Q3 2024 NXP Semiconductors NV Earnings Call
I'm Mark, all of everyone, this is Jeff Palmer
Speaker Change: from NXT. Thank you and welcome to the United States, I'm a conductors third quarter earnings call with me on the call today as Kurt Sievers and its peace president and CEO and Bill Betz, our CFO.
The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that invoke risks and uncertainties that have caused and experienced results to differ materially from management's current expectations.
Speaker Change: These risks in an uncertainties include, but are not limited to statements regarding the macro-economic impact on the specific and market to which we operate.
Speaker Change: The sale of new and existing products and our expectations for the financial results for the fourth quarter of 2024.
Speaker Change: and the next P. undertakes no obligation to revise or update publicly any forward-looking statements. For full disclosure on forward-looking statements, please refer to our press release.
Speaker Change: Additionally, we'll refer to certain non-gap financial measures which are driven primarily by discrete events that management does not consider to be directly related to NFPs underlying core operating performance.
Speaker Change: for soon to regulation G.
Speaker Change: and XP has provided reconciliation to the non-gap financial measures to the most directly comparable gap measures in our third quarter 2020 for earnings press release, which will be furnished to the SEC on Form 8K and available on SP's website in the investor relations section at NSP.com. Now I'd like to turn the call over to Kurt.
Kurt Sievers: Good Morning, everyone. We appreciate you joining our call this morning.
Kurt Sievers: Beginning with quarter three, NXT delivered quarterly revenue of 3.25 billion in line with our overall guidance of down 5% year and year and up 4% sequentially.
Kurt Sievers: While we experience some strengths against our expectations in the communication infrastructure, mobile and automotive end markets, we were confronted with increasing macro related weakness in the industrial IoT markets.
Kurt Sievers: At the Total Company level, sequential growth was led by China.
Kurt Sievers: Non-Gab over rating Marchion in quarter three was 35.5% 50 basis points of buster year ago period and 40 basis points of buster midpoint of our guidance.
Kurt Sievers: Year and Year Operating Profit Performance was due to a combination of lower revenue and cross profit, partially offset by favorable operating expenses.
Kurt Sievers: Now let me turn to the specific trends in our focus and markets.
Kurt Sievers: In automotive, revenue was 1.83 billion, down 3% versus the year ago periods, and inline with our guidance range.
Kurt Sievers: The inventory digestion at our main tier-one customers continues to appear with further pressure coming from slowing European and North American car OEM and demand.
Speaker Change: At the same time, the experience healthy growth in the China and Asia-Pacific automotive end-parks.
Speaker Change: Turning to industrial and IoT, revenue was 563 million, down 7% versus the year ago periods and below our guidance range.
Speaker Change: During the quarter we experienced weaker than expected trends globally.
Speaker Change: In mobile, revenue was 407 million, up 8% versus the year ago period and at the high end of our guidance range, in what is normally a seasonally strong period.
Speaker Change: In communication infrastructure and other revenue was 451 million, down 19% year and year, and above the high end of our guidance as several RFID programs ramped stronger than originally anticipated.
Speaker Change: From a channel perspective, distribution inventory was 1.9 months up from the 1.7 months in quarter two, following our attempts to stage dedicated mass market product in the channel.
Speaker Change: While, at the same time, self-rule to distribution service customers in the European and American markets was somewhat slower.
Speaker Change: I'll let me turn to our expectations for quarter 4, 2024.
Speaker Change: We are guiding what a four-reven year to 3.1 billion down about 9% versus the fourth quarter of 323 and down about 5% sequentially.
Speaker Change: Relative to our earlier expectations, we are taking a more conservative stance for quarter four. Hence, we will also aim to hold channel inventory approximately flat sequentially at 1.9 months or about eight weeks.
Speaker Change: This is because we began to see increasing weakness in the industrial and IoT market already during quarter three.
Speaker Change: As well as an unexpected contraction in manufacturing PMI below 50 across all regions except China.
Speaker Change: Furthermore, we find ourselves exposed to a broad slowdown of European and not the American automotive OEM outlooks for 2024, only partially compensated by the aforementioned strength in China automotive.
Speaker Change: This leads to more strengthened inventory reductions at our Tier 1 customers, below the natural end demands.
Speaker Change: So at the midpoint, we anticipate the following trends in our business during quarter four.
Speaker Change: Automotive is anticipated to be down in the high single digit percent range for a score of 3-23.
Speaker Change: Excuse me, was a score of 4, 23 and down in the mid-single ditch at the center range was a score of 3, 24.
Speaker Change: Dustray and IOT is expected to be down by 20% versus quarter four, 23 and down in the mid-single digit percent range sequentially.
Speaker Change: Mobile is expected to be down in the low single-ditch at the centre-range both, whereas a score of 4, 23 and sequentially.
Speaker Change: And finally, communication infrastructure and other is expected to be down in the mid-Single Digital Passenger Range, both with a score of 423 and sequentially.
Speaker Change: In summary, our guidance for the fourth quarter reflects broader macro weakness in Europe and North America, only partially compensated by strength in China.
Speaker Change: The Signlittle rebound which we had anticipated for the second half of 24 has not materialized.
Speaker Change: The soft and uncertain demand environment appears to be causing the T1 customers to take a very cautious stance on their inventory positions.
Speaker Change: These trends are consistent with the multiple profit warnings issued by Matt Reveston Automotive OEMs, as well as the contracting global manufacturing PMI trends which are weighing on demand in the industrial and IoT market.
Speaker Change: The net impact to NXT are lower than expected all the trends from all direct customers and distribution partners.
Speaker Change: Notwithstanding this more challenging short-term demand environments, we are very confident we have deployed a long-term bidding strategy, focusing our investments to succeed in the fastest growing secular and markets of automotive and industrial IoT.
Speaker Change: In the short term, we will maniacally focus on managing what is in our control, while making the right decisions for the long-term health of the business.
Speaker Change: This will enable NXT to drive resilient profitability in earnings, even in an uncertain demand environment.
Speaker Change: and now I would like to pass the call to Bill for a review of our financial performance. Thank you, Chair and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q3.
and provided our revenue outlook for Q4, I will move to the financial highlights.
Speaker Change: Overall, our Q3 financial performance was good.
Speaker Change: Revenue was in line, non-GAAP gross margin was near the low end of our guidance, more than offset by favorable operating expenses, resulting in better operating profit.
Speaker Change: Turning to Q3 specifics.
Speaker Change: Total revenue was $3.25 billion, down 5% year-on-year.
Speaker Change: We generate $1.89 billion in non-GAAP gross profit, and reported a non-GAAP gross margin of 58.2%.
Speaker Change: down 30 basis points year-on-year and 30 basis points below the midpoint of our guidance range due to product mix.
Speaker Change: Thank you for watching!
Speaker Change: Total non-gas operating expenses were 738 million or 22.7% of revenue, down 65 million year-on-year, although this was 22 million below the midpoint of our guidance due to lower variable compensation, project spend, and payroll.
Speaker Change: from a total operating profit perspective.
Speaker Change: Non-gas operating profit was $1.15 billion.
Speaker Change: And non-GAAP operating margin was 35.5%, up 50 basis points year-on-year, and 40 basis points above the midpoint of our guidance.
Speaker Change: Non-GAAP interest expenses with $70 million, with taxes for ongoing operations of $182 million, or a 16.8% non-GAAP effective tax rate.
Non-controlling interest was $11 million and stock-based compensation, which is not included in our non-GAAP earnings, was $115 million.
Speaker Change: Taken together, we delivered non-GAAP earnings per share of $3.45, slightly ahead of our midpoint guidance of $3.42.
Speaker Change: Now I would like to turn to the changes in our cash and debt.
Speaker Change: Our total debt at the end of Q3 was $10.18 billion, with our cash balance of $3.15 billion.
Speaker Change: down $111 million sequentially due to the cumulative effect of capital returns, internal capex, investments in previously announced equity-accounted foundry joint ventures, and cash generation during the quarter.
Speaker Change: The resulting net debt was $7.03 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.24 billion.
Speaker Change: Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q3 was at 1.3 times and our 12 month adjusted EBITDA interest coverage ratio was 22.9 times.
During Q3, we paid $259 million in cash dividends.
Speaker Change: and repurchase 305 million of our shares.
Speaker Change: Taken together, we return $564 million to our shareholders, representing 95% of non-GAAP-free cash flow.
Speaker Change: In addition, on August 29th, the NXB Board of Directors authorized an increase of our existing capacity to purchase an additional $2 billion of buybacks.
with a total balance of $2.64 billion at the end of Q3.
Speaker Change: Furthermore, since the end of Q3 and through Friday, November 1st, we repurchased an additional $117 million of our shares under an established 10B5-1 program.
Speaker Change: Turning to working capital metrics, days of inventory was 149 days, an increase of one day sequentially.
Speaker Change: while distribution channel inventory was 1.9 months or approximately 8 weeks.
Speaker Change: Days receivable were 30 days, up 3 days sequentially, and days payable were 60 days, a decrease of 4 days versus the prior quarter.
Speaker Change: Taken together, our cash conversion cycle was 119 days, an increase of 8 days versus the prior quarter.
Speaker Change: Cash flow from operations was $779 million.
Speaker Change: and Net Cap X was $186 million or 6% of revenue, resulting in non-GAAP free cash flow of $593 million or 18% of revenue.
Speaker Change: Turning to our expectations for the fourth quarter.
Speaker Change: At the midpoint, this is down 9% year-on-year and down 5% sequentially.
Speaker Change: We expect non-GAAP gross margin to be about 57.5% plus or minus 50 basis points.
Speaker Change: Furthermore, our guidance assumes flat channel inventory at about 8 weeks exiting Q4.
Speaker Change: This reflects our continued discipline of proactively managing our distribution channel, especially during uncertain demand environments.
Speaker Change: Operating expenses are expected to be $725 million, plus or minus $10 million.
Speaker Change: Taken together, we see non-gas operating margin to be 34.1% at the midpoint.
Speaker Change: We estimate non-GAAP financial expenses to be $77 million, with the non-GAAP tax rates to be 16.8% of profit before tax at the midpoint.
non-controlling interest and other will be nine million
Our guidance assumes a $2 million loss from our equity-accounted boundary joint ventures.
Speaker Change: We suggest for modeling purposes, you use an average share count of 257 million shares.
Taken together at the midpoint, this implies a non-GAAP earnings-for-share of $3.13.
Speaker Change: We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $118 million.
Speaker Change: Turning to Uses of Cash
Speaker Change: we expect capital expenditures to be around 5% of revenue.
Speaker Change: We also will make a $400 million capacity access fee and a $120 million equity investment into BSMC.
Speaker Change: as well as a $52 million equity investment into ESMC, which are our two equity accountant foundry joint ventures, which are under construction.
Speaker Change: In closing, I would like to highlight three items.
Speaker Change: First, we will continue to return all excess cash to our owners through buybacks and dividends.
Speaker Change: We expect our Q4 capital returns to be above $700 million.
Speaker Change: Second, despite the macro headwinds, NXP will continue to navigate and operate within its long-term financial model.
Speaker Change: And lastly, we look forward to you joining our 2024 Investor Day on Thursday, November 7th at 8.30 a.m., where we will provide an update to our long-term strategic plan and financial models.
Speaker Change: I would like to now turn it back to the operator for your questions.
Speaker Change: Thank you. At this time, we will conduct a question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster.
Thank you.
Speaker Change: Our first question comes from the line of Ross Seymour of Dutch Bank. Your line is now open.
Ross Seymour: Hi guys, thanks for letting me ask a question.
Ross Seymour: Kurt, seems like a lot of things changed during the course of the quarter. You're not alone in highlighting weakness, and I don't think it's NXP-specific, but can you just talk a little bit about the specific customer behavior changes you saw? Because up until now, you seem to have set things up pretty conservatively throughout the year. So the guide down seems to be a little more of a surprise for you guys than the peers, just given the setup appeared to be a little more favorable heading into the quarter and guide.
Kurt Sievers: Yeah, thanks and good morning, Ross. Indeed, we were taken by some surprise, I would say, in the August time frame during quarter three.
by a broadening weakness in the industrial and IOT market, pretty much across the board, which led to a much more cautious stance on their side Ross relative to also their inventory positions.
Kurt Sievers: and the same is now broadening when you ask for the guidance for Q4 is clearly broadening into the automotive segment.
Kurt Sievers: where I would exclude China from these discussions. I think you've heard similar from our peers. China actually appears to be quite strong. Our growth was led by China.
Kurt Sievers: in in quarter three.
Kurt Sievers: and the sequential growth, and also in quarter four, China actually will grow from a sequential perspective over quarter three.
Kurt Sievers: across automotive and industrial and IOT but that weakness and that customer behavior you were asking for is really specifically strong now in the fourth quarter in the Western automotive and industrial segments.
Kurt Sievers: They are customers and use all the profit warnings from the car OEMs, for example. We are now the tier ones
Kurt Sievers: are aiming to further reduce their inventory.
Speaker Change: So
Speaker Change: Our trend to undership against natural end demand is becoming even tougher, Ross. That's how I would characterize the customer behavior. It almost felt like everybody from them kept up their forecast, and then suddenly, August, September, they started to drop.
and that is now rippling through to the tier 1's, which are becoming even more cautious on what they want to hold from NXP in terms of inventory. You know that we have talked about this extended inventory digestion before, but that has now extended because of the end market weakness.
Speaker Change: Thank you for watching!
Speaker Change: Thanks for that, Culler. And I guess looking forward, Bill, switching to the gross margin side, I know you talked about for the quarter, so just can you talk a little bit about utilization that's leading to the, you know, roughly half a point to a point decline in gross margin? And how do we think about the levers for gross margin going forward at the risk of kind of front running what you're going to talk about on Thursday? What are the pluses and minuses to that in a weaker environment where inventory seems to be a little bit more persistently elevated?
Speaker Change: Yes, thank you, Ross. And quickly on our Q3, our gross margin was missed, and you can probably see that very clearly through our segment reporting where industrial IOT revenues
Speaker Change: where 80% of that is serviced through the distribution and carry a treat of margins for us.
Speaker Change: And we also had a bit stronger mobile revenues, which are slightly diluted to corporate margins a bit.
Speaker Change: And so that's why we missed 30 bases going to Q3. We obviously see that trend. Kurt talked about the segments where clearly industrial IOT will be stepping down again. So that becomes a mixed headwind going into Q4.
Speaker Change: In addition, obviously declining by $150 million, we do also lose some fall through over our fixed costs.
Speaker Change: Related to inventory, you saw from a day's perspective, we're kind of holding ourselves. But clearly, when you see our Q report, you're going to see increased finished goods. And basically, those finished goods we were going to put in the channel, but the sell-through wasn't there, so we held them on our balance sheet.
Speaker Change: And so it will probably take us a quarter or two to get back to where we want to be from an inventory perspective.
Speaker Change: Now more longer term on the gross margins, again clearly we're running our utilizations in the low 70s. We expect to continue to run them in the low 70s probably at least for the first half of 2025.
Speaker Change: So that will flip and become a tailwind when we decide and see sequential improvements in our revenue sometime in 2025.
related to it. Clearly, we have mixed events to tell when that would come in our way into the future as we continue to ramp our new products.
Speaker Change: More importantly, we're going to talk about during Analyst Day our real strategic structural changes that we plan to make more longer-term, which obviously I've said many times that 58% is not our final destination and please hold tight for a couple more days and I'm going to walk you through that.
Speaker Change: a gross margin journey over the next three years, and plus some as well, related to it. But we feel pretty good. Obviously, we have to make sure we've earned off some finished goods here and going into Q4 and Q1, and rebalance the inventory a bit. But remember, we're holding about three weeks onto our balance sheet.
Speaker Change: which is Margin and Creative, when we do ship it into the channel. We're holding that quite tightly at about eight weeks. We believe eight weeks is probably one of the lowest compared to all our peers.
Speaker Change: and once the environment normalizes, we will bring that back up to 11 weeks. It's just a matter of when that will be, when the macro improves.
Speaker Change: Thank you.
Speaker Change: Thanks, Ross.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Bye-bye.
Speaker Change: Our next question comes from the line of Chris Cosco of Wolf Research. Your line is now open.
Chris Cosco: Yes, thank you. Good morning. I guess the first question is with regard to the channel inventory, and I know that you wanted to increase that somewhat. I guess it is right to interpret that the increase in channel inventory was just a function of the end markets being larger than you thought. And I guess...
Chris Cosco: In the context of your customers taking the inventory down so low, how does that affect your view of where you want your own inventory to be as you go into next year on both a channel basis on an internal basis?
Speaker Change: So hi Chris, let me take the channel question and the internal inventory question will be answered by Bill in a minute.
Speaker Change: So, on the channel, yeah, I think you got it exactly right. We wanted to increase by a digit from 1.7 to 1.8, which we did. And by the way, let me remind you why we want to do this. We want to be sure
Speaker Change: That critical product for competitiveness in the channel is probably staged on the shelves. Since most of our competitors have higher positions there, we want to be sure we don't fall behind in terms of competitiveness.
Speaker Change: And yes, we inched another digit higher, which was then a function of the late weakness in the quarter, which I just talked about, which reduced the sell-through more than we had anticipated. That's why we indeed inched a little bit higher than we had anticipated in the plan.
Speaker Change: And Bill, maybe you'll speak about the inter-elementary targets. Absolutely. Clearly, the macro environment is weaker now than 90 days ago, as Kurt explained. So I expect our inventory levels internally to remain elevated for the next couple of quarters until we obviously grow revenues again from a sequential standpoint.
Speaker Change: But again, at the same time, we are proactively reducing our foundry purchases.
Speaker Change: which are more variable in nature for us. And this will probably have an impact in the first quarter of 2025.
Speaker Change: Q4 obviously is limited because we placed these orders already in Q3.
Speaker Change: And again, as I talked to Ross, we're holding about three weeks of finished goods of inventory on our balance sheet.
Speaker Change: Again, we think it's important to hold it very tightly and low at eight weeks, and sometime in 2025, we'll bring this back to the 11 weeks when the macro improves. And again, I have to say our majority of our inventory has long lived supporting our auto industrial markets and had very, very low obsolescence risk.
Speaker Change: Thank you very much.
Speaker Change: Thank you. I guess as a follow-up, I'll ask a question which I know is very difficult to answer, but you're going to get it, so I'll be the one to ask it, which is...
Speaker Change: You know, do you think that we're pretty close to the bottom now, and recognize how difficult it is given the moving targets and such?
Speaker Change: But, you know, as an example, you know, sort of normal seasonality is down to the first quarter. I don't know if we should think about that differently.
Speaker Change: given what's happened in the second half of this year. And I guess with what your customers are planning to do with inventory, and bring it so low, does that give you some confidence that we're kind of approaching revenue bottom levels here?
Speaker Change: Yeah, let me try and go at this. This is a number of complex questions. So first of all, clearly the forward-looking, there is a lot of uncertainty around this. I mean, with all the...
Speaker Change: unexpected downticks from a macro perspective in automotive and industrial which we've seen over the past say 10 weeks. I want to be really careful in making strong statements for the for the longer future into next year.
Speaker Change: however what we can offer is we do believe that probably quarter one will follow
Speaker Change: a pretty normal seasonal pattern for NXP, which is a high single-digit sequential down from Q4 into Q1. We see no reason why we should be different to normal seasonality here into Q1.
Speaker Change: I don't want to go that far, Chris, to call the trough, because I just don't know what the macro is going to do with all the uncertainty around us. I don't think we can do this.
Speaker Change: Yet, I do agree with you that with our strong discipline on the channel inventory, and I had it in my prepared remarks, we keep it now flat again into quarter four, so where we start to stage a bit into the third quarter.
Speaker Change: We hold here, so we keep it flat into the fourth quarter, which keeps us at a very low level of eight weeks only.
Speaker Change: and also indeed with the direct customers at some point, inventory is just, it's just burned. So yes at some point of course that sets us up for a good growth. I just cannot call and don't want to call when that moment is.
Speaker Change: But I would say NXP from an inventory, in the customer space perspective, is actually pretty well positioned.
Speaker Change: Got it, totally fair, thank you. Thanks, Chris.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Thank you for watching!
Speaker Change: Our next question comes from the line of Vivek Arya of Bank of America Securities. Your line is now open.
Vivek Arya: Thanks for taking my question. Kurt, what's NXT's relative exposure in a China-based car versus a European premium car? So let's say, you know, your China customers continue to take
Speaker Change: How does that content play out for NXP? And then, you know, this China strength. Yes, you have mentioned it. The peers have mentioned it. How much of that is kind of pre-buying before the elections? And, you know, does that kind of, you know, keep the industry exposed to insourcing risks?
Speaker Change: on a longer term basis.
Speaker Change: Hi Vivek, first on our exposure to content per vehicle in China versus premium Western.
Speaker Change: there are damped high-end cars in the meantime in China which which have a similar set of features so
Speaker Change: I would probably say that on the higher-end cars in China, we have a very similar exposure from a content-privileged perspective as we have in the Western world. And as we have discussed a couple of times before, since they are spinning new platforms faster,
Speaker Change: I dare to say that probably the growth of that content exposure is growing faster than in the rest of the world because they just get faster to the next innovation steps. They develop a new platform in two to three years.
Speaker Change: which gives us the opportunity to tap faster into a higher content opportunity. So over time that is actually strengthening.
Speaker Change: Now, from anything we can see, I don't think, and that's sort of the second half of your question, I don't think that they are staging inventory or something because of election or other external events.
Speaker Change: It is actually the success of the Chinese industry. I mean, if you look at the...
Speaker Change: at the Global SAAR. In the meantime, for the world, it has tipped down to a forecast of minus 2% this year. So Global SAAR is going to decline by 2% this year. At the same time, China is going to grow by 2%.
Speaker Change: so you you see the differential that China is actually doing better which which puts it at least to our estimate in a in a fair light relative to how our revenue develops better in China than in the other regions
Speaker Change: The same holds true for this for this whole discussion about XCV, so electric vehicle penetration. In China, it keeps going strong We just got the other week that data point that in in September, September this year 46%
Speaker Change: that was the penetration of XCVs in China. So almost 50% of the vehicles in China was then already electric.
Speaker Change: So, the SAR overall does well in China, and the EV penetration is doing better than in the rest of the world. And that's for me a fair reason why I do believe that the China growth which we are experiencing is sustainable. It's really their competitiveness.
Speaker Change: locally and globally against the Western players. It's almost like what is lost in the West is won in China.
Speaker Change: Thanks for watching!
Speaker Change: And for my follow-up, I think you mentioned that, you know, Q1 you expect to be seasonal if I heard correctly, which is down high single digits. But if I were to just take the average of just your automotive business over the last, you know, seven years, including the COVID, that is more, you know, down like 1-2% or so on an average. I understand, like, seasonality could mean different things at different times.
Speaker Change: What explains this large difference between, you know, what we have seen with NXT over the last six or seven years in Q1, especially in your automotive business, versus what I think you, you know, are kind of alluding to for Q1 2025?
Speaker Change: Hey Vivek, I'll take that, it's Jeff here. I don't think we're going to provide a guidance by segment into Q1, as Kurt said on a previous question, we do expect Total Company to be seasonally down into Q1, and I think that's probably about as far ahead of our skis as we're going to get today.
Speaker Change: Thank you for watching!
Vivek: Okay, thank you.
Speaker Change: Okay, we'll take the next question operator
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Christopher Mews of Cantor. Your line is now open.
Christopher Mews: Yeah, good morning, good afternoon. Thanks for taking the question. I was hoping you could give a little more color on the industrial slowdown that you're seeing.
Christopher Mews: You talked about China strong, and I'm assuming that's a little more IOT.
Christopher Mews: So, we'd love to hear kind of what, you know,
Speaker Change: whether North America, Europe, kind of any changes in terms of geo and where, you know, you're seeing weakness, whether it's broad, isolated, to say factory automation. We'd love to hear your thoughts.
Speaker Change: Yeah, hi CJ. Indeed, let me reconfirm the weakness in Q3, but also now specifically going to Q4.
Speaker Change: is predominantly across the board from Europe and the U.S. in industrial and IoT, so across also most sub-segments.
Speaker Change: but mind you that
Speaker Change: We are not that big in Europe and the US in industrial and IoT, so we are actually a relatively small player there. If you want to get a little bit of color, I would say especially factory automation appears to be particularly weak there in the West, in Europe and the US.
Speaker Change: The strength in China is more in the consumer IoT part, that 40% portion of our industrial IoT segment.
Speaker Change: than in the core industrial. It's not that core industrial is particularly weak in China, but if you want to have color between the two in Q4 in China, then the stronger one is the consumer IOT, which I guess is also a bit of a seasonal strength into the fourth quarter.
Speaker Change: Thank you so much. I guess as my follow up, you know, given kind of how you well manage the cycle today, there's a perception that you're gearing into the next cycle maybe less than peers. So I was hoping you could speak to kind of where you think you are overall in terms of your sell-in versus sell-through and demand.
Speaker Change: And if there's any kind of color around end markets, to kind of give confidence that, you know, when things do recover, that you do have that gear in cyclically.
Speaker Change: Yeah, CJ, I'm happy you're asking because I fail to understand the logic why we would come back less strong than others.
Speaker Change: because we have felt somewhat better so far.
Speaker Change: And I fail to understand that because the only one reason why we are declining less this year, for example, with our guidance You will see that NXP is like 5% down this year versus most of our direct peers more double-digit down The reason for that is that we hit the brakes earlier
Speaker Change: It's not that we took anything away from the future. The only thing is
Speaker Change: We didn't do it in the first place, so we did a little less and a little softer in 22.
Speaker Change: and 23, which helped us to not have to hit the brakes so hard in 24.
Speaker Change: But that puts us at the same starting point into any recovery. So that is our firm position here. And I think it all comes back down to what we discussed a little earlier in this call, which is the actual inventory position, which we have in the channel, and Bill said it.
Speaker Change: 1.9 months or about eight weeks currently, which is still quite a bit away from the longer term target of 11 weeks or two and a half months. So that we still have like, I think $300 million or so under the belt to be shipped in, which we don't do in the current environment. Again, we stay cautious. We could do, but we don't do it because we wanna do it when it makes sense, when the recovery happens.
Speaker Change: and on the on the direct customer inventory.
Speaker Change: I can of course only assume CJ but I don't see a reason why we would be any any worse or any better than than typical peers I mean that's that's the treatment you get from the from the customers we can't control that but I I don't think we should be any different to our
Speaker Change: to our peers. So therefore, no, I don't think there is a reason to believe we have less of a recovery ahead of us. We actually feel good about this soft landing strategy, which in quotes only brought us down by five percent this year, thanks to cautious behavior the year before.
Speaker Change: Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Stacey Raskin of Birkstein Research, your line is now open.
Stacey Raskin: Hi guys, thanks for taking my questions. My first one, just around the auto, like 90 days ago you were sort of suggesting to us that auto would be stronger into the end of the year because of company-specific winds and radar and other things that were going to be ramping.
Speaker Change: So, part of the incremental weakness, I'm a little confused. Did that stuff just not ramp, or did it ramp less than you thought? Or is it ramping later than you thought? Or what is it? Because it certainly doesn't seem to be enough to offset the broader weakness that we're seeing. What's going on with that?
Speaker Change: Yeah, Stacey, absolutely. I can confirm we did say that half-two would grow over half-one, driven by two factors. One was the anticipated recovery and the other one was company-specific growth.
Speaker Change: We went very deeply into this and tried to find what happened and what didn't happen. The company-specific growth, Stacey, is happening. I mean it's a little softer because if they build a little less cars then of course you ramp also a little bit less but the fundamental mechanisms of radar and s32 ramps
Speaker Change: are happening. We are actually growing quite nicely in the second half over the first half.
Speaker Change: But it is wiped away by the recovery not happening, and on the contrary, a macro weakness which is actually superseding all of that. So underneath, the company-specific drivers are intact. We will show a bit more detail on Thursday in our investor day in Boston.
Speaker Change: but it's it's not strong enough to overcome the macro weakness, Desi.
Speaker Change: Got it, that's helpful. So my follow-up, I wanted to ask about gross margins. I understand why they're coming down.
Speaker Change: in Q4, I think. Now, in Q1, you just suggested that revenues are probably down high single digits sequentially. It doesn't sound to me like mix is any better.
Speaker Change: Is it should I be thinking that the 57 and a half just given those dynamics in the near term is likely not the trough Like like how should we be thinking about gross margins into Q1? Just giving the the further revenue shortfall that we're seeing in any other drivers that are leading in the beginning of the year
Speaker Change: Yeah, Stacy, this is Bill. First, we're not going to guide Q1.
Speaker Change: But for modeling purposes, I would suggest when incorporating what Kurt said about the seasonal adjustments to revenues,
Speaker Change: probably best to use a gross margin similar to those revenue levels at the past.
Speaker Change: in the absence of a guide. Again, we just don't know. It's not fully ordered book yet, so mix will play a role, of course, but I'm just not that smart enough. But for modeling, I would just use something along those lines of during the last three years of those revenue.
Speaker Change: But where was that? I'd open up my model like where were gross margins last time revenues were? I don't know
Speaker Change: Stacy, you can probably find it on our website. I'll dig it up, I'll dig it up myself, but thank you guys.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Thank you.
Speaker Change: Thank you.
Speaker Change: Our next question comes from Alondra Francois Bovignes of UPS. Your line is now open.
Speaker Change: Thank you very much. My first question was on the pricing as you know we are at the end of the year where
Speaker Change: It's like an intense conversation, I should say, from many peers that I talk to about this. So I was wondering, for NXP, how should we think about the pricing strategy? How do you think the pricing is going to play out given this?
Speaker Change: pressure may be more than usual especially into next year that would be very helpful and I have a follow-up after I said okay.
Speaker Change: Yeah, thanks Francois, absolutely. Let me confirm indeed two data points here. The one is, and we talked about this through this year,
Speaker Change: We can now say with a lot of confidence that for this year pricing will have been neutral So we will end the year with a flat with a flat pricing over the previous calendar year 2023
Speaker Change: and from anything we can see today relative to next year's pricing across the entire company so that's that's all the segments all the channels together it it will probably be a low single-digit ASP erosion
Speaker Change: They went into flat this year.
Speaker Change: And we assume that for next year, but also the years after, it is reasonable to assume we are back to a low single-digit ASP erosion annually, which is very much in line, by the way, with what we had experienced in the years before the supply crisis and before COVID.
Speaker Change: And I know you hear different data points from different people, Francois, but mind you that we have...
Speaker Change: a pretty differentiated portfolio. So a lot of our product is very far away from a catalog or commodity product which gives us also in a period like now a relatively strong standing when it comes to pricing.
Francois: you know, uncertainty with local players probably going after pricing. Even if you have a sticky, you know, and strong differentiation as you describe, Kurt, it's fair to assume maybe that, you know, the pricing environment and, you know, the oversupply that will take a bit longer to feel.
Speaker Change: How does NXP tend to play in that role? I mean, the trade-off between market share and gross margin, for example, would you consider like...
Speaker Change: to exit some product as soon as you see something that doesn't play your way? Or, you know, cost-saving program as well given the very long down cycle, is it something that you consider as well potentially?
Speaker Change: Just, you know, strategy.
Speaker Change: Absolutely. I mean, one side of this equation...
Speaker Change: You all will learn more on Thursday this week when we will provide the new financial model with our new Gross Margin Forecast, which obviously is a function or a consequence of that. But let me give you some color on the pricing.
Speaker Change: So, we will not try and bid on price.
Francois: Francois. Generally I would say the way how Bill and I and the management team how we are running the company is if we have to compete on price only then we are in the wrong product category.
Speaker Change: There is always a gray zone in between. Of course, we have to stay try and stay Competitive but if it really comes to a point that the only the only way the only leverage we have to win would be price Then we would eventually exit that and you have examples. I mean we did this with with powertrain microcontrollers in automotive, for example
Speaker Change: there over a number of years after we had acquired Freescale.
Speaker Change: We have actually exited some of these sub-segments, and they have been heavily picked up by some of our peers. So, yes, we are doing that. Or the banking card business years ago, there was a similar thing, where in the end we don't try to compete on price.
Speaker Change: Now, there is, of course, more to it, Francois, because it is also our cost-competitiveness. We work...
Speaker Change: maniacally on bringing our own costs down and the more recent moves with the VSMC joint venture for example in in Singapore and a few other moves we have are actually helping us to come at the same time to a competitive cost base.
Speaker Change: So, I mean, prices is also a function of the cost which we can achieve, and also there we work very hard. But still, ultimately, no, we are not the company which would sacrifice cross-margin for short-term market share. That's not the philosophy how we run the company.
Speaker Change: That's what I thought. Thank you, Kurt.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Josh Bolter of TDCAL and your line is now open.
Josh Bolter: Hey guys, thanks for taking my question. I'm sorry for harping on gross margin, but it's the one that's hit my inbox the most last night and this morning.
Speaker Change: I guess if we zoom out, I mean, your gross margins have been remarkably stable for like 10, 11 quarters, and now we're starting to see some leverage with revenue. Like, can you, I guess, maybe walk through why now?
Speaker Change: It sounds like it's all maybe fixed cost coverage and utilization rates, and there's nothing going on with pricing, but
Speaker Change: You know, the mixed by end market isn't really changing.
Speaker Change: Anything within mix of products that we should be aware of or any other factors beyond, again, fixed cost coverage and purchase agreements that are really driving the sequential decline in gross margins in both the fourth quarter and, I guess, what you're implying for the March quarter, which is another leg down. Thank you.
Speaker Change: Sure. Hey, Joshua. Thanks. Yeah, I mean
Speaker Change: It's really just a function of the revenue levels over a fixed cost structure. Obviously, mix plays a role in Q3 a bit.
Speaker Change: playing another role of some sort of it along with the lower revenues at the Q4.
Speaker Change: And really, the step down going into Q1, it will be the total revenue level, to be honest with you. There's not really anything else fundamentally different.
Speaker Change: It's just that, okay, now you have to rebalance the inventory a bit, and so maybe you don't build as much goods, and you have to adjust foundry, and so forth.
Speaker Change: I know I will walk the team through the gross margin journey this upcoming Thursday. And again, I would say we've been quite resilient here compared to many of our peers because of that fluctuation of their revenues clearly have an impact to their gross margins and how they service their customers or stage inventory. So, we feel pretty good of where we are. And again, it will be mostly a function of revenue over the near term. And then once we see the macro improve, we're very excited about.
Speaker Change: some of the levers that Kurt just talked about more longer term to actually bring the gross margin above our high end of our current model today.
Speaker Change: Got it. Thank you. I appreciate the color there. For a follow-up, I...
Speaker Change: Yeah, Kurt, I think you mentioned in your prepared remarks, there's a lot of volatility and changes going on at OEMs in particular in the West.
Speaker Change: I was wondering if you could maybe speak to your confidence and
Speaker Change: ignoring the inventory changes.
Speaker Change: Have there been changes in the assumptions on content for...
Speaker Change: at those customers, and in particular, I think the 5-nanometer S32MP was supposed to ramp in sort of the 2026 timeframe. Is that still on progress? And I guess, how are you seeing engagements for your content on the software-defined vehicle side? Thank you.
Speaker Change: Yeah, thanks Josh.
Speaker Change: No change. We are actually very confident here and my leader for the auto business Jens will speak in much greater detail on Thursday about the traction of the SDV.
Speaker Change: But you will also see in the numbers that our SDV, S32 growth accelerated segment
Speaker Change: has outperformed our targets in spite of all the turmoil over the past three years. So we will show the numbers on Thursday. So that has great traction today.
Speaker Change: and we anticipate it will continue to have great traction, and that absolutely, of course, includes the S32N, which is the 5nm vehicle computer, and a lot of other products. What does happen, however, is we do see a continued...
Speaker Change: non-competitiveness of the Western OEMs versus Chinese OEMs. So I dare to say that from anything we can judge here,
Speaker Change: The pendulum swings more in favor of the Chinese car companies. That doesn't mean that the content per vehicle in Europe or the U.S. comes down.
Speaker Change: But maybe the number of cars that they are building is coming down. So that's not a content question It's more a unit production question, which is going probably in favor of China, which means next to our efforts to win with STV concepts across the board
Speaker Change: We want to particularly be sure that we keep winning also in China, because that is where probably the bigger opportunity is going forward.
Speaker Change: Thank you. See you Thursday.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of Tashia Hari of Goldman Sachs. Your line is now open.
Tashia Hari: Hi, good morning. Thank you so much for taking the questions. I have two quick ones on automotive. I just wanted to clarify, Kurt, the incremental weakness you're seeing in auto, is that at this point purely due to weakening end demand, or are your Tier 1s bringing down their inventory levels as we speak as well? I think last quarter you gave a range of something like 2 to 12 weeks in terms of how they're managing their inventory. Have you seen any changes to how they think about optimal inventory levels?
Kurt Sievers: It is unfortunately indeed both, Patricia. So they they bring down
Speaker Change: the expected unit numbers which they will produce. I said earlier that the SAR for this year is now at minus two percent, in Europe by the way, at minus five percent year over year.
Speaker Change: but because of that
Speaker Change: The two to twelve weeks to shear also become a lower number. That's the whole issue. So, with the OEMs telling the Tier 1s that they need less parts,
Speaker Change: they forecast also a lower inventory target. So we get a double whammy. We suffer directly from the lower production numbers.
Speaker Change: But we also suffer from the overlaid lower inventory in absolute dollar terms, which is a function of that So I would say the 2 to 12 weeks still stand but against the lower revenue number and that's why And there is also an emotional element like
Speaker Change: toward year-end when they have a poor outlook.
Speaker Change: They, of course, have no interest whatsoever to end the year on a too high inventory, so they rather go lower than higher. So yes, it is both. The one is overlaid the other, which, of course, on the other side of all of this, is the starting point for a better recovery. But again, I don't want to go to the point when that recovery is.
Speaker Change: In the end, it means once it grows, it grows even stronger. That's what we had the last three cycles out of that same situation.
Speaker Change: Yeah, that makes a lot of sense. Thank you. And then as my follow-up, you know, you've seen a mixed shift in favor of hybrids at the expense of
Speaker Change: EVs, maybe not at the expense of EVs, but EV adoption has kind of stalled over the past several quarters. I think the industry consensus view is that over the long run, EVs do grow pretty materially. But as you talk to your partners and customers into 25 and maybe early part of 26, do you have a view on how hybrids perform or EVs perform relative to one another? And more importantly, what are the implications from a content perspective for you guys at NXP?
Speaker Change: Thank you
Speaker Change: Yeah, so we don't have that much of a differential between hybrids and EVs, because, as you know, we don't have power discretes, which are much more sensitive to the difference between hybrids and full EVs.
Speaker Change: Our main thrust in the electrification space is the battery management systems And they don't they don't differ that much from a dollar content perspective between the two So therefore we we don't have a sharp eye on on the on the specific mixed change between hybrids and fully V
Speaker Change: At the same time, I just want to slightly maybe adjust what you said, the overall XCV
Speaker Change: It has slowed, absolutely, but it is still going to be a 14% growth this year, so in units, XEVs worldwide this year will grow by 14% over the year before, while the total SAR is declining by 2%. So, I mean, that is still a very, very strong growth.
Speaker Change: and it will be 37% of the total vehicle production this year. So 37% of all vehicles produced on the planet this year are actually XCVs. So it is moderated from a pace perspective relative to what it was forecasted to be.
Speaker Change: But it is still growing very sharply and that continues to help us.
Speaker Change: And yes, the other half of your question, yes, we do continue that over the longer term. We do continue to believe it will grow. We think something like a 75% global XCV penetration by 2030. That's kind of the data point which we have ahead of us.
Speaker Change: Appreciate that. Thank you.
Speaker Change: Thank you. One moment for our next question.
Speaker Change: Our next question comes from the line of William Stein of True Security. Your line is now open.
William Stein: Great, I'm just going to ask one if I can. The weaker than expected results in industrial and IoT and yet the strength in China, I'm a little bit confused because I always recalled this
William Stein: Thank you.
Speaker Change: This segment
Speaker Change: to be very China and very China distribution focused. So maybe you can correct my understanding. Is it, am I correct? But what's outside of China is very, very weak or is my recollection of the mix of this in terms of geo and channel maybe stale? Thank you.
Speaker Change: It has a
Speaker Change: maturity in China that is very true so you don't you don't miscall it. The the US and Europe is very weak.
Speaker Change: And what we did say is that about 80% of the whole industrial IoT business is going through the distribution channel. So maybe you mix this with the China exposure.
Speaker Change: Not all of that 80% is in China.
Speaker Change: but 80% of the total segment is going through the channel.
Speaker Change: and since we we keep up our channel discipline and don't overship there
Speaker Change: we basically are really fully exposed to the end demand.
Speaker Change: because we are down to our eight weeks and we keep it flat there. So, therefore, the strength in China cannot overcompensate the weakness in Europe and the US.
Speaker Change: Yet, China as a whole, as I said before, will grow into Q4 in both the industrial and the auto segment. But the rest is just falling so much that it can't hold up.
Speaker Change: Thank you.
Speaker Change: Marvin, we'll take one last question here today, please.
Speaker Change: Thank you. One moment for our next question.
Marvin: And our last question comes from the line of Chris Stanley of Citi. Your line is now open.
Chris Stanley: Hey gang, thanks for squeezing me and just two quick ones
Chris Stanley: Thank you.
Chris Stanley: So guys, can you just give us a sense of how much of your auto business is China? And then I'm sure you were at the Paris Auto Show as well. It seemed like there were, you know, dozens of China sort of EV, you know, cars.
Chris Stanley: companies and startups.
Chris Stanley: If China, you know, gains a bunch of share in the EV market, what's the impact to NXP? Is it good? Is it bad? Is it indifferent?
Speaker Change: So, Chris, we don't break down the GEO by segment, but since auto is like 56 or 58 percent of NXP,
Chris Stanley: and you find in the queue the total breakdown by GEO of NXP where China is between 35 and I think now even 37 percent with the strength in China.
Chris Stanley: I mean, just assume that that auto is probably not that far from the corporate average.
Chris Stanley: And that means indeed, Chris, yes, with China getting stronger, and I can only echo what you say, there is a whole enchilada and great lineup of EVs coming out of China, which at some point will find their way worldwide.
Chris Stanley: that is
Chris Stanley: to the extent we can see it today.
Chris Stanley: a good thing for NXP because they are faster, they get faster innovation out, which means our newer products are coming into production much quicker than with Western OEMs. And if we keep up the pace and we put everything in motion to do that, this continues to be a positive for NXP.
Speaker Change: Great, thanks Kurt. I've got to figure out a way to get that into my note on enchilada, Chinese enchilada VVs. And then just real real quick a follow-up for for Bill.
Speaker Change: So, Bill, your inventory days are, you know, basically in the 145 to 150 range for this year. Longer term, what's the goal there? Are we going to, you know, keep it at 150 while this weakness passes? And then where are we looking at, like, longer term there?
Speaker Change: Yeah, sure. Over the next couple quarters, I think we'll be at this level until we decide to replenish the channel.
Speaker Change: And so that's about three weeks worth. So that would naturally come down and pull down our internal inventory when we decide to go replenish. More longer term, we will be updating this on Thursday on what we think is the required inventory target to service our customer needs. So
Chris Stanley: please be patient with me and wait two more days and you'll get the whole complete model of everything of both the P&L and their working capital and CapEx and so forth. So just please be patient with me there.
Speaker Change: We'll do. Thanks, guys.
Speaker Change: Thank you. This concludes the question and answer session. I would now like to turn it back to Kurt Sievers, President and CEO, for closing remarks.
Kurt Sievers: Thanks, Operator. We had to report today that we were taken by some surprise in the third quarter of an enhanced weakness in the automotive and industrial and US and European markets, which is totally beyond our control.
Speaker Change: So what we do, we clearly maniacally try to control and will control what is what is in our powers and I hope the guide and the early science which we show for next year give you a feel for that.
Speaker Change: that does not take away anything.
Speaker Change: from staying course on our soft landing strategy which should set us up very well for the recovery whenever it happens. We are not in a position to make a judgment on that but when it happens we should be set up very well with the low inventory in the channel and the low inventory at our direct customers.
Speaker Change: Now at the same time I hope to see many of you in our investor and analyst day this week, Thursday in Boston, where we will speak about our long-term strategy and give you the long-awaited updates on our long-term financial model. Can't wait to see you all. Thank you very much for your attention this morning. Thank you.
Speaker Change: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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