a horrendous fight.
Joshua: Tier ones wanting to lower their levels.
Joshua: Is that playing into what's going on with some of the digestion youre seeing now thank you.
Speaker Change: Oh sure sure absolutely.
Speaker Change: That's a horrendous fight.
Kurt Sievers: And that's why I said earlier it is really hard to call the final exact landing place for the size of inventory per tier one because it is a matter of their negotiation with their OEM customers. The midterm trend is that every piece of new business they are winning, OEMs are now often forcing the new business to hold a certain amount of inventory for specific semiconductor components. So that becomes very explicit, but it's only for new business. So think about it as something which will be layering in over the next couple of years as those new design wins are materializing. That's the way the OEMs want to get a firm handle on the size of inventory at tier ones. But at the moment, it's still the Wild West because none of this is really contractually anchored because it's old contracts, which didn't have these articulations, which is why it is indeed all over the place. And that also makes it a bit harder to be precise.
Speaker Change: <unk>.
Speaker Change: And that's why I said earlier. It is it is really hard to call. The final exact landing place for the size of inventory per tier one because it is a matter of negotiation with.
Speaker Change: With their OEM customers.
Speaker Change: The midterm trend.
Speaker Change: Is that every piece of new business they are winning.
Speaker Change: Oems are now often enforcing for their new business to hold a certain amount of inventory for specific semiconductor components.
Speaker Change: It becomes very explicit but it's only for new business. So think about it as something which will be layering in over the next couple of years as those new design wins are materializing, that's the way how the Oems want to get a firm handle on the on the size of inventory of tier ones at the moment, it's still wild west because none of.
Speaker Change: This is really contractually anchor because it's old contracts, which didn't which didn't have this articulations, which.
Speaker Change: Which is why it is indeed all over the place that makes it also a bit harder to be to be precise.
Joshua Bouchard: All right, sure. I think, do you have one more, Cheshire? Yeah, if that's OK. I was just making a bill. I was going to ask about the policy of repurchases. I know you mentioned it still returned 100% of free cash flow, but we have been running a little bit below that the last several quarters. Should we expect after you pay down the debt in March that repurchases pick up, or is it something more tied to the business environment?
Speaker Change: Thanks, Alright.
Speaker Change: Sure.
Speaker Change: I think.
Speaker Change: Youll have on water.
Speaker Change: That's okay.
Speaker Change: Bill I was going to ask about the policy on repurchases I know you mentioned it still return 100% of free cash flow, but had been running a little bit below that the last couple of quarters.
Speaker Change: Should we expect after you pay down the debt in March <unk>.
Speaker Change: We purchased as pick up or is it something more tied to the business environment. Thank you.
Bill Betts: Thank you. Yeah, I mean, again, our capital allocation, as I say, hasn't changed. If I just look over the last three years, we returned $8.8 billion, or 113% over those three years. And you're right; the trailing 12 months, 77%; the current quarter was 72%. And again, we have set aside some cash, as you all know, that we're going to retire some of our debt and deleverage the company here. And we think that's a good use of our cash.
Bill Burke: Yes, I mean again, our capital allocation as I state. It Hasnt changed if I just look over the last three years, we returned $8 $8 billion or 113%.
Bill Burke: Over those three years and you are right. The trailing 12 months 77 current quarter was 72% and <unk>.
Bill Burke: Again, we are we set aside some cash as you all know that we're going to retire some of our debt and deleverage the company here and we think that's a good use of our cash.
Joshua Bouchard: And we're going to continue being flexible on our balance sheet and doing all of the above dividends, buybacks, debt, as well as small M&A, no changes, and we're going to continue to do what we do. Thank you. Thanks, Josh. Thanks. All right. Yeah, I guess that gets us to the end of the call. So thanks, everybody, for joining the call this morning. Clearly, it continues to be a tough environment where NXP takes any control possible, and I dare to say we have started to take that control, especially relative to inventory built externally and inventory management internally. We started to take that control in a very disciplined manner early, in the mid of 2022 for the distribution side, and starting in the second quarter of last year on the direct customer side, which we believe allows us to continue to drive a safe landing and soft landing in this tough environment. In the medium and longer term, we continue to be fully focused on the automotive and industrial markets to innovate and drive profitable growth.
Bill Burke: And we're going to continue being flexible on our balance sheet and doing all of the above dividends buybacks debt as well as small M&A no changes and we're going to continue to do what we do.
Speaker Change: Thank you thanks.
Speaker Change: Thanks, Josh.
Speaker Change: Alright.
Speaker Change: Yes, I guess that gets us to the end of the of the call.
Speaker Change: So thanks, everybody for joining the call this morning.
Speaker Change: Clearly continues to be a tough environment.
Speaker Change: Where NXP takes any control possible and I dare to say, we have started to take that control, especially relative to inventory built.
Speaker Change: Externally and inventory management internally, we started to take the control in a very disciplined manner early.
Speaker Change: In the mid of 'twenty, two for the distribution side and starting in the second quarter of last year on the direct customer sites, which we believe allows us to continue to drive a safe landing and soft landing in this tough environment.
Speaker Change: Longer term, we continue to be fully focused on the automotive and industrial markets to innovate and drive profitable growth. Thank you all.
Kurt Sievers: Thank you all. Thank you for your participation. This does conclude the program, and you may now disconnect. Everyone, have a great day. Thanks for watching!
Speaker Change: Yeah.
Speaker Change: Thank you for your participation. This does conclude the program and you may now disconnect everyone have a great day.
Speaker Change: Okay.
Speaker Change: [music].
Sure.
Speaker Change: Yeah.