Q3 2025 NXP Semiconductors NV Earnings Call

Speaker #2: Hello and thank you for standing by . Welcome to Nxpi third quarter 2025 Earnings Conference Call . At this time , all participants are on a listen only mode .

Speaker #2: After the speakers presentation , there will be a question and answer session . To ask the question during the session , you will need to press star one one on your telephone .

Speaker #2: You will then hear automated message advising your hand is raised . To withdraw your question , please press star one one again . I would now like to hand the conference over to Jeff Palmer Senior Vice President , Investor Relations .

Speaker #2: Please go ahead, sir.

Speaker #3: Thank you . Tawanda , and good morning everyone . Welcome to our third quarter earnings call today . With me on the call today is Rafael Sotomayor , Nxp's president and CEO .

Speaker #3: And Bill Betz, our CFO. Also on the call with us is Kurt Sievers, who will act as a special advisor to Rafael through the end of 2025.

Speaker #3: The call today is being recorded and will be available for replay from our corporate website . Today's call will include forward looking statements that involve risks and uncertainties that could cause nxp's results to differ materially from management's current expectations .

Speaker #3: These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate.

Speaker #3: The sale of new and existing products , and our expectations for financial results for the fourth quarter of 2025 , NXP undertakes no obligation to revise or update publicly any forward looking statements .

Speaker #3: For a full disclosure of forward looking statements , please refer to our press release . Additionally , we will refer to certain non-GAAP financial measures which are driven primarily by discrete events that management does not consider to be directly related to nxp's underlying core operating performance .

Speaker #3: Pursuant to regulation G , NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2020 earnings press release , which will be furnished to the SEC on form 8-K and is available on Nxp's website in the Investor Relations section .

Speaker #3: Now , I'd like to turn the call over to Rafael .

Speaker #4: Thank you , Jeff , and good morning . We appreciate you joining our call today . Our overall performance during the third quarter was solid .

Speaker #4: Our revenue exceeded guidance by 23 million . We experienced sequential growth driven by broad based improvements across all regions and end markets . We maintain good profitability in controlled operating expenses , resulting in healthy flow through .

Speaker #4: Turning to the specifics , NXP delivered third quarter revenue of 3.17 billion , a decline of year and up 8% sequentially . non-GAAP operating margin in the third quarter was about 34% , 170 basis points below the same period a year ago .

Speaker #4: And ten basis points above the midpoint of our guidance . The lower operating margin versus the same period last year was due to lower revenue and gross profit , partially helped by flat operating expenses .

Speaker #4: Taken together , we drove non-GAAP earnings per share of $3.11 , a penny better than guidance distribution . Inventory was flat at 2% year on nine weeks .

Speaker #4: Consistent with our guidance , while still below our long term target of 11 weeks . From a direct sales perspective , we believe our shipments into the tier one automotive supply chain has approached end demand .

Speaker #4: We estimate that aggregate inventory levels of NXP , NXP specific products at our major tier one partners are below , Nxp's manufacturing cycle time .

Speaker #4: We believe this reflects a continued cautious approach in the automotive supply chain due to the uncertain macro environment . Overall , during the quarter , we did not experience any material customer order , booleans or push outs .

Speaker #4: Now I will turn to our expectations for the fourth quarter . Our outlook reflects the continued strength of our company specific growth drivers and signs of a steady cyclical recovery in our automotive and industrial markets .

Speaker #4: We do not yet anticipate direct customer inventory restocking . As one might expect off the bottom of a cycle . Cyclical trough from a channel perspective .

Speaker #4: Our guidance assumes distribution inventory may fluctuate between 9 and 10 weeks as we are selectively staging additional products in the channel to be competitive.

Speaker #4: We are guiding fourth quarter revenue to $3.3 billion , up 6% versus the fourth quarter of 2020 . For and up 4% sequentially at the midpoint .

Speaker #4: We expect the following trends in our business during Q4. Automotive is expected to be up mid-single digits versus Q4 2024 and up in the low single-digit percent range versus Q3 2025.

Speaker #4: Industrial and IoT is expected to to be up in the mid 20% range year on year and up 10% versus Q3 2025 . Mobile is expected to be up in the mid-teens percent range year on year , and up in the mid single digit range on a sequential basis .

Speaker #4: And finally , communication infrastructure and other is expected to be down in the 20% range versus Q4 2024 . And flat versus Q3 2025 .

Speaker #4: In summary , NXP third quarter results and guidance for the fourth quarter reflect a growing confidence in the company's specific growth drivers and that our new upcycle is beginning to materialize .

Speaker #4: This is based on several signals we track regularly . These include continually growing customer backlog placed with our distribution partners , improved order signals from our direct customers , increased short cycle orders , and a growing number of product shortages , leading to customer escalations .

Speaker #4: At the same time , we do not yet see material customer restocking due to the uncertain macro environment . Now , an update on our pending acquisitions of Kinara and Aviva links .

Speaker #4: We have received over regulatory approvals . We have closed both Aviva Links and Kinara . We are extremely excited about the long term benefits these acquisitions will bring to our customer engagements and market position .

Speaker #4: As we have previously shared in the short term , these acquisitions will have an immaterial impact to the revenue and the financial model of NXP .

Speaker #4: We do believe the revenue impact will be material in 2028 and beyond . The three recent acquisitions Tech Auto , Kinara and Aviva Links will enable Nxp's vision to be the leader in intelligent edge systems in the automotive , industrial and IoT markets .

Speaker #4: As this is my first earnings call, I would like to assure you that the strategy we laid out during our November 2020 Investor Day stays firmly in place.

Speaker #4: This includes our product innovation focus and our financial and capital return model . For the last six months , I traveled globally engaging with our customers , suppliers , and development teams .

Speaker #4: My key takeaway is that NXP strategy is compelling . We are focused on the most important customers and thought leaders are highly differentiated product roadmaps position us well to achieve our long term goals .

Speaker #4: I will continue to work closely with the cross-functional leaders throughout NXP to accelerate our innovation in time to market efforts . Overall , we remain focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence .

Speaker #4: And now I would like to pass the call to Bill for a review of our financial performance.

Speaker #5: Thank you, Rafael, and good morning to everyone on today's call. As Rafael has already covered the drivers of the revenue during Q3 and provided the revenue outlook for Q4.

Speaker #5: I would like to move to the financial highlights . Overall , Q3 financial performance was solid , with revenue , gross profit and operating profit all above the midpoint of our guidance range .

Speaker #5: While operating expenses were a touch above the midpoint of our guidance due to slightly higher variable compensation, taken together, we delivered non-GAAP earnings per share of $3.11, or a penny better than the midpoint of our guidance.

Speaker #5: Now , moving to the details of Q3 total revenue was 3.17 billion , down 2% year on year . And 23 million above the midpoint of our guidance range .

Speaker #5: We generated 1.81 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 57% , down 120 basis points year on year .

Speaker #5: And in line with the midpoint of our guidance range . Total operating expenses were 738 million , or 23.3% of revenue , flat year on year , from a total operating profit perspective .

Speaker #5: non-GAAP operating profit was 1.07 billion and non-GAAP operating margin was 33.8% , down 170 basis points year on year and ten basis points above the midpoint of our guidance range .

Speaker #5: Non-GAAP interest expense was $91 million, while taxes for ongoing operations were $173 million, or an effective non-GAAP tax rate of 17.7%.

Speaker #5: Non-controlling interest was 15 million and results from equity accounted Investees related to our joint venture manufacturing partnerships was a $2 million loss non-GAAP were 6 million unfavorable versus our guidance , primarily due to a slightly higher tax rate driven by improved profitability .

Speaker #5: Stock based compensation , which is not included in our non-GAAP earnings , was 118 million . Now , I'd like to turn to the changes in our cash and debt .

Speaker #5: Our total debt at the end of Q3 was 12.24 billion , up 757 million sequentially . We issued three new tranches of debt totaling 1.5 billion , with a combined weighted cost of debt of 4.853% .

Speaker #5: During the quarter . We reduced our net commercial paper outstanding by 735 million . Additionally , we plan to retire two tranches of debt due in March and June of 2026 , totaling 1.25 billion , with a weighted cost of debt of 4.465% .

Speaker #5: Our ending cash balance was 3.95 billion , up 784 million sequentially due to the cumulative effect of commercial paper reduction capital returns , equity and CapEx investments offset against the new debt and cash generated during the quarter .

Speaker #5: The resulting net debt was 8.28 billion , with a trailing 12 month adjusted EBITDA of 4.65 billion . Our ratio of net debt to trailing 12 month adjusted EBITDA at the end of Q3 was 1.8 times , and our 12 month adjusted EBITDA interest coverage ratio was 15.9 times .

Speaker #5: During Q3 , we paid 256 million in cash dividends and repurchased 54 million of our shares , representing a 12 month total shareholder return of 2.5 billion , or 106% of non-GAAP free cash flow .

Speaker #5: After the end of the quarter and through October 24th . We bought an additional 100 million of our shares under a ten B5 one program .

Speaker #5: Now , turning to working capital metrics . Phase of inventory was 161 days , an increase of three days versus the prior quarter , with inventory dollars up modestly due to pre builds and wafer receipts from our foundry partners .

Speaker #5: Days receivables were 31 days down , two days sequentially and days payable were 58 days down , to day sequentially as well . Taken together , our cash conversion cycle was 134 days .

Speaker #5: Cash flow from operations was 585 million , and net CapEx was 76 million , or about 2% of revenue , resulting in non-GAAP free cash flow of 509 million , or 16% of revenue .

Speaker #5: During Q3 , we paid 225 million towards the capacity access fees related to Vsmc , which is included in our cash flow from operations .

Speaker #5: Additionally , we paid 139 million into Vsmc and 15 million into Ismc . Our two equity accounted foundry joint ventures under construction with the payments reflected in our cash flow from investing activities .

Speaker #5: Now turning to our expectations for the fourth quarter. As Raphael mentioned, we anticipate Q4 revenue to be $3.3 billion, plus or minus $100 million at the midpoint.

Speaker #5: This is up about 6% year on year and up 4% sequentially . Better than our view 90 days ago . We expect non-GAAP gross margin to be 57.5% plus or -50 basis points .

Speaker #5: Operating expenses are expected to be about 757 million , plus or -10 million , or about 23% of revenue . Consistent with our long term financial model .

Speaker #5: Taken together , we see non-GAAP operating margin to be 34.6% at the midpoint , bringing NXP back into our long term financial model .

Speaker #5: In addition , our guidance includes about two months of operating expenses for the closed Aviva Links and Canada acquisitions . Now , turning to the below line items we estimate non-GAAP Financial expense to be about 103 million .

Speaker #5: We expect the non-GAAP tax rate to be 18% of profit before tax . Noncontrolling interest expense will be about 14 million , and start up expenses related to our equity account .

Speaker #5: Investees will be about $3 million . Loss for Q4 . We suggest for modeling purposes , you use an average share count of 254.3 million shares .

Speaker #5: We expect stock based compensation , which is not included in our non-GAAP guidance , to be 118 million . Taken together at the midpoint , this implies a non-GAAP earnings per share of $3.28 .

Speaker #5: Turning to the uses of cash . We expect capital expenditures to be around 3% of revenue , below our 5% target . As we execute our hybrid manufacturing strategy .

Speaker #5: This includes consolidating our 200 millimeter front end manufacturing factories , investing in our 300 millimeter joint ventures with Vsmc and Ismc . These investments will result in margin expansion , supply resilience , and access to a competitive manufacturing cost structure .

Speaker #5: As shared at our Investor Day , we will continue to substantially invest in Vsmc in Singapore during Q4 , including a 250 million capacity access fee payment and a 350 million equity investment .

Speaker #5: When Vsmc is fully loaded in 2028 , it will drive a 200 basis points improvement in Nxp's total gross margin . Additionally , we will make a 45 million equity investment into Ismc in Germany , enabling additional 300mm supply resilience .

Speaker #5: Lastly , we will pay approximately 500 million for the closed acquisitions of both Aviva Linx and Canara and furthermore , we have restarted our buybacks at the beginning of September and we will continue to buy back stock consistent with our capital allocation strategy and finally , I would like to extend my personal thanks to Kurt as he transitions to a new and exciting chapter of his life .

Speaker #5: He's been in an inspiration to all NXP team members and a personal mentor and value partner to me . As a CFO . We will miss his infectious humor , timely counsel , and thoughtful insights .

Speaker #5: With that , I would like to now turn it back to the operator for questions .

Speaker #2: Thank you . Ladies and gentlemen , as a reminder to ask the question , please press Star One on your telephone . Then wait for your name to be announced .

Speaker #2: To withdraw your question , please press star one one again . Wes , if you limit yourself to one question and one follow up , please stand by while we compile the Q&A roster .

Speaker #2: Our first question comes from the line of Ross Seymore with Deutsche Bank . Your line is open .

Speaker #6: Hi guys . Thanks for the question and congrats to both Kurt and Rafael . I guess my first question , a big picture one bill , you just mentioned that the guidance for the fourth quarter was better than you expected 90 days ago , but the details Rafael gave while positive , didn't seem like much had really changed .

Speaker #6: So what specifically got better over the last 90 days ? But either by end market inventory region , etc. ?

Speaker #4: Yeah , let me let me let me take that one . Ross . So we the way the way we think about Q4 and we're guiding Q4 sequentially , you know , 4% up .

Speaker #4: And so what we said last time , we said we're going to I mean , we did provide a soft guide of Q4 that we said we're going to be flat or slightly up .

Speaker #4: So I think what I would say is that things that we expected to go maybe potentially the risk that we have , they didn't materialize .

Speaker #4: And the signals , the signals with respect to a soft recovery , continue to get to continue to be there . Right . And our order book continues to be strong .

Speaker #4: The backlog , our distribution partners continues to be healthy . And so if you look at the the quarter to quarter guide , what is driving a slight improvement ?

Speaker #4: I would say over seasonality , pre-COVID , seasonality is industrial and IoT , where I think we see signs now of slight demand improvement .

Speaker #6: I guess on that front, you mentioned about the inventory staying in the 9 to 10 week level, not quite getting to the 11.

Speaker #6: That's your target. If you go from 9 to 11, any sort of rough dollar amount that that contributes that we should think about?

Speaker #6: And is there any specific trigger that you're looking at to let that inventory get back to its normal level , whether it be in the fourth quarter , which it doesn't sound like , or in , say , the first half of next year .

Speaker #4: Yeah . Ross . So I understand that in the past , I mean , we apply a math that it was that we said it was about one week of inventory equals to $100 million .

Speaker #4: And I understand the math , but what I , what I would like to kind of , for now is to think of I think it's more useful to look at how we are managing the channel strategically .

Speaker #4: And so kind of shift a little bit of , of , of , of how you look at a channel inventory . If you look at today , given the current environment that we have , we're visibility is limited .

Speaker #4: Orders come late. The one thing I want to leave you with is that it's important to have the right product mix in the channel to be competitive, especially when you think about our competition that has significantly higher inventory in the channel than we do.

Speaker #4: And so and as you know , we're not a cattle company . So getting the right product is really important for us now , today , right now we're being selective with additional products that have that .

Speaker #4: We have high conviction that of sell through . And so that one that's the reason I state that the inventory may fluctuate between 9 and 10 .

Speaker #4: Because because what I want to leave you with is in today's environment , weeks of inventory is not static , right ? Orders are coming late .

Speaker #4: Now , I would say that your your question with respect to when 11 weeks . I would say that as our visibility and confidence continues to improve and I will I will confirm your your point .

Speaker #4: We still see the optimal level moving towards 11 weeks and that may or may not happen in Q1 . As as we see improvements in the business conditions .

Speaker #6: Thank you .

Speaker #3: Thanks , Ross .

Speaker #2: Thank you . Please stand by for our next question . Our next question comes from the line of Francois Bouvignies with UBS . Your line is open .

Speaker #7: Thank you very much . My first question is on . Maybe you know your comment , Rafael , you said that you think are .

Speaker #7: I mean , a low in in automotive , for example , and things are getting better . Broad based . But you do not expect to increase inventories in the channel .

Speaker #7: I mean , or even sorry , not in channel , but in the direct channel . So I was wondering if we look at Q1 , you know , in terms of seasonality , I think you are down high single digit percentage , quarter on quarter for Q1 .

Speaker #7: Should I read this comment ? As you know , today with your visibility , you are comfortable with with seasonality , assuming there is no stockpiling and and demand is stabilizing , is that the right way to look at it ?

Speaker #4: So you're asking me about Q1.

Speaker #7: Yeah . Q1 . So , you know , like in a way , directionally based on what you just said , you know , like , are you comfortable with the seasonal trend ?

Speaker #4: Yeah . Well , let me let me just kind of before I get into , I give you a slight answer on that one , I would say that if you look into what we feel good about is the setup into 2026 , if you look at how we finish Q4 , I think that we are now entering a phase of inventory normalization and auto , and we're seeing , you know , signals of of of I would say , demand , demand improvement in , industrial and IoT .

Speaker #4: I think we like the setup . I'm not going to guide you Q1 for you , Francois , but I think if you're going to model , I think modeling seasonality and I would say using pre-COVID seasonality , which is high , high single digits decline would be would be reasonable .

Speaker #7: Thank you Rafael . Appreciate the color . Maybe the second question is for Bill . I mean , gross margin is is going up in the next quarter .

Speaker #7: I assume it could be because of mix , but I would be happy to to have your view here . But more generally , I mean , your inventories is still fairly high .

Speaker #7: You know , there's a bit higher dollars , a bit higher . So you assume you're loading is still , you know , you keep loading quite high .

Speaker #7: So how should we think about the gross margin direction after this Q4 . Are you going to you know , increase the loading at the expense of gross margin , or do you think you can manage this level of gross margin or even increase from here ?

Speaker #7: Just a moving parts would be very helpful. Thank you.

Speaker #5: Sure . Francois , as you can see , as you mentioned , we are guiding gross margins up approximately 50 basis points into Q4 .

Speaker #5: And this is driven by the higher revenues . Francois improved operational costs and also , yes , higher utilizations , which is actually offset with unfavorable product mix .

Speaker #5: And then , of course , we have the normal plus or -50 basis points on what that mix tends to ultimately be in the quarter for Q1 2026 .

Speaker #5: In the full year of 2026 , we are not guiding . However , please consider our normal seasonality that Raphael just talked about in revenues for Q1 along with our annual low single digit price negotiations that typically impact us in the first quarter .

Speaker #5: And we always work to offset those throughout the year through cost reductions and operational efficiencies . So for full year 2026 , I would say we expect to be in our long term model of 57 to 63% , driven by a function of revenue levels , improved Utilizations cost reductions , offsetting the price gives , and the normal product mix fluctuations in any given quarter .

Speaker #5: I would say , as stated before , please continue to use that rule of thumb for every 1 billion of revenue on a full year basis drives approximately 100 basis points .

Speaker #5: Improvement to gross margin . For example , I shared in the past at 15 billion , we should be at 60% , and then remember , as I mentioned in my prepared remarks , beyond 2027 , we also see another lift to our gross margins by approximately 200 basis points , driven by our hybrid manufacturing strategy .

Speaker #5: And again , overall , I think we're very pleased with the trajectory of our gross margins and how we manage this . Related to your inventory question , you know , you're right , in Q3 , we finished inventory at 161 days .

Speaker #5: That was up three days . And we're staging inventory to support our growth into into Q4 proactively . We are holding more inventory to support the continued increase of late orders that Raphael talked about , which are coming in below lead times .

Speaker #5: And , of course , the customer escalations have grown quarter over quarter . As Raphael shared in his prepared remarks . And as I mentioned last quarter , we started our pre builds for the 200 millimeter consolidation plans , which by the end of the year will be worth about 6 to 7 days .

Speaker #5: Of our total NXP days of inventory . Also remember , we're holding approximately 14 days of inventory on our balance sheet versus our distribution partners .

Speaker #5: Again , that assumes nine weeks . And with the positive signals we are seeing and from lessons learned from the past , you know , I'm quite comfortable and pleased with the .

Speaker #5: Internal inventory positioning as we , you know , as we mentioned many times , we have long lived inventory and deform , preventing obsolescence , risk .

Speaker #5: So , you know , if you had me call inventory into Q4 , I would say similar levels from a days perspective , plus or minus five days .

Speaker #5: Is the best view I can give you at the moment into Q4.

Speaker #7: Very clear . Thank you . Gentlemen .

Speaker #3: Thanks , Francois .

Speaker #2: Please stand by for our next question . Our next question comes from the line of Joe Moore with Morgan Stanley . Your line is open .

Speaker #8: Great . Thank you . I also wanted to touch on automotive customers kind of view on inventories . And I guess can you just talk to us a little bit about what those conversations are like ?

Speaker #8: Understanding . There's not much overlap between you and Nexperia at this point . I would think stuff like that is a reason to want to hold more inventory and kind of buffer yourself from these geopolitics issues .

Speaker #8: Just are you seeing any indications that that is happening or will happen ?

Speaker #4: Yeah , Joe , I mean , that's a great question . And I think it really I think the issue with an Experia really shows up really shows that the current level of , of inventory at the end , customer is not is not sufficient to , to to have any ripple of of this continuity .

Speaker #4: We don't see it restocking with our direct customers and now I would say , I mean , the good thing , right ? If you look at the business dynamics of auto highly related to , to , to , to inventory , the normalization and also already a very nice already we consider a very nice tailwind .

Speaker #4: And you would expect the next phase to actually become be restocking of inventory . But we have not seen it happen . And so the conversations are pretty much about how they are being very conservative with respect to how they manage their working capital .

Speaker #4: So no restocking so far .

Speaker #5: Yeah , maybe I'll add on itself . Just to add to it , because I think your question , does it impact NXP in any way from a direct standpoint ?

Speaker #5: The answer is no . And as Rafael said , we're still in the early phase . And seeing customer escalations . The signals improved , the restocking has not happened , nor has price increases have happened , which you typically see during a supply crisis .

Speaker #5: But those are other signals that we wait to see .

Speaker #8: Okay . And is there any impact potentially on automotive production from all of that ? On the negative side that you could see , you know , if they have shortages of other components , that it slows productions ?

Speaker #4: We Joe , we don't anticipate that . I think that the products that are associated right now with these are products that that could be second source .

Speaker #4: I think the qualification process is it could be relatively benign for OEMs , but so far our orders would not indicate any impact .

Speaker #4: So into , into , into the production of , of auto .

Speaker #8: Thank you so much .

Speaker #2: Thank you. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is open.

Speaker #9: Hi , guys . Thanks for taking my questions . My first one I wanted to drill into gross margins a little more . So you are guiding it up sequentially .

Speaker #9: But it's flat year over year even on a pretty decent revenue increase . I guess that's mixed , but I'm struggling to see where the mix issue is .

Speaker #9: It looks like your industrial mix is higher . Auto looks about the same . Like like what is going on with gross ? It sounds like utilizations .

Speaker #9: I'm not even sure they don't sound like they're lower year over year . Like , why are we getting more gross margin leverage like on a year over year basis ?

Speaker #5: Yes , Stacy , I think the factor that we see going into Q4 again , what we talked about is from an end segment , our gross margins tend to be much closer to each other , to the corporate average .

Speaker #5: But you can see the industrial , not the industrial , the common infrared down quite a bit year over year . And then the other one is you can see we're having record quarters in our mobile space , which again , you kind of , you know , slightly below our , our margin corporate mix .

Speaker #5: So those two and markets are kind of impacting our mix from a utilization standpoint . We are in the high 70s or plan to be in the high 70s into Q4 related to it .

Speaker #5: And so we do have kind of inventory at the high end internally . So of course , that also has an impact of how we run total our material throughout the line , just not in the front end , but also in the back end and so forth .

Speaker #5: So but really , those are help offsetting that . That unfavorable mix that we see at the moment .

Speaker #9: I guess the the inventory fill also helps out the depreciate the distribution stuff is higher margin as well .

Speaker #5: Yes, there are two sets of it. So remember the distribution, and what you'll see is that our distribution sales will be up quarter over quarter.

Speaker #5: But let me remind you that a portion of that or a large portion of it is driven by our mobile business where we drive and use the distribution partners in that mobile end market .

Speaker #5: And so that's what's driving the increase from a quarter over quarter perspective .

Speaker #9: Thanks for my follow up . I just wanted to level set . So . It sounds like there is some some fill into Q4 .

Speaker #9: So if I say half a week I guess is that do I just like roughly think of that as $50 million of income on the in impact into the Q4 guide ?

Speaker #9: And I know you said Q1 , you were comfortable with seasonal , but does that incremental channel filling Q4 influence how we might think about Q1 seasonality or sort of implicitly assuming that you are going to be putting more into the channel in Q1 before seasonal guide ?

Speaker #4: Okay , there was several questions on that one . Stacy , let me let me let me grab that one . So so you made a comment again on the on trying to kind of equate where we're going to end up in the channel .

Speaker #4: And you equate , I mean , you mentioned $50 million . And again , I mean , I wouldn't see it that way .

Speaker #4: I mean , we gave we gave a guidance of 3.3 . The demand again , I mean , the visibility that we have right now is low .

Speaker #4: Orders are coming late . And so where the the weeks of inventory end up in the channel , like I said , it may fluctuate between 9 and 10 .

Speaker #4: It's not going to be more than ten . It may be nine . And and so to to put a formulaic kind of way of looking at how much revenue is going to come from weeks of inventory staying in the channel .

Speaker #4: I don't know if I can really kind of go there given given how fluid the demand is . Again , we're putting products that we have high conviction of sell through , right ?

Speaker #4: And so so I don't see it . We use the .

Speaker #9: Channel scenario .

Speaker #4: That .

Speaker #9: The guidance . But you must have a scenario that's baked into guidance for Q4 . Right ?

Speaker #4: Yeah . In the scenario says that we the depends the inventory may fluctuate between 9 and 10 weeks . The scenario is what material we put in the channel .

Speaker #9: Okay . All right guys thank you .

Speaker #2: Thank you . Our next question comes from the line of Tom O'Malley with Barclays . Your line is open .

Speaker #10: Hey guys . Thanks for taking my questions . The industrial and IoT business seems very strong to close the year . Kind of particularly versus where expectations were .

Speaker #10: You guys have been helpful in the past about kind of laying out where you're seeing that strength , whether it's the core industrial side or more on that IoT side .

Speaker #10: Could you give us a little bit of a feel of what's moving into your into your Q4 ?

Speaker #4: Yes , Tom , let me just step back . And if you look at our our , our our industrial IoT business at a high level , 60% , excluding industrial , 40% is consumer .

Speaker #4: And even within that , 80% of the revenue flows to distribution . So I just kind of gives you kind of step by now what we've seen in IoT , the , the , the end customer backlog through the channel continues to improve .

Speaker #4: So we see really strong signs of of of of demand improvement on the consumer side . This is where we continue to benefit from company specific drivers .

Speaker #4: And this for instance I'll give you an example . There's a new category of wearables . This is smart glasses that have high demand .

Speaker #4: They require high performance low power processing . And this is an area where our portfolio is strong . So we're seeing some tailwinds on that side .

Speaker #4: And the core industrial . We're seeing broad based improvements across regions and products . And for us , if you were to drill into a little bit of the application specific , it will be driven by for us , it's driven by energy storage systems and building automation .

Speaker #4: Now , let me put a caveat here . I don't think we and will be the first one to tell you we don't see ourselves as bellwethers for industrial IoT .

Speaker #4: And so what we see , it may be that this is very company specific .

Speaker #10: Helpful . And then a similar question just on the automotive side , because it's useful to kind of see what's moving here is just on the S32 portfolio , like you've seen some really strong growth trends .

Speaker #10: And like part of the reason , many think that you guys have handled this a lot better is just the growing portion of your business that is levered to processors .

Speaker #10: So maybe again , what happened in the quarter , maybe the processor , the processor business versus the rest of auto . And then into the fourth quarter , any kind of color .

Speaker #10: On if there's a divergence there , how we should be thinking about just the entire auto business with those two pieces . Thank you .

Speaker #4: No , I think , Tom , I mean , we were encouraged about the direction that auto is taking , right ? I mean , if you were to take just Q3 in Q3 , we were only 3% below our prior peak .

Speaker #4: And and so I think that's that's encouraging . Now , with respect to what is what is driving what is driving the performance and the business .

Speaker #4: I mean , it continues to be what we what we what we deem , what we term coined accelerate growth drivers . And these are in the software defined vehicle , which is 32 franchises that you mentioned is radar .

Speaker #4: It's connectivity . And so if you were to ask me what is driving is what that is exactly what is driving is the secular shift to software defined vehicles , is driving the performance of auto .

Speaker #3: And and Tom , if I could add , you know , we'll provide a full year kind of a update on where we're at with our accelerated growth drivers on our Q4 call .

Speaker #3: But directionally , I'd say we feel very good about how the accelerated growth drivers are playing out . Enter quarter .

Speaker #10: Thank you guys .

Speaker #3: Yep .

Speaker #2: Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.

Speaker #11: Thanks for taking my question , man . Best wishes to both Rafael and Kurt . So Rafael , let's say , you know , if 26 plays out the way 25 did with China , OEMs and ISVs growing , but the rest of the world , you know , not growing or flattish .

Speaker #11: What does that mean for NXP ? So in an overall flattish auto production environment , what kind of lift can content provide , net of any pricing movements like can your autos be conceptually within your long term model for next year ?

Speaker #4: So I'll be back . I think the one , the one , the one thing I want to I want to maybe , maybe reframe the , the the the way we , the drivers of our business right .

Speaker #4: Car production is not the driver of our business . We're not SA related . I mean , if you were to look at , you know , the production , the production has been stable for years .

Speaker #4: I mean , varies 1% here and there , but it stays pretty flat and I 90 ish million a year content growth dwarfs SA growth .

Speaker #4: And so and then what you have in auto is the production is quite stable . But you have a very complex . You have a very complex supply chain .

Speaker #4: And that complex supply chain is the one that creates either bubbles in inventory glut or vacuums that create shortages . And that the , the , the supply chain is the one that creates the cyclical aspect of our business .

Speaker #4: If I just tell the way I see it is , we see normalization , inventory . If you already get behind the content growth of auto normalization of inventory is something that we see as very , very positive for the direction of auto .

Speaker #4: And so I just want to kind of basically reframe the way , the way I think you posed the question a little bit .

Speaker #4: And the way we see it , content growth and normalization of inventory provides for us an optimistic view of our business in auto in 2026 .

Speaker #11: And for my follow up bill on gross margins , is it just volume that takes you from the the lower end of the 57 to 63 range , right towards the middle of the range ?

Speaker #11: Or are there any new products , any new kind of mixing up of your portfolio that can provide benefits on top of any volume benefits , right .

Speaker #5: Oh , absolutely . As we said in the past , our new product ramps are accretive to the company and they go through their normal growing pains .

Speaker #5: Of course , as they ramp and other parts of our products roll off , I mean , mix is really the one that you know , what orders we get , what orders we serve , we serve over 10,000 SKUs or products every quarter .

Speaker #5: And so we have to adjust and either accommodate for it and offset those or vice versa . Let them fall through . And that's why gross margin improves as another factor related to it .

Speaker #5: But really also our hybrid manufacturing strategy as we move more to 300 millimeter . And as we're making all these investments that will start to yield benefits beyond 2027 , as I talked about .

Speaker #5: But short term levers , again , it's I think we're doing a really good job offsetting any price gives that we give through our cost efficiencies .

Speaker #5: And productivity internally on test time reductions and so forth . So those those , you know , that's really what we're supposed to go do day in and day out .

Speaker #5: And I think the team's doing a good job. You can see this by just our variability and our gross margins through this last cycle.

Speaker #5: So so I think as we become less fixed cost , that will just improve with that variability going forward . As I mentioned today , we're 30% fixed .

Speaker #5: And my guess is in about a couple years from now , once we finish our consolidation efforts . So think five years . And so we'll probably be below 20% , which will reduce that variability .

Speaker #12: Okay .

Speaker #2: Thank you . Our next question comes from the line of Chris Caso with Wolfe Research . Yolanda's open .

Speaker #12: Yes . Thanks . Good morning . I wanted to go back to some what you said with inventory levels , particularly at your your direct automotive customers , where do those inventory levels stand now ?

Speaker #12: And you quantified a bit on what the impact would be as , as the distribution channel improved in increased inventory ? Is there any I mean , help us with the magnitude of what would happen if those direct auto customers , you know , finally decided that they did indeed need to restock ?

Speaker #4: So , Chris , what we see right now that we're starting to ship to on demand , and I think normalization and we can see it in our orders .

Speaker #4: And we did say , indeed that we don't see the restocking . Now , specific question is of what the levels are . I think I think we don't have this ability at a granular level per customer , per tier one .

Speaker #4: That would be a complex , but it's very clear to us that is way below our manufacturing cycle . And and that's what I mean by is I think that that is just eventually not a healthy level to be able to manage sustainable business .

Speaker #4: I can't comment whether this will happen or not in in the next few quarters or , or in even 2026 . But that is a potential scenario of restocking is indeed a tailwind for our business .

Speaker #4: That that is that is something that that will provide no benefit for us .

Speaker #3: Maybe I could add a little bit . Rafael , you know , Chris , as you know , for about the last eight quarters , we've been under shipping into the tier one supply chain and actual end production .

Speaker #3: So it's actually been a headwind to us , I'd say over the last two quarters . And in our guidance into Q4 , we started to see that that headwind subside .

Speaker #3: And so we think the inventory levels at the tier one are where they the tier one players believe are normalized for the current environment .

Speaker #3: They are still very cautious on the macroeconomic outlook . And so , as Rafael said , we've not seen that next lever of restocking occurring .

Speaker #3: But when you go from a headwind of under shipping to at least shipping to end demand, you know, that's the new growth in the short term.

Speaker #3: Did you have a follow up , Chris .

Speaker #12: I do , thanks . I wanted to come to your your comment on buybacks . You mentioned in your prepared remarks , could you give us a little more detail on what what the intention is going forward ?

Speaker #12: And , you know , what what we should expect now that you're resuming the buybacks ?

Speaker #5: Yeah , no change to our capital allocation strategy . Chris , as shared in our prepared remarks , we restarted our buybacks . As I mentioned , we have a lot of cash going out .

Speaker #5: And so we just wanted to make sure we had all the cash to continue to return and make all the investments we want to make inside NXP , but also balance that with healthy returns to our owners .

Speaker #5: And so if you look at the last 12 months , we've returned 106% back to our owners and we're going to continue to go do that .

Speaker #12: Thank you .

Speaker #2: Thank you . Our next question comes from the line of Blayne Curtis with Jefferies . Your line is open .

Speaker #8: Hey , guys . Thanks for taking my question . I just want to ask on the kind of cyclical tailwinds for seasonality . I mean , I guess if you look at December , it's really just .

Speaker #6: Industrial that maybe you could argue is.

Speaker #8: Above typical .

Speaker #6: Seasonality .

Speaker #8: And then I think you said just soft guidance for March normal . I think a lot of people have talked about just the slowing down of the recovery .

Speaker #8: I mean , your comments were pretty positive , Rafael . So I'm just kind of curious if you can just kind of assess , you know , if you're just looking at seasonality , you know , I guess is there is the seasonal , the cyclical tailwind slowing .

Speaker #8: And I guess maybe you can look at the different markets and if you feel differently about them .

Speaker #4: Yeah . I think if you look at the Q4 numbers , you know , you clearly stated industrial and it was above about seasonality .

Speaker #4: I would even say that automotive was slightly better than seasonality , right ? pre-COVID levels . And the drivers are what they have .

Speaker #4: One common driver that is , I think is inventory digestion is is is it's almost done . I think that that that is that is one normalization is a big deal .

Speaker #4: And we're trying to shift to , to to to true end demand in automotive . And we're starting to see some company specific drivers in industrial .

Speaker #4: IT that are helping us . With respect to whether seasonality is going to change are we calling an upcycle ? I think I think we're careful with that because one , we do have the inventory digestion done as a factor for an upcycle .

Speaker #4: We do see some specific areas of growth and industrial , and we see an encouraging signs of true demand in industrial and IoT .

Speaker #4: And so , so we do see the elements of a soft upcycle . And that's the reason why I would say that , that if you were to ask me today , are you are you more optimistic than you were last quarter ?

Speaker #4: I would say that we are slightly more optimistic than last quarter .

Speaker #8: Thanks . And then I wanted to ask you on mobile , I mean , I have I have numbers , right . It might be a record .

Speaker #8: I'm just kind of curious about the drivers behind that.

Speaker #4: You know , and mobile we're we're we're a specialty player . They're mostly driven by by by the wallet and a little bit of custom analog that we do for a , for tier one customer .

Speaker #4: There . I see that the moves of , of Q Q2 to Q3 and Q4 , and I think you got to take Q3 and Q4 together is purely in my opinion , it's just a seasonal and some strength .

Speaker #4: And some of our customers .

Speaker #8: Okay . Thank you . Thanks .

Speaker #13: Thank .

Speaker #2: Our next question comes from the line of Joshua Buckhalter with TD Cohen . Your line is open .

Speaker #14: Hey guys . Thank you for taking my question . And congrats to both Rafael and Kurt and good luck . I know it's still early in earnings season , but your comments and outlook on the industrial IoT segment , you know , certainly better than than your peers who have mainly talked about decelerating trends .

Speaker #14: You know , we've kind of

Speaker #14: touched on it a little you bit . And I realize you're not going to comment on peers , but would you say the difference in what you're seeing versus peers is because of inventory management or more product cycle driven ?

Speaker #14: And what gives you confidence in the sustainability of sort ? The upcycle that you're starting to see ? Signs of with orders still coming in late and with the lead time .

Speaker #14: Thank you .

Speaker #4: Yeah . Josh ? Yeah . The so I can speak , speak of of NXP situation with respect to industrial IoT because for us industrial IoT has indeed been one of the more challenging end markets in 2022 .

Speaker #4: And as of Q3 , our business still 20% below our peak . Right . And again , I do remind you that we're not the bellwether for industrial IoT .

Speaker #4: So the comparisons to to , to to other , you could peers may not be I guess , relevant . But I , I would have to say that we we did manage inventory in a different way .

Speaker #4: We were very disciplined in the way we manage our business in the downcycle . And I think I would say that we will be similarly disciplined managing what we see .

Speaker #4: And I would say as a sub upcycle . And again , I mean , we are having some some company specific drivers there that are driving demand .

Speaker #4: That is true . New demand . And we have exposure to a few few , few company specific design wins in the core industrial that that are driving the driving some of the some of the improvement .

Speaker #4: But but I , I don't know how you would take that as a , a bellwether for the industry .

Speaker #14: Understood . Helpful caller . Thank you . And I maybe also hoping that you could provide some color on the China auto market .

Speaker #14: What you saw there intra-quarter and your expectations into Q1. I believe a good amount of that is actually served by the Disti.

Speaker #14: So our inventory levels there , you know , lean as well . Thank you .

Speaker #4: Yes . China , I mean , listen , I was I was in China a few few months ago with Kurt , and we did a , we did a customer visit to both China , China , Taiwan and actually Japan , China specifically .

Speaker #4: China continues to be strong , continues to be a very dynamic market . It themselves , the auto industry there , is very competitive .

Speaker #4: And they they continue to actually push for innovation for products . Our I would say our inventory situation there is also lean . It's also but but but but but it's a is a business that is driven that is driving a strong .

Speaker #4: We have good customer traction, so we feel very optimistic about our position in China.

Speaker #3: And Josh , if I could just add as a reminder in the Asia market , specifically in China , Auto , we service the majority of that through our distribution channel , and it is in the Western markets that North America and Europe , where we do it on a direct basis .

Speaker #3: So our approach to channel management , which I'd say is , is probably best in class . We take a heavy hand there , even in Asia with the channel .

Speaker #14: Thank you both .

Speaker #13: Thank you .

Speaker #2: Our next question comes from the line of William Stein with Securities. Your line is open.

Speaker #8: Great . Thanks for taking my questions .

Speaker #15: First , I'm hoping you can remind us about the strategic purpose of the recent acquisitions . I think TT tech closed recently , but then you have the two new ones as well .

Speaker #15: Can you just frame that as it relates to the rest of the auto business ? And then I have a follow up . Thank you .

Speaker #4: Yeah . William . These these these acquisitions are actually directly aligned with the strategic direction of bringing intelligent systems at the edge of industrial and automotive .

Speaker #4: If you look at tech as a company that is is a software software company that is going to help us accelerate our move of the system defined vehicle .

Speaker #4: And and around S32 and around the system approach . And so quite excited to have them . It's a is a capability that would have been very difficult to obtain organically .

Speaker #4: And as a company that brings IP specific also in functional safety at the system level . Aviva Links is a company that that that has really , really I would say innovative technology on on on a service technology that is , that is a standard .

Speaker #4: So it's a standard service and that is critical to standardize sensors . Think of our radar . Think of cameras . Think of lidar around around a core processor , which in this case would be our 32 .

Speaker #4: So we're quite , quite bullish on on Viva Viva Links and Kinara brings AI capabilities , especially Genai capabilities , high performance low power that is going to also accelerate in the our portfolio of intelligent into the edge .

Speaker #15: And then the follow up , there's been some discussion about some elevated competitive dynamics in the infotainment part of your autos business . Can you remind us how big that is in your autos business and maybe update us on that competitive situation ?

Speaker #15: Thank you .

Speaker #3: Yeah . Hey , Will , I'll take that one . So if you think about Ivi in-vehicle infotainment , there's kind of two parts .

Speaker #3: There's the visualization . What you see on the dashboards and there's the what you hear the the audio portion . I'd say on Ivi Auto we continue to be a dominant player .

Speaker #3: There, on the visualization, our performance is maybe a little below some of our peers, but I think that's very well known at this time.

Speaker #3: And I think with that Tawanda , I think we're going to need to move back to Rafael for closing remarks if we can .

Speaker #4: Well , thank you everyone for joining us today and your thoughtful questions this quarter marks both a leadership transition and a reaffirmation of nxp's consistent strategy .

Speaker #4: Focus on profitable growth , discipline , execution and predictable returns . We are encouraged by the gradual increasing signs of a cyclical recovery across our automotive and industrial and IoT markets , and by the continued strength of our company specific growth drivers .

Speaker #4: Our priorities remain clear . Deliver on our commitments and manage what is in our control and position and XP to continue to grow profitably .

Speaker #4: I want to express my gratitude to Kurt for his outstanding leadership and for the partnership we have built over many years . In his 30 year career at NXP .

Speaker #4: He has left a lasting legacy , navigating us through various challenges and positioning NXP as a leader in the markets we serve . I am truly humbled to follow his footsteps .

Speaker #4: It is a privilege to lead this company and this team . I am excited about what we will achieve together . Thank you .