Q2 2025 NXP Semiconductors NV Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to NXT. Second 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 this session. You would need to press star 1, 1 on your telephone, you would then hear an automated message advising. Your hand is raised and to withdraw your question. Please press star 1 1 again, please be advised. That today's conference is being recorded, I would like now to turn the conference over to your first Speaker. Jeff Palmer, senior vice president of investor relations. Please go ahead.
Speaker Change: Thank you, Michelle and good morning everyone. Thank you for joining our call today. With me, on the call is Kurt Sievers nxp, CEO, Rafael Sotomayor, NXT president and build. That's our CFO.
Speaker Change: Call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties, that could cause nxp results to differ materially or Management's current expectations. These risks and uncertainties include, but are not limited to the statements regarding the macroeconomic impact on the specific and markets in which we operate the sale of new and existing products, and our expectations for the financial results. For the third quarter of 2025
Speaker Change: NSP undertakes, no obligation to revise or update publicly any forward-looking statements for a full disclosure on forward-looking statements. Please refer to our press rooms.
Speaker Change: Additionally, we will refer to certain non-gaap Financial measures which are driven primarily by discrete events that management does not consider to be directly related to nsp's underlying core operating performance.
For so to regulation G and XP is providing reconciliations of the non-gaap financial measures to the most directly comparable. Gaap measures in our second quarter, 2025 degrees press release which will be furnished to the SEC on Form 8K and is available on xp's website in the investor relations section. Now, I'd like to turn the call over to Kurt.
Kurt: Thank you Jeff and good morning everyone. We we appreciate you joining our call today.
I will review our quarter 2 performance.
Kurt: And then I will discuss our guidance for the third quarter.
Kurt: Beginning with Q2 our Revenue was 26 million better than the midpoint of our guidance.
Kurt: The revenue Trends in all our focus and markets were above expectations.
Reflective of increasingly positive cyclical trends.
Kurt: Taken together, nxp delivered quarter 2 revenue of 2.93 billion.
A decrease of 6% year on year.
Kurt: Non-gaap operating margin in quarter 2 was 32%.
230 basis points below the year ago, period and 20 basis points above the midpoints of our guidance.
Year-on-year performance was a result of the lower revenue and the related gross profit for through partially offset by 40 million lower operating expenses.
From a channel perspective, distribution inventory was consistent with our guidance of 9 weeks.
While still below our long-term Target of 11 weeks.
Kurt: And during the quarter, we did not experience any material customer order pullings or push-ups, which could be associated with tariffs.
From a direct sales perspective, we continue to support Western Tier 1 Automotive customers with their desire to digest on hand inventory.
However, we do believe that for the most part, the Tier 1 are either approaching or already at normalized inventory.
Kurt: Now, let me turn to our expectations for the third quarter.
Kurt: Our guidance for the third quarter, reflects the combination of an emerging cyclical Improvement in nxp score and markets.
Kurt: Company, specific growth products.
we are guiding photo 3 Revenue to 3.15 billion down, 3% versus the third quarter of 2024
Kurt: and up 8% sequentially, a return to better than historic seasonal trends.
Kurt: at the midpoint, we expect the following Trends in our business during quarter 3,
Kurt: Automotive is expected to be flat versus quarter 3 2024.
And up in the mid single digit percent range versus quarter 2 2025.
industrial and iot is expected to be up in the mid single digit range year and year and up in the high, single digit, range versus quarter 225
Kurt: Mobile is expected to be up in the low single digit percent range year over year.
Kurt: And up in the mid 20% range on a sequential basis.
And finally, communication, infrastructure and other is expected to be down in the upper 20% range versus quarter 3 2024.
And flats versus quarter 2 2025.
Our guidance assumes Channel inventory will remain at 9 weeks.
Kurt: However, if the significant recovery continues, we may stage additional products at our distribution partners.
Kurt: To be competitive.
And hence, we made selectively increase the inventory in the jump.
Kurt: With respect to direct sales, our Automotive Outlook assumes, that we will come closer to shipping to natural and demand.
Kurt: In industrial and iot which is primarily served to distribution.
Kurt: We see globally, a broad-based recovery. Across both core industrial and consumer iot.
Kurt: So in summary NXT second quarter results and guidance for the third quarter, reflect an increasingly positive view that a new upcycle is beginning to materialize.
This is based on several signals. We track regularly.
Kurt: These include continually growing customer, backlog, levels placed with our distribution purposes.
Kurt: Improve order signals from our direct customers.
Increased broad cycle orders.
Kurt: And increasing product, shortages, leading to customer escalations.
At the same time, the Tariff environment continues to create a level of uncertainty in the long-term planning of our customers.
And yet, as of today, the direct impact of the current tariffs is immaterial to nxp financials.
Kurt: So looking ahead, we will continue to manage what is in our Direct Control to drive solid, profitability and earnings.
This includes strengthening our competitive portfolio, by leveraging, the recently closed acquisition of T detect Auto.
Kurt: As well as the addition of kinara and Aviva links.
Kurt: Which are still pending regulatory approval.
Kurt: Lastly, we are on track to align or evasive fabrication Footprints consistent with our hybrid manufacturing strategy.
And now I would like to pass the call over to you Bill for a review of our financial performance.
Bill: Uh thank you care. And good morning to everyone on today's call.
Speaker Change: As current has already covered the drivers of the revenue during Q2 and provided, our Revenue outlook for Q3. I will move to the financial highlight.
Overall, our Q2 financial performance was good.
Speaker Change: With revenue and gross profit above the midpoint of our guidance range.
Speaker Change: While operating expenses were at high end of our guidance, due to the timing of tape outs and project spend.
Speaker Change: Taken together, we delivered non-gaap earnings per share of 2 dollars and 72 cents or 6 cents better than the midpoint of guidance.
Consistent with our Guidance, the distribution Channel inventory was 9 weeks.
now, moving to the details of Q2 total revenue was 2.93 billion down 6% year-on-year,
Speaker Change: And 26 million above the midpoint of our guidance.
We generated 1.65 billion in non-gaap growth profit and reported a non-gaap gross margin of 56.5%.
10 basis points year on year and 20 basis points above the midpoint of our guidance range due to higher revenue and slightly favorable manufacturing costs.
Total non-gaap operating expenses, were 720 million or 24.6% of Revenue down, 40 million year on year, and 10 million above the midpoint of our guidance range.
Speaker Change: From a total operating profit perspective. Non-gaap operating profit was 935 million and non-gaap operating margin was 32%.
Speaker Change: Down 230 basis points a year on year and 20 basis points above above the midpoint of the guidance range.
Non-gaap interest expense was 85 million, while taxes for ongoing operations for 148 million.
Or a 17.4% non-gaap effective tax rate.
Speaker Change: Non-controlling interests was 12 million and results from Equity account. Investees associate with our joint. Venture manufacturing Partnerships was Zero taken together. The below. The line items were 1 million unfavorable. This is our guidance.
Speaker Change: Stock-based compensation, which is not included in our non-gaap earnings was 117 million.
Now, I would like to turn to the changes in our cash and debt.
Our total debt at the end of Q2 was 11.48 billion down 247 million sequentially. As we repay, the 500 million tranche of debt due in May 2025 during the
Our ending cash balance was 3.17 billion down 8118 million sequentially due to the cumulative effect of acquisition costs.
Debt reduction Capital returns equity and capex Investments offset against the cash and additional liquidity generated during the quarter.
The resulting net debt was 8.31 billion and we exited the quarter with a trailing 12-month adjusted ibida of 4.75 billion.
Our ratio of net debt to trailing 12-month adjusted. EBA at the end of 22 was 1.8 times and our 12-month adjusted ebit. The interest coverage ratio was 17.4 times,
Speaker Change: During Q2 we paid 257 million in cash dividends and repurchased, 204 million of our shares.
Speaker Change: Due to the capital requirements related to the TV Tech auto acquisition.
Speaker Change: The potential closure of canara and Aviva links. And our long-term, net debt, leverage ratio targets. We paused the buyback during the quarter.
We expect to resume the buying in Q3 consistently with our long-term capital allocation policy.
turning to working capital metrics days of inventory was 158 days, a decrease of 11 days versus
Speaker Change: With inventory dollars slightly up sequentially.
Days receivables. Worth 33 days down 1 day sequentially and days. Payable worth 60 days Down 2 days. Sequentially taken together out. Cash conversion cycle, improved to 131 days.
Speaker Change: Cash flow from operations was 779 million and net capex was 83 million or 3% of Revenue resulting in non-gaap free cash flow of 696 million or 24% of Revenue.
During Q2 we paid 35 million towards the capacity, access fees related to bsmc, which is included in our cash flow from operations. Additionally, we paid 50 million into V and 16 million into esmc. Our 2 Equity accounting boundary joint ventures under construction.
Speaker Change: Go from investing activities.
Speaker Change: Now, it's turning to our expectations for the third quarter.
As Kurt mentioned, we anticipate Q3 Revenue to be 3.15 billion plus or minus about 100 million.
Speaker Change: At the midpoint, this is down about 3%, year-on-year and up 8% sequentially.
Speaker Change: We expect non-gaap gross margin to be 507% plus or minus 50 basis points.
Operating expenses are expected to be about 735 million plus or minus about 10 million or about 23% of Revenue consistent with our long-term financial model.
Speaker Change: The sequential increase is primarily driven by the acquisition of TD Tech Auto and variable compensation.
Speaker Change: Taken together we see non-gaap operating margins to be 33.7% at the midpoint.
Speaker Change: Please note our third quarter guidance does not incorporate the remaining 2 Acquisitions. Which continue to be under regulatory review.
We estimate non-gaap Financial expense to be about 91.
Speaker Change: Million. We expect non-gaap tax rate to be 17.4% of profit before tax.
Speaker Change: Non-controlling interest will be about 14 million and results from Equity account investees about 1 million.
Speaker Change: For Q3, we suggest for modeling purposes, you use an average share count of 2503.8 million shares.
We expect to stop based compensation, which is not included in our non-gaap guidance to be 116 million taken together at the midpoint this implies non-gaap earnings per share of 3.10.
Speaker Change: Turn into uses of cash. We expect Capital expenditures to be around, 3% of Revenue.
Speaker Change: We will make a 225 million capacity, access fee in a 145 million Equity investment into dsmc.
Speaker Change: As well as a 15 million Equity investment into esmc which are 2 Equity. Accounted Foundry, joint ventures under construction.
Pending the regular Tori approval, for Aviva and kinara Acquisitions. We will resolve in a cash payment of 550 million.
Speaker Change: Now, in closing, I would like to highlight a few Focus areas for nxp.
Speaker Change: First, as Kurt mentioned, based on the signals we tracked.
Speaker Change: It appears to us, we are in the early stages of a cyclical recovery.
Speaker Change: Second.
We have started the consolidation of our Legacy front. End 200, mm factories. As part of our hybrid manufacturing strategy,
This includes pre-build a bridge site for future customer requirements, which will result in higher inventory.
Speaker Change: We expect by year end. This will be approximately 6 to 7 Days of inventory, which we will hold and die for
Speaker Change: As a result, I will front end. Utilizations have moved to the mid 70% range during Q2 from the low 70% range before.
Lastly, we will continue to focus on what is in our control driving. Solid profitability and earnings consistent with our long-term financial model.
Speaker Change: I would like to now turn it back to the operator for your patient.
Speaker Change: Thank you.
Speaker Change: as a reminder to
Speaker Change: and wait for your name to be announced and to withdraw your question. Please. Press star 1 1 again and we do ask to please limit yourself to 1 question and 1 follow up.
1 moment while we compile the Q&A roster.
Unidentified Moderator: And the first question comes from Ross Seymour with dorchi bank, your line is now open.
Ross Seymour: In general, just how are you feeling this quarter versus last?
Speaker Change: Yeah, thanks and good morning. Uh, good morning Ross. Um, clearly better. Um, so it is indeed the same signals. That's that's actually the reason why we do this. We we track these signals all the time. Uh, and there is clearly an an improvement on All 4 of them over the past 90 days. Um, that is exactly why I tried to, to highlight them because that drives our growing confidence that we are in the, in the beginning of a new of a new upcycle.
Speaker Change: So, 90 days ago, I guess I really talked about, uh, a balance of uncertainty, from tariffs and some, some early early signals, which would signify the early Innings of, a, of a new cycle.
Speaker Change: Uh this time I would say nothing really new on the tariffs. But clearly those signals about the new upcycle have strengthened since uh since 90 days ago. So uh a market difference, Ross versus 1 quarter ago.
Speaker Change: Great, thanks for that color. And then uh, for Bill, just uh, I guess 2 parts quickly on margins. Uh, 1, how much does your gross margin get benefited from uh, running the Fabs a little hot in the consolidation and then 2 with those 2 pending deals on the appex side of things? How do you expect to manage that if they closed as Opex pop up in the fourth quarter? Or can you kind of offset that in other ways to keep that 23% intensity?
Speaker Change: Sure uh, good morning Ross um related to Q2 results of delivering the 56.5. It had very little uh impact related to the 57% not much. I would say because again you start the material and we're only building a couple days and at the end of the year, it'll be about 6 to 7 days. As you can see, we've been uh also focus on draining some of our internal inventory as well. So you have that net effect occurring there.
Related to the Acquisitions. Uh, that are still pending. Again, we have, uh, mechanisms in a way to try to absorb this as much as we can. If we do close in this quarter, which we do expect, we may be a bit higher, but remember, these 2 Acquisitions are the smaller of the 3, uh, just to remind you from a headcount size I believe. Um, kinara is around 60 and Aviva links is around 100.
Speaker Change: Thank you.
Speaker Change: Jen will come from Vic Arya with Bank of America Securities. Your line is open.
Jen: Uh, thank you for taking my question. Um, Kurt I uh, I heard on the call uh, the suggestion that you had an early stages of a cyclical recovery. Um, so if we apply that to the automotive segment, um, you know, Q2 sales, uh, flattish year on year, I think Q3 are also indicating to be flattish year on year. Uh, and that seems to be a somewhat more conservative tone that we hear from some of your analog peers who are more optimistic. Um, right, they are seeing the year-on-year sales increase, especially in China. So how would you contract the pace of recovery? You are seeing an automotive, uh, versus your your peers. And when do you expect your Automotive Sales to start growing uh year on year? Can can that happen in Q4?
Jen: Hey, um, good morning giving. Um, yeah, well I I can't really contrast to our peers because I think we are the first 1 to have earnings. So I I wouldn't really know what they have to say this quarter. We will probably all of us learn a little bit later. Um, now I still fully understand your questions and I I would re re reform of this a little. Um, our Automotive business is, um,
Accelerating massively from the second into the third quarter when you think about the sequential growth. So we just gave you actual of the second quarter which were 3% up quarter on quarter. And for the first time in a long time, by the way flat year in year, as you rightfully said,
Jen: Uh, and we said now mid single digit uh, up into the uh, third quarter, so that that is doubling in terms of, in terms of sequential growth with it. So, therefore, um, I'd say there is, there is a clear difference. Uh, furthermore the, um,
Jen: you also asked about China, China has been strong all along and mind you that we are serving the automotive Market in China predominantly through distribution, where we have been and continue to be, uh, below our our inventory targets there with with 9 weeks,
Significantly less than than 11 weeks. Uh so what really matters is this change in the western tier ones.
Jen: So what I try to say is we work? I don't think we should sugarcoat that the automotive macro is certainly mixed. Um as in p just came out with their latest SAR forecast for this year.
Jen: Uh, which they up to actually from 90 days ago to Flat year on year, 90 million cars. Um, when we talked 90 days ago, they were actually at 88 million cars. So the forecast has slightly gone up. I wouldn't celebrate this as a big thing. It's it's it's still flat. So our main Improvement is that we come closer to shipping to natural and demand feedback. That's the key points because the inventory burn at the tier 1's is going away.
Jen: Uh, so that's how I would frame the automotive environment at this stage.
Speaker Change: Correct and for my, uh, follow-up, uh, just uh, 1 or 2 relate once a bill. So, uh, Bill, if you could give us, um, just the contributions from um, the the Acquisitions. I think 1 has closed 2 have not closed. So just how to kind of think about when they do close, what the contribution, you know, ranges might might be and then if I were to, uh, you know, make a guess for Q4 and say, if NXT sales were to grow low to mid single digit sequentially, in Q4, uh, what would that do to, uh, gross margins and, and is there anything to make that we should be thinking about as we kind of? Uh, conceptually think about, uh, Q4, uh, gross margins.
Okay. That that was a number of questions we work which you did slow into your second question. Well done, uh, let me try to pass them. Um the first 1 was about the contribution of the Acquisitions. Uh we actually closed 1 AC in the second quarter which is uh which is T to take Automotive.
And as we said before, um, their contribution from a, from a revenue, growth margin perspective is completely immaterial to our financial model, um, all the way through, um, 27, we did acquire them for the IP and know how they have in software for safe processing in the software defined vehicle where it it is. A major major contributor to our to our system Solutions there, uh, on the Opex side, um, we do have to digest Opex from them. And I think Bill talked about this uh, in the prior
Both both quarters before uh that we do create space with our existing Opex, by actually Depp prioritizing less strategic Parts in our portfolio. In order to have enough room to swallow ttek photos Opex. And I think we also told you they come with 1100 software Engineers. Those are now indeed part of nxp. Uh, so the Opex guide, which you get for quarter 3, VX includes fully TT tech automotive. It's fully in their uh, but we did create space for this by Deep prioritizing other elements and all in all. Um, and here I I speak for for what Bill said earlier, we are on track in the second half of the calendar year. 25 to be in our Opex model or say 23% Opex of Revenue. That's that's what we're going to hit in the second half of calendar year 25.
Speaker Change: Uh now you talked also about Q4 and I think this gets pretty lengthy here. Um we don't really guide here from Q4 but you put something into my mouth so from experience, I know I have to say something otherwise, you say I said it differently. Um,
Speaker Change: We, we don't guide you for, but I know you want to model something with it. Um, so I guess for Q4 Revenue to start with, it is fair to orientate yourself on the, on the long term historical seasonality, which we have had from Q3 to Q4 or to be more specific. A flat to slightly up Revenue development from Q3 into Q4.
Speaker Change: Now, I want to remind you when saying this, that this is all sitting on 9 weeks of women entry. Uh, and in order to stay competitive in the channel.
Uh, we may want to Stage our what we call hero products, which are the products, which have the best sales through higher in the channel, from an inventory perspective, in order to be competitive against the the competitive pressure in and upcycle situation. Uh, so I made that comment for quarter 3.
By putting more inventory in and the same holds for Q4.
Speaker Change: And that would be of course over and above this historic seasonality of flats is slightly up, which I talked about earlier.
and now the last part of your question was about the impact on Rock margin and that I give to you, uh,
Speaker Change: Sure um Q3 uh would relate to gross margin, the way to think about this. The 57% guide is assumes that we stay in the mid 700s from a utilization utilization standpoint because at the same time we're we're lowering inventory, but we serve the bridge and build up a couple days of our inventory as well. Now for Q4 we are not guiding it. However, I will continue at this time. The model of front-end utilization in the mid 70s based on a purchase said, the normal revenue seasonality of plaidish to slightly up.
Unless we see stronger, business signals and conditions, which we may want to increase this then up to the upper 70s, we haven't made that decision yet. It's something that we will monitor very carefully and explore from now until next earnings period. And then again Beyond 2025, I know you didn't ask, but I'm sure somebody will ask, uh, with without providing direct guidance. I'll just refer to what I said, last quarter. And what we shared during analyst day as a good rule of thumb, for every 1 billion in incremental Revenue, we should see about 1.
100 basis points of incremental margin on a full year basis. Uh, so at 12 billion, Revenue should be around the 57%. 13 and 58 1459 percent. And so on. Now, of course, there is timing elements and other levers that we may get us above or below these levels. Given any quarter intense why we give plus or minus 50 basis points on a quarterly basis. Now, remember these other levers include front-end utilizations, back to the 85%, level for even above mix refilling, our Channel Target of 11 weeks, ramp of those new products, improved costs, normal annual, uh, low single digit, uh, uh, asps and eventually think about post 2027 the re uh, reducing our fixed costs with our uh, consolidation efforts uh, part of our hybrid manufacturing strategy. So a lot going on. But, uh, we are, we have the leverage in place to, uh, and we feel very
Speaker Change: Very confident in delivering, our long-term model range of 57 to 63.
And our next question will come from France swab. Boen with UBS your line is open.
Boen: Thank you very much. I just have a, a follow up on your channel inventory. So, you say, c that you expect to sit at 9 weeks, your guidance is based on 9 weeks and you may increase it, uh, either in Q3 and Q4, um, if I recall correctly, what, what are you waiting for? Exactly, you know, to, to increase, I mean, what are the signs that you would make you, you know, make the decisions and why you, you know, you don't do it right now. So what are the moving part that would make it increase to uh, to higher levels? Uh, that would be my first question.
Yeah. Uh, thanks for smart, good afternoon. Um, I actually did not say or Q3 or Q4. Um, I what I want to say is it could be Q3 and Q4, um, that, that really depends on the, on the circumstances. Uh, what we are waiting for is, uh, ah, ah, further solidification through this quarter, but it could be in this in this quarter, uh, of those, at least those 4 Trends, which I talked about earlier.
Boen: Which is the number of fraud cycle orders, which is the growing backlog of the orders at our distribution Partners, uh, which is the growth of our direct, uh, customer order books and actually escalations supplier escalations, which by the way have almost doubled over the last 90 days. So if this continues to go and that's
Boen: I put it into my prepared remarks from SWA. Uh it could be as early as in this running quarter uh that we start to touch this. Again, the importance here is it is not about those 200 million Revenue, uh, which is probably the difference currently between 9 and 11 weeks
Because we know we just ship revenue from here to there. It is about being competitive and drive ourselves at the Distributors with with the right products. So that's how you have to think about it. But again, uh, there is a chance, it happens in Q3 and, and the same again in Q4 and that could be and and eventually
Speaker Change: Makes sense. Thank you very much K and maybe 1 1 for Bill. Let me know the inventory days. Yeah, 11 days below is actually a big decrease in days. I mean uh when you look in the history, so that's welcome. Still on the absolute number is still very you know, relatively high. But how should we think about your own inventories in the in in Q3? And Q4? Do you, do you want to work it down? You know, more aggressively, maybe perhaps given the relative high level. I would be great to have your your color here.
Speaker Change: As well, for Q2 we made some progress on reducing our internal Dio.
Speaker Change: 59 days last for to 158 days. Now, approximately 5 days are linked to a future asset for sale.
Speaker Change: And the remaining is linked to reducing our inventory levels from a day perspective.
Speaker Change: Or Q3 based on the cam combination of starting inventory, linked to the higher revenues.
Speaker Change: And taking account the start of our pre-built of a couple days.
Speaker Change: We expect to be at a similar levels ending in Q3. Now, please note, we are still holding about 14 days. Worth of Channel inventory on our balance sheet and by year end, hold about 6 to 7 Days of pre-built stock related to our manufacturing consolidation efforts.
Speaker Change: So overall, you know, we're trying and continue to balance and hold a bit more, internal inventory versus our long-term Target of 110 days, to ensure we improve Supply in this new emerging upcycled from the lessons learned from the Co supply crisis in the past. So we're trying to balance this as best as we can.
Speaker Change: Thanks a lot.
Speaker Change: And the next question will come from CJ, Muse with can or your line is open.
Speaker Change: Yeah, good morning. Uh thank you for taking the question. I I guess digging a little bit deeper into Auto. You talked about shipments tracking to, to natural and demand was hoping perhaps you could be a little more specific within your key growth drivers. Uh in the trends you're seeing there uh both uh from China and and kind of non-china perspective to to get a sense of you know, the rate of recovery geographically.
Yeah. Uh, thanks uh, CJ. So a couple of statements here 1 is, um,
as the annually update them, I sneak preview it, it appears that all the growth drivers, uh, which we laid out and that means, of course also, including the automotive ones are on track to, uh, to the targets, which we had given you in November last year, in our investor day,
Speaker Change: Uh, secondly, I think it's really important in automotive to take a step back and look at our overall Automotive, uh, situation.
Speaker Change: Relative, probably relative to peers. And I want to remind you that the revenue which we just guided for quarter 3,
Speaker Change: Is only 4% below the peak which we had an automotive in the fourth quarter of calendar year 23. So we are, we are just a little bit away from the peak. So we've done extremely well through this, what you would call a downside. But again,
you know, where the industry has gone in in what high percentages from from Peak to truck, we are now only 4% away from the former Peak. Now, of course, we going to grow above that Peak because of the growth drivers. But I I just wanted to put this a bit into perspective, also relative to, uh, to the question earlier from from VC, now on the geographic basis. Um, ZJ the way I would phrase it is
Speaker Change: China has been and continues to grow both uh from a quarter on quarter perspective as well as from a year in your perspective. There was 1 dip in the in the in the Q and Q growth in Auto in China, which was q1. And we talked about this earlier, this is a seasonal, a seasonal drop, which we every year have in, in China, it did grow, uh, very nicely into the second quarter. And so, we built into the third quarter, the same is true for for Japan. And, um, and Asia Pacific, what for us is the change.
Which is, which is significant, and which really makes a difference to us. And that also drives the the higher sequential growth for the total Auto segment.
Empty months. And that makes that makes a real difference because we get them.
Speaker Change: Growth, without the micro.
Speaker Change: Would need to improve. So we don't need improvement from the macro for for us to grow our. And we also don't need restocking at customers. That growth comes alone from the moderation of the inventory burn at these Tier 1 customers. And that's the biggest Dynamic which we currently have CJ.
Speaker Change: Very, very helpful and I guess a follow-up question for you. Billy, you, you spoke earlier to the fact that around, uh, the key drivers to gross margins was hoping, you know, perhaps you could speak to maybe the the the near-term. The next 6 to 9 months, uh, within the kind of structure of 57 to 63% Target Model. Um, would you highlight, you know, any particular drivers, um, you know, outside of of utilization and mix? Uh, that could impact Trends there. Uh, or or or no.
Speaker Change: Uh, yes, I I think Kurt alluded to it. We still are holding at 9 weeks and obviously that's an opportunity once we feel. And, and Target and specific areas to bring that back up to 11 and that will also help our inventory. Um, I think ongoing improved, uh, costs, we continue. If you recall in the beginning of the year, we always have our low single digit price adjustments, and then it takes time to get
Through and improve for the full year effect. So that that becomes a tail.
Speaker Change: we continue and then more, you know, medium-term it's really going to be a
Speaker Change: Function of why I lay down that rule of thumb. So, um, that's where we are, you know, besides the utilization that I mentioned earlier,
Speaker Change: Thanks so much.
Chris Danley: And our next question will come from Chris Danley with City. Your line is open.
Speaker Change: Hey uh, thanks guys. Um, hey Kurt can you just give us a little more color on the visibility Trends? Uh, maybe, you know, through the end of the year. Even into next year, you mentioned some shortages and escalations just any sort of quantitative metrics you can give us. Uh, say now versus 3 months ago on how the rest of this year. Next year is looking
Speaker Change: Well, I, um, hi Chris. Hi, I'm spotting though because I went ahead of my skis already. Um
Speaker Change: uh,
Speaker Change: Yeah, the Q3 guidance. You just got um, the difference to 90 days ago is that 90 days ago, we didn't even provide any, not even the remote soft guide.
For the, for the next 4. Uh, I did offer that color for the calendar for the 4 of this year, a few minutes ago with a, with a flat to slightly up. Uh, typical historic seasonality uh, based on the 9W week. Uh, distribution inventory and we may or may not be higher than that.
Chris Danley: Um, my sense is Chris that that Dynamic is continuing. Because, uh, inventory has burned away.
Speaker Change: Our.
Company specific growth drivers and here I would actually call Out Auto because it's almost 60% of the company are just firing on all cylinders. I mean, the the there is a whole, a whole race now on these software defined Vehicles, which is driving very hard, our our Revenue in the s32 processor families, going very, very well. So we this number 1 position, which we have their globally. Uh, we really see it. Expanding radar is doing very well because the the the 8os levels are are driven up and and I personally even believe that you think a bit more midterm that robot taxes will become more pervasive.
Uh, well, an electrification even so people in the western world, might have been a little bit more muted on it. Electrification. Just keeps um, keeps penetrating. So S&P latest forecast. For this year is 15% more units car units, which are xvs over last year, uh, and ending this year of 43%, Global penetration now,
Speaker Change: What makes me really excited Chris in all of this is China. So Raphael and Ivy we we were just um, week before last week we were we were together in China and maybe Russell you you share a little how excited we were by how Innovative and how fast customers are turning a design into Revenue. Yeah, I know indeed, and thanks for the question on that 1. Um, China.
Speaker Change: If you if you think of China China China is an oem driven Market where they're driving Innovation through software defined vehicles and it's an extremely fast moving. So clearly China is extremely competitive in the competitive pressure and I will get from this is not only in pricing, it's also
Speaker Change: Quite exciting. We we had a a week ago of a very good meetings with both the oems and the tier 1s.
Speaker Change: Where uh, you know, kind of part of the transition plan passed the uh, the relationship to me. But not only that, it was started initiatives associated with software, defined, architectures BMS, and radar. So quite exciting the opportunities that we see.
Speaker Change: Strength in China. Oh, I'm also with t.
Speaker Change: The the there's a story there in China. It's probably not.
Speaker Change: Told enough, the tier ones in China.
Speaker Change: Are relevant, not only for China, relevant foreign um, foreign oems.
Speaker Change: For China markets and non China. And so
Speaker Change: quite the important meetings there with the Tier 1, Chinese customers who are driving, Innovation and competitiveness, and non-china, oems.
Thanks for the color guys. Um, so just as a follow-up uh I guess on that on that same topic. I mean it sounds like Auto uh your most optimistic on that. If we look at the next, I don't know year year and a half hurt. Would you expect higher relative growth from your Automotive segment or your industrial segment?
Speaker Change: Like Chris 2 points. Uh, the 1 is, we are as optimistic on Industrial. Um, it was an auto question. So we answered on auto. That doesn't mean we are not optimistic on Industrial. Uh, and the best way to answer your midterm question is we see absolutely no reason to not meet our um November 24 3-year Wall Street guide of of um
8 to 12% both in industrial and iot as well as in Auto. Since we will be certainly below this this year. Um, we we clearly see the opportunity to catch up, uh, next year in the year after which is greatly helped by the cycle and by the companies specific drivers. So so it's also industrial and maybe um Rafael you speak a bit about the early views on on Hai capability of nxp in, in in industrial
Rafael: yeah, so um, we see
Rafael: Well, we already starting to see the signals already in in industrial for the next quarter to actually normalize. Now this is the first time the last time we we discussed, how Q2
Rafael: National iot was being driven by by a consumer space.
Rafael: The changes that we see now in Q3 is that this is broad-based. This is uh, uh, the growth that we see in in quarter over quarter is, is driven geographically in all areas, all Geographic, uh, geographies are are are showing growth.
Rafael: and the other thing we see in this, we also see now
Rafael: a big part of this of this growth comes also from industrial record industry, not just consumer. So the trends of the state decision industrial for nxp on the MCU and in microprocessor, places starting to kind of take shape
And now we're starting to get engagements for next for next year on a higher performance, higher AI capabilities with our with our Tier 1. So the uh the thesis of our industrial growth of 8 to 12% that continues to 8 to 12 percentage.
Rafael: Thanks a lot guys. That's very helpful.
Unidentified Moderator: And our next question will come from Thomas omali with barklay, your line is open.
Thomas Omali: Hi guys, thanks for taking the question. If, if I look at last quarter and this quarter, obviously 1 of the major changes is your your confidence that you could actually up some of the weeks of just the inventory. And you're, you're still kind of waiting mid quarter here, and you kind of addressed that already, but you made the remark 9 weeks to 11 weeks is 11 weeks. The maximum that you guys
Thomas Omali: With Channel refill in this period of time. Or is there any circumstance in which you would go a little bit higher than that? Just walk me through. Why would be 11 weeks? Um, is that just kind of the stated goal long term or what would change to make you? Maybe go a little bit higher than that? Given that you guys are clearly seeing a recovery.
Thomas Omali: Yes. Um, it's a, it's a stated long-term goal, uh, which we actually about the same size we have before the whole, uh, Co and Supply prices, we completely relooked at it reassessed it, uh, by the mix of the pieces, which are in there and
We were probably the only ones to hold our Channel inventory, very much under control through, uh, this cycle which has served us extremely well. Uh, but yeah. We want to go back to normal. The definition of normal for us is 11 weeks and and then we just continue on a, on a much more regular basis, but yeah, maybe it it jumps the day to 12 and jumps down to 10 again. But the, the target, the stated long-term Target is indeed 11 weeks. I would almost go that far and I think we had it even on a slide there in our voice Street, um, model, which we provided last November. Uh, the 11 weeks was actually an element of the forecast. So we set this forecast is, is, is valid with the 11 weeks inventory, uh, on the long run.
Helpful curve. And then obviously, you gave us a little sneak peek in the Q4 so I can't help but pick a little bit there too. But you're saying, uh, flat to slightly up. If you look at normal, seasonality for your segments kind of into the December quarter at least over the past 7. 8 years, um, it looks like Auto is up low single digits Industrials actually up a bit more robustly in the fourth quarter. If you're to plug that in you kind of get greater than 20% growth in the industrial business. You're clearly pointing to some some strength there. But any differences that we should be thinking about in the recovery between Auto Industrials the year closes. Or would you say the contributing factors to that flat to slightly up are relatively in line with what you've seen historically?
Thomas Omali: Tom. That's a stretch too far, uh, clearly no segment guide into Q4. Um, what? I did say, the flat to slightly up is indeed just mathematically, or I don't know, 9 year or so, um, average historical seasonality across the entire company and that's what we give for Q4 and and it stays there. So, I'm sorry, but we, we really can't go to a, to a second level at this stage.
Thomas Omali: And the next question comes from Joshua Buck halter with TV toe in your line is open.
Joshua Buck: Hey guys, thank you for taking my question. Um, in your prepared remarks, I think you talked about, not seeing any material impact from the Tariff environment or Poland. Um, can you make me elaborate on what signals you're looking for and what makes you? So sure that you know, there's not really a meaningful impact yet, you know, I think a few of your peers have commented, you know.
Joshua Buck: Your customers, don't check it. Pull in box when they place an order. So be curious to hear. Um, if there's any changes in your customers behavior and what you're seeing on the tower front, thank you.
Oh, we have, we have a pretty good view on this uh Joshua be called we are we are very alert to it. Um and that has to do with that. We have been highly disciplined over a number of years. Now, on on on inventory levels. Uh, so we didn't want to we didn't want to get into the Trap of uh, of being a
Joshua Buck: A victim of Poland here at the very end of the down cycle or better at the beginning of the upcycle. Uh, the way we, we can do this is, um, we have a lot of AI running on our Auto patterns, um, which tells you immediately? If there is anything, which falls out of the normal patterns, and when we see that, we go back to the customer and ask what is it?
Joshua Buck: Um and if if there is a clear plea for this would would is a wish for a pull in relative to tariffs. Uh, we typically don't support it because that is exactly what we want to avoid. We had a very few of those situations so I'm not I'm not talking fiction um not much though. Um and and therefore we we can really make that statement. We also looked at it relative to Liberation day if there was any correlation.
Joshua Buck: Of any of these signals. Uh, and given our our very application specific business structure. We have pretty smooth auto tracks. I mean, this is not like everything is jumping around all the time. It is relatively smooth. So we we would see those those deviations. That's That's the basis. I made this, this comment from my comments to be to be very clear. Here was a firm comment for the past second quarter. Um, so the the numbers which we gave you had had no Pullins or push-ups. Uh, and the comments also holds for what we can see from today's perspective for the third calendar quarter. Now, I don't know.
Joshua Buck: So yet what the rest of the quarter is going to be in the end but it it it doesn't appear at this stage uh that any of this would happen.
Speaker Change: Like, are you seeing them sustained? Accelerate, pull back on their investment in, in newer Technologies and features like FTV and, and and ones that that enables. Thank you.
Speaker Change: Uh yeah, that that's actually what I find exciting because, yes, that that is accelerating clearly OEM so around the world are finding out more and more that the STV concept delivers them. A number of very, very significant competitive advantages. 1 is really uh, consumer value because the car it just doesn't age in the hands of the consumer which is a significant Advantage. Uh but it also makes their designs uh more versatile and cheaper. Um, so I'm going that far to claim that a lot of the cost advantages, which the Western car industry is suffering from against or disadvantages against the Chinese players is because China has embarked earlier faster and more successfully on sdb Concepts. So it's a must to, to, for the rest of the world to catch up to remain competitive with, uh, with China inks. So, uh, clearly an acceleration and I know that that sounds
Orthogonal to the Tariff pressures and other other turmoil. This industry is in
Speaker Change: They all know.
Speaker Change: This is the way to, um, to go to move forward.
Speaker Change: In the drivetrains and people know how to do it. It's now it's now like how to reach the consumer with it. Uh, the next big thing is STDs and the next big thing in that is an XP. I mean, we are with our s32 family and our ethernet connectivity with it.
Speaker Change: We and now teach to take Auto software. There's just I mean we are just far away from everybody.
Speaker Change: Got it. Thank you. And and Kurt, if this is indeed your last earnings call, thank you for all the help over the years.
Speaker Change: Thanks to thank you.
Unidentified Moderator: And our next question will come from Stacy. Ray gone with Bernstein research. Your line is open.
Speaker Change: Hi guys. Uh, thanks for taking my question. Um Kurt I wanted to revisit the tttt tech uh in the guide. I know you said it was insignificant, but but I mean it had 1100 employees. And you paid 625 million for it is the revenue really zero? Like how how big is the insignificant amount of Revenue that's actually in Q3
It is insignificant uh Stacey because we don't want them to do.
What they used to do uh to an extent. Um, there is a we need that competence. They have uh and that know how in a sector which they know uh, but really going more from from maybe a service model uh, to becoming an integral element.
Of what we do for the sdv.
So that's that's that's why this is also changing to what it. It it might have been in the past uh stating okay. So it's like it's like what single digit millions or is it doubled it? Like just just help me size it. How big is it?
Speaker Change: I we we don't give a number for it, Stacey, but it is really completely insignificant and immaterial to nxp financials on the revenue growth margin as a consequence site. It is not insignificant at all from the Opex side, which I pulled out, because those 1100 Engineers, we of course want to have them. We pay them. So they are on the payroll. So that that's really where the um, where the impact is, I've got. Okay. So there's a business model changes. What you're saying? Okay, I absolutely
Absolutely. Yeah.
Speaker Change: Thank you um for my follow-up. Um, I wanted to take a little bit on Q4 so it does sound like I I get it. The guidance like doesn't include.
Filling the channel but it's certainly on the table and you sort of gave a number for, you know, kind of typical seasonality for Q4. Are there plausible scenarios where you could be above seasonal in Q4 without filling up the channel further than it is right now.
Speaker Change: Stacy, we don't guide you for it all.
Right.
Speaker Change: No, I'm just saying.
You, you asked me, uh, if if I could, if I could give you a direction today, if we can be above seasonality, I mean, that's that's your question. And it's I just want
Speaker Change: What what I'm asking is, do you need to fill the channel to be above? Seasonal is what I'm asking?
Speaker Change: No.
Speaker Change: Put it a little higher. Now if if that all continues the way it it actually in all the past cycle has continued. Of course, the dynamic roles or accelerates even into Q4. I mean, even though I wonder a little bit, I we've had negative pre-announcements from Auto oems and like the the end demand environment for auto doesn't seem fantastic.
Speaker Change: So it's just a normalization of inventory. Or like what?
Speaker Change: I I I absolutely know what you speak about. There were a few um less less overwhelming announcements very recently but I think we have to look at the total Market Stacy and I told you that as in Peach just upped their car forecast for this year from 88 million, to, to 90 million. It's only 2 million cars. And I would also, clearly not say it's not the SAR which is driving us, but it's not going backwards. It's actually improving a little and our growth comes from content increase. Thanks to our like radar electrification as 32 and it comes and it's really important that comes from a moderation.
Speaker Change: We burn at the tier 1s in the Western World which has been a big headwind over. I'd say 8 quarters now and if that goes away we just start to shift to natural and demand which is growth Stacy. I mean there's not much we have to do is just the inventory burn goes away at the tier ones and we already grow
Speaker Change: Got it. Now that that's helpful. I I apologize if I sound like a harpy, thank you very much. No, that's all right. Uh, Stacey and I think we are at time. Uh, so I want to thank you all for the, for the attention. And I, I trust you. You got to feel that we have quite a change from 90 days ago, relative to the sentiment on the, um, on the upcycle, which starts to be clearly broad-based in industrial, and iot across geographies across consumer iot, and core industrial, and across direct and distribution channels. So it can't be broader than this. Uh, and also Auto which was actually the best segment if you will in the second quarter. Because it was, it was already flat here on year is accelerating from a sequential perspective. But what excites Us in Auto is the design win traction, on the 1 hand, and the fact that this damped inventory burn at the, at the Tier 1 starts to go away.
Having said that, thank you very much all and um speak to you in the individual calls. Thank you. Bye bye. Thank you.
Speaker Change: Today's conference call, thank you for your participation. You may now disconnect