Q1 2024 NXP Semiconductors NV Earnings Call
Okay.
Operator: Hello, and thank you for standing by. Welcome to NXP's first quarter 2024 earnings conference call.
Speaker Change: Hello, and thank you for standing by welcome to Nxp's first quarter 'twenty 'twenty four earnings conference call.
Operator: At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. I would now like to turn the call over to Jeff Palmer, Senior VP of Investor Relations. You may begin.
Speaker Change: At this time all participants are in a listen only mode.
Speaker Change: After the Speakers' presentation, there would be a question and answer session to ask a question. During this session you will need to press star one on your telephone.
Speaker Change: You will then hear automated message advising your hand is raised to work.
Speaker Change: Withdraw your question. Please press star one again.
Speaker Change: I would now like to turn the call over to Jeff Palmer Senior VP of Investor Relations you may begin.
Jeff Palmer: Thank you, Tawanda. Good morning, everyone. Welcome to NXP Semiconductors' first quarter earnings call. With me on the call today are Kurt Sievers, NXP's President and CEO, and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website.
Thank you Joanna and good morning, everyone welcome to NXP Semiconductor's first quarter earnings call.
Jeff Palmer: With me on the call today is Kurt Sievers, Nxp's, President and CEO and Bill <unk>, our CFO and.
Speaker Change: Our call 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 macroeconomic impact on the specific end markets in which we operate. The sale of new and existing products and our expectations for financial results for the second quarter of 2024. NSP undertakes no obligation to revise or update publicly any forward-looking statement.
Speaker Change: This call will include forward looking statements that involve risks and uncertainties that could cause nxp's results to differ materially from management's current expectations.
Speaker Change: These risks and uncertainties include but are not limited to statements regarding the macroeconomic impact on specific end markets in which we operate.
Speaker Change: The sale of new and existing products and our expectations for financial results for the second quarter of 2024.
Speaker Change: NSP undertakes no obligation to revise or update publicly any forward looking statements for a full disclosure on forward looking statements. Please refer to our press release.
Jeff Palmer: For a full disclosure on overriding statements, please refer to our press room. Additionally, we will refer to certain non-GAAP financial measures that are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2024 earnings press release, which will be furnished to the SEC on Form 8K and available on NXP's website, in the Investor Relations section. Now, I'd like to turn the call over to Kurt.
Speaker Change: 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.
Speaker Change: Pursuant to regulation G. NXP has provided reconciliations of the non-GAAP financial measures. The most directly comparable GAAP measures in our first quarter 2020.
Speaker Change: Our earnings press release, which will be furnished to the SEC on form 8-K and available on Sec's website in the Investor Relations section.
Kurt Sievers: Thank you, Jeff, and good morning, everyone. We appreciate you joining us on our call this morning. Beginning with quarter one, revenue trends in all our focus end markets were in line with the midpoint of our guidance. NXP delivered quarterly revenue of $3.13 billion. Essentially flat year-on-year, the non-GAAP operating margin in Q1 was 34.5%. 30 basis points below the year-ago period and 60 basis points above the midpoint of our guidance. Year-on-year performance was a result of consistent gross profit generation, offset by slightly higher operating expenses, as we continue to invest in our future business. From a channel perspective, we held distribution inventory at a tight 1.6 month level, consistent with our guidance and well below our long-term target of two and a half months of inventory in the channel.
Speaker Change: Now I'd like to turn the call over to Kurt.
Kurt Sievers: Thank you chip.
Kurt Sievers: Good morning, everyone.
Kurt Sievers: We appreciate you joining our call this morning.
Kurt Sievers: Beginning with quarter, one revenue trends in all of our focus end markets.
We are in line with the midpoint of our guidance.
NXP delivered quarter one revenue.
Kurt Sievers: 313 billion.
Kurt Sievers: Essentially flat year on year.
Kurt Sievers: non-GAAP operating margin in quarter, one was 34, 5%.
Kurt Sievers: 30 basis points below the year ago period.
Kurt Sievers: And 60 basis points above the midpoint of our guidance.
Kurt Sievers: Year on year performance was the result of consistent gross profit generation.
Kurt Sievers: Offset by slightly higher operating expenses.
Kurt Sievers: As we continue to invest in our future business.
Kurt Sievers: From a channel perspective, we helped distribution inventory at a tight one six months level.
Kurt Sievers: Consistent with our guidance and well below our long term targets of two and a half months of inventory in the channel.
Kurt Sievers: Now let me turn to the specific trends in our focus and market. In automotive, revenue was $1.80 billion, down 1% versus the year-ago period and in line with our guidance. We continue to manage an orderly process of inventory digestion with our major direct automotive Tier 1 customers.
Now, let me turn to the specific trends in our focus end markets.
Kurt Sievers: In automotive revenue was 180 billion down 1% versus the year ago period and in line with our guidance.
Kurt Sievers: We continue to manage an orderly process of inventory digestion with our major direct automotive tier one customers.
Kurt Sievers: In industrial and IoT, revenue was $574 million, up 14% versus the year-ago period, and in line with our guidance. Our performance compares favorably versus the year-ago period when the business had a trough. Since 1Q23, we have seen a steady sequential improvement in the industrial and IoT demand trends, although not yet back to the long-term levels which we would expect. In mobile, revenue was $349 million, up 34% versus the year-ago period, where again, the business had dropped already back in 1Q23. And lastly, in communication, infrastructure, and other, revenue was $399 million, down 25% year-on-year and in line with our guidance.
Kurt Sievers: In industrial and Iot revenue was $574 million up 14% versus the year ago period and in line with our guidance.
Kurt Sievers: Our performance compares favorably versus the year ago periods, when the business has trust.
Kurt Sievers: Since <unk> 2003, we have seen a steady sequential improvement in the industrial and Iot demand trends, so not yet back to the long term levels, which we would expect.
And mobile revenue was $349 million up 34% versus the year ago periods.
Kurt Sievers: Again, the business had dropped already back in 123.
Kurt Sievers: And lastly in communication infrastructure and other revenue was $399 million down 25% year on year and in line with our guidance.
Kurt Sievers: And now let me turn to our expectations for the second quarter of 2024. We are guiding second quarter revenue to $3.125 billion, down 5% versus the second quarter of 2023 and flat sequentially. In the automotive end market, revenue trends during the first half of 2024 reflect a continued inventory digestion process at our direct tier one automotive customers, compounded by a soft automotive macro environment. In the industrial and IoT end markets, we had already invested in OneQ23.
Speaker Change: And now let me turn to our expectations for the second quarter 2024, we are guiding quarter to revenue to $3 125 billion down 5% versus the second quarter of 2023 and flat sequentially.
Speaker Change: In the automotive end markets revenue trends during the first half of 'twenty 'twenty four reflect the continued inventory digestion process at our direct to tier one automotive customers compounded by a soft automotive macro environments.
Speaker Change: In the industrial and Iot end markets, we had already trust in <unk> 23.
Kurt Sievers: We see improving demand in China, in part thanks to our lean channel position, as well as thanks to incrementally healthier end demand. This is expected to be partially offset by soft end demand in Europe and the Americas. In the mobile end market, we continue to witness the expected modest cyclical recovery. And finally, within the communications infrastructure and other end markets, our resumption of sequential growth is primarily driven by secure RFID tagging.
Speaker Change: We see improving demand from China in part thanks to our lean channel position as well as thanks to incrementally healthier and demands.
Speaker Change: This is expected to be partially offset by soft empty month in Europe and the Americas.
Speaker Change: In the mobile end markets, we continue to witness the expected modest cyclical recovery.
Speaker Change: And finally within the communications infrastructure and other end markets are a resumption of sequential growth is primarily driven by secure RFID tagging.
Kurt Sievers: Taken together at the midpoint, we anticipate the following trends in our business during the second quarter. Automotive is expected to be down in the high single-digit descent range versus quarter 2.23 and down in the mid-single-digit descent range versus quarter 1.24.
Speaker Change: Taken together at the midpoint, we anticipate the following trends in our business during the second quarter.
Speaker Change: Automotive is expected to be down in the highest single digit percentage range versus quarter 223.
Speaker Change: And down in the mid single digit percent range, where this quarter 134.
Kurt Sievers: Industrial IoT is expected to be up in the high single-digit percent range for both year-on-year and versus quarter-one-twenty-four. Mobile is expected to be up in the low 20% range year-on-year and about flat versus Q1 2024. And finally, communication infrastructure and others is expected to be down in the mid-20% range year-on-year and up in the high single-digit percent range versus quarter 1
Speaker Change: Industrial and Iot is expected to be up in the high single digit percentage range for both year on year and versus quarter $1 24.
Speaker Change: Mobile is expected to be up in the low 20% range year on year and about flat versus Q1 24.
Speaker Change: And finally communication infrastructure and other is expected to be down in the mid 20% range year on year and up in the high single digit percent range versus quarter 124.
Kurt Sievers: So, in summary, we are beginning to see incrementally improving demand signals for the second half of 2024 across all end markets. Hence, during quarter two, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting quarter two. And if demand momentum continues, we will stage additional channel inventory during the second half, however, in a very controlled and targeted manner. So it is unlikely that we will grow channel inventory back to our long-term target of two and a half months within this calendar year.
Speaker Change: So in summary, we are beginning to see incrementally improving demand signals for the second half of 'twenty four across all end markets.
Speaker Change: Hence during quarter, two we will begin to states slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth.
Speaker Change: Therefore, our guidance assumes approximately one seven months of distribution channel inventory exiting quarter too.
Speaker Change: And if demand momentum continues be build stage additional channel inventory during the second half.
Speaker Change: However, in a very controlled and targeted manner.
Speaker Change: So it is unlikely that we grow channel inventory back to our long term target of two and a half months within this calendar year.
Kurt Sievers: And taken all together, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline, just consistent with our views from a quarter ago. Overall, we continue to manage what is in our control, enabling NXP to drive solid profitability and earnings in a challenging demand environment. This is our first water recital.
Speaker Change: And taken altogether the potential outcome for 2024 should be in the range of a modest annual revenue growth a decline just consistent with our views from a quarter ago.
Speaker Change: Overall, we continue to manage what is in our control, enabling NXP to drive solid profitability and earnings in a challenging demand environment.
Speaker Change: Our first quarter results our guidance for the second quarter and our early views into the second half of the year underpin our cautious optimism that NXP is successfully navigating through this industry wide cyclical downturn.
Kurt Sievers: Our guidance for the second quarter and our early views into the second half of the year underpin a cautious optimism that NXP is successfully navigating through this industry-wide cyclical downturn. And now, before turning the call over to Bill... While we are very focused on managing the soft landing through the cycle, I would like to take a minute to highlight a couple of important innovation announcements that we made during the first quarter.
Speaker Change: And now before turning the call over to Bill <unk>.
Speaker Change: We are very focused on managing the soft landing through the cycle.
Bill: I'd like to take a minute to highlight a couple of important innovation announcements, which we made during the first quarter.
Kurt Sievers: This includes our F32 core right platform for next-generation software-defined vehicles. It represents the industry's first platform to combine high-performance automotive processing, vehicle networking, and system power management, along with integrated software to address the complexity, the scalability, and the cost efficiency required for the software-defined vehicle. And as part of that announcement, we also introduced our 5nm S32N processor, a milestone in the expansion of our S32 processing family. Additionally, we introduced the industry's first 28 nanometer RF CMOS single-chip automotive radar, which enables next-generation automotive ADAS systems. This new product further expands our market-leading franchise, and it enables next-generation, highly-performance, coherent radar systems in a very cost-effective manner.
Bill: This includes our F 32 core right platform for next generation software defined vehicles.
Bill: It represents the industry's first platform to combine high performance automotive processing visual networking and system power management.
Bill: Along with integrated software to address the complexity.
Bill: Taylor ability and cost efficiency required for the software defined vehicle.
Bill: And as part of that announcement, we also introduced our five nanometer 32 and processor.
Bill: Bilestone, India expansion of our F 32 processing somebody.
Bill: Additionally, we introduced industry's first 28 nanometer RFC loss single chip automotive radar, which enables next generation automotive Adas systems.
Bill: This new product further expands our market leading franchise.
Bill: And it enables next generation highly performance coherent radar systems in a very cost effective manner.
Kurt Sievers: Lastly... NXP and Honeywell, who is a leader in building automation systems, signed the Memorandum of Understanding. This collaboration aims to help make buildings operate more intelligently by integrating NXP's neural network-enabled industrial-grade applications processes into Honeywell's building management. This agreement is another great example of how NXP will participate in and potentially lead the revolution of AI processing at the edge in industrial applications. And now I would like to pass the call over to you, Bill, for a review of our financial performance. Thank you.
Lastly.
NXP and Honeywell, who is a leader in building automation systems.
Bill: The memorandum of understanding this.
Bill: This collaboration aims to help make buildings operate more intelligently by integrating Nxp's neuro network enabled industrial grade applications processes into Honeywell building management systems.
Bill: That agreement is another Great example of how NXP Bill participates and potentially leads in the revolution of AI processing at the edge and industrial applications.
And now I would like to pass the call over to you Bill for a review of our financial performance. Thank you per and good morning to everyone on today's call.
Bill Betz: Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of revenue during Q1 and provided our revenue outlook for Q2, I will move to the financial highlights. Overall, the Q1 financial performance was good. Revenue was in line with the midpoint of our guidance range, with non-GAAP gross margin slightly above the midpoint of our guidance, while inventory in the distribution channel continues to remain below our long-term target. Turning to the Q1 results.
Bill: As Kurt has already covered the drivers of the revenue during Q1.
Bill: And provided our revenue outlook for Q2 I.
Bill: I will move to the financial highlights.
Bill: Overall, our Q1 financial performance was good.
Bill: Revenue was in line with the midpoint of our guidance range with non-GAAP gross margin slightly above the midpoint of our guidance while inventory in the distribution channel.
Bill: <unk> to remain below our long term target.
Turning to Q1 results.
Bill Betz: Total revenue was $3.13 billion, flat year-on-year, in line with the midpoint of our guidance range. We generated $1.82 billion in non-GAF gross profit and reported a non-GAF gross margin of 58.2%, flat year-on-year, though 20 basis points above the midpoint of our guidance range. The incremental margin was due to an increase in the estimated useful lives of our internal front-end manufacturing equipment from 5 to 10 years. This was about 30 basis points favorable to the results, which was not in our guidance.
Bill: <unk> revenue was $3, one 3 billion.
Bill: That year on year in line with the midpoint of our guidance range.
Bill: We generated $1 18 billion and non-GAAP gross profit.
Bill: And reported a non-GAAP gross margin of 58, 2% flat year on year the 20.
Bill: 20 basis points above the midpoint of our guidance range.
Bill: The incremental margin was due to an increase in the estimated useful lives of our internal front end manufacturing equipment from five to 10 years.
Bill: This was about 30 basis points favorable to the results, which was not in our guidance.
Bill Betz: Total non-GAAP operating expenses were $736 million, or 23.5% of revenue, up $8 million year-on-year and down $55 million from Q4. This was $19 million below the midpoint of our guidance range, primarily due to a combination of reduced variable compensation and proactive expense control. From a total operating profit perspective, non-GAF operating profit was $1.08 billion, and non-GAF operating margin was 34.5%, down 30 basis points year on year and 60 basis points above the midpoint of our guidance range. Non-gas interest expense was $64 million, with taxes for ongoing operations of $171 million, or a 16.8% non-GAAP effective tax rate. The non-controlling interest was $5 million.
Bill: Total non-GAAP operating expenses were $736 million or 23, 5% of revenue up 8 million year on year and down $55 million from Q4.
Bill: This was $19 million below the midpoint of our guidance range, primarily due to a combination of reduced variable compensation and proactive expense controls.
Bill: From a total operating profit perspective.
Bill: non-GAAP operating profit was 1.08 billion and non-GAAP operating margin was 34, 5% down 30 basis points year on year, and 60 basis points above the midpoint of our guidance range.
Bill: non-GAAP interest expense was $64 million with.
Bill: With taxes for ongoing operations of $171 million.
Bill: A 16, 8% non-GAAP effective tax rate.
Noncontrolling interest was $5 million.
Bill Betz: And stock-based compensation, which is not included in our non-GAAP earnings, was $115 million. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $10.18 billion, down $997 million, as we repaid the 4.875% bond that was due on March 1, 2024. Our ending cash balance, including short-term deposits, was $3.31 billion, down $963 million sequentially due to the commutative effects of debt repayment, capital returns, CapEx investments, and cash generation during Q1.
Bill: And stock based compensation, which is not included in our non-GAAP earnings was $115 million.
Bill: Now I would like to turn to the changes in our cash and debt.
Bill: Our total debt at the end of Q1 was $10 $1 8 billion down $997 million as we repaid the 487, 5% and bond that was due on March one 2024.
Bill: Our ending cash balance, including short term deposits was 331 billion down $963 million sequentially due to the cumulative effect of debt repayment capital returns Capex investments and cash generation during Q1.
Bill: The result, the resulting net debt was $6 9 billion and we exited the quarter with a trailing 12 month adjusted EBITDA of $5 4 billion.
Bill Betz: The resulting net debt was $6.9 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.4 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 22.8 times. During Q1, we paid $261 million in cash dividends, and we repurchased 303 million of our shares. Subsequent to the end of Q1, and through Friday, April 26th, we repurchased an additional $97 million of shares under an established 10B5-1 program.
Bill: Our ratio of net debt to trailing 12 months adjusted EBITDA at the end of Q1 was one three times and our 12 month adjusted EBITDA interest coverage ratio was 22 eight times.
Bill: During Q1, we paid $261 million in cash dividends.
And we repurchased $303 million of our shares.
Bill: Subsequent to the end of Q1 and through Friday April 26, we repurchased an additional $97 million of shares under an established <unk> Dash one program.
Bill Betz: Turning to working capital metrics, days of inventory was 144 days, an increase of 12 days sequentially, while distribution channel inventory was 1.6 months or about 7 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 26 days, up two days sequentially. And days payable were 65 days, a decrease of seven days versus the prior quarter.
Bill: Turning to working capital metrics.
Bill: Days of inventory was 144 days, an increase of 12 days sequentially, while distribution channel inventory was $1 six months or about seven weeks.
Bill: As we have highlighted throughout the previous year.
Bill: 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 receivables were 26 days up three days sequentially.
Bill: And days payable were 65 days, a decrease of seven days versus the prior quarter.
Bill Betz: Taken together, our cash conversion cycle was 105 days, an increase of 21 days versus the prior quarter. Cash flow from operations was $851 million, and net capex was $224 million, or approximately 7% of revenue, resulting in non-GAAP free cash flow of $627 million, or about 20% of revenue. Turning now to our expectations for the second quarter.
Bill: Taken together, our cash conversion cycle was 105 days, an increase of 21 days versus the prior quarter.
Bill: Cash flow from operations was $851 million and net capex was $224 million or approximately 7% of revenue, resulting in non-GAAP free cash flow of $627 million or about 20% of revenue.
Speaker Change: Turning now to our expectations for the second quarter.
Bill Betz: As Kurt mentioned, we anticipate Q2 revenue to be $3.125 billion, plus or minus about $100 million. At the midpoint, this is down 5% year on year and flat sequentially. We expect non-gap gross margin to be about 58.5% plus or minus 50 basis points, which includes approximately 60 basis points associated with the change in our useful life estimate for our internal front-end manufacturing equipment. As Kurt noted in his prepared remark, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth.
Speaker Change: As Kurt mentioned, we anticipate Q2 revenue to be $3, <unk> 5 billion, plus or minus about $100 million.
Speaker Change: At the midpoint this is down 5% year on year and flat sequentially.
Speaker Change: We expect non-GAAP gross margin to be about 58, 5% plus or minus 50 basis points, which includes approximately 60 basis points associated with the change of our useful life estimate for our internal front end manufacturing equipment.
Speaker Change: As Kirk noted in his prepared remarks, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth there.
Bill Betz: Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting Q2. Operating expenses are expected to be about $765 million, plus or minus about $10 million. The sequential increase is primarily driven by our annual merit increases and the $15 million license fees paid to Impinj as part of our legal settlement.
Speaker Change: Therefore, our guidance assumes approximately $1 seven months of distribution channel inventory exiting Q2.
Speaker Change: Operating expenses are expected to be about $765 million, plus or minus about $10 million the.
Speaker Change: The sequential increase is primarily driven by our annual merit increases.
And the $15 million license fee paid to impinge as part of our legal settlement taken.
Bill Betz: Taken together, we see the non-gas operating margin to be 34% at the midpoint. We estimate non-GAAP financial expense to be $63 million, with the non-GAAP tax rate to be 16.8% of profit before tax, non-controlling interest, and other will be about $5 million. For Q2, we suggest, for modeling purposes, you use an average share count of 258.5 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $115 million.
Speaker Change: Taken together, we see non-GAAP operating margin to be 34% at the midpoint.
Speaker Change: We estimate non-GAAP financial expense to be $63 million.
Speaker Change: With the non-GAAP tax rate to be 16, 8% of profit before tax.
Speaker Change: Non controlling interests and other will be about $5 million.
Speaker Change: For Q2, we suggest for modeling purposes, you use an average share count of 258 5 million shares.
Speaker Change: We expect stock based compensation, which is not included in our non-GAAP guidance to be $115 million.
Bill Betz: For capital expenditures, we expect it to be around 6%. Taken together, at the midpoint, this implies a non-GAAP earnings per share of $3.20. In closing, looking through the remainder of 2024, I'd like to highlight a few focus areas for NXP. First,
Speaker Change: For capital expenditures, we expect to be around 6%.
Speaker Change: Taken together at the midpoint this implies a non-GAAP earnings per share of $3 20.
Speaker Change: In closing looking through the remainder of 2024 I'd like to highlight a few focus areas for NXP.
Bill Betz: From a performance standpoint, we will continue to navigate a soft landing through a challenging and cyclical demand environment with cautious optimism for second half improvement in our business. Second, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model. Specifically, we expect our gross margin to continue to perform at or above the high end of the long-term model while maintaining internal fab utilization levels in the low 70s for the remainder of the year.
Speaker Change: First <unk>.
Speaker Change: From a performance standpoint, we will continue to navigate a soft landing through a challenging and cyclical demand environment with our cautious optimism for a second half improvement in our business.
Speaker Change: Second we will continue to be disciplined to manage what is in our control and stay within our long term financial model specifically, we expect our gross margin will continue to perform at or above the high end of the long term model.
Speaker Change: While maintaining internal fab utilization levels in the low seventies for the remainder of the year.
Bill Betz: Third, there is no change to our capital allocation policy, where we have returned $2.4 billion over the last 12 months. Furthermore, we will continue to be active in the market repurchasing NXP shares. And lastly, we are excited to host an Investor Day on November 7th in Boston. The specific details will be available soon on the NXP Investor Relations homepage.
Speaker Change: Third there is no change to our capital allocation policy, where we have returned $2 $4 billion over the last 12 months.
Speaker Change: Furthermore, we will continue to be active in the market repurchasing NXP shares and lastly, we are excited to host an investor day on November seven in Boston the.
Speaker Change: The specific details will be available soon on the NXP Investor Relations homepage, we look forward to you joining us.
Operator: We look forward to you joining us. I'd like to now turn it back to the operator for questions. Thank you.
Speaker Change: Like to now turn it back to the operator for questions.
Operator: Ladies and gentlemen, as a reminder to ask a question, please press star 1-1 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 1 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A, Ross. Our first question comes from Ilana Vivek Arya with Bank of America Securities. Your line is open.
Speaker Change: Thank you.
Speaker Change: Ladies and gentlemen, as a reminder to ask a question. Please press star one on your telephone and then wait to hear your name announced towards.
To withdraw your question. Please press star one again.
Speaker Change: We ask that you limit yourself to one question and one follow up please.
Please standby, while we compile the Q&A roster.
Speaker Change: Okay.
Speaker Change: Our first question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.
Vivek Arya: Thanks for taking my question. For the first one, Kurt, I think you gave a very clear explanation of, you know, kind of the cautious optimism around the automobile industry in the second half of the year. My question is kind of a more, you know, medium to longer-term question. You know, in the past, you gave a 9 to 14% growth target for your automotive business. And since then, a lot of things have changed, right?
Vivek Arya: Thanks for taking my question for the first one.
Vivek Arya: Curt I think you gave a very clear explanation of.
Vivek Arya: And then a kind of a.
Vivek Arya: Our cautious optimism around the automotive in the second half of the year. My question is kind of a more medium to longer term question.
Vivek Arya: In the past you gave a 9% to 14%.
Vivek Arya: Growth target for your automotive business and since then a lot of things have changed that a slowdown in EV.
Kurt Sievers: With the slowdown in EVs and inflation and all those other things, what is the right way to think about NXP's long-term automotive growth prospects? Is there a simple formula that connects production growth to your sales growth target?
Completion, and all those other things what is the right way to think about Nxp's long term automotive growth prospect is there a simple formula that connects.
Vivek Arya: <unk> growth to your.
Kurt Sievers: Yeah, good morning, Vivek. So first of all, let me augment what you said. The cautious optimism which I expressed for the second half is not limited to automotive. It is important to note that that cautious optimism for second half growth over the first half is actually across the company. It's very broad based.
Vivek Arya: Sales growth targets.
Speaker Change: Yes, hi, good morning, Vivek so.
Speaker Change: First of all let me augment what you set the cautious optimism Victoria Express for the second half.
Is not limited to automotive.
It is important to note that this quarter's optimism for second half growth over first half.
Speaker Change: It's actually across the company.
Kurt Sievers: It's across distribution and direct, and it is across all of our segments. Now, coming back to your original question, longer-term automotive growth, yes, we had a guide of 9 to 14 percent from 21 to 24. Now, we are in 24.
Speaker Change: Very broad based it's across distribution and direct and it is across all of our segments.
Speaker Change: Now coming back to your original question longer term automotive growth.
Speaker Change: Yes, we had a.
Guidance of 9% to 14% from 'twenty one to 'twenty four now we are in 24, it's actually good to see that automotive is probably that one segment, which is going to hit the <unk>.
Kurt Sievers: It's actually good to see that automotive is probably that one segment which is going to hit the target this year of the 9 to 14. And we will, as Bill said at the end of his prepared remarks, we will host an investor day in November where we will come out with the new growth targets for the next three years for all of our segments, including automotive. Now, so I will not be able to give you a number today for the next three years for automotive, but directionally, Vivek, I would say the algorithm isn't that much different from the history because we see the content drivers very much in place, and you know that we are, as NXP, very well benefiting both from ADAS as well as from the electrification trends, and mainly on the mid-to-longer-term basis from a trend to software-defined vehicles where our industry-leading franchise in processing is certainly going to win.
This year off the 9% to 14.
Speaker Change: And Bill as Bill said at the end of his prepared remarks, we will host an investor day in November Barry will come out with the new growth targets for the next three years for all of our segments, including automotive.
Speaker Change: Now so I will not be able to give you a number today for the next three years for automotive, but directionally correct.
Speaker Change: I would say the Idaho rhythm.
Speaker Change: Isn't that much different from the history, because we see the content drivers.
Speaker Change: Very much in place and you know that BR is NXP.
Speaker Change: Very well benefiting both from Adas as well as probably electrification trends.
Speaker Change: And mainly on the mid to longer term basis from the from a trend to software defined radios sphere.
Speaker Change: Industry, leading franchise in processing is suddenly going to win so that continues.
Kurt Sievers: So that continues, which means in the end, the SAR as an underlying mechanism probably becomes less relevant. And I would also tell you that we think pricing will be, certainly, to start with, sustainable from where we come from. You know that we have, as NXP, increased prices over the past three years. We said it would be neutral this year. And as I said earlier, for the coming years, maybe we will go back to a very small, low single-digit ASP erosion per year.
Speaker Change: Which means MTN the Saar.
Speaker Change: And some underlying mechanism probably becomes less relevant.
And I would also tell you that we think pricing.
Speaker Change: We'll be certainly to start with sustainable from where we come from a you know that we have is NXP increased prices over the past three years, we said it will be neutral this year and as I said earlier for the coming years, maybe we go back to a very small low single digit ASP erosion per year, I mean that has to be discuss.
Kurt Sievers: I mean, that is to be discussed in the coming years. But nothing out of the normal, I would say, and especially not surprising, coming back to where it was pre-COVID. I mean, that's really important for that algorithm. So, please bear with us, Vivek, for the November Investor Day and become more specific with exact numbers. But I just wanted to signal to you that you should not expect massive changes here.
Speaker Change: In the coming years, but nothing out of all of the mobile I would say and especially not surprising coming back to where it was pre COVID-19 I mean, that's really important for that for that aggregate. So please bear with us vivek for the November Investor day, and become with exact numbers.
Speaker Change: But I just wanted to signal to you you should not expect massive changes here.
Kurt Sievers: And then, Kurt, kind of a more near-term or sort of just calendar 24 question on your automotive business. So, last year, your auto sales grew about 9% about in line with auto production, right? So, despite better pricing, i.e., you're somewhat undershipped. What is the assumption for the entirety of calendar 24? Because your auto sales seem to be declining sequentially in Q2. So, is the assumption that they pick back up, and they do better than production in the backup? Just what is the kind of puts and takes for how you are thinking about the entire automotive industry? Yeah, look, indeed.
Speaker Change: Got it and then kind of a more near term or sort of just calendar 'twenty. Four question on your automotive business. So last year. Your auto sales grew about 9% about in line, but auto production right. So despite better pricing I E you're somewhat under shipped.
Speaker Change: What are the what is the assumption for the entirety of calendar 'twenty forward because your auto sales seem to be declining sequentially. In Q2. So is the assumption that they picked back up and they do better than production and tobacco just what is kind of the puts and takes about how you were thinking about automotive for the entire year.
Kurt Sievers: Yeah, look, indeed, you had it quite right for last year. The 9% growth in automotive revenues of NXP was actually in a very strong SAR year. I think the SAR last year was something in the order of almost 10% growth year-on-year, so it was so spectacularly high. And indeed, NXP did increase prices from a corporate total company perspective by 8%. So yes, we totally undershipped already last year, which was part of that soft landing strategy which we are pursuing.
Speaker Change: Yes look indeed, you had it's quite right for last year.
Speaker Change: 9% growth of automotive revenues of NXP.
Speaker Change: Was actually in a very strong solid year I think the Saar last year.
Speaker Change: Something in the order of almost 10% growth year on year, So spectacularly high.
Speaker Change: And indeed, NXP did increase price.
Speaker Change: Corporates total company perspective by 8%.
Speaker Change: So yes, it would be totally under shipped already last year, which is which was part of the soft lending strategy, which we are pursuing.
Kurt Sievers: So we think we have already started to correct the automotive revenue and inventory situation in the direct customers since the mid of last year and in the distribution channel already way back because we never went above 1.6. Now, when you think about this year, Vivek, it is indeed a little different.
Speaker Change: We think we have already started to correct the automotive.
Speaker Change: Revenue at.
Speaker Change: And the inventory situation in that.
Speaker Change: Direct customer since mid of last year and in the distribution channel already way back because we never went above one six now.
Speaker Change: When you think about this year vivek. It is indeed that the macro is a little different.
Kurt Sievers: The latest S&P numbers would suggest a 0% SAR for this year and a bit of a moderation in EV penetration. I say that very carefully, Vivek, because I think the headlines we all see about the EV slowdown are more dramatic than what it really is. S&P is still talking about 20 plus percent unit growth of XEV, so hybrids and fully EVs for this year, which is still very strong growth.
Speaker Change: The latest S&P numbers would suggest is zero percent Saar for this year.
Speaker Change: And a bit of a moderation in the EV penetration.
Speaker Change: I would say that very carefully because I think the headlines we all see about EV slowdown.
Speaker Change: Are more dramatic than that what it really is S&P is still talking about 20 plus percent unit growth of FCB. So hybrids.
Speaker Change: <unk> for this year, which is still a very strong growth.
Kurt Sievers: What really drives our revenue number, however, this year is the inventory digestion with the direct customers. Clearly, in Q1 and now with the guide which we just gave for the second quarter, we are digesting inventory with our direct automotive tier one customers. If this is exactly done by the end of Q2 or if it takes a little bit into Q3, it is hard to say. However, we have every indication that the second half in the automotive this year is going to grow solidly above the first half of this year. And that is actually driven by company-specific enablers. So we have radar platforms which are strongly ramping up in the second half.
Speaker Change: What really drives our revenue number. However, this year is the inventory digestion brisk with direct customers.
Speaker Change: Clearly in Q1.
Speaker Change: Now with the guide that we just gave for the second quarter, we are digesting inventory.
Speaker Change: With our direct automotive tier one customers. If this is exactly done by the end of Q2 or if it takes a little bit into Q3 very hard to say however, we have any indication that the second half in automotive. This year is going to grow solidly above the first half of this year and that is actually driven both by.
Speaker Change: Company specific enablers. So we have radar platforms, which are strongly ramping and be in the second half but of course. It is also driven by the normalization of the inventory digestion, which means we bought move in the second half from under shipping as two months to meeting demand again.
Operator: But of course, it is also driven then by the normalization of inventory digestion, which means we would move in the second half from undershipping and demand to meeting and demand again. I will not give you the full-year growth number. We don't guide the full year by segment. Actually, we only guide the next quarter. But when I said that the whole company was modestly up or down for the full year, and automotive is more than 50 percent of the company, then you can guess that automotive is probably not that far from the same number.
Speaker Change: I will not give you the full the full year growth number vivek adult guidance of 40% by segment actually we only guide for next quarter, but.
The whole company is modestly up or down for the full year and automotive is more than 50% of the company then youll get adjusted automotive is probably not that far from the terminal.
Speaker Change: Thank you.
Speaker Change: Okay.
Ross Clark Seymore: Please stand by for our next question. Our next question comes from the line of Ross Seymour with Dutchie Bank. Your line is open.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is open.
Ross Clark Seymore: Hi guys, thanks for asking the question. Kurt, I want to get into a little bit of the increased comfort that apparently you're feeling with the desire to start refilling the channel. I know you did a little bit of that in the first quarter, but in the second quarter, it seems like your optimism has increased a little bit sequentially, even despite the automotive side being guided down. And you know, I know you went through each of the segments specifically, but if you step back at a higher level, what's giving you the confidence? What's improved to give you the confidence to fill the channel? Yeah. Hey Ross,
Ross Clark Seymore: Hi, guys. Thanks for the question, Chris I wanted to get into a little bit about the increased comfort that apparently youre dealing with the desire to start refilling. The channel I know you did a little bit of it in the first quarter, but the second quarter. It seems like Youre optimism has increased a little bit sequentially, even despite the automotive side being guided down.
I know you went through each of the segments, specifically, but if you step back at a higher level, what's giving you that confidence what's improved.
To give you the confidence to fill the channel.
Kurt Sievers: Yeah, hi, Ross. So first of all, Q1, honestly, the 1.6, and you are right, we came from 1.5 in Q4, it's just been hovering around 1.5 and 1.6. It's very hard to keep this strictly to one number, so I'd say Q1 wasn't really intentional. It's just, if you look back over the past, I don't know, 12 quarters, we've always been jumping up and down between 1.5 and 1.6. Quarter two, yes, this is intentional.
Ross Clark Seymore: Yeah.
Chris: Yes, Hi, Ross.
Ross Clark Seymore: So first of all.
Speaker Change: Q1 honestly, the one 6% you're right became from one five in Q4.
Ross Clark Seymore: It's just been hoovering around $1 <unk> $1 six its very hard to keep the restricted to one number so.
Q1 wasn't really intentional. It's just if you look back over the past I don't know 12 quarters, we've always been jumping up and down between 1516.
Speaker Change: Yes. This is intentional so we want to try to get it to $1 seven.
Kurt Sievers: So we want to try to get it to 1.7 for the exit of quarter two. And indeed, it is based on growing, but still cautious optimism for the second half. Now, what is giving us that optimism? It is really a mix between, um... Simplistic considerations and very company-specific considerations. I think in the question from Vivek, a minute ago I mentioned in the automotive industry we have company-specific platforms which are ramping up in the second half, where we sit almost every day with our customers and discuss the organization of that ramp. So we just know that's going to happen.
Speaker Change: For the exit of quarter two.
Speaker Change: And indeed it is.
Speaker Change: Based on growing so cautious optimism for the second half Nevadas, what is giving us that optimism.
Speaker Change: It is really a mix between.
Speaker Change: Cyclical considerations.
And very company specific considerations.
I think the question Vivek a minute ago I mentioned in automotive we have company specific platforms, which are ramping in the second half.
Speaker Change: Is it almost every day with our customers and discuss the organizational fed ramp. So if you just know that's going to happen.
Kurt Sievers: Secondly, and Bill mentioned that in his prepared remarks, we have the settlement with Impinj for the RFID tagging business. And the fact that the two market-leading franchises or companies in that market space, NXP and Impinj, have settled here has been a positive catalyst, I would say, for the market development for RFID tagging. So we see a positive development there, which is then also playing into the second half over the first half in our communication infrastructure and other business.
Speaker Change: Secondly, and as Bill mentioned that in his prepared remarks, we had the settlement was in pinch.
Speaker Change: For the RFID tagging business.
Speaker Change: And the fact that the two market leading franchises or companies in depth in that market space NXP and Enbridge have settled here.
Speaker Change: Both are positive catalyst I would say to the market's development for RFID tagging. So we see a positive development there which is then also playing into the second half over first half in our communication infrastructure and other business.
Kurt Sievers: And then, thirdly, and that's more on the cyclical side... We clearly see that the automotive Tier 1 inventories will normalize, so then we just go back to shipping at run rates, so there's nothing spectacular happening. The demand is there already today, but we are still digesting inventory. And then the second half, so we don't expect that there will be more car production or more EVs or anything. It is simply that we ship to meet end demand.
Speaker Change: And then thirdly, if thats more on the cyclical side.
Speaker Change: We clearly see that the automotive tier one inventories will normalize so that'll be just go back to shipping to run rates. So theres nothing spectacular happening the demand is there already to date, but we are still digesting inventory.
Speaker Change: The second half. So we don't expect that there is more cost reduction or more evs or anything it is simply that we shipped to end demand.
Kurt Sievers: But the same holds even more true for industrial IoT. Where we come from an extremely lean channel position, that industrial IoT business is largely exposed to China. You might also have seen that the PMI in China is actually developing quite nicely. So we do see, both in the core industrial as well as in this consumer IoT business, which is in that segment, sequential improvement. And that is the main reason, actually, that we are staging the channel because we absolutely want to be sure we have a competitive position on the shelves of our distribution partners when we enter the third and fourth quarter.
Same holds even more true for industrial Iot.
Speaker Change: Barry come from an extremely lean shuttle position.
Speaker Change: The industrial Iot business is largely exposed to China.
Speaker Change: You might also have seen that the PMI in China is actually developing quite nicely. So we do see both in the core industrial as well as in this consumer Iot business, which is in that segment.
Speaker Change: <unk> sequential improvements.
And that is the main reason actually that we are staging the.
Speaker Change: Channel because we absolutely want to be sure we have a competitive position on the shelves of our distribution partners entering into the third and fourth quarter.
Ross Clark Seymore: Thanks for those details. I guess since you mentioned the impinge side, Bill, you're doing a great job on the OPEX. You came in below your guide in the first quarter. The second quarter you included, you said a 15 million payment for that. Can you just give us an idea of one: is that impingement payment a one-time deal, and so it goes away after this quarter? And then, more importantly, what are your thoughts on the OPEX side of things? If the optimism on the revenue side is increasing, should we expect the OPEX to increase with variable comp or any of those sorts of drivers? Sure, let me check that out, Ross.
Speaker Change: Thanks for those details I guess since you mentioned, the and pin side Bill Youre doing a great job on the Opex you came in below your guide in the first quarter. The second quarter. You included you said $15 million payment for that can you just give us idea one is that payment as a one time deal and so it goes away after this quarter and then.
Speaker Change: More importantly, what are your thoughts on the Opex side of things if the optimism on the revenue side is increasing should we expect the opex to increase with variable comp or any of those sorts of drivers.
Bill Betz: Sure, let me, good day Ross, break those two apart. So, the agreement that we have with Impinj is an annual cross-license agreement that will impact us on a go-forward basis about $15 million in the second quarter, and it grows slightly, but that could stop at any time in the future once we have the workarounds complete. And again, don't know exactly the exact timing, but that's something that we're pursuing internally. So, as we think about the second half, and I think this is where you're going, is, you know, where we are headed with Off X, and what we're going to try to do is make sure we get back into that model, as you know, around that 23% as we think about the second half.
Speaker Change: Sure, Let me get say Ross, let me break those two apart. So the agreement that we have within Tianjin The annual cross license, which will impact us on a go forward basis about $15 million in the second quarter.
Speaker Change: And it grows slightly but that could stop anytime in the future. Once we have the work Arounds complete.
Speaker Change: And again don't know exactly what that exact timing.
It's something that we're pursuing internally.
Speaker Change: Related to.
Speaker Change: Our Opex clearly you can see we are somewhat at a model in Q2, but that's really driven by our annual merit increases. So we are a combination of both of those.
Speaker Change: <unk> occurring in Q2, the 15th annual Merit increases.
Speaker Change: Offsetting some of that impact is also our proactive miss on our expense control and you saw that in Q1, as well and some lower variable compensation. So as we think about the second half and I think that's where you're going is where im headed with opex and what we're going to try to do is make sure we get back into that model as you know.
Operator: Please stand by for our next question. Our next question comes from a line from C.J. Muse with Canopies Journal. Your line is open.
Speaker Change: Around that 23% as we think about the second half.
Christopher James Muse: Yeah, good morning. Thank you for taking the time to answer the question. I guess my first question on gross margins, you know, if I take into account the change in the depreciation on equipment, you're essentially pro forma guiding gross margins flat. And I guess I would have thought maybe you would have had a little bit of a kiss from the channel refill as you take it one more month. And so I guess if you could kind of comment on what might be an offset there.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Yes.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of C. J Muse with Cantor Fitzgerald. Your line is open.
Speaker Change: Yes. Good morning. Thank you for taking the question I guess first question on gross margins if I take into account the change in the depreciation on equipment. You are essentially pro forma guidance gross margins flat and I guess I would've thought maybe you would have had a little bit of a kiss from channel retail.
You take it one more month and so I guess, if you can kind of comment what what might be an offset there then.
Christopher James Muse: And then, you know, considering your vision for utilization rates to stay kind of where they are through the remainder of the year, how should we be thinking about the trajectory for gross margins in the second half?
Speaker Change: Considering your vision for utilization rates to stay kind of where they are through the remainder of the year, how should we be thinking about the trajectory for gross margins into the second half.
Bill Betz: Yeah, hey, how are you? Yes, you're right, so obviously if you just for the accounting basically what kind of flattish guiding to flat, and again, it's within our plus or minus 50 basis points. I'm not really that good for three million dollars with ten basis points, but again, there's all sorts of clips and takes in that, and, you know, part of the reason for the useful life, I You know, as you know, every year we have to look at this from the accounting perspective, and related to this specific topic, there were a number of factors considered, including the NXP product life cycle, age of tools, and market analysis. And this is something that we just had to do, and we did it.
Speaker Change: Yeah, Hey, how are you yes.
Speaker Change: Yes, Youre right. So obviously, if you adjust for the accounting basically we're kind of flattish guiding to flat.
Speaker Change: And again within our plus or minus 50 basis points I'm, not really that good for $3 million of 10 basis points, but again.
Speaker Change: There's all sorts of puts and takes in that.
Speaker Change: <unk>.
Speaker Change: Part of the reason for the useful life I would say accounting change as you know every year. We have to go look at this from accounting and.
Speaker Change: Related to this specific topic there was a number of factors considered which includes the NXP product lifecycle all age of tools in the market analysis and this is something that we just had to go do and data. We think it's the right thing to do and we're calling it out so it's very clear and to be honest with you. We expect now to run at or above our long term.
Bill Betz: We think it's the right thing to do, and we're calling it out, so it's very clear. And to be honest with you, we expect it now to run at or above our long-term model, versus our previous commentary where we said, you know, near or at the gross market. And what levers we have, some of the tailwinds, as we mentioned before on our previous calls, CJ, is clearly our utilization is running in the low 70s, so that eventually will go back up and become a tailwind.
Model.
Speaker Change: Versus our previous commentary, where we said.
Speaker Change: Near or at the gross margin and what levers we have some of the tailwind as we mentioned before in our previous calls.
Jay: Jay is clear.
Jay: Clearly our utilizations are running in the low <unk>. So that eventually we will go back up it becomes a tailwind we talked about higher revenues fall through over that 30% fixed cost again that should help we discussed about replenishing the distribution channel and Thats, where you are buying with your question just that that one should get something but you are right over time.
Bill Betz: We talked about higher revenues falling through over that 30% fixed cost. Again, that should help. We discussed replenishing the distribution channel. That's where you were replying with your question, just that dot one, you know; we should get something.
Bill Betz: But you're right, over time, when we bring that back up to target, that should be a lever for us to carry that higher margin. We also talked about expanding customer reach within the mass market. That just takes time. And now, you know, internally, the team's focused on productivity improvements, cost reductions, and over the longer time horizon, as we have explained this many, many times, it's really our new product introductions layering on top of our business.
Jay: When we bring that back up to target that should be a lever for us to carry the higher margin.
We're also we talked about expanding customer reach within the mass market that just takes time.
Jay: Internally the teams focus on productivity improvements cost reduction and over the longer time horizon. We explain this many many times is really our new product introductions layering on top of our business they'll continue to move that so.
Bill Betz: They'll continue to move that. So, you know, we have an analyst day or investor day coming up on November 7th. We'll break that out in more detail and update that model. But hopefully, you guys can see that even through this downturn, we're managing margins quite well at 58 or 58.5 with the accounting adjustment. That's not our end destination.
Jay: We have an analyst day or Investor day coming up on November 7th we'll break that out in more detail and update that model, but.
Jay: Hopefully you guys can see that even through the downturn, we're managing margins quite well.
EBITDA was 58 five with the accounting adjustment.
That's not our end destination.
Christopher James Muse: Excellent. And then a question for Kurt, as you look back to the COVID period and kind of the initiation of NCNR programs, you know, it sounds like that was really done at the most senior levels, you know, with you and focused on volume, not price. And curious, just as you look forward, how did that kind of help nurture your customer relationships? And what potential benefits, you know, might you see ahead as we progress into a world where NCNRs are no longer part of the business? Thank you. Yeah.
Speaker Change: Excellent and then a question for Kurt.
Speaker Change: Look back to the Covid period, and kind of initiation of events in our programs.
It sounds like that was really done at the most senior levels.
Kurt Sievers: With you and focused on volume not price I'm curious just as you look forward how did that kind of help nurture your customer relationships and what potential benefits might you see ahead as.
Speaker Change: As we've progressed in a world where <unk> are no longer part of the business. Thank you.
Kurt Sievers: Yeah, a couple of considerations here, CJ. The one is just to remind everybody, our NCNR programs ended with the calendar year 23, so since January 1st, there is nothing anymore under any NCNR program. However, I would very strongly say, and I pointed out because I know that some industry peers have had very different opinions on this, the way we had our program was actually good. I would do it again.
Speaker Change: Yeah.
Speaker Change: A couple of considerations here.
Speaker Change: One is just just.
Speaker Change: To remind everybody our ensign now programs have ended with the calendar year 'twenty three so since January 1st there is nothing anymore under any ensign our program.
Speaker Change: However.
Speaker Change: Very strongly.
Speaker Change: Pointed out because I know that some industry peers.
Speaker Change: Very different opinion on this.
We had our program was actually good I would do it again.
Kurt Sievers: It did help because, in our particular case, it did put us closer together, and we learned much earlier about over-inventory build because there was an agreement underneath which forced the customer to the table to tell us that things would be running too high if we didn't jointly try to correct them. And that is the reason why we undershipped already all of last year in the automotive business, and I think I started to speak about this in the Q1 earnings call already last year, that there were first signs of building inventory with Tier 1 automotive customers. Again, we wouldn't have seen that; we wouldn't have learned about it without NCNR.
Speaker Change: It did help because in our particular case it did put us closer together and we learned much earlier about over inventory build because there was an agreement underneath which forces the customer to the table to tell us that things would be running too high if you don't try and be tried to correct.
Speaker Change: And that is the reason why we under shipped already all of last year in automotive and I think I started to speak about this in the Q1 earnings call already last year.
Speaker Change: First signs of building inventory with tier one automotive customers again that would not we wouldn't have seen that we wouldn't have learned about that with all the NCR now from a more strategic perspective C. J.
Kurt Sievers: Now, from a more strategic perspective, CJ, I think this is all about how does this industry learn from the supply crisis to not run into the trap again to try and apply just-in-time concepts with semiconductor products which have a three to four months manufacturing cycle time. And I would say I have mixed emotions about this.
Speaker Change: I think this is all about how does this industry learn from the supply prices.
Speaker Change: Two to not run into the trip again to try and apply just in time concepts with semiconductor products, which have three to four months manufacturing cycle time.
Speaker Change: And I would say I have mixed emotions about the C J.
Kurt Sievers: On the one hand, I'd say the automotive OEM customers and some of the industrial OEM customers are very thoughtful, and we have entered into long-term agreements into programs where we know how to deal with inventory in a very specific way for those products which are most critical. So I would say there is good learning in place, and that's clearly a step forward beyond NCNR. With some of our direct customers, however, we clearly see that now, under the pressure of working capital requirements, they tend to become very tactical when it comes to reducing inventories again, from my perspective, too far down.
Speaker Change: On the one hand, I would say the automotive OEM customers and some of the industrial OEM customers.
Speaker Change: We are very thoughtful and we have entered into long term agreements into programs. There we know how to deal with inventory in all the various universe, specifically about those products, which are most critical so I'd say there is good learning in place.
Speaker Change: That's clearly a step forward beyond <unk>.
With some of our direct customers. However, we clearly see that now under the pressure of working capital requirements.
Speaker Change: They tend to become very tactical when it comes to reducing inventories again.
Speaker Change: From my perspective, too far down.
Kurt Sievers: So I would go so far as to say that we see inventory targets for some of our direct customers, not all, but some, which I believe are starting to pose a risk when I think about the next uptick. And what I mean by risk is that we get again into supply trouble because the short reaction time, which would be required then to ship again much more suddenly, is gonna be very hard. And that is compounded by the fact that that supply chain is a very long one.
Speaker Change: I would go that far that we see inventory targets of all some of our direct customers not all but some.
Speaker Change: Which I believe are starting to pose a risk when I think about the next uptick and what I mean with the risk is that we got again into supply trouble because.
Speaker Change: The short we extra language would be required them to ship again much more suddenly.
Speaker Change: It's going to be very hot and that is compounded by the fact that that supply chain is a very deep one so it's not just one partner, which we shipped two and then it goes to the car company, but it's typically two or three or four stages and they all reduce inventory.
Kurt Sievers: So it's not just one partner which we ship to, and then it goes to the car company, but it's typically two or three or four stages, and they all reduce inventory. And at some point, they all will want to increase inventory again. And that is what drives the cycle. So I'd say on the OEM side, good learnings in the post-NCNR time, CJ. With the direct customers, it is a more mixed picture, unfortunately.
Speaker Change: And at some point they all want to increase inventory again and that is what drives the cycle. So I would say on the OEM side. Good learnings in deep in the post and CNR times C. J with the direct customers. It is a more mixed picture. Unfortunately.
Operator: Please stand by for our next question. Our next question comes from the line, of course, Danely with Citi. Your line is open.
Speaker Change: Very helpful. Thank you.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Citi: Our next question comes from the line of course daily with Citi. Your line is open.
Christopher Brett Danely: Hey, thanks guys. Um, Kurt, just a, I guess, a longer-term question on the automotive end market. You know, what are your thoughts on the relative growth rates of hybrids versus EVs? And then also, it seems like BYD is doing a little bit better than Tesla this year. Do you expect those two trends to continue? And then what will the impacts, if any, on NXP be? Or does it not matter?
Corsi Daley: Thanks, guys.
Just I guess a longer term question on the automotive end market.
Citi: What are your thoughts on the relative growth rates of hybrids versus Evs and then also it seems like.
Citi: There's a little bit better than than Tesla this year.
Citi: Expect those two trends to continue and then what are the impacts if any to NXP or does it not matter.
Kurt Sievers: These are interesting questions, Chris, which we also think about very hard. Let me try and dissect them.
Speaker Change: These are interesting questions, Chris, which we also think about very hard.
Speaker Change: Let me try and dissect it.
Kurt Sievers: The one is, and I think I said this in my prepared remarks earlier, the XEV, so if you combine hybrids and battery electric vehicles, it continues to grow pretty well. But that is carried by China. And the reason why many media headlines suggest it is not going well is that Europe and the U.S. are actually quite small in XEVs. To be more specific, if you take the total XEVs worldwide, only 12% of those are in the U.S., and 24% are in Europe, while China holds 44%, and BYD indeed is a big part of that. So it means that China, 44%, Chris, is growing this year, according to S&P, by 27% in volume.
Speaker Change: The one is and I think I've said this in my prepared remarks earlier.
Speaker Change: <unk>. So if you combine hybrids and battery electric vehicles.
Speaker Change: <unk> continues to grow pretty well.
Speaker Change: And but that is carried by China.
Speaker Change: And the reason why many media headlines suggest it is not going well.
Speaker Change: Is that Europe, and the U S are actually quite small in Suvs to be more specific if you take the total Suvs worldwide only 12% of those are in the U S. And 24 are in Europe by China holds 44% and BYD. Indeed is a big part of that and that China, 44% Chris is.
Speaker Change: Growing this year according to S&P by 27% in volume.
Kurt Sievers: So what I try to say with that is the XEV in total certainly keeps growing nicely. Now, if you go into the split between BEV and hybrid, so full electric and hybrid electric, then I say, it isn't that difficult.
Speaker Change: What I tried to say what that is the SCB in total certainly keeps growing nicely now if you go into the split between <unk> and hybrid so full electric and hybrid electric.
Speaker Change: I would say.
Kurt Sievers: The battery electric vehicles are still only 15%, but they grow by 25%. Hybrids are 24%, but they grow by 17%. So the one has a smaller base and grows faster. The other one has a bigger base and grows a bit slower.
Speaker Change: It isn't that difficult the battery electric vehicles are still only 15%, but they grow by 25% hybrids or 24%.
Speaker Change: But growth was 17% so that one has a smaller base grows faster. The other one has a bigger base and gross a bit slower.
Kurt Sievers: I think in the long run, Chris, and that's more from a technical perspective, BEVs will win the race. I think this hybrid thing is an intermediate period. I do believe in the long run, it will all tilt to BEVs once battery and electronic technology give enough range. I mean, then the whole concept of a hybrid is actually not meaningful anymore. Now for NXP, it doesn't matter that much as it does for some of our peers because only a very little of our product portfolio has a strict exposure to BEV only.
Speaker Change: I think on the long run, Chris and Thats more from a technical perspective be leesville when the rates I think there is hybrid thing as an intermediate periods I do believe on the long run it will all tilt to be Evs one specialty.
Speaker Change: Chronic signal achieved gives enough range than the whole concept of a hybrid it's actually not meaningful anymore now.
Speaker Change: Now for NXP, it doesn't matter that much as it does to some of our peers because only very little of our product portfolio has a strict exposure to BBB only it is actually only the high voltage battery management solutions.
Kurt Sievers: It is actually only the high-voltage battery management solutions. Everything else also plays in hybrid mode. So that's very different from people who have silicon carbide, for example, which only goes in one and not in the other.
Speaker Change: Everything else also plays in hybrid so that's very different to people who have silicon carbide for example, which only goes into one and not in the other so therefore, Chris I don't know exactly how that plays out over the short term, but it's also not relevant.
Christopher Brett Danely: So, therefore, Chris, I don't know exactly how that plays out over the short term, but it's also not relevant very much to our revenue. In the long term, I'm sure it is going to tilt back all to BEVs again. Tesla against BYD, I don't want to call that, Chris. I would just say the Chinese, and there are much more than BYD, are extremely competitive and aggressive. I'm very glad that we have had such great exposure to them because, I do believe that a large part of the global electric growth will continue to come from China. Now, how Tesla plays with that or in that, I don't know, but certainly, China is going to be the majority in the end, and that's, again, that's BYB+.
Speaker Change: Very much to our revenue on the long term I'm sure it is going to tilt back or or <unk> ago.
Speaker Change: Well against <unk>, I don't want to call that Chris.
Speaker Change: I would just.
Speaker Change: Say, the Chinese and there is much more than BYD.
Speaker Change: Extremely competitive and aggressive.
Speaker Change: I am very glad that we have a great exposure to them.
Speaker Change: Because I do believe that a large part of the global electric growth will continue to come from China.
Speaker Change: Now, how tesla place with that or in that I don't know.
Speaker Change: But certainly China is going to be the majority in the <unk>.
Speaker Change: <unk> plus.
Bill Betz: Great, thanks. And then just a quick follow-up for Bill. Bill, you said your utilization rates are going to remain kind of flattish in the second half of the year. What would be the catalyst to take them higher? Would it be some sort of inventory days level or... Even Better Demand Outlook, or some combo of both? Can you share what would be a catalyst for higher utilization rates?
Speaker Change: Great. Thanks, and then just a quick follow up for Bill.
Speaker Change: Bill you said your utilization rates are going to remain kind of flattish in the second half of the year what would be the catalyst.
Bill: To take them higher would it be some sort of inventory days level or.
Bill: And even better demand outlook or some combo of both can you share what would be a catalyst for higher utilization rates.
Bill Betz: You're correct; it's a combo of both.
Bill Betz: You're correct. It's a combination of both.
Bill Betz: As you can imagine, right now we're at the high end of our model when we look at what's in the channel, what we have on hand, and then we're trying to balance that, stage it appropriately for that second half growth. So it's balancing out quarter from quarter, but we want to make sure we continue to do the right thing here and keep inventory in check. And some of that inventory of the 144 days is coming from the fact that revenue dropped off from Q4, and so revenue COBS is probably impacting that drop by about 14 days, and then we actually decreased our inventory dollars in the quarter by about two days, or $32 million.
Bill: You are correct. It's a combo of both as you can imagine right now we are at the high end of our model when we look what's in the channel what do we have on hand.
Bill: And then we're trying to balance that stage it appropriately for that second half growth.
Bill: Balancing at quarter from quarter, but we want to make sure. We continue to do the right thing here and keep inventory in check and some of that inventory of 144 days.
Bill: Is coming from the fact related to the revenue drop off from Q4.
Bill: So and so revenue comps is probably impacting that dropped by about.
Bill: <unk> thousand 14 days and then we actually decreased our inventory dollars in the quarter by about two days or $32 million. So we're trying to balance all this all the moving pieces and I expect it will go.
Bill Betz: So we're trying to balance all this, all the moving pieces, and I expect that we're going to focus on getting inventory maybe a little bit tighter in the second half, but if growth is higher than our current expectations, clearly we'll be able to run our factories to increase the utilization of inventory. Great, thanks guys.
Bill: On getting inventory, maybe a little bit tighter in the second half, but if the growth is higher than our current expectations clearly will be able to.
Bill: Brian our factories.
Bill: Increase the utilization there.
Speaker Change: Great. Thanks, guys.
Operator: Please stand by for our next question. Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open.
Speaker Change: Thank you.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open.
Gary Wade Mobley: Hi guys, thanks for taking my question. Kurt, you seem to be implying that the second half revenue is about 12% higher than the first half, or in dollar terms, about $750 million higher. Correct me if I'm wrong, but I would imagine the majority of that delta is inventory restocking, direct in through distribution, but maybe you can give us a sense of the magnitude of the impact from improving demand or seasonality there.
Gary Wade Mobley: Hi, guys. Thanks for taking my question.
Gary Wade Mobley: Curt you seem to be implying that second half revenue is about 12% higher than the first half or in dollar terms about $750 million higher.
Speaker Change: Work with him wrong, but.
Gary Wade Mobley: I would imagine the majority of that Delta is inventory.
Gary Wade Mobley: Inventory restock direct into distribution, but maybe you can give us a sense of the magnitude of the impact from improving end demand or seasonality there.
Kurt Sievers: Yeah, hi, Gary. First of all, no, that's not what I said. What I said is that the second quarter is guided at 3-1-2-5, so you can calculate the first half revenue. And then I said that the full year is somewhere between modestly down and modestly up, and very importantly, I want to stress that that growth in the second half over the first half is not just coming from the channel. We clearly see, and we have the data points from all the patterns, etc., that also direct business is going to grow in the second half over the first half, and I gave two examples, I think, with Ross earlier.
Curt: Hi, Gary.
Gary Wade Mobley: First of all no that's not what I said, what I said is that the second quarter as guided at 301 to five so you can calculate the first half revenue.
Gary Wade Mobley: And then I said that the full year is somewhere between modestly down to modestly up.
Gary Wade Mobley: And very importantly, I want to stress that that growth in the second half over the first half.
Is not just coming from the channel be clearly see.
Gary Wade Mobley: And we have the data points from from order patterns et cetera. That's also the direct business is going to grow in the second half over the first half and I gave two examples I think with Ross earlier.
Kurt Sievers: One is the automotive platforms which are ramping that are totally independent of the cycle, and there is no product in the inventory because it's a new product which just comes in at the customer, and RFID tagging which is also with direct customers in parts where it has nothing to do with the cycle, but it is the relief of the industry after the settlement between NXP and Impinj for that market.
Gary Wade Mobley: One is automotive platforms, which are ramping that is totally independent of the cycle.
And there is no product on the inventory because it's new product, which just comes in at the customer.
Gary Wade Mobley: And it is RFID tagging.
Gary Wade Mobley: Which is also with direct customers in pumps there.
Gary Wade Mobley: It has nothing to do with the cycle, but it is Steve So the relief of the industry. After the settlement between NXP and pinch for that market.
Bill Betz: Very importantly, I also want to say that it is highly unlikely, Gary, that in order to do this, we would go to two and a half months of channel inventory. So what I said is, in quarter two, we take it to 1.7. So that's one digit higher. We are at 1.6, and we want to exit Q2 at 1.7. And if demand continues to go the way we predict this, we will slightly increase further in Q3 and Q4.
Gary Wade Mobley: Very importantly, I also want to say that it is highly unlikely Gary that's in order to do this we would go to a half months of channel inventory.
Gary Wade Mobley: So what I said is in quarter, two we take it to $1 seven so thats one digit up we are at one 6% and we want to exit Q2 at one seven.
Gary Wade Mobley: And if that demand continues to go the way we preview. This beeville slightly increased further in Q3 and Q4 I must admit I cannot see a scenario that we would get two to four to five.
Bill Betz: I must admit, I cannot see a scenario where we would get to 2.4 or 2.5 with that. So the modesty up or down for the full year does not depend on taking the channel for two and a half months. So I'm sorry if that was not clear earlier, so I'm glad you did ask, Gary, but that's really not the background to it.
Gary Wade Mobley: So the modestly up or down for the full year, thus not dependent on taking the pedal Charles two and half months. So I'm sorry, if that was not clear earlier. So I'm glad you did ask Gary, but that's really not the background to it.
Operator: Just a quick follow-up for Bill. He did a good job of highlighting the increased depreciation schedule from five years to 10 years on internal front end equipment. What does that do for the long-term capital intensity for the overall company? No change.
Gary Wade Mobley: Okay.
Speaker Change: A quick follow up for Bill you.
Did a good job of highlighting the increased depreciation schedule from five years to 10 years on internal front end equipment, what does that do for the long term capital intensity for the overall company.
Stacy Aaron Rasgon: No change. Our current view is our CapEx is to spend six to eight percent. Again, this is really a accounting change that we, you know, we just dealt with it and moved on.
Bill: No change to our current view is our Capex is spent 6% to 8%.
Bill: Again, this is really accounting change that.
Bill: We just dealt with it and move down.
Speaker Change: Thank you.
Stacy Aaron Rasgon: Please stand by for our next question. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is open.
Speaker Change: Thank you.
Speaker Change: Please standby with our our next question.
Speaker Change: Our next question comes from the line of Stacy <unk> with Bernstein Research. Your line is open.
Stacy Aaron Rasgon: Bye guys, thanks for taking my questions. For the first one, I also wanted to sort of revisit the second aphorem.
Stacy: Hi, guys. Thanks for taking my questions.
Stacy: First one I also wanted to sort of revisit the second half ramp, but it does seem clear.
Stacy Aaron Rasgon: So it does seem clear if the full year is flat, plus or minus, you're up decent double digits, half over half. Does that start in Q3? Like, is Q3 above seasonal to get us there? Like, like, how would you, I guess, sitting where we are right now, how would you sort of characterize likely Q3 seasonality versus what you've seen historically?
Full year is flat plus or minus Europe decent double digit half over half does that start in Q3 like in Q3 above seasonal that to get us there like like how would you I guess sitting where we are right now how would you sort of characterize likely Q3 seasonality versus what you've seen historically.
Kurt Sievers: Hi Stacy, we really can't go there. I mean, I'm already leaning out of the window here with giving kind of directional full-year guidance, which we thought was useful given the dramatic cycle we are all going through. But now calling it into Q3 and Q4 separately, I'm sorry, we don't provide this. So it is for the full year.
Hi, Stacy, we really can't go there.
Speaker Change: Im already leaning out of the window here with giving kind of a directional full year guidance, which which we thought is useful given the draw.
Speaker Change: Dramatic cycle, we are going through but calling it into Q3 and Q4 separately I'm sorry.
Speaker Change: <unk> provides us.
Speaker Change: It is for the full year and honestly, it's also hard to say Stacy because you know that inventory digestion is not an extra shift I mean this is the number of customers each of them has their own dynamic has moving targets.
Kurt Sievers: And honestly, it's also hard to say, Stacy, because inventory digestion is not an Excel sheet. I mean, this is a number of customers. Each of them has its own dynamic, has moving targets. So things could be settled earlier, or they could be settled a little later. And calling that exact by the quarter end is virtually impossible.
Speaker Change: Things could be settled earlier could be solved with a little a little later and calling the exact by the quarter end is virtually impossible.
Stacy Aaron Rasgon: Okay, so I mean, maybe to take that point and maybe step out a little more. So on autos last year, you've already sort of indicated that you undershipped last year, you had strong pricing, and you didn't you actually underperformed the market last year. So if you actually started undershipping last year, why are you still in an inventory correction now? So this is like six quarters.
Okay. So I mean, so maybe it would take that point and maybe step out a little more so on autos lastly, you've already sort of indicated that you under shipped last year, you had strong pricing and you didn't actually under underperformed the market last year. So if you actually started under shipping last year why are you still in the inventory correction now.
Speaker Change: So this is this is like six quarters.
Kurt Sievers: Because we wanted to spread this out, Stacy, that was the whole idea. I think last quarter we discussed our understanding of that so-called soft landing strategy for NXP. Our whole target was to actually not have a sharp peak to trough in the automotive industry because that would have been a bad impact on our factories and Bill would come back with heavy underloading and negative margin impact. So the idea was to spread this over a longer period of time, which is why we started early but didn't want to overdo it in any given quarter.
Speaker Change: Because we wanted to spread result, Stacy that was the whole idea I think last quarter, we discussed about our understanding of the so called soft landing strategy for NXP.
Speaker Change: Our whole target was to actually have not as sharp peak to trough in automotive because that would be a bad impact on our factories and bill will come back with a heavy on the loading of negative margin impact. So the idea was to spread this over a longer period of time, which is why we started early.
Speaker Change: But didn't want to overdo, it and didn't want to overdo it in any given quarter.
Kurt Sievers: So say we started in Q3 last year on the direct side of automotive, and obviously, it goes at least until the end of the second quarter of this year. So that would be a full year of correction on the direct side, maybe a little bit spreading into the third quarter. Mind you that at the same time, our distribution automotive business, which is 40% of the total automotive revenue, has always been at 1.6 only. So on that side of the house, we haven't had to correct at all.
Speaker Change: So <unk> started in Q3 last year for the direct side of automotive.
And obviously it goes at least until the end of the second quarter of this year, so that would be a full year of correction on the direct side, maybe a little bit spreading into the third quarter.
Speaker Change: Mind, you that at the same time, our distribution automotive business, which is 40% of the total automotive revenue has always been a $12 six or so.
Speaker Change: On that side of the house.
Stacy Aaron Rasgon: So that's the way you should think about it, which explains some of the confusion I'm reading in a lot of reports about the peak-to-trough behavior of NXP versus others. In Comtintra, in industrial and mobile, we have a 30% peak-to-trough, more or less. It's just that our trough was already a year ago because of our channel discipline, but it's the same peak-to-trough as everybody else. It's just in automotive, it's probably more in the 9 to 10 percent because I believe we'll trough in automotive this quarter too, right now. But again, that is intentional, as I just explained.
Speaker Change: I have to correct at all.
Speaker Change: So that's the way how you should think about the which explain also some of the confusion I am reading a lot of reports about the peak to trough behavior of NXP versus others.
Speaker Change: In in content trough in industrial and mobile.
Speaker Change: We have a 30% peak to trough more or less.
Speaker Change: It's just that our trough was already a year ago because of our channel discipline, but it's the same peak to trough as everybody else is just an automotive it's probably more in the 9% to 10%.
Speaker Change: And because I believe we trough in automotive.
Speaker Change: This quarter two right now.
Speaker Change: But again that is intentional as I just explained.
Kurt Sievers: So is demand getting worse now, or is just your inventory behavior taking a harder line on inventories now? Because it does feel like the general trajectory is getting worse over the last quarter and Q4, Q1.
Speaker Change: Got it so is it demand is getting worse now or just your inventory behavior, taking a harder line on inventories now because it does feel like the general trajectory is getting worse over the last quarter.
Stacy Aaron Rasgon: No, it's really the inventory. We don't see... I mean, you have to take the offset from the SARs, Stacy. I said earlier that last year, of course, there was a SAR growth of 10%. This year, it is flat. That is, if you compare like for like, then that makes this year, of course, a less positive environment from a macro perspective. But everything else, which is the company-specific decisions we have, which is the content increase, which is offered by the industry per se, entrepreneurship, which is also flat for us this year, is totally in place. So, no, it's just inventory.
Speaker Change: In Q4 Q1 Q2.
No. It's really the inventory, we don't see I mean, you'll have to take the offset from the Saar Stacey.
Speaker Change: I said earlier that last year of course, there was a saar growth of 10%. This year it is flat.
Speaker Change: <unk> is a if you compare like for likes and that makes this year of course are less less positive environment from a macro perspective, but everything else, which is the company specific positions, we have which is the key.
Speaker Change: Content increase which is offered by the industry per se.
Speaker Change: Enterprising, which is also flat for us this year is totally in place. So no. It's just inventory.
Operator: Got it. Okay. Thank you, guys. I appreciate it.
Speaker Change: Got it okay. Thank you guys appreciate it.
Joshua Louis Buchalter: Please stand by for our next question. Our next question comes from the line of Joshua Buchalter with T.D. Cohen. Your line is open.
Speaker Change: Thank you please.
Speaker Change: Please standby for our next question.
Speaker Change: Our next question comes from the line of Joshua but also with T. D. Cohen Your line is open.
Joshua Louis Buchalter: Hey guys, thanks for taking my question and congrats on the results. For my first one, I think there's a perception out there that there's a line to draw between software-defined vehicles and EVs and that it's much more difficult to do an SDV architecture on an ICE engine. Maybe you could spend a minute or two talking about what you're seeing from your customers. I mean, is there a big correlation between that digital architecture change versus electric vehicles because they're re-architecting, and what are you seeing on ICE engines for a software-defined vehicle? Thank you.
Hey, guys. Thanks for taking my question.
Joshua: As a result.
Joshua: For my first one I think there's a perception out there that there is.
Joshua: Aligned dropped to draw between software defined vehicles and Evs.
Speaker Change: It's much more difficult to do an FPV architecture on an ice engine.
Speaker Change: Maybe you could spend a minute or two youre talking about what youre seeing from your customers I mean is there a big correlation between.
Speaker Change: That digital architecture change versus electric vehicles, because the re architect being or and what are you seeing an ice engine for software defined vehicle. Thank you.
Kurt Sievers: Yeah, hi Joshua. I would say no. Fundamentally, the concept of a software-defined vehicle, which is actually moving a lot of performance parameters from hardware to software and creating much more flexibility, is completely independent of what kind of powertrain it has. The fact is, however, that all the OEMs I know are extremely busy with developing electric powertrain-based new vehicles. And for most of them, it is actually the core of their activity going forward.
Speaker Change: Yeah, Hi, Joshua.
Speaker Change: I would say no fundamentally the concept of a software defined vehicle, which is actually moving a lot of performance power meters from hardware to software and creating much more flexibility.
Speaker Change: Is completely independent of what kind of powertrain to test.
Speaker Change: Now the matter of the fact is however, that's all Oems I know are extremely busy with developing.
Speaker Change: Electric powertrain based new vehicles.
Speaker Change: And for most of them. It is actually the core of their activity going forward and that is of course, the reason why when they think about STB implementations.
Bill Betz: And that is, of course, the reason why when they think about STV implementations, it falls together with electric drivetrains. But that is not because there would be a technical reason. I actually know that several STV implementations where we are a leading partner for OEMs will comprehend both ice and electric drivetrains. So it is the same STV concept, which splits them at a much lower level into an implementation for a combustion engine car or an implementation for a battery electric vehicle car. But fundamentally, there is no difference.
Speaker Change: False together with with electric Drivetrains, but that is not because there would be a technical reason.
Speaker Change: I actually know this.
Speaker Change: Several sdd implementations, where we are a leading partner for Oems very comprehensive both.
Speaker Change: And electric Drivetrains.
Speaker Change: So it is the same STB concept, which split spend on a much lower level into an implementation for a combustion engine car or implementation for a battery electric vehicle.
Speaker Change: Fundamentally there is no difference.
Bill Betz: Appreciate the color there and maybe for Bill, after you just paid down the billion dollars note in March, I think you don't have anything due for over a year now and only 500 million next year. In the past, I guess, NXP has been more aggressive utilizing the balance sheet, and I think your past argument was two times leveraged. Can you maybe talk about how you're thinking about utilizing the balance sheet in capital returns here? Thank you. Yeah, sure.
Speaker Change: I appreciate the color there.
Speaker Change: Maybe for Bill.
Bill: Can you just paid down the $1 billion.
Bill: In March I think you don't have anything do for over a year now and only 500 million next year.
Bill: Okay.
Bill: In the past I guess NXP has been more aggressive utilizing the balance sheet and I think.
<unk> was two times Levered can you maybe talk about how you are thinking about utilizing the balance sheet and capital returns here. Thank you.
Bill Betz: Yeah, sure. So again, Josh, no change to our capital allocation strategy. If I just look back over the last three years, we returned $8.4 billion, or 107% of our accrued cash flow. The last 12 months, it's below 100% because we retired that debt that you just mentioned. And so that's about 82%.
Speaker Change: Yes, sure so again, Josh no change to our capital allocation strategy if.
If I just look back over the last three years, we've returned $8 $4 billion.
Speaker Change: Or 107% of our free cash flow last trailing 12 months, it's below 100% because we retired that debt that you just mentioned so that's about 82% and in this past quarter, we did 90%.
Bill Betz: And in this past quarter, we did 90%. So I think we did take the opportunity to deleverage the company. We looked at our gross leverage metric, and it was at 2.1 times; now it's at 1.9. Clearly, with the credit rating agencies, the sweet spot's below one and a half.
Speaker Change: So.
Speaker Change: I think we did take the opportunity to deleverage the company, we looked at our gross leverage metric than it was at two one times now that one nine.
Speaker Change: Clearly with the credit rating agencies, and sweet spots below one and a half.
Bill Betz: If we look at, we're going to continue to buy back our shares. We think it's a great use of our cash. We have approximately 1.1 billion left on our board authorization plan for buybacks this year. We continue to pay a healthy level of dividend. So if you look at that as a percentage of cash flow from operations for the last 12 months, it's about 28%.
Speaker Change: If we look at we're going to continue to accurately buying back our shares we think it's a great use of our cash.
Speaker Change: We have approximately $1 1 billion left on our board authorization plan of buyback this year.
Speaker Change: We continue to pay a healthy level of dividend. So if you look at that as a percentage of cash flow from operations over the last 12 months of about 28%.
Bill Betz: And as we talked about in the past, we treat it somewhat as fixed. We'll continue to execute and invest in the business. That's the number one priority, right? We're going to stay within our financial model, invest in the business, and continue a lot of small tuck-ins of our M&A that we've been actively involved in. So overall, I think we're committed to continuing returning excess free cash flow back to you
Speaker Change: We talked about in the past that we treated somewhat as best.
Speaker Change: We will continue to execute.
Speaker Change: And the business that's the number one priority right, we're going to stay within our financial model and best in the business continue a lot of small tuck ins of our M&A that we've been actively involved and so overall I think we're committed to continue returning excess free cash flow back to you all.
Operator: Great. Hey, Tawanda, we'll take one more question here today. All right.
Speaker Change: Thank you.
Speaker Change: Great.
Speaker Change: And then we will take one more question here today alright.
Operator: Alright, please stand by for our final question. Our final question comes from the line of Chris Caso with Wolf Research. Your line is open.
Speaker Change: Please standby for a final question.
Speaker Change: Our final question comes from the line of Chris Caso with Wolfe Research. Your line is open.
Christopher Caso: Yes, thank you. Good morning. I wonder if you could talk a little bit more about the China for China manufacturing strategy that you've spoken about in the past. I mean, I guess on one point, you know, how that protects business in China, and then secondly, you know, what margin implications that may have if you change that manufacturing strategy going forward.
Christopher James Muse: Yes. Thank you good morning, I'm wondering if you could talk a little bit more about the China for China manufacturing strategy.
Christopher James Muse: Spoken to in the past I mean, I guess in one point.
Christopher James Muse: That protect the business in China, and then secondly, what margin implication that may have.
Christopher James Muse: You.
Christopher James Muse: You changed that manufacturing strategy going forward.
Kurt Sievers: Yeah, hi Chris. That's indeed a very important point. There is a clear ongoing and, I'd say, increasing requirement from our Chinese customers in the automotive and beyond sectors to go for localized manufacturing. We are pursuing this quite forcefully.
Speaker Change: Yes, Hi, Chris that's indeed, a very.
Speaker Change: A very important point.
Christopher James Muse: There is a clear ongoing and I'd.
Christopher James Muse: I'd say increasingly requirements from our Chinese customers in automotive and beyond.
Christopher James Muse: To go for localized manufacturing.
Speaker Change: We are pursuing this.
Kurt Sievers: We have chosen the Nansheng factory of TSMC, which happens to host the 16 FinFET, 16 nanometer technology, which is the core of our microprocessors for automotive. We are working with SMIC, which we have done historically outside of automotive and continue to do so outside of automotive, and we just ended up choosing a third foundry partner, which I'm not going to name here, but a third foundry partner for the analog mix signal space in order to produce our products in China for China, which is helpful in two ways, Chris.
Christopher James Muse: Quite forcefully.
Christopher James Muse: We have chosen the Nanjing factory of TSMC, which which happens to host the 16, Finfet 16 nanometer technology, which is the core of our microprocessors for automotive.
Christopher James Muse: We are working with Smith.
Christopher James Muse: Which we have done historically outside of automotive and continue to do so to the automotive.
Christopher James Muse: And we just ended up choosing a third.
Christopher James Muse: Foundry partner, which I'm not going to name here, but a third party developer for the Mexico.
Christopher James Muse: Base.
Christopher James Muse: In order to produce our products in China for China.
Speaker Change: That is helpful. In two ways, Chris the woman's indeed that we can follow that requirement of local manufacturing and I believe NXP is in a comparatively good positioning here because several of our peers have their own factories and for them that moved to China is really not easy.
Kurt Sievers: The one is indeed that we can meet that requirement of local manufacturing, and I believe NXP is in a comparatively good position here because several of our peers have their own factories, and for them, the move to China is really not easy. Secondly, cost. You just mentioned it.
Speaker Change: Secondly cost you just mentioned that there is a certainly a competitive.
Kurt Sievers: There is certainly a competitive market in China, and if we want to successfully play against local Chinese competitors, which, certainly, over time, will continue to try and come up, it is good when we can use the same cost base which they use, which is local foundries in China. So, in an ideal case, Chris, and again, let's see how it plays out, you will not see any impact on the margin from doing this, but it keeps us competitive. I mean, the whole point is that we can play against them successfully because we can leverage the same cost competitiveness that they have in local manufacturing.
Speaker Change: Markets in China, and if we want to successfully play against local Chinese competitors, which certainly over time, we'll continue to try and come up.
Speaker Change: It is good when we can use the same cost base, which deals which is local foundries in China.
Speaker Change: No.
Speaker Change: Year case, Chris again lets see how it plays out you will not see any impact on the margin from doing this but it keeps us competitive I mean, the whole point is that we can play against them successfully because we can leverage the same cost competitiveness, which they have in the local manufacturing environment.
Kurt Sievers: Good. I look at Jeff here.
Speaker Change: Good morning.
Christopher Caso: You have a follow-up question? Yeah, I do. And if I could follow up on China from, you know, a competitive standpoint regarding, you know, what they could actually produce. And, you know, you've addressed it from a manufacturing standpoint, putting you on an equal cost base. What do you think about the capabilities of some of these local players?
Speaker Change: I looked at Jeff here, you have a follow up yes.
Jeff Palmer: Yes, I do and if I could follow up.
Speaker Change: Also with China from.
Speaker Change: A competitive standpoint regarding what they could actually produce and you've addressed it from a manufacturing standpoint, and putting you on an equal cost base with them.
Speaker Change: What do you think about the capabilities.
Kurt Sievers: Obviously, you know, there's an imperative in China to try to bring as much content locally as possible. Do you see the competitive threat rising in terms of the capabilities of some of the local players? You know, that could be a factor going forward. Look Chris, in principle, and that's an overriding statement, we are always paranoid about competition because I've learned in my career in this industry that you better be paranoid at all times because that keeps you alert to run successfully against competition.
Jeff Palmer: Some of these local players obviously.
Speaker Change: As an imperative in China and to try to bring as much content.
Speaker Change: Locally as possible do you see the competitive threat rising in terms of the capabilities.
Speaker Change: Some of the local players.
Speaker Change: That could be a factor going forward.
Speaker Change: Look Chris in principle, and Thats, an overwriting segments. We are always paranoid about competition because I've learned in my career in this industry you better be paranoid at all times because that keeps you too.
Speaker Change: To run successfully against competition.
Kurt Sievers: Factually, in that particular case, we see two areas where China is very, very busy from a local competition perspective. One is power discrete, especially for automotive, and that ranges all the way from IGBT's MOSFETs to silicon carbides.
Speaker Change: Actually in that particular case.
Speaker Change: We see two areas, where China is very very busy from a local competition perspective, one is.
Speaker Change: Power discrete, especially for automotive and it ranges all the way from from <unk> MOSFET to silicon.
Kurt Sievers: We just observed that. For us, it doesn't matter since you know that this is not part of our portfolio, but that's something where it appears they are actually making quite good progress. Secondly, lower-end microcontrollers. There are a number of companies, and they together have a couple of hundred million dollar business already that's outside of the automotive industry. We think with the fast move and requirements for higher processing performance and a lot more software in the automotive industry, this is a long way for them.
Speaker Change: Silicon carbide.
Speaker Change: We just observe that for us it doesn't matter since you know that this is not part of our portfolio, but that's something where it appears they actually made quite good progress.
Speaker Change: Secondly, lower end microcontroller.
Speaker Change: There is a number of companies and together have a couple of hundred million dollars of Golar business already.
Speaker Change: Outside of automotive.
Speaker Change: We think with the <unk>.
Speaker Change: Fast move and requirement for higher processing performance and the lot more software in automotive.
Kurt Sievers: Again, we are paranoid, but I think it's just another set of competitors that we are facing, like in other places in the world. So, we are not fearful of this anytime soon. In the analog space, I could imagine, again, we haven't really seen much, but I could also imagine that they get into the lower-end catalog analog space at some point. I mean, if I were China, I would try and do this.
Speaker Change: Is this is a long way from again VR paranoid, but I think its just another set of competitors, which we are facing like in other places in the world.
Speaker Change: So we are not.
Speaker Change: Not fearful of this.
Speaker Change: Anytime soon.
Speaker Change: The analog space.
Speaker Change: I Couldnt mentioned again, we haven't really seen much but I could also mention that they get into the lower end catalog analog.
Speaker Change: At some point I mean, if I was trying to I would I would try and do this so overall clearly a trend. So I completely agree with you that this is something which they want to do we don't see it really moving in our space at this time and certainly with the localization of our manufacturing.
Kurt Sievers: So, overall, clearly a trend. So, I completely agree with you that this is something that they want to do. We don't see it really moving in our space at this time, and certainly with the localization of our manufacturing, we kind of want to counter that, at least from a competitive cost base and from a compliance perspective.
Speaker Change: We kind of on account of it at least from a competitive cost base and from a compliance perspective.
Speaker Change: Good.
Kurt Sievers: With that, we are a little bit over time. I want to conclude the call by summarizing and just making the remark again. This is a tough cycle. We have for many quarters operated a soft landing strategy in order to keep the P&L earnings and profitability in reasonable shape. With some cautious optimism, we are now seeing that the second half is turning around. It's hard to say what the slope of that is going to be, but given our low inventory position going into this, we are cautiously optimistic that we can land the year in this plus minus zero kind of fashion, which we discussed during the call. In the meantime, we keep every possible control on anything we can do about gross margin and OPEX, as well as CAPEX. With that, I would like to conclude the call and thank all of you.
Speaker Change: A little bit over time.
Speaker Change: I want to conclude the call with summarizing in just making the remark again.
Speaker Change: This is a tough cycle.
Speaker Change: We have over many quarters operated a soft landing strategy in order to keep the P&L.
Speaker Change: Earnings and profitability in reasonable shape.
Speaker Change: With some cautious optimism we are seeing now that the second half is turning around.
Speaker Change: It's hard to say what the slope of that is going to be but given our low inventory position going into this.
Speaker Change: We are cautiously optimistic.
Speaker Change: Because last year in this plus or minus zero.
Speaker Change: Kind of fashion, which we have which we discussed during the call in the meantime, we keep every possible control on anything we can do about gross margin and opex as well as capex with that.
Speaker Change: We'd like to conclude the call and thank all of you.
Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Speaker Change: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Okay.
Speaker Change: Yes.