Q1 2025 NXP Semiconductors NV Earnings Call
Good day and thank you for standing by welcome to the NXP first quarter 2025 earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
with President-Elect Joe Biden.
So to regulation G. NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2025 earnings press release, which will be furnished to the SEC on form 8-K and available on our website in the Investor Relations section.
Kurt: I'd like to pass the call to Kurt.
Kurt: Thank you, Jeff and good morning, everyone.
Kurt: We appreciate you joining our call today.
Kurt: I will review our quarter, one performance and then discuss our guidance for quarter two.
Kurt: Beginning with quarter, one revenue was 10 million better than the midpoint of our guidance.
Kurt: The revenue trends in the mobile and communications infrastructure markets were slightly above expectations.
Kurt: While performance in the automotive and industrial and Iot markets were slightly below our expectations.
Kurt: Taken together NXP delivered Q1 revenue of $2 84 billion, a decrease of 9% year on year.
non-GAAP operating margin in quarter, one was 31, 9%.
Kurt: 260 basis points below the year ago period.
Kurt: About 40 basis points above the midpoint of our guidance.
Kurt: Year on year performance was the result of the lower revenue and related gross profit or through <unk>.
Kurt: Partially offset by lower operating expenses.
Kurt: From a channel perspective distribution inventory was in line with our guidance at nine weeks below our long term target of 11 weeks.
Kurt: From a direct sales perspective, we continue to support western tier one auto customers with their ongoing digestion of on hand inventory against the backdrop of a cloudy automotive demand environments.
Kurt: Now, let me turn to our expectations for the second quarter.
Kurt: We are operating in a very uncertain environment influenced by tariffs with volatile direct and indirect effects.
Kurt: As of today, the direct impact of the current tariffs is immaterial to our financials.
Kurt: However, the indirect impact of current tariffs related to future energy demand and supply chain.
Kurt: Mains unknown.
Kurt: No we are not.
Kurt: Normally customer order pull ins or push outs, which could be associated with the tariffs.
Kurt: And other than the potential indirect impacts of tariffs.
Kurt: We are seeing some positive trends.
Kurt: These trends include improving distribution customer backlog levels.
Kurt: Well it stabilized order signals from our direct customers.
Kurt: Additionally, we are experiencing an increase in short cycle orders.
Kurt: As well as some spot product shortages, leading to customer escalations.
Kurt: Together these trends have historically been indicative of the early innings of improving cycle dynamics.
Kurt: Therefore, our guidance reflects these improving cycle trends.
Kurt: Immaterial direct tariff impact.
Kurt: We have not incorporated any judgment of indirect impact from tariffs.
Given the uncertain macro environment, we are only providing guidance for the second quarter.
Kurt: We are guiding Q2 revenue to $2 9 billion down 7% versus the second quarter of 2024.
Kurt: The up 2% sequentially.
Kurt: At the midpoint, we expect the following trends in our business during quarter two.
Kurt: Automotive is expected to be flat versus quarter two 2024.
Kurt: And up in the low single digit percent range versus quarter 125.
Kurt: Industrial and Iot is expected to be down in the mid teens percent range year on year.
Kurt: And up in the mid single digit percent range versus quarter 125.
Kurt: Mobile is expected to be down in the mid single digit percent range on both a year on year and a sequential basis.
Kurt: And finally communication infrastructure and other is expected to be down in the high 20% range versus quarter 224.
Kurt: Flat versus quarter 195.
Kurt: Our outlook assumes that the bill continue to under ship and demand in automotive.
Kurt: Expect channel inventory to be flattish at nine weeks against our long term targets of 11 weeks.
Kurt: Before turning to your questions I would like to review, a strategic acquisition, which we announced in the first quarter.
On February 10, we announced the intention to acquire Kimura for $307 million.
Kurt: Industry leader in high performance energy efficient and programmable neuro processes.
Kurt: This acquisition provides a scalable platform for AI Apollo etch space systems, combining nxp's broad portfolio processing connectivity security and advanced analog solutions with <unk> AI.
Kurt: AI MCU hardware and software.
Kurt: We believe there is an inflection points in the industrial and Iot markets, which is creating demand for intelligent edge AI compute solutions.
Kurt: Customers need high performance secure low power processing, which takes place locally at the edge.
Kurt: This eliminates the requirement to connect to the cloud for the execution of our models.
Kurt: In order to meet the critical latency securities and real time extra requirements.
Kurt: Qunar already has meaningful customer engagements within the factory automation building, an energy management healthcare and smart home end markets.
We expect the regulatory approval should be complete by the end of second quarter.
Kurt: The transaction will not have a material impact on the financial model shift at our Investor Day in November.
Kurt: We expect <unk> to be accretive to our current financial model by 2028.
Kurt: And it will accelerate our overall position in the industrial and Iot markets.
Kurt: And sorry, Steve first quarter results and guidance for the second quarter underpin a cautious optimism that NXP continues to effectively navigate through it.
Kurt: Challenging set of market conditions.
Kurt: We are operating in a very uncertain environment influenced by tariffs with volatile direct and indirect effects.
Kurt: Considering these external factors, we are redoubling, our efforts to manage what is in our direct control, enabling NXP to drive solid profitability and earnings.
Speaker Change: Now finally on a more personal note after deep reflection I have decided to retire from NXP at the end of 'twenty five.
Speaker Change: My past 30 proud yields with NXP, including seven years as president in five years as CEO been hugely fulfilling.
Speaker Change: I am incredibly thankful for the in value of the privilege to work with so many amazing people.
Speaker Change: And having the opportunity to co create nxp's future and drive technological leadership or a better world.
Speaker Change: For three decades passionately prioritize and dedicated my energy to NXP and all of our stakeholders.
Speaker Change: Now the time has come to start planning for a shift in focus on my personal journey.
Speaker Change: I am looking forward to entering the next chapter of my life in good health.
Speaker Change: Taking more time for family friends and personal passions.
Speaker Change: And I would like to congratulate Raphael on his promotion to president of NXP.
Speaker Change: I look much forward through the next six months of transition periods before Raphael assumed the Chief Executive Officer Roy for NXP in October.
Speaker Change: We work very closely together with all of you in the upcoming periods.
Speaker Change: Building on more than 10 years of experience in NXP Rafael will be an excellent leader to execute on NXP strategy to bring intelligence systems to the actually the automotive and industrial Iot end markets.
Bill: And with that I would like to pass the call over to you Bill for a review of our financial performance.
Bill: Thank you Karen and good morning to everyone on today's call as Kurt has already covered the drivers of the revenue during Q1 and provided our revenue outlook for Q2.
Bill: I will move to the financial highlights.
Overall, our Q1 financial performance was good.
Bill: Revenue was slightly above the midpoint of our guidance range.
Bill: Gross profit was in March.
Bill: Operating expenses were below the midpoint of our guidance.
Bill: Taken together, we delivered non-GAAP earnings per share of $2 64.
Bill: Or five better than the midpoint.
Bill: We continue to manage sales into the distribution channel consistent with our guidance of nine weeks.
Bill: Now moving to the details of Q1.
Bill: Total revenue was $2 eight or bill.
Bill: One 9% year on year slightly above the midpoint of our guidance range.
Bill: We generated $1 $5 9 billion and non-GAAP gross profit and <unk>.
Bill: non-GAAP gross margin of 56, 1%.
Bill: Down 210 basis points of year on year.
Bill: And 20 basis points below the midpoint of our guidance range due to product and channel mix.
Bill: Total non-GAAP operating expenses 686 million or <unk> 44, 2% of revenue.
Bill: Down $50 million year on year, and $14 billion below the midpoint of guidance.
Bill: From a total operating profit perspective.
Bill: non-GAAP operating profit was $904 million and non-GAAP operating margin was 31, 9%.
Bill: Down 260 basis points year on year.
Bill: 40 basis points above the midpoint of our guidance.
Bill: non-GAAP interest expense was $80 million.
Bill: Taxes for ongoing operations were $143 million.
Bill: We're at 17, 4% non-GAAP effective tax rate.
Bill: Noncontrolling interest was $7 million and results from equity accounted investees associated with our joint venture manufacturing partnerships was $1 million.
Bill: Together.
Bill: Below the line items were $3 million unfavorable since our guidance.
Bill: Stock based compensation, which is not included in our non-GAAP earnings was $127 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 11, seven 3 billion up 871 million sequentially due to a combination of a second tranche of the European investment Bank.
Bill: And the initial results of our new commercial paper program.
Bill: Our ending cash balance was $3 99 billion.
Bill: 696 million sequentially due to the cumulative effect.
Of additional liquidity capital returns.
Bill: X investments.
Bill: Cash generation during the quarter.
Bill: The resulting net debt was 774 bps.
Bill: And we exited the quarter with a trailing 12 month adjusted EBITDA up four points eight 9 billion.
Bill: Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q1.
Bill: It's one six times and our 12 month adjusted EBITDA interest coverage ratio was 19 two times.
Bill: During Q1, we repurchased $303 million of our shares and paid $258 million in cash dividends.
Bill: After the end of the quarter end through April 25th we bought an additional $19 million of our shares under an established <unk> one program.
Bill: Turning to working capital metrics days.
Bill: Days of inventory was 169 days, an increase of 18 days sequentially and flattish on a dollar basis.
Bill: As receivable were 34 days up four days sequentially and days payable were 62 days down three days sequentially.
Bill: Taken together, our cash conversion cycle was 141 days.
Bill: Cash flow from operations was $565 million.
Net capex was $138 million or 5% of revenue, resulting in non-GAAP free cash flow of $427 million or 15% of revenue.
Bill: During Q1, we paid a 125 million capacity access fee related to the SMC.
Bill: Which is included in our cash flow from operations.
Bill: Additionally, we paid $16 million.
Bill: Our equity accounting foundry joint venture under construction in Germany, and a $20 million into the SMC.
Bill: Equity accounted foundry joint venture under construction in Singapore.
Bill: Both of which are included in our cash flow from investing.
Bill: Now turning to our expectations for the second quarter.
Kurt: As Kurt mentioned.
Speaker Change: We anticipate Q2 revenue to be $2 9 billion, plus or minus about $100 million.
Kurt: Estimate.
Kurt: This is down about 7% year on year.
Kurt: About 2% sequentially.
Kurt: We expect non-GAAP gross margin to be 56, 3%.
Kurt: Thus, our minus 50 basis points.
Kurt: Operating expenses are expected to be about $710 million.
Kurt: While certain environment about $10 million.
Kurt: The sequential increase is driven by our normal annual merit increases.
Kurt: The previously disclosed annual license payment.
Kurt: Modest the offset by our ongoing restructuring to make room for the three pending acquisitions.
Kurt: Taken together, we see non-GAAP operating margin to be 31, 8% estimate.
Kurt: Please note our second quarter guidance does not incorporate the three pending acquisitions.
Kurt: We estimate non-GAAP financial expense to be about 88 million.
Kurt: We expect the non-GAAP tax rate to be 17, 4% of profit before tax.
Kurt: Not in Charlotte interest will be about $90 million and results from equity accounted investees about $2 million.
Kurt: For Q2, we suggest for model purposes, you use an average share count of 255 million shares.
Kurt: We expect stock based compensation, which is not included in our non-GAAP guidance to be 115 million taken.
Kurt: Taken together at the midpoint this implies a non-GAAP earnings per share of $2 66.
Kurt: Furthermore, we continue to operate our internal fabs in the low 70% range and we expect our days of inventory to be flattish into Q2.
Kurt: Turning to uses of cash we expect capital expenditures to be around 4%.
Kurt: We will pay a 35 million capacity access fee to D C.
Kurt: Additionally, we will make a $16 million equity investment into FMC.
Kurt: $50 million equity investment into D SMC.
Kurt: Our Q equity accounted foundries joint ventures under construction.
Kurt: Pending the regulatory approval of the three acquisitions. It will result in a cash payment of $1 1 billion and we will redeem.
Kurt: 800 million tranche of debt due in may.
Kurt: Our current cash balance of over $1 billion.
Kurt: After close and media acquisitions.
Kurt: Our ongoing restructuring actions are intended to enable NXP to get into its stated long term operating expense model up to <unk>.
Kurt: 43%.
Kurt: In the second half of 2025.
Kurt: In closing I would like to highlight a few focus areas for NXP.
Kurt: As Curt mentioned in his prepared remarks, our outlook does not consider unknown indirect end market demand impacts because of global tariffs.
Kurt: The direct impact of the current tariffs are immaterial to our financial guidance.
Kurt: Second.
Kurt: With the upcoming CEO transition there is no change to our long term financial model and capital allocation strategy and lastly, we are operating in a very uncertain environment influenced by global tariffs.
Kurt: During these external factors and end markets we operate.
Kurt: Redoubling, our efforts to manage what is in our direct control, enabling NXP to drive solid profitability and earnings.
Kurt: While executing our growth strategy with.
Kurt: With that I would like to now turn it back to the operator for <unk>.
Speaker Change: Certainly as a reminder to ask a question. Please press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again, please limit yourself to one question and one follow up please standby, while we compile our Q&A roster.
Speaker Change: Our first question will be coming from Christopher Muse of Cantor Fitzgerald. Your line is open Christopher.
Speaker Change: Yes. Good morning, good afternoon, and thank you for taking my question and Kirt, you will clearly be very mixed.
Christopher Muse: For for everything that you've done over the last five years, and obviously before that as president.
Speaker Change: I guess, maybe first question.
Speaker Change: You highlighted in your prepared remarks.
Speaker Change: The <unk> acquisition, but you've also made acquisitions with Veeva in Q T Chek.
Speaker Change: And I guess my question is this as you think about <unk>.
Competition from China in the MCU World how much of these acquisitions are defensive in terms of.
Speaker Change: A world, where MCU discrete purchases probably.
Speaker Change: The decrease.
Speaker Change: And focus on software is more important or.
Speaker Change: Conversely, more offensive in terms of true differentiation, both in the auto and in the industrial side of things.
Speaker Change: You look to really separate yourselves.
Speaker Change: Many thanks, and good morning T J.
Speaker Change: Yes indeed.
Speaker Change: We have had three acquisitions now cynara Aviv IMTT take auto.
Speaker Change: Our ISP AI edge compute which I just discussed briefly on the call are veeva is about the OXXO draws.
Speaker Change: Activity in the car between displays and <unk>.
Speaker Change: Collaros.
Speaker Change: For very high data rates in one direction versus the other so clearly, beating what Ethernet can do and tissue take auto is indeed, a very strong software complements to our core REIT platform.
Speaker Change: And to answer your question in brief this is clearly a authentic.
Speaker Change: Compliments to our product strategy as we have it today.
Speaker Change: To make us more differentiated with our.
Speaker Change: Portfolio.
Speaker Change: I'm also a little bit hesitant in future because not just the compute portfolio beat both especially the BMR in pizza take auto is the whole offering with our core our platform for the software defined vehicle.
Speaker Change: Clearly this will come to good play in China, but I have to emphasize CJ not only in China. I mean, this is a global offering but it will certainly also further help our China for China strategy.
Speaker Change: Very helpful and then as a quick follow up could.
Speaker Change: Could you give us a kind of level set where we are in the auto correction you talked about under shipping in demand I guess when do you now expect excess inventory to be digested and how are you thinking.
Speaker Change: Geographic perspective, I think we've got three months ago, you talked about China strong.
Speaker Change: Americas kind of slowly recovering in Europe weak is that kind of consistent with where we are again today. Thanks. So much.
Speaker Change: Yes.
Speaker Change: Actually quarter, two guidance is a bit of a turning point.
Speaker Change: Above and beyond the comments I made in my prepared remarks about about better backlog was seven distribution customers.
Speaker Change: About stabilization of the order patterns from direct customers. Some some early.
Speaker Change: Earnings of Escalations, B cohorts of lifestyle purchase with very short term.
Speaker Change: Orders, but the turning point of auto in the second quarter is actually in my view. This second quarter, we are flat year on year and that's the first time up to 500 watts. So we look now back two five quarters of year on year declines in automotive and this second quarter of.
Speaker Change: <unk> 25 is the first time that we are we are flat.
Speaker Change: It is indeed see a combination of a stabilizing.
Speaker Change: From the direct customers with somewhat slower digestion.
Speaker Change: Our buffer inventory in the in the western tier ones.
Speaker Change: Say somewhat slower because some of them are done and we still have a few left which are still absorbing over inventory. So this is still under shipping to their end demand at the same time, we see a pretty nice pick up.
Speaker Change: And all the pace, especially from Asia for the second quarter automotive in Asia and here is a combination of China and Japan.
Speaker Change: Admittedly that also has seasonal components.
Speaker Change: China automotive is always seasonally weak in Q1, and then picks up the pace in Q2, and that's exactly what we see.
Speaker Change: And in Japan, There is another element, which makes Q2 always stronger than Q1, which has to do with the price adjustments.
Speaker Change: <unk> talked about global pricing in the last earnings call.
Speaker Change: Hope I made it to influence that.
Speaker Change: Most of the western customers with several pricing for the full year by January 1st.
Speaker Change: For Japan that is by April 1st.
Speaker Change: Natural customer behavior is that they hesitate to buy before they have the new prices.
Japan was waiting and Thats why we have seen an uptick in Japan into the second quarter.
Speaker Change: Instead of Adobe one of the next question's for floor I'd say it upfront.
Speaker Change: Having all the price negotiations with the large customers now scheduled for the year I can reconfirm ends with confidence what I said last earnings which is we will have for this year of low single digit price erosion for the whole company for the year. So no change to what we said last year. It's just that now the competence is fully in place since we.
Speaker Change: Also close and operate and execute in Japan.
Speaker Change: Thanks, so much.
Speaker Change: Thank you one moment for our next question.
Speaker Change: Our next question will be coming from Ross Seymore of Deutsche Bank Ross Your line is open.
Ross Seymore: Hi, guys. Thanks sort of ask a couple of questions and Kirk I want to Echo what T. J said. Thank you so much for all your help over the years and congrats and best of luck in retirement. So I guess my first question is I know you talked about the.
Speaker Change: Direct and indirect not really having an impact on the tariff front, but can you just talk a little bit about how NXP is viewed by the customers and by the various governments I know where you're technically headquartered but are you a U S company to China or U S.
Speaker Change: China for China play or does the U S. Consider you a European company just trying to talk through the manufacturing footprint, you have and the flexibility that might provide.
Speaker Change: Yeah. Thanks, Thanks, Ross and good morning.
Let me first.
Speaker Change: Reiterate indeed, what I've said about direct and indirect impact.
Speaker Change: The direct impact of the current tariffs.
Speaker Change: We considered immaterial to our financial guidance. So there is a tiny little bit but it is immaterial therefore considered a zero.
Speaker Change: What I did say about the indirect impact is.
Speaker Change: It is completely confusing because things are changing by the day I think today is another reiteration of plans for the 25% auto.
Speaker Change: So that keeps changing and we don't see a consistent pattern, but I would also clearly to say we have been very busy talking to all of our customers across the world asking them, what they plan to do what they have ultimately done.
Speaker Change: And there is neither pull in or push out.
Speaker Change: Ill effects at this point in time, and we also don't we didn't really foresee anything for the second quarter from an indirect perspective, so that's why.
Speaker Change: Comment in my prepared remarks.
Speaker Change: The second part of your question is is indeed, yielding something.
Speaker Change: Essentially see as an opportunity.
Speaker Change: Especially in China will be our seal and of course, we position ourselves that way as a European company very clearly as a European company with a lot of our manufacturing operations, given our hybrid manufacturing strategy outside of the U S. So that makes us I'd say.
Speaker Change: Pretty much appreciated partner for the for the industry and our customers in China.
No tariffs have been exempted and coming and going over the last couple of weeks, but clearly we've seen a opportunity with our China for China, Australia sheets from these tariffs because our manufacturing structure in our hybrid manufacturing network, which I think I've discussed over the past couple of quarters already.
Speaker Change: Which is very much emphasize again and strongly building a local manufacturer manufacturing network is a positive. So it's not just <unk> seen Ross, but it's also sexually such that I think more than a third.
Speaker Change: Our China for China business today is already manufactured and Chuck. So we already have made a lot of progress in leveraging this disadvantage now you also already seen in the U S. Well funded the USPI is seen as a U S company.
Speaker Change: Means VR complying with anything that has been being asked from us, but I think the package which gives us.
Speaker Change: Potentially a boost and we tried to leverage is that the Chinese are seeing us as European and behalf. We have already spent I'd say two years.
Speaker Change: Changing our supply network to be a better partner from our China for China manufacturing perspective.
Speaker Change: Thanks for that I guess for my follow up I, just wanted to pivot over to the industrial side of things you gave a lot of color about the order patterns et cetera, and automotive channel versus direct et cetera, we've heard from other companies that they're seeing some of the green shoots and I know those are dangerous words these days, but nonetheless in the industrial business I'm, just wondering what you're seeing on that.
Speaker Change: I'd of things both.
Speaker Change: Correct or geographically and then of course via the channel.
Speaker Change: Yes.
Speaker Change: As a precursor to this.
Speaker Change: I am a little bit humble when it comes to looking at NXP as a as a bellwether for for the industrial sector. I mean, we are comparably small so I'm a little bit careful in taking my commentary and all.
Speaker Change: S as strong direction for the for the whole industry.
Speaker Change: We are seeing is.
Speaker Change: That's actually in Q1 performance perspective excellent performance, but also for the guidance for the second quarter, which is up mid single digit.
Speaker Change: It is more or less by the consumer Iot pumps, but then the core industrial pumps. The ratio is still about the same as we discussed earlier Ross switches that 60 40 between core industrial and consumer Iot.
Speaker Change: Direct Shelly both in Q1, but also now into Q2. It is the consumer Iot part, which was strong on a relative basis.
Speaker Change: However, I do believe Ross that also has to do with company specific design wins, we just have a number of really strong design wins and again they are specifically in China, which are now playing out nicely in the first half. This year. So I don't know we can take this as a proxy for the industry is probably pretty specific to <unk>.
Speaker Change: Steve.
Speaker Change: Thank you.
Speaker Change: Okay.
Speaker Change: Our next question. Our next question will be coming from Chris Caso of Wolfe Research. Your line is open Chris.
Chris Caso: Yes. Thank you. Good morning, I was wondering if you could expand a little bit on some of the comments you made on your China for China strategy.
Speaker Change: I guess, how far that progresses.
Speaker Change: And.
Speaker Change: I guess ultimately with.
Speaker Change: In China, how much of your China revenue do you expect to be able to supply domestically and under which time and then maybe you could speak a little bit to the U S. Obviously, because that's something where we're awaiting the regulations and how much of the U S. You would be able to satisfy from U S fab.
Chris Caso: Yes, so good morning, Chris.
Chris Caso: First of all the China for China strategy has two legs, one is the manufacturing leg, which I will expand on in a second the other one I think structurally or strategically even more important is the <unk>.
Chris Caso: Both mapping and product generation dedicated for Chinese customers with consideration of them at lead customers given that they are really setting the pace now in the automotive and industrial sector. When it comes to innovation.
Chris Caso: I might have talked last call about the affected or even change the management team of NXP to the to the extent that I have the needle not directly reporting to me who runs the China business to make sure that you have full visibility on the highest level in the company on the specific product. So the product road mapping is a very important strategic.
Chris Caso: Now back to your question on the on the manufacturing side.
Chris Caso: Currently above.
Chris Caso: By the way everything I would say now is wafer manufacturing.
Chris Caso: There is different considerations when you're thinking about.
Chris Caso: Second test and assembly versus products wafer manufacturing.
Chris Caso: Speak now about vapor manufacturing their behalf above 30% capability at the moment.
Chris Caso: To supply not only capability, that's actually what we do to supply for our China for China business. So from the revenues, which we currently ship China for China, 30% are actually sourced in China and of course, we broke hubs to <unk> office now don't assume that the rest is in the U S.
Chris Caso: No that'd behalf, we have 60% of our overall basis coming from.
Chris Caso: Foundries, which are typically not in the U S. So we have a much higher number which is non U S.
Chris Caso: <unk> <unk> from Europe, and other places in Asia, serving China. So it's a much higher number than the 30%, which is which is already in China, but again, we want to work is as high as possible as soon as possible to have maximum independence here relative to positive with tariffs.
Chris Caso: To that end.
Chris Caso: I would actually say Chris.
Chris Caso: Tariffs have both are now adding uncertainty and complexity.
China for China, Australia, achieved which which I can speak about here is not something we are suddenly did because of the tariffs Steve had that actually in place for probably more than two years.
Chris Caso: Given the revenue opportunity, which we see for our core markets automotive and industrial in China beverage should see at the industry in China is leading the pack now from a global perspective, which is why we've been leaning into this already for a longer time.
Chris Caso: Okay.
Chris Caso: Thank you.
Chris Caso: As a follow up question for Bill.
Speaker Change: I think you made a comment that you would get to your 30, I'm sorry, 23%.
Speaker Change: <unk> expense as a percentage of revenue target in the second half of the year after accounting for the acquisitions could you go into a little more detail on that and what assumptions youre, making.
Speaker Change: To get to that those numbers.
Speaker Change: Yes, sure. So on operating expenses right, we're not guiding the second half you could see in Q1, we were favorable against our guidance.
Speaker Change: That means we're ahead of the plan of the restructuring activities.
Speaker Change: And we're going to continue that into Q2 and Q3 as a time phase.
Speaker Change: Think about it.
Speaker Change: At the end of June 3rd yet, we will have probably 1250 extra employees joining us.
Speaker Change: For a full quarter effects start in Q3, and Q4 and you are right in my prepared remarks, basically what we're doing is continue making space for those acquisitions.
Speaker Change: So that we can absorb and hit our model at 23%, obviously, we're not guiding the second half, but we have scenarios on what revenue. We think we wanted to use different levers to go pull against that.
Speaker Change: But we feel pretty confident and land sometime in 2022nd half of 2025.
Speaker Change: Yeah.
Speaker Change: Got it thank you.
Speaker Change: Tony will take the next caller. Thank you and our next question will be coming from <unk> <unk> of UBS. Your line is open Francois.
Speaker Change: Thank you very much and again, thank you very much if it happens you will be missed sad to see you, leaving the 20 sales after say as well.
Francois: The two question I had is on the firstly on the.
Speaker Change: You said that you don't see much put in so far and not much impact there in terms of order behavior.
Speaker Change: Obviously, you managed very well during COVID-19.
Speaker Change: Inventories in the channel. So my question is if you were seeing some pull in at some point would you allow your customers to increase their inventories or would you control. It. The way you did during Covid I mean, how do you want to play.
Speaker Change: Dynamic here given I mean, your customers, maybe they would like to increase the buffer and inventory maybe above some level that you use to you would like to see.
Speaker Change: Yeah, Thanks, Ed and good afternoon profile and by the way.
Speaker Change: Instead of wrong for the half year. So this is multiple slides.
Speaker Change: Got it.
Speaker Change: On the on the pull ins.
Speaker Change: So yes first of all reconfirmed through Q1.
Speaker Change: And through.
Speaker Change: Sure.
Speaker Change: To date in Q2, we have not seen pool, and so I would say that very explicitly we check that very carefully a customer by customer because we wanted to be sure that this is clean of debt.
Speaker Change: If it was to happen I think the underlying policy Forsworn continues to be we don't want this to be don't like steps.
Speaker Change: Now there could be specific reasons in specific cases with specific customers, where they can't explain us why it makes sense that we might want to do it but I would say, especially on the distribution side, which is more than 50% of NXP I think I said in my prepared remarks, we want to stay flat to the nine weeks inventory into the second quarter.
Speaker Change: Sure.
Speaker Change: Fair again, we wouldn't want to allow it.
Speaker Change: And I also said that I I don't know CJ O. Ross asked earlier, we are still busy with some tier one automotive customers to digest inventory.
Speaker Change: And for that same reason, we don't have a hell of a lot of appetite to.
Speaker Change: To consider Poland's so I'd say with possible exception is always in the range of the moment we do.
Speaker Change: Don't want that we would not want to support.
Speaker Change: Alright. Thank you Curt maybe on my follow up would be for bill on the gross margin side I mean your inventory days.
Speaker Change: Relatively high when you look at the <unk> you said you wait.
Speaker Change: Thank you we'd be flat.
Speaker Change: And then when I look at the gross margin.
Around 56.
Speaker Change: <unk> in H, one I looked at the consensus has more than 57% gross margin you're the second half of the year.
Speaker Change: So how should we think about the gross margin here because it seems tricky to get to a big improvement of gross margin with inventories having to come down on your balance sheet, maybe not in Q2, but in Q3 Q4. So can you help us.
Speaker Change: Our ratio rests on the gross margin side trajectory in the second half of the year can you can it go up despite inventories coming down on your balance sheet and maybe you can remind us.
Speaker Change: The mix effect.
Speaker Change: Sure absolutely very fair question.
Speaker Change: So let me just repeat in Q1, we had a slight mix driven by our product and channel mix.
Speaker Change: If we hold everything equally and going into Q2, or just saying, Okay. We right now in our order books pretty full we actually see the mix and it's a similar mix as Q1 and getting all three are on the higher revenues over fixed cost and Thats why we got it.
Speaker Change: $56 three now we're now providing guidance for the second half of 2025.
Speaker Change: The best way to think about our gross margin is a function of revenue levels.
Speaker Change: Before any of our company specific drivers to influence it.
Speaker Change: So for example, and then.
Speaker Change: $13 billion revenue annual number level, we will feel very confident at 58% plus or minus.
Speaker Change: 12 billion 50, 711 building in 56 again at that plus or minus 50 basis points and we demonstrate those levels in the past.
Speaker Change: Now from an upside.
Speaker Change: Yes.
Speaker Change: We obviously had these additional levers to drive gross margin much either.
Speaker Change: And they include increasing of our internal utilization again at 70%.
Speaker Change: And it's staying at 70% because of our inventory as you said is that.
Speaker Change: Yes.
Speaker Change: The consolidation of our 200 millimeter.
Speaker Change: Yes.
Speaker Change: We'll be talking more about that in a second.
Speaker Change: We're increasing our industrial and Iot go to market through our channel. So we want to focus on addressing that mass market. We also have and by the way our company specific accelerate growth truckers are tracking to our growth plans versus Investor day I know we're all in.
Speaker Change: One quarter and everything is good there.
Speaker Change: We had the normal operational efficiency of our projects to offset just these annual pricing low single digit that we occur. So those two offset each other and a bit longer term, which we've shared all of last year, we will leverage <unk> 300 millimeter joint venture with Vanguard, which is tracking.
Speaker Change: Slightly ahead of schedule. So we feel pretty good about that so overall stepping back with the revenue numbers I. Just gave you we feel very confident to deliver our long term gross margin range of 57 to 63. It really is where the revenue comes from an influence at the starting point and then you have <unk>.
Speaker Change: Yes.
Speaker Change: On inventory again, Youre right 169 days.
Speaker Change: Is it is probably the upper bounds and Mike liking for sure.
Speaker Change: Related to it that you have to think.
Speaker Change: We manage Q4 going into Q1, we had to manage the absolute dollars because it was the variable orders with our suppliers and we kept utilizations insurance so going into Q2 and also Q3 again 169, because we have a backlog that we see actually is.
Speaker Change: Okay, so far for Q3.
Speaker Change: So we have to make sure we take that into account to make sure we build the proper product.
Speaker Change: So, but as you all know that the uncertainty around the macro effects related global tariffs and more importantly, the number of potential disruptions from a supply chain perspective that could occur and we're starting to read about we believe holding a bit more inventory is important from the lessons learned from the past, but again I agree with you.
Speaker Change: The $1 69 in the upper balance that we're going to probably adjust this once we learn a little bit more about second half confidence that second half revenue.
Speaker Change: Very clear thank you Francis.
Speaker Change: One moment for our next question, which is coming from Stacy Raskin of Bernstein Research. Your line is open Stacey.
Stacy Raskin: Hi, guys. Thanks for taking my question Bill first a question for you. So I know you said you werent guiding the second half.
Stacy Raskin: That being said the opex targets, I mean, you're running $710 million a quarter in opex, 23% of that would be like $3 1 billion at some point in the second half you got cost of $50 million a quarter in opex coming in cubic's, having $7 50, a quarter would be like $3 3 billion at some point in the second half I mean, these are the kinds of revenue targets.
Stacy Raskin: Into the second half that you have in mind when you give those opex targets like how do we think about that in the context of everything else.
Stacy Raskin: Let me remind you about the Q2 Opex number there is a one time payment from reoccurring license that occurs each year, that's about $16 million to one of our peers and have had that in my prepared remarks.
Stacy Raskin: I also mentioned that we continue to restructure the company to make space for these new acquisitions, which I have not disclosed the size from an operating expense standpoint related to it. So we feel pretty confident under a different types of revenue scenarios that we can model because we have other levers.
Stacy Raskin: To make sure we remember what I said and what our whole message is we are redoubling our efforts on the areas that we can control and as you know Stacy the two things that we like to control is our spend because that we can do as well as some extent the inventory time based on what we're building and not building it.
Stacy Raskin: Takings, and placing bets with those orders with the unknown macro environment.
Stacy Raskin: That helps provide additional help that cause.
Stacy Raskin: That is helpful. And then I guess my follow up I guess I'm going to try it. So I know you said you didn't want to give color.
Speaker Change: On the backup I mean, any just even soft commentary on how you guys are seeing in Q3 right now like I mean, what's the typical seasonality in Q3.
Stacy Raskin: Is there any reason to expect you could be above or below that typical seasonality.
Stacy Raskin: I'm sympathetic to the idea that nobody knows what the Hell is going on at all right now, but any color you can give us at all.
Stacy Raskin: Even though mobile farther out would be helpful. If you're if you're so inclined.
Stacy Raskin: Yes, good morning, Stacy this is Kurt.
Speaker Change: Look last year, we did this.
Stacy Raskin: And you know that would be.
Stacy Raskin: <unk>.
Stacy Raskin: We called we call it a cycle, which which didn't happen.
Stacy Raskin: And one of the learnings from that was that we would not want to repeat this now this year. The situation is even more complex because as I've said in my prepared remarks on the one hand, we do see now what has been always good early innings of the cycle recovery I mean, thats very positive.
Stacy Raskin: See there at the same time, we have this.
Stacy Raskin: Pretty material uncertainty of the indirect impacts from the tariff, which we just cannot figure out what they would possibly mean for the second half. Therefore, we wanted to draw European alignment not even for US okay for the second half, we just count it would be really irresponsible to do it. So if you stick to two quarters.
Stacy Raskin: Sure.
Speaker Change: I mean, how do you even tell the difference between like a cycle recovery or green shoots and pull forwards in short term orders and things like that when they look the same.
Stacy Raskin: All we can really see that because as I gave you.
Stacy Raskin: Thank you a couple of.
Stacy Raskin: One of them, what's the backlog of our distribution and customers, which we see by product.
Stacy Raskin: He is starting to grow after a long long periods of absolutely no growth or even declining.
Stacy Raskin: Different customers new customers new products that is totally different.
Speaker Change: Absolutely and I'll call it.
Speaker Change: I also talked about a nicely stabilized all but from our direct customers.
Speaker Change: Has been in decline for a long long long periods. It has stabilized across the board.
Speaker Change: <unk> is not a political but it's far from even.
Speaker Change: <unk>.
Speaker Change: So we think we can clearly differentiate between those because as I as I said earlier to I think be vulnerable voids.
Speaker Change: To agitate coolants and increased inventories again, so stacy that's for us a pretty it's a pretty.
Speaker Change: Plenty focal points.
Speaker Change: So therefore, no, let's let's stick to the second quarter.
Speaker Change: And see how that plays out with the uncertainty which has provided to us from the from the tariff landscape to our customers.
Speaker Change: What we do is we speak to our customers and Thats, where the uncertainty comes from I mean, it's still asking messing it but we have no better source in speaking to our customers big and small across the difference.
Speaker Change: And they have no idea what the second half should look like so how should we make it up.
Speaker Change: Yeah, No I got it that's helpful. Thank you so much I appreciate it.
Speaker Change: Okay.
Speaker Change: And one moment our next question.
Speaker Change: Our next question will be coming from Vivek Arya of Bank of America Securities. Your line is open.
Speaker Change: Thanks for taking my question.
Speaker Change: Could I just wanted to go back to the.
Speaker Change: Green shoots that we're discussing because when I look at your Q1 results.
Speaker Change: Also in industrial sales.
Speaker Change: Industrial Iot sales were actually modestly below expectations I think the upside came from mobile in the Comm segment and Q2, you are largely guiding to kind of seasonal trends. So if they're a green shoot is it fair to say they have not yet shown up in the first half and it could show up in the second half I'm just trying to.
Speaker Change: You'll get a sense for where are these greenfield showing up if any.
Speaker Change: There'll be that you don't look at what we thought it was earlier because you pressed us already in Q1 to do a soft guide for Q2.
Speaker Change: I don't know I think I've said, it's it's maybe flat or very very slightly up.
Speaker Change: No but.
Speaker Change: But I think there was there was something very relevant in your question, which is which is in Q1, Indeed auto and industrial and Iot were a touch light against guidance, while the other two segments very touch richer.
Speaker Change: That has a reason and this is actually Chas.
Speaker Change: Japan and China. So it is the seasonal weakness of China, automotive, which will have a little bit stronger than what we had some anticipated.
Speaker Change: Again, we know that that was to happen. So we it was forecasted but not to the full extent it came.
And in Japan, I think I talked about this earlier it is the price change, which is leading customers to finally in my view that for several years.
Speaker Change: The increased prices or kept them flat now it was the first time that would be low single digits.
Speaker Change: Price decline or customers also in Japan, So we're eagerly waiting and held actually back to purchase until they could enjoy the.
Speaker Change: <unk> prices, so it's a bit of.
Speaker Change: Its kind of specific in fourth quarter, two we see things coming up but you don't see Vivek is of course, what underneath is still at work from an inventory digestion perspective, with the tier one automotive customers, which is kind of booking some some of the optimized uptake, which we're seeing but again you didn't.
Speaker Change: Call you didn't hear me, calling the cycle.
Speaker Change: We see our trends.
Speaker Change: <unk> are or have been in the past and I would say also now indicative of early innings of the cycle recovery, but it's certainly not at the stage that we would say with both the business everything is jumping up.
Speaker Change: That alone would not be given simply given the uncertainty of mature customer space from tariffs.
Speaker Change: Got it and for my follow up.
Speaker Change: The last I think forecast that we saw from IHS F&B.
Speaker Change: For light vehicle production to be down I think kind of low single digit so let's assume that that is the case right.
Speaker Change: Including all the effects of the audits and whatnot.
Speaker Change: If that is the industry backdrop, what does that.
Speaker Change: Tell us about what Nxp's automotive business could do this year given all your color.
Speaker Change: Company specific growth drivers. Thank you well, let me let me confirm Vivek did indeed, S&P just published their latest forecast for the year, which sets the salary is going to be down by almost 2%. This year, which compares to a flat line last quarter. So it has it has the greatest.
Speaker Change: Rich, maybe or maybe not as a consequence of the tariff fees could be but the matter of the fact is indeed it is in our 2% decline in the forecast versus versus a flat line before.
Speaker Change: As we said earlier be almost guiding the year edits be overlooked I think of the year for automotive you Greg.
Speaker Change: However.
Speaker Change: The much bigger rolling continues to play the content increases.
Speaker Change: All of the growth drivers, which we have laid out at the last Investor day in November.
Speaker Change: Think about Stds think about radar think about electrification unlikely at work. So we are on track on those and I think it is those content increases, which should continue to make us very optimistic about automotive not as much the flower.
Speaker Change: So does that suggest.
Speaker Change: They can offset thus far declined our RV unwilling.
Vivek Arya: Hey, Vivek I'll take that I really think we're going to hold off giving any real color on where the second half could be revenue wise and you also have to remember our revenue does not synchronized global production quarter per quarter.
Vivek Arya: There's always a six month or so lag between when we recognize revenue and when the car comes out of the factory somewhere in the world is counted in stock, but we really do want to respectfully non address revenue targets or potentials in the second half.
Vivek Arya: Understood. Thank you good luck.
Vivek Arya: Yeah.
Vivek Arya: Tony This will probably be our last.
Speaker Change: Analysts questions. If you would certainly and our last question will come from Mark <unk> of Evercore ISI Mark Your line is open.
Mark: Great. Thanks for taking my question and congrats on your retirement and really appreciate all your great insights and help over the years and wish you luck.
Mark: The question Kurt is for you every two to three years, there's like a new theory on inventory stocking that gets proposed.
Mark: Before Covid. It was just in time and then and then during Covenant became just in case announced just in time.
Mark: I think our own checks are consistent with your own that some of the tier ones are well below normal for their inventory stocking on semis at least.
Mark: My question is about like what would you what are you.
Mark: What would you expect on a restocking cycle are you of the view that that's something has foundational change like you and your semiconductor peers keep inventories well above normal in your lead times.
Mark: Lower than when they were they had been historically or and then downstream your your supply chain feels comfortable with the idea of just keeping things very low and then you don't really benefit from a restocking cycle or are you of the view that that really nothing has changed and it is all driven by lead times. So when lead times stretch everybody is just going to restock again.
Speaker Change: Mark I have a bit of a frustrating answer it's more of a leather than the first.
Speaker Change: I'd say more than because there are notable exceptions to this.
Speaker Change: Don't think that semiconductor companies in general who had more inventory because it would be just the room inventory that always creates a mix issue.
Speaker Change: Well <unk> got better in several cases is the communication and the alignment between customers and us on understanding the future.
Speaker Change: Understanding there could be bottlenecks at the ports.
Speaker Change: Given the whole geopolitical turmoil. There is also a more sophisticated diversified supply chain in place now across the world, which eventually eventually heads going forward.
Speaker Change: But fundamentally mark.
Speaker Change: Sure.
Speaker Change: As an industry in total intellectually we've all learned a lot.
Speaker Change: Practically practically not much of that is actually happening as we speak.
Speaker Change: The broken capital pressure across the supply chain is just too high.
Speaker Change: Two alone that's two two.
Speaker Change:
Speaker Change: With that.
Speaker Change: I guess just the last question, let me Mark I want to follow up.
Speaker Change: Sure.
Speaker Change: No. That's all I had it was simple as that thanks, so much I appreciate it thanks, Jeff.
Speaker Change: Thanks.
Speaker Change: Thanks, very much Martin let me, let me go to make just a couple of closing comments.
Speaker Change: We have now a very interesting crosshair situation between.
Speaker Change: What I would call a significant macro uncertainty offered by the private tariffs with the current service more the indirect impact of them rather than the direct which is immaterial for us.
Speaker Change: Landing against.
Speaker Change: The clear early innings of the cycle recovery.
Speaker Change: My view of that for example, automotive terms to a flat year on year already now in the second quarter. So those two are competing audits, which are not easy to forecast into into the rest of the year.
Speaker Change: With that we continue to.
Speaker Change: I hope so.
Speaker Change: Pretty strong resilience through the trough cycle.
Speaker Change: And at the same time offer excellent exposure to the secular growth drivers, especially in the automotive and industrial sectors. So we when we assume out from this.
Speaker Change: We see us nicely on track to properly doubling our EPS by 2030, plus as we had laid out in our Investor day last year in November of course, a lot of turmoil short term, but seeing the cycle coming back now both overshadowed by the uncertainty in the macro from tariffs, but fundamentally seeing the cycle coming back.
Speaker Change: We consider as a pretty nice positive. Thanks for your attention today and see you soon thank you.
Speaker Change: And ladies and gentlemen. This concludes today's conference call. Thank you for participating you may now disconnect.
Speaker Change: Okay.
Speaker Change: [music].