Operator:

Good day, and welcome to the NXP 2Q '24 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers' presentation there'll be a question-and-answer session and instructions will be given at that time. As a reminder, this call may be recorded. I would now like to turn the call over to Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Kurt Sievers:

Thanks very much, Jeff, and good morning everyone. We appreciate you all joining our call today. Let me begin with quarter two. Revenue trends in all our focus end markets were in line with the midpoint of our guidance range. NXP delivered quarter two revenue of $3.127 billion, down 5% year-on-year and flat sequentially. The non-GAAP operating margin in quarter two was 34.3%, 70 basis points below the year-ago period and 30 basis points above the midpoint of our guidance. Year-on-year performance was a result of lower revenue in the automotive and communications infrastructure markets combined with consistent gross profit generation. From a channel perspective, distribution inventory was 1.7 months consistent with our guidance and just slightly up from the 1.6 months in quarter one. With that, we continue to operate well below our long-term target of 2.5 months of inventory in the channel. Now let me turn to the specific trends in our focus end markets. In automotive, revenue was $1.73 billion, down 7% versus the year-ago period and in line with our guidance. We have worked with our direct Tier 1 customers to ensure a continued orderly process of inventory digestion. In industrial and IoT, revenue was $616 million, up 7% versus the year-ago period and in line with our guidance. Our performance compared favorably versus the year-ago period, driven by demand in China and Asia Pacific, while the trends in the European and North American markets remained soft. In mobile, revenue was $345 million, up 21% versus the year-ago period and in line with our guidance. And finally, in communication infrastructure and other, revenue was $438 million, down 23% year-on-year and in line with our guidance. Now I will turn to our expectations for the third quarter 2024. We are guiding Q3 revenue to $3.25 billion, down 5% versus the third quarter of 2023 and up 4% sequentially. In the automotive end market, our revenue troughed in the second quarter and we will resume sequential growth in quarter three. This will be led by company-specific drivers and by now we are also moving much closer to shipping to end demand at several customers. At the same time, the inventory digestion process at select direct Tier 1 auto customers will extend into the second half, stretching beyond our initially expected levels and with a surprisingly wide variation of their desired steady-state inventory levels. Taken together, while resuming sequential growth in the second half of 2024, we continue to ship below automotive end demand in the somewhat softening automotive macro. In the industrial IoT end market, we see steady improvement in the consumer IoT demand in China. This is offset by persistent weakness in the core industrial demand in Europe and the Americas. In the mobile end markets, we anticipate normal seasonality from a lean inventory position. And finally, within communications infrastructure and other, we expect our company specific growth in secure RFID tagging to be more than offset by the previously discussed weakness in the remaining parts of that reportable end market. So at the midpoint, we anticipate the following trends in our business during the third quarter. Automotive is anticipated to be down in the low single digit percent range versus quarter three '23 and up in the mid-single digit percent range versus quarter two 2024. Industrial IoT is expected to be up in the low single digit percent range both year-on-year and quarter-on-quarter. Mobile is expected to be up in the mid-single digit percent range versus quarter three '23 and up in the mid-teens percent range versus quarter two '24. Finally, communication infrastructure and other is expected to be down in the mid 20 percent range year-on-year and down in the mid-single digit percent range versus quarter two '24. In summary, NXP trough in the first half of this year and now we expect to resume sequential growth through the second half. Therefore, during quarter three, we will continue to stage inventory just a touch higher in the channel in order to support our competitiveness and in order to prepare for the anticipated second half growth and beyond. With that, our quarter 3 guidance assumes approximately 1.8 months of distribution channel inventory. However, we will not grow channel inventory back to anywhere near our long-term target of 2.5 months within this calendar year. As a result, we will continue to stage inventory in a very controlled and targeted manner in the channel. Taken together, the second half will grow over the first half with the potential outcome for 2024 to be a modest annual revenue decline in the low single digit range. This is toward the low end of our earlier expectations because of the more persistent and deep inventory digestion at our auto Tier 1 customers and due to the continued weakness in our core industrial markets in Europe and the Americas. Before turning the call over to Bill, I would like to highlight what I believe is a truly strategic long-term investment for our hybrid manufacturing strategy. On June 5, 2024, we disclosed the formation of a 60-40 manufacturing joint venture between Vanguard International Semiconductor and NXP. The strategic rationale for the investment is to enable NXP to execute its long-term growth objectives with access to competitive cost, supply control, and geographic resilience. This move complements our participation in the TSMC-led joint venture in Europe, which we announced in August 2023. The new joint venture, VisionPower Semiconductor Manufacturing Company, or VSMC, will build a 300 millimeter fab in Singapore, which is a global hub for third-party foundries with excellent access to a robust and highly skilled workforce for mature node manufacturing. Singapore is also where NXP and TSMC have successfully operated SSMC, a 200 millimeter joint venture, for over 25 years. Phase 1 of the VSMC joint venture fab will support 130 nanometers to 40 nanometer mixed signal power management and analog products, targeting the automotive, industrial, consumer, and mobile end markets. When fully operational in 2029, the fab will produce 55,000 wafers per month, and there is a Phase 2 option to expand the fab, providing an additional 45,000 wafers per month, including 28 nanometer process flows. A key factor for the long-term success of the joint venture is that TSMC will license the foundational process flows, as well as NXP contributing proprietary mixed signal process flows. We are very confident to partner with Vanguard, an independent trailing-edge foundry located in Taiwan. Vanguard's largest shareholder is TSMC, which owns approximately 30% of Vanguard and which will help to assure the long-term success of the joint venture. From a financial perspective, NXP will make a total investment of $2.8 billion between 2024 and 2028, with the peak investment period being in 2025. This investment enables NXP to address about $4 billion of incremental annual revenue, for which the capacity has not been available to us before. Furthermore, this joint venture opens the door to a strategic roadmap to eventually consolidate our 200 millimeter internal factories over time into a very cost competitive footprint. And now, I would like to pass the call over to you, Bill, for a review of our financial performance.

Q - Vivek Arya :

Thanks for taking my question. For this calendar year, Kurt, you're suggesting total sales down low single-digit, which as Bill also mentioned, I think that suggests Q4 up mid-to-high single-digit sequentially. Normally, your Q4s are kind of flat or down. So I'm curious, what is giving NXP the confidence that you can have sequential growth in Q4? Are there certain end markets you think will do better than seasonality, or is this all kind of channel inventory refill? I'm just trying to understand the dynamics as you see it for Q4 right now.

Vivek Arya:

All right, thank you, Kurt. And just one more on automotive. Post-COVID, a lot of OEMs and Tier 1s built up a lot of inventory to avoid the problems they ran into as they were recovering. Do you think that process is now behind us? Do you think they will hold to those levels? Do you think they will start to go back to the prior trends? The reason I ask the question is that just as you're kind of signaling somewhat of a turn in automotive, auto production is not that great. And there is just a lot of concern that maybe inventory levels are still too high, which is why it's kind of pleasantly surprising to hear you be somewhat more positive on the automotive recovery. So maybe just give us a sense of where we are in the supply-demand dynamic for automotive in the second half of this year versus what you thought it would be three months ago?

Operator:

Thank you. Our next question comes from C.J. Muse with Cantor Fitzgerald. Your line is open.

Kurt Sievers:

Yes, C.J. So relative to how is the inventory at the Tier 1s between those different product segments, it is completely customer specific, C.J. There is no overriding pattern because it really depended on what they thought they had to order through all of this NCNR [ph] time during the last two years. So we don't have a pattern there, C.J. There is no answer to that question because it is absolutely different customer by customer. We also have Tier 1 customers where we are done with inventory digestion, which is actually driving the growth into the third quarter, where none of the product categories has any more surplus inventory. So it’s a completely uneven picture. And secondly, mind you, that their targets are not the same. I think I said to Vivek earlier, targets range between two and 12 weeks. So the one would declare 12 weeks as being on target and no over inventory. The other with three weeks says, I still have a week too much because my target is two. So therefore, I can't answer that question because it's just all over the place. However, in general, our accelerated growth drivers, think about the electrification, BMS chips, think about S32, core right processing, think about radar. They tend to grow now anyway because they all have ramping platforms in the second half, which are overpowering, I would say the inventory digestion, which is why we call that out as company specific drivers, which is above and ahead of the inventory digestion in any case in the second half. And of course, that's going to continue next year, C.J. But then the base is also going to be fine because by then the -- say all the rest of the business, which might still see some inventory digestion will be clear too.

Bill Betz:

Yes. Hey, C.J. This is Bill. So right now on utilizations on our internal factories, we plan to run them for the rest of the year in the low 70s. We don't expect to bring them up or fully utilize them until 2025. As you can see, we have a bit higher inventory on our balance sheet. And again, we probably have holding about 25 days in theory that belongs into the channel, so we'll navigate through that. Another 10 days of strategic inventory and the remainder of 10 days of in-orders that come in within a quarter that we want to serve the upside. So we think inventory gets back in balance sometime in 2025 at this current picture.

Operator:

Thank you. And our next question comes from Ross Seymore with Deutsche Bank. Your line is open.

Kurt Sievers:

Yes, thanks. Good morning, Ross. It is indeed, in our view, a demand issue in the U.S. and Europe. So the U.S. and Europe is where we have more of the core industrial business and there we clearly see it is a macro-driven demand issue and at least in our case, not really that much a function of over-inventory. And yes, where we do see growth into the third and fourth quarter is actually more from China and that is more led from the consumer IoT part of the business. So that 40%, which is more IoT, what we call IoT that is actually doing pretty well, which by the way is a matter of fact for China overall. So when I think about the geographies and how they've done in the past quarter and the second quarter, then actually China is the one which is growing both year-on-year as well as, or which has grown both year-on-year as well as sequentially. And that also plays into industrial where then the consumer IoT is the piece which is pulling it. So answer is, in short, it is a demand issue very much from the Americas and Europe in core industrial.

Bill Betz:

Yes. Hey, Ross. Relate to our capital allocation again, as I stated, there's no change. We're going to be continually active buying back the stock, continue making sure our dividend is at 25% of our cash flow from operations as right now I think we're around 28% on a trailing standpoint. We're going to continue to do some small M&A tuck-ins that we've been doing over the last several quarters. Related to the timing of the cash for both ESMC and VSMC, they are at different times and they will show up in our cash flow statement in different areas. So think about the equity investments for both those ventures will show up in our equity investment accounting on our cash flow statement. And again, those are spread out for VSMC specifically. Think about five years where the first three years represent about 75% of the $2.8 billion that we talked about and the remainder over the two years. As you know, we also have an investment of a 10% equity position in ESMC. Again, similar but different timing in equity. And then there's a portion of, we break that out, of that $2.8 billion that I talked about, the $1.6 billion is equity. The $1.2 billion will come out of working capital operations. It's more of a guarantee of supply where we have to actually get more supply up front so that we can service our customers and be able to deliver incremental revenue. Because at this point in time, we just don't have that capacity available based on all the design wins we have that are going to ramp at that time frame. So that's the strategic nature of this venture related to it. Now on CapEx specifically, we're going to stay at the low end of our model at 6%. I don't see us going above that any time soon. And again, we will probably update the CapEx as a percentage of revenue during our November 7th Investor Day.

Operator:

Thank you. And our next question comes from Francois Bouvignies with UBS. Your line is open.

Kurt Sievers:

Yes, sure, Francois. So the growth in automotive in the second half is really having two legs. The company specific, which I will reply to, but I have to highlight it is also just moving closer to shipping to end demand. Not all the way there, but moving closer because of inventory digestion being more behind us than in front of us. Now on the company specific side, I mean, let me call out indeed radar. We have ramps with at least two Tier 1 automotive companies which are operating absolutely globally. So they are serving OEM platforms across the globe. So we are pretty well hatched here relative to end demand -- from end demand perspective. And those are design wins, Francois, which we made probably three years ago or so, which are now finally coming into production. Everything is being prepared. And yes, of course, I mean, with a SAAR of minus 2%, there is always something which is a little less and something which is a little more. But since it is widespread, both geographically and across different OEMs, we are actually absolutely optimistic that those numbers will come in the way we want them to come in. So there hasn't been also any change over the past couple of quarters in the view of preparing that. And again, it is about radar, front phasing and side radar platforms for global OEMs. Maybe Francois, if you need to get a bit more color, you know that when we talk about radar, it is typically a complete chipset. So we talk about the front-end transceiver, the microprocessor and in several cases, not always it even includes Ethernet connectivity and power management.

Bill Betz:

Sure. Let me first say about pricing. Pricing this year is flattish. Again, no increases, no decreases, so that's not causing the movement in the gross margin. Again, in Q2 we kind of did slightly better by 10 basis points and that was driven by favorable product mix. As we transition into Q3 we do see the favorability like you point out on the higher revenues over our fixed cost. But this is being offset by slightly unfavorable product mix that we plan to ship. So therefore at the moment, those two are kind of offsetting each other. And just to remind everyone, we ship over 10,000 different part numbers a quarter on average. And to be honest with you, to manage the mix exactly right is quite difficult and that's why we put the plus or minus 50 basis points on our gross margin. Now on the positive side, we have multiple tailwinds to help improve our gross margins further. Both I would say more in the medium and long term. We talked about earlier about the internal utilizations. Again, we're going to keep them in the low 70s for the rest of the year because of balancing our inventory. But we expect in 2025 that becomes a tailwind for us as we bring that up. As clearly as revenue improves we get that fall through over the fixed costs as we demonstrated in Q3, but unfortunately the mix is slightly going the other way. Timing of the replenishing our distribution channel, it carries higher average, higher margins. And so you heard Kurt talk about we're not going back to 2.5 this year, so expect that more in 2025. Internally, ongoing productivity, cost reductions of course we're doing. We continue to have this big, big drive on really focusing on additional long tail customers with our distribution partners, which over time should benefit. As we always talk, the continued ramping of our new products which carry a higher margin. And then more longer, longer term as I had in my prepared remarks, we expect to improve our 2029 margins by over 200 basis points of whatever the actual 2028 gross margins are driven by our strategic investments in this newly VSMC joint venture. Again, we're going to talk more about this on our financial model on November 7th and you all know I've hinted many times that 58% is not our final destination.

Operator:

Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is open.

Kurt Sievers:

Yes, hi Stacy. I would say our auto expectations for the second half are in some in line with what we had before. So I would say similar to what we would have said 90 days ago, but with 2 moving components underneath. The inventory digestion to be done is actually worse. So we have lower headwind than we had anticipated some time ago. At the same time, some of our company-specific stuff is actually going better. Those two things are completely unrelated, Stacy. It just happens to play out for us that, that part of the company is actually more in line with what we had seen before. But again, I want to be very transparent. The inventory digestion in automotive is a longer drag on us than I would have thought and I would have talked about 90 days ago, given all the changes on the inventory targets they have, which I explained in earlier questions.

Kurt Sievers:

Yes, Stacy. So several points here. Yes, our long-term target remains to be 2.5. Absolutely. I mean we -- and that's not just because it used to be our target, but we went through the whole analysis, what makes sense, what is strategically meaningful. And it happens to be that indeed the outcome, given our product and segment mix, is that 2.5 remains the long-term target. What I did say in my prepared remarks is also indeed we don't see a case where we go back to the 2.5 at the end of this calendar year. I would almost say by far not. And we just say that because we don't want to put smoke and mirrors on this. What is this annual outlook? Is it all driven by channel refill? No, no, no, it is not. And here, Stacy, I would also say that is a change probably versus 90 days ago. 90 days ago, I thought we might want to be a bit more aggressive in refilling the channel, which given the poor macro environment in the Americas and Europe, we feel is probably not appropriate. So that is not lost revenue. So when we have now a little lower outlook than we had before, it is just that we do a little less into the channel than what we would have planned earlier. For reasons which have to do with the macro and we just want to continue to operate the company in a very responsible way. Now finally, you asked where does it go into the channel, where we take it up. It's really a cross-segment, Stacy. It is about high runner products. The way we think about this is there are certain products which are really hot in the channel. And we have to make sure that we have sufficient of those products on the shelves of our distributors such that they push them instead of competitive products from our peers. And there we are a little behind and are busy to push those products in. And they are, I would say, neither geography nor segment specific. They really go across the board. It's more product specific.

Operator:

Thank you. And our next question comes from Thomas O'Malley with Barclays. Your line is open.

Kurt Sievers:

Yes. Hey, Tom, I'm sorry. And we might have been confusing here. To be very specific, RFID is not 50% of that segment. What is 50% of the segments by the end of last year, what was then 50% is what we call secure cards, which includes payment cards, transport cards, and RFID and security. So the RFID is a part of that 50%, Tom. And for the rest, everything you said is right. The RFID keeps growing. It keeps growing into Q3. It will keep growing sequentially into Q4, but it is less than 50% of the total, which is why it is easily offset by the rest. And the rest is then -- and again here the numbers from the end of last year, the Legacy Digital Networking business is about 30 -- or was about 30% by the end of last year. And this is where we said we selectively start to end of life products after kind of eight years collecting good cash from that part. And it is the pretty lumpy radio power business, RF power business for the mobile base stations, which at the end of last year was 20%. And that is hanging in there. I would say it's kind of up and down every other quarter, but in the end, more on the downward slope. So basically think about this whole comps infra segment end of last year, 50% secure cards, including RFID, 30% legacy digital networking, 20% RF power. And the only structurally growing part in there is actually the RFID.

Kurt Sievers:

Hey Thomas, look you are really pushing it a step too far now. We tried to give a lot of color for the second half with the guidance of the third quarter. I really can't give you all the breakout on how each segment is going to do in the fourth quarter. And honestly speaking Tom, we also don't know that. I mean there are things which are constantly moving around, especially relative to these two things. One is the inventory targets of our Tier 1 automotive customers. The other one is the macro for industrial in Europe and the U.S., which could or could not get better a little earlier or a little later. So honestly speaking, I don't know. We just say here the outcome of all of this, if you put it all together, is going to be this low single digit decline for the whole company over the complete year. But the trend and that piece I will tell you, the trend in automotive is a positive one. I mean we left the trough in automotive behind us. I want to be dead clear. Quarter two was the trough in automotive, which I think was a 9% peak to trough for automotive. And it is now coming up. How fast is something we have to see because it's really a function of the inventory digestion.

Operator:

Thank you. Our next question comes from Blayne Curtis with Jeffries. Your line is open.

Kurt Sievers:

Yes, hi Blayne. So first of all, I just want to be sure everybody knows we are the number one in auto processors worldwide. Whatever you hear from peers is typically related to parts of that, which is the microcontroller part or the application processor part, et cetera. If you put it all together, you'll find enough third-party evidence that NXP is the number one and keeps being the number one. And that holds also for China. So I think in China, we have a fairly strong position in processors. We actually push the performance very much up. So our attempt and our strategy in China is to lead customers to higher performance because we know that is where we have the most differentiation. We all know that Chinese local competition is coming in in the non-auto world on the low-end microcontrollers. I think it's just a function of time that they will try to do this also in automotive. So all of our strategy here is to push for the higher performance processors, not microcontrollers, but microprocessors, which for us is the 16 nanometer devices and going forward even lower. And here, I think we have a unique and strong position, Blayne. So I feel actually we are in a good place. Now when it comes to manufacturing, absolutely right. In our China for China strategy, which is a big requirement in the meantime from our Chinese customers, our first tactical step is provide local manufacturing capability. And that includes the microcontrollers and microprocessors. For microprocessors, it is quite straightforward because we manufacture them in 16 FinFET from a big Taiwanese foundry. I think we published this earlier. It is TSMC. And TSMC has a fully operational factory in Nanjing in China, which is doing 16 nanometers. So it's a copy exact factory of what they have in Taiwan. So we are just transferring it from Taiwan into China. So it's a fairly straightforward process to allow local manufacturing for microprocessors of NXP in China.

Kurt Sievers:

Yes, well, the 16 nanometer ones are in full production plane. So they absolutely contribute to one of the three accelerated growth drivers, which we highlighted in our '21 to '24 growth. So I think we guided 9% to 14% for automotive. And there were three high growth drivers. One of them is the S32 platform, which is the performance processing for automotive. And the big part of that is indeed 16 nanometer processors. And what I can say now ahead of the November 7th Analyst Day is that for that piece we will be ahead of target. So we laid out growth targets and the automotive processing will be actually above the target which we had laid out in November '21.

Operator:

Thank you. We have time for one last question. And that question comes from Chris Danely with Citi. Your line is open.

Kurt Sievers:

Yes. Hi, Chris. Yes, I clearly say that China is in a better position than the other geographies in automotive these days, which I think is also a function of the continued success of electric vehicles in China. If you look at all the numbers, then electric vehicles, both hybrid and battery electric, continue to grow significantly. I think S&P just published something like 21% unit growth in xEVs in China in '24 over '23, which is a staggering growth. And that reflects also back into our business. So yes, I would call out China.

Bill Betz:

Sure, Chris. Let me take that. Based on the latest second half guidance for the revenues that Kurt talked about, we do expect internal inventory days to start coming down in Q4. As Q3 will probably be similar levels of Q2. And the reason for this, it takes a bit longer is where the inventory is staged. When you look at our Q filings, we reduced for WIP and moved products into finished goods as we service about 85% internally. So we add more value to that product through our back ends. Then this finished goods will help support the Q3 sequential growth. And we expect a similar profile entering into Q4 to ensure we service our customers around that. So again, I think this is probably near our peak levels. And hopefully we expect Q4 to start coming down and then get this back in order in 2025.

Operator:

Thank you. That concludes our question and answer session. I'd like to turn the call back over to Kurt Sievers for closing remarks.

Operator:

Thank you. This does conclude the program. You may now disconnect. Everyone, have a great day.

Operator:

You're welcome.

Operator:

Hello, and thank you for standing by. Welcome to NXP's First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeff Palmer, Senior VP of Investor Relations. You may begin.

Operator:

[Operator Instructions] Our first question comes from the line of Vivek Arya with Bank of America Securities.

Kurt Sievers:

Yes. So first of all, let me augment what you said, the cautious optimism, which I expressed for the second half is not limited to Automotive. It is important to note that, that cautious optimism for second half growth over first half is actually across the company. It's very broad-based. It's across distribution and direct and it is across all of our segments.

Vivek Arya:

Got it. And then, Kurt, kind of a more near-term or sort of just calendar '24 question on your Automotive business. So last year, your Auto sales grew about 9%, about in line with Auto production, right? So despite better pricing, i.e., you somewhat undershipped. What is the assumption for the entirety of calendar '24 because your Auto sales seem to be declining sequentially in Q2. So is the assumption that they pick back up and they do better than production in the back up? Just what is kind of the puts and takes for how you're thinking about Automotive for the entire year?

Operator:

Our next question comes from the line of Ross Seymore with Deutsche Bank.

Kurt Sievers:

Yes. So first of all, Q1, honestly, the 1.6, and you are right, we came from 1.5 in Q4. It's just been hovering around 1.5 and 1.6. It's very hard to keep this strictly to one number. So I'd say Q1 wasn't really intentional. It's just -- if you look back over the past, I don't know, 12 quarters, we've always been jumping up and down between 1.5 and 1.6. Quarter 2, yes. This is intentional. So we want to try to get it to 1.7 for the exit of quarter 2. And indeed, it is based on growing still cautious optimism for the second half. Now what is giving us that optimism.

Ross Seymore:

I guess since you mentioned the Impinj side, Bill, you're doing a great job on the OpEx. You came in below your guide in the first quarter. The second quarter, you included, you said a $15 million payment for that. Can you just give us an idea of, one, is that Impinj payments a onetime deal, and so it goes away after this quarter? And then more importantly, what are your thoughts on the OpEx side of things? If the optimism on the revenue side is increasing, should we expect the OpEx to increase with variable comp or any of those sorts of drivers?

Christopher Muse:

I guess first question on gross margins. If I take into account the change in the depreciation on equipment, you're essentially pro forma guiding gross margins flat. And I guess -- I would have thought maybe you would have had a little bit of a [ kit ] from the channel refill as you take it one more month. And so I guess if you can kind of comment what might be an offset there.

Bill Betz:

Yes. You're right. So obviously, if you adjust for the accounting, basically, we're kind of flattish guiding to flat and again, it's within our plus or minus 50 basis points, I'm not really that good for $3 million or 10 basis points. But again, there's all sorts of puts and takes in that, and part of the reason for the useful life, I would say, accounting change. As you know, every year, we have to go look at this from accounting and related to this specific topic, there was a number of factors considered, which includes the NXP product life cycle, age of tools and the market analysis. And this is something that we just how to go do, and we did it.

Kurt Sievers:

Yes. A couple of considerations here, C.J. The one is just to remind everybody our NCNR programs have ended with the calendar year '23. So since January 1, there is nothing anymore under any NCNR program. However, I would very strongly say, and I pointed out because I know that some industry peers had very different opinion on this. The way how we had our program was actually good. I would do it again. It did help because, in our particular case, it did put us closer together and we learned much earlier about over inventory build because there was an agreement underneath, which forced the customer to the table to tell us that things would be running too high if we don't jointly try to correct and that is the reason why we undershipped already all of last year in Automotive. And I think I started to speak about this in the Q1 earnings call already last year that there was first signs of building inventory with Tier 1 Automotive customers.

Operator:

Our next question comes from the line of Chris Danely with Citi.

Kurt Sievers:

These are interesting questions, Chris, which we also think about very hard. Let me try and dissect it. The one is -- and I think I said this in my prepared remarks earlier, the xEV, so if you combine hybrids and battery electric vehicles, continues to grow pretty well. And -- but that is carried by China. And the reason why many media headlines suggest it is not going well is that Europe and the U.S. are actually quite small in xEVs. To be more specific, if you take the total xEVs worldwide, only 12% of those are in the U.S. and 24% are in Europe while China holds 44% and BYD indeed is a big part of that. And that China 44%, Chris, is growing this year according to S&P by 27% in volume.

Bill Betz:

You're correct. It's the combo of both. As you can imagine, right now, we're at the high end of our model when we look what's in the channel, what do we have on hand. So -- and then we're trying to balance that, stage it appropriately for that second half growth. So it's balancing at quarter-for-quarter, but we want to make sure we continue to do the right thing here and keep inventory in check. And some of that inventory of the 144 days is coming from the fact related to the revenue drop-off from Q4 and so revenue cost is probably impacting that drop by about 14 days. And then we actually decreased their inventory dollars in the quarter by about 2 days or $32 million.

Operator:

Our next question comes from the line of Gary Mobley with Wells Fargo Securities.

Kurt Sievers:

Yes. First of all, no, that's not what I said. What I said is that the second quarter is guided at $3.125 billion, so you can calculate the first half revenue. And then I said that the full year is somewhere between modestly down to modestly up. And very importantly, I want to stress that, that growth in the second half over the first half is not just coming from the channel.

Bill Betz:

No change. Our current view is our CapEx is to spend 6% to 8%. Again, this is really accounting change that we just dealt with it and moved on.

Stacy Rasgon:

For the first one, I also wanted to sort of revisit the second half ramp. So it does seem clear if the full year is flat, plus or minus, you're up decent double digits half over half. Does that start in Q3? Like is Q3 above seasonal to get us there? Like how would you -- I guess, sitting where we are right now, how would you sort of characterize likely Q3 seasonality versus what you've seen historically?

Stacy Rasgon:

Okay. So I mean -- so maybe to take that point and maybe step out a little more. So on Autos, last year, you've already sort of indicated that you undershipped last year, you had strong pricing and you didn't -- you actually underperformed the market last year. So if you actually started under shipping last year, why are you still in an inventory correction now? Like so this is like 6 quarters.

Stacy Rasgon:

Got it. So is it demand getting worse now? Or is it just your inventory behavior taking a harder line on inventories because it does feel like the general trajectory is getting worse over the last quarter and Q4, Q1, Q2.

Operator:

Our next question comes from the line of Joshua Buchalter with TD Cowen.

Kurt Sievers:

Yes. I would say no. Fundamentally, the concept of a software-defined vehicle, which is actually moving a lot of performance parameters from hardware to software and creating much more flexibility is completely independent of what kind of powertrain it has. Now the matter of the fact is, however, that all OEMs, I know, are extremely busy with developing electric powertrain-based new vehicles. And for most of them, it is actually the core of their activity going forward.

Bill Betz:

Yes, sure. So again, Josh, no change to our capital allocation strategy. If I just look back over the last 3 years, we returned $8.4 billion or 107% of our free cash flow last trailing 12 months, it's below 100% because we retire that debt that you just mentioned. And so that's about 82%. And in the past quarter, we did 90%. So I think we did take the opportunity to deleverage the company. We looked at our gross leverage metric, and it was at 2.1x, now that 1.9. Clearly, with the credit rating agencies and [ sweet stocks ] below 1.5. If we look at -- we're going to continue actively buying back our shares. We think it's a great use of our cash. We have approximately $1.1 billion left on a board authorization plan of buybacks this year.

Jeff Palmer:

Towanda, we'll take one more question here today.

Christopher Caso:

I wonder if you could talk a little bit more about the China for China manufacturing strategy that you've spoken to in the past. I mean I guess in one point, how that protects the business in China? And then secondly, what margin implication that may have if you change that manufacturing strategy going forward?

Kurt Sievers:

Look, Chris, in principle, and that's an overriding statement, we are always paranoid about competition because I've learned in my career in this industry, you better be paranoid at all times because it keeps you hot to run successfully against competition. actually, in that particular case, we see 2 areas where China is very, very busy from a local competition perspective. One is power discretes, especially for Automotive and that ranges all the way from IGBTs MOSFETs to silicon carbide. We just observed that for us, it doesn't matter since you know that this is not part of our portfolio. But that's something where it appears they actually make quite good progress.

Operator:

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.

Blayne Curtis:

Go ahead and get started. And I'm Blayne Curtis, recently joined Jefferies, covering U.S. Semiconductor, Semi Cap Equipment. I've known NXP for a very long time. Very happy to have Kurt Sievers, the President and CEO; as well as Bill Betz, who's the CFO. Welcome both of you. And I think having just initiated when I'm not talking about NVIDIA, the question is definitely analog. We've been very positive on that area. So I thought maybe I'd be just a way to start off, just kind of your perspective, where we are. Because I get that question asked all the time, where we are in the cycle? You definitely have had some comments. Every company is a bit different, but kind of where are you seeing it for NXP in the industry and then we'll get into some more further questions.

Q - Blayne Curtis:

Perfect. I do want to ask you about the actual auto markets. So you're now shipping below demand. I think I get this a lot from investors. During the pandemic, I think people were cash flushed. They bought loaded cars because that's all that was on the lots. So it's kind of the question is just are people's wallet smaller, are you worried about just sales of autos? And then in terms of the mix of cars, semi content is rising, but I think maybe there was a mix of certain features that maybe was overexaggerated during the pandemic? Kind of just your perspective on both of those?

Blayne Curtis:

I'm curious, being an analyst in the U.S., Chinese auto OEMs are not in the U.S., but marketing around now that have initiated. And you're even seeing some in Canada, in the Europe, meeting investors, that's actually a big thing where they see these cars. They're actually quite feature-heavy and good price point. I'm kind of just curious in terms of the success of Chinese EVs globally. What's your perspective? And then for NXP, your content in those cars versus global?

Blayne Curtis:

Right. And I guess the natural follow-on, and I get this is probably the #1 pushback to the whole analog group is the concept of Chinese localization. So it's an auto question, but actually broader as well. It does focus, you're not in the silicon carbide market, which is one hot area of it. But there are areas, microcontrollers and such, we you might see -- what are you seeing in terms of the Chinese companies?

Blayne Curtis:

And everyone ask you, we're going to run out of time. So in terms of growth, there's a lot to talk about. But the growth drivers within auto. I mean you've done a good job highlighting these at the Analyst Day, RADAR, domain zonal controllers. So people might not fully understand what that is, but it was a big $1 billion-plus opportunity for yourself. And maybe you could just update us in terms of the progress there on the multiple growth drivers in auto?

Blayne Curtis:

This goes for either of you or Bill, but just in terms of going back to the cycle, you navigated the cycle , I would say, better than anybody in terms of you're not really even down, most are down 20%, 30%. So you mentioned how you kept the supply chain lean. I'm kind of curious in terms of your view coming out of it, you've talked about adding back to the disti channel. What are you looking for? I mean, it sounds like you're through it. You didn't even see a decline, and you're talking about hopefully auto is cleaned up by Q2. So what else are you looking for, for the rest of the year to kind of add back that inventory industries?

Blayne Curtis:

Actually, a perfect leading because I was going to ask Bill on the gross margin. So I mean, you are trying to bring down your own inventories, but you're actually starting to see your volumes take off. In terms of the gross margin for the rest of the year, are you going to be able to show some improvement? I mean, obviously, overall volumes help, but kind of the counterbalancing is to bringing the inventories.

Blayne Curtis:

With that, we're out of time. Went by quick. Thank you.

Bill Betz:

Thank you.

Operator:

Good day, and welcome to the NXP 4Q '23 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. As a reminder, this call is being recorded. I would now like to turn the call over to Jeff Palmer, Senior Vice President of Investor Relations. You may begin.

Kurt Sievers:

Thank you, Jeff, and good morning, everyone. We really appreciate you joining our call this morning. I will review both our quarter four and our full year 2023 performance, and then discuss our guidance for quarter one. Beginning with quarter four, our revenue was $22 million better than the midpoint of our guidance with the trends in the Mobile market performing better than our expectations, with Automotive and, Industrial and IoT performance in-line with our guidance, and Communication Infrastructure slightly below our expectations. Taken together, NXP delivered quarter four revenue of $3.42 billion, an increase of 3% year-on-year. Non-GAAP operating margin in quarter four was 35.6%. 90 basis points below the year-ago period and about 20 basis points above the midpoint of our guidance. The year-on-year performance was a result of solid gross profit growth, offset by higher operating expenses as we continue to invest in new product development. From a channel perspective, we maintained distribution inventory at a tight 1.5-months level, well below our long-term target of 2.5 months. In addition, we continue to partner with our direct customers on the normalization of their on-hand inventory. For the full year, revenue was $13.28 billion, an increase of about 1% year-on-year. Passing the revenue growth, we increased our pricing by approximately 8% in 2023, offsetting our higher input cost to maintain our gross profit percentage. And at the same time, our unit volumes were down by approximately 7% through 2023. We believe this underpins our view that we have intentionally under-shipped fundamental end demand in order to limit inventory build in the channel and at our direct customers. Full year non-GAAP operating margin was 35.1%, a 120 basis-point compression versus the year-ago period as a result of the improved gross profit performance, offset by increased operating expenses primarily in products and system innovation investments. Now, let me turn to the specific full-year 2023 trends in our focused end markets. In Automotive, full-year revenue was $7.48 billion, up 9% year-on-year, which is a reflection of higher pricing, strong company-specific growth drivers, offset by lower shipment volumes. For quarter four, Automotive revenue was $1.89 billion, up 5% versus the year-ago period and in line with our guidance. Turning to Industrial and IoT. Full year revenue was $2.35 billion, down 13% year-on-year, a reflection of our tight channel management in a cyclically weak end market offsetting price increases. We saw the trough for the Industrial and IoT business back in quarter one 2023. For quarter four, Industrial and IoT Revenue was $662 million, up 9% versus the year-ago period and in line with our guidance. In Mobile, full-year revenue was $1.33 billion, down 17% year-on-year because of weak trends and inventory digestion in the handset marketplace. For quarter four, Mobile revenue was $406 million, flat versus the year-ago period and better than our guidance. Finally, in Communication Infrastructure and Other, full-year revenue was $2.11 billion, up 5% year-on-year. The year-on-year growth was due to a combination of increased sales of secured card and tracking solutions, higher pricing, and last-time buys of select legacy network processor solutions. And that was offset by declines of RF Power products for the cellular base station markets. For quarter four, revenue was $455 million, down 8% year-on-year and below our guidance. Now, like every year, I would like to provide the annual progress update on our six accelerated growth drivers, which we highlighted during our Analyst Day in November 2021. Starting with Automotive, the accelerated growth drivers are radar, electrification and our S32 processor family for the software-defined vehicle. Looking at our performance in 2023, both the S32 processor family and our electrification solutions are tracking ahead of plan. Revenue from radar is tracking below plan as we took strong actions to limit shipments to customers who are [digesting] (ph) inventory. Taken together, the Automotive's accelerated growth drivers in aggregate are tracking above plan. The underlying core Auto business grew in line with our longer-term expectations. Within Industrial and IoT, we are trading below our expected growth range. We believe the underperformance is a reflection of significant cyclical end-market weakness and of our disciplined approach to managing the distribution channel. So remember, we served approximately 80% of the Industrial and IoT end-markets through our distribution channel to efficiently address the needs of tens of thousands of small customers, the majority of whom are in the Asia-Pacific and the Greater China region. Within Mobile, we are below our expected revenue growth range for the ultra-wideband accelerated growth driver due to the well-documented weakness in the Android handset market. However, ultra-wideband traction in the Automotive market, which is the first well-defined use-case for ultra-wideband is progressing very well. 18 out of 20 Automotive platforms have been awarded to NXP and another 15 platforms are evaluating NXP solutions as we speak. And at this point in time, the ultra-wideband revenue stream is being driven by about seven automotive platforms and the few premier handset OEMs. Finally, for RF power amplifiers within Communications Infrastructure, we are below our expected revenue growth range. The challenge we faced was a combination of weaker base station deployments globally in 2023 and the faster-than-expected OEM transition to gallium nitride from LDMOS technology. However, the underlying core portion of Communications Infrastructure performed very well in 2023 as a result of serving pent-up demand for various secure cards and tracking solutions including RFID for intelligent labels. Taken together, we are ahead of plan for the Communications Infrastructure segment. Now, let me turn to our expectations for quarter one 2024. We are guiding quarter one revenue to $3.125 billion, about flat versus the first quarter of 2023. From a sequential perspective, this represents a deceleration of about 9% at the midpoint, versus the prior quarter, which is consistent with our original outlook for quarter one to be down in the mids to high single-digit range. Our tempered outlook for quarter one reflects typical seasonality compounded by our continued desire to enable the normalization of on-hand inventories at our direct customers. And we will continue to hold channel inventory in a tight range. Regarding pricing, we see improving input costs trend versus previous years, which allow us to assume flat pricing for 2024. So at the midpoint, we anticipate the following trends in our business during quarter one. Automotive is expected to be down in the low-single-digit percent range versus quarter one, 2023, and down in the mid-single-digit percent range versus quarter four 2023. Industrial and IoT is expected to be up in the mid-teens percent range year-on-year and down in the low-double-digit percent range versus quarter four 2023. Mobile is expected to be up in the low 30% range year-on-year and down in the mid-teens percent range versus quarter four 2023. Finally, Communications Infrastructure and Other is expected to be down in the mid-20% range year-on-year and down in the low double-digit percent range versus quarter four 2023. In review, during 2023, thanks to our company's specific end-market exposure, we experienced the variations of the semiconductor cycle at distinctly different points of time for the various parts of our portfolio. On the one hand, full-year revenue performance in our more consumer-oriented segments of Industrial and IoT, and Mobile was underwhelming. However, following our tight channel management, these businesses troughed already back in quarter one 2023 after experiencing a traumatic post-COVID reset. Ever since, we have seen a gradual improvement, and we do think these growth trends should continue throughout 2024. On the other hand, within Automotive and core Industrial, we experienced solid trends in the early part of 2023. But have entered the multi-quarter inventory correction phase with our direct customers starting in the second quarter of 2023. This should continue through the first half of 2024. In the second half of 2024, we expect also in the Automotive and core Industrial segments to shift to end demand and resume growth. Regarding our Communications Infrastructure and Other business, we expect 2024 revenue to decline over 2023, consistent with our prior view we shared on the Q3 earnings call. So as we look ahead to 2024, we do think the macro has deteriorated from our view 90 days ago. We now expect the first half of 2024 will decline versus the first half of 2023 due to longer than anticipated inventory digestion at our direct automotive customers. However, we expect our company revenue in the second half of 2024 will grow over the first half of 2024, as we believe we will be shipping again to end demand by then. Overall, we have and will continue to manage everything in our control to navigate a soft landing for our business. As such, we have kept a very tight handle on our distribution channel and we are supporting our direct customers to facilitate inventory digestion as appropriate. This enables us to take advantage of the cyclical improvement as soon as it materializes per segment. And based on everything I've said, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline. So now, I would like to pass the call to you Bill for a review of our financial performance.

Operator:

Thank you. [Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. Your line is open.

Kurt Sievers:

Yeah. Hey, thanks, Ross. Good morning. Indeed, I think the color you put on this is what I would concur with. On the channel side, we feel safe and very much under control relative to the inventory. Let me put it that way, for quarter one, we have absolutely no intention to go beyond the 1.6 range. It will hover between 1.5 and 1.6. I think we had 1.5 the past two quarters. So consider for Q1 maybe a 1.6, but that's not an increase, it's more the precision we can hold that. So no intention to increase general inventory really in the first quarter. For the rest of the year, Ross, it isn't much different to how we've put this the past couple of quarters. We will only start to replenish when we see sufficient momentum in the market to justify that. So that means there is neither a guarantee that by the end of the year we hit the 2.5 inventory, which is our long-term target, nor will we do any fast or hectic steps here. So we will possibly start, because I do assume, when we come back to this later in the call, we do expect that there is some market recovery in the second half of the year, so that makes it more likely that we will start to replenish the channel by then. But again, it's really something which is a function of the market environment. The size of it is indeed the $500 million which we have discussed before, but again, that is not necessarily a part of our considerations for the annual revenue movement. Now, the inventory or the excess inventory at direct customers, indeed, I think we started to try and correct that one back in the second quarter of last year. I think that was the first time I also talked on the earnings call that we did see a few automotive Tier 1 customers where the majority of that is sitting with having excess inventory. And the fact that we knew by then already, Ross, is thanks to our NCNR system. We -- and we discussed about these NCNR orders, which by the way in our case are different to the constructs which some of our peers have been using. Ours were annual. Annual means tied to the calendar year. So to be very explicit, we currently have no more NCNR orders. So all of that was running out at the end of the calendar year 2023. But those NCNR orders, in hindsight, were very good because they let customers call us up and say, we see a problem, we see building inventory. And since that second quarter of last year, we've been busy to try and normalize this in a reasonable cadence, which is also good for our financials. And coming back to your question, yes, we think we will still be busy with that through the middle of this year, mainly, and I would say almost exclusively in automotive. So that is something which we only have in automotive. By the middle of this year, that should be behind us. And then we should move from under-shipping end demand with direct customers in automotive to shipping to end demand again in the second half.

Kurt Sievers:

Well, in principle, I would say if there was no excess inventory and we would be in a normal world, Ross, we stick to our 9% to 14% long-term growth, which includes then the set performance of those growth drivers, which we specified back in the Analyst Day in November ‘21. So they are just moving around a little, and that's why we transparently gave the color for this past year, pending on the speed of inventory control. And I think you might have noticed that I did say that radar was actually not performing to target. The reason here is really that radar has a relatively concentrated customer base. It's almost -- it's just direct customers where the inventory control was much easier to exercise because it's a very specified product range with a very non-fragmented customer base where it was easier to get a handle on the inventory control. So I dare to say inventory control in radar is already completely behind us, which will make ‘24 obviously a much better year. But on the longer term, on the three-year horizon, Ross, just assume they all come to the targets which we specified back in November ‘21.

Operator:

Thank you. Our next question comes from Vivek Arya with Bank of America. Your line is open.

Kurt Sievers:

So good morning, Vivek. Yeah, apparently I was a good man last time relative to the next [quarter] (ph). I think you just reiterated the pieces which we gave you, but I'm happy to give you a bit more color around those. So we really see the different parts of our revenue being dependent on the cycle they are exposed to. So all the consumer-oriented businesses, and that's the IoT part of Industrial and IoT and Mobile, we think we left the trough way behind us in the first quarter of last year, and other than some seasonal fluctuations, they will continue to grow throughout the calendar year 2024, which has to do that a large part of that is anyway supplied through the channel, so we are not suffering from excess inventory digestion. So we are pretty positive that that part of the company will grow. At the same time, I reiterate what I said last time, the Comms Infra & Other business will decline from a year-on-year perspective. So ‘24 revenue for Comms Infra & Other will be down versus the calendar year ‘23. I think we discussed at length the bits and pieces in there why that is. And then you come to the [blog] (ph) of Automotive and core Industrial where indeed there is something between first half and second half which has to do with the inventory digestion at the direct customers in automotive which I just discussed with the question of Ross a minute ago, where we do believe the turning point is somewhere around the middle of the year, where that over-inventory which is still sitting there is being digested. If you put all of these pieces together, Vivek, then obviously, half two is going to be bigger than half one. Obviously, half one of this year, of 2024, is going to be down against the half one of last year. And that puts it somewhere in this flat plus/minus range for the full year, indeed. So the confidence really comes from the view which we have on the inventory digestion on the Automotive and core Industrial side. At the end, at this very same time, the continued gradual improvement in the consumer-oriented businesses where given our tight channel management, we have no excess inventory. This is really where it comes from.

Kurt Sievers:

Look, Vivek, I, of course, don't know and cannot judge what exactly they do. But conceptually, the contrast will be alive as long as they need to digest their over-inventory in the channel. That's very simple. We don't have that because we never build it. We actually back in the second quarter of 2022, mind you second quarter of 2022, that's almost two years ago, we started to control the channel and keep it at the 1.6 and 1.5 months level. We -- even with that, we troughed them in the first quarter of '23. So we even went down from this. And since then, we kept it very steady. In the meantime, some of our peers kept shipping hard and they just need to correct this. And that contract will disappear at the moment that over-shipment they have done there is actually behind them. I mean, maybe another number, Vivek, which puts this in perspective, and we gave you that transparency very intentionally. Last year, NXP as a company, did grow 1% in revenue. I also told you that our pricing last year was up by 8%. So that gives you a feel that we had a pretty significant volume decline last year from a supply perspective. So plus 1% revenue, plus 8% price gives you a 7% volume decline, which is clearly under-shipping, we think against end demand, but certainly against peers. I mean if you just take the same numbers from peers, then many of them who are now having a bit more of a hard time, they just shipped harder through the first -- at least the first three quarters of last year. So under the curve in the end, it's going to be the same thing. It's a matter of when did you ship and when do you need to reduce shipments. So that's my answer. I don't think other than that, there is a fundamental difference, Vivek. So I don't want to claim we have a much better industrial business. I think we just had a more disciplined handle on it earlier.

Operator:

Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is open.

Operator:

Stacy, your line is open.

Stacy Rasgon:

Hello?

Stacy Rasgon:

Yeah, that was -- I don't know what was going on there. Thanks for taking my questions. I had a question on the IoT trend. So it obviously bottomed in Q1 last year. I was wondering if you could parse out the recovery trends between the Consumer piece and the core Industrial. So we all know Consumer is getting a little better. Has the increase off the trough from a year ago been all Consumer or has the general purpose IoT started to recover as well? Like what are those trends across those two pieces?

Stacy Rasgon:

Got it. Thank you. My follow-up, I wanted to ask about lead times. Have they normalized to pre-COVID levels? And is that part of what's enabling you to keep pricing flat? Do you have just like better control of pricing because you have a better controlled lead times? You've got a lot of competitors that are talking about pricing starting to come down now.

Stacy Rasgon:

Got it. That’s helpful. Thank you guys.

Gary Mobley:

Hey guys. Thanks for taking my question. Kurt, you called out some better-than-expected revenue on the Mobile side, and you appear to be poised for some pretty significant year-over-year growth in Mobile in the first half of fiscal year '24. Is that a function of the Android market being last bad? Is it largely a function of maybe some traction in ultra-wideband or is it a function of content gains at your largest Mobile customer?

Gary Mobley:

Thank you for that, Kurt. And Bill, you seem to be calling out 58% gross margin for fiscal year '24, which is down only 50 basis points from the prior year. And that's quite commendable considering what's going on in the industry and whatnot. And it seems like you have a lot of gross margin headwinds from utilization to mix headwinds and whatnot. Maybe if you can give us some additional color in terms of the offsets to those headwinds and what's allowing for this gross margin resiliency?

Gary Mobley:

Helpful. Thanks, Bill.

Operator:

Thank you. Our next question comes from Francois Bouvignies with UBS. Your line is open.

Kurt Sievers:

Yeah. Hi, Francois. No exact quantification, but I guess a few pointers. It isn't useful in my view, to look at one individual quarter. But I think now since the full calendar year '23 is behind us, you can look at the full year where I think our Auto business did grow by 9%. I also said that the company has increased pricing by 8%. So let's just assume for a minute that in Auto, we did also increase price in that order of magnitude, which basically puts you almost on a zero supply increase line last year in Automotive. So say zero growth in Automotive last year in supply and units. And that goes against what I would call super bullish Automotive fuel last year with, I think, in the end, the 9% SAAR increase to 90 million units, a rocking increase in electric cars. I think the xEV cars last year, we're growing by 45% year-over-year. So I mean all the good arguments, which we've discussed so often for a lot of content increase on top of the 9% SAAR. And we shipped zero. I mean that gives you a feel why we have a very strong view that we already significantly under-shipped through all of last year. But at the same time, I mean, it's obvious we have over-shipped in the time before. It's just that I believe we started very early with taking a handle on that and controlling that over-shipment and throttling it back. I think through all of last year, we have under-shipped in the distribution side of Automotive, which is 40% of the revenue. And I'd say we've take -- we started to take more stringent action in the second quarter of last year to also control the over shipments in the direct side. But that's the one which is not completely done yet. So it's very hard to qualify that Francois because you don't know what size of inventory individual Tier 1 customers want to keep on the long run. And it's also not a -- it's not a steady target. I mean we discussed with them very often. And these targets in terms of how many weeks of semiconductor inventory they want to keep. First of all, they are ranging widely between different Tier 1s. I could quote a range here between two weeks and 18 weeks. It's really all over the place. And it also changes over time. As soon as they see reason to believe that their business is going to grow again, which means the OEM call offs they are getting, then they want to grow their inventory again. So that's why it's a bit of a moving target. But I think for us, the synthesis is that we believe by the middle of calendar year '24, we have that behind us.

Kurt Sievers:

Look, a couple of things, Francois. First of all, I'm glad we get well through '24. I can't get my head around '25, that's a little early, to be honest. Now at the same time, I think you put good pieces together relative to input costs, the one which you didn't put up is the fact that the Tier 1 foundries are still a bit tight lipped when it is to cost decreases. And the biggest part of our input is Tier 1 foundries, not Tier 2 and Tier 3 foundries because we need these Tier 1 foundries for our Automotive and Core Industrial business. And there, unfortunately, the trends are not quite as ambitious as you mentioned them. Over time, Francois, I do believe, say, mid to longer term, that the industry will return to low single-digit ASP erosion year-over-year. That is what we had in the pre-COVID period in the application-specific business like ours. And I think it is reasonable to assume that, that is also going to happen in the mid to longer-term future. However, this year is a transition year because the input is not yet the input cost and the inflationary environment is just not yet at that level as it used to be in the past. And very important, and I know it's probably very clear, but I just want to reiterate that very clearly. This does not mean falling back to the levels which we had pre-COVID. What I'm saying is, from the levels which we have achieved now, we possibly have that in the mid to longer-term future, this very low single-digit ASP erosion per year, but we absolutely see no scenario that falls back to the levels of pre-COVID.

Operator:

Thank you. Our next question comes from Chris Danely with Citi. Your line is open.

Kurt Sievers:

Hey, good morning, Chris. Yeah, clearly, first of all, I confirm what you say. It got worse over the last 90 days or at least our view on what we are exposed to got worse. I would say the end demand in Auto has weakened. I mean the latest S&P data is now almost a percentage point down year-on-year in terms of SAAR, so that's a little less than it was before. The xEV penetration is a little slowing. Again, it is still up, but it is a little slowing. So these are just gradual movements to the less positive side than what it was 90 days ago. But I think what is probably the somewhat bigger part in here is that we just got a better handle now, what is the remaining size of the excess inventory with our Tier 1 Automotive customers, which we are working down through the first half. So I cannot pass in percentage, which one of the two is contributing how much. But I'd say it is in that, say, combination of Automotive, core Industrial over-inventory and at the same time a weakening macro.

Bill Betz:

That's correct, Chris.

Bill Betz:

Basically it is matching to the sell-through.

Chris Danely:

Got it. Thanks for all the color guys.

Operator:

Thank you. Our next question comes from Joshua Buchalter with TD Cowen. Your line is open.

Kurt Sievers:

Joshua, absolutely. That's a horrendous fight and that's why I said earlier, it is really hard to call the final exact landing place for the size of inventory for Tier 1 because it is a matter of their negotiation with the -- with their OEM customers. The midterm trend is that every piece of new business they are winning, OEMs are now often enforcing for the new business to hold a certain amount of inventory for specific semiconductor components. So that becomes very explicit, but it's only for new business. So think about it as something which will be layering in over the next couple of years as those new design wins are materializing. That's the way how the OEMs want to get a firm handle on the size of inventory at Tier 1s. At the moment, it's still Wild West because none of this is really contractually anchored because it's old contracts, which didn't have these articulations, which is why it is indeed all over the place, and that makes it also a bit harder to be precise.

Joshua Buchalter:

Yeah, that's okay. I would just, maybe, Bill -- I was going to ask about the policy of repurchases. I know you mentioned it's still return 100% of free cash flow but have been running a little bit below that in the last several quarters. Should we expect after you pay down the debt in March that repurchases pick up? Or is it something more tied to the business environment? Thank you.

Joshua Buchalter:

Thank you.

Operator:

Thank you.

Operator:

Thank you for your participation. This does conclude the program and you may now disconnect. Everyone, have a great day.

Operator:

Good day and thank you for standing by. Welcome to the NXP Third Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead.

Kurt Sievers:

Thank you very much, Jeff, and good morning, everyone. We appreciate you joining our call today. I will start with a review of our quarter three results, discuss our guidance for quarter four and provide our early views of 2024. Now let me begin with quarter three. NXP delivered quarterly revenue of $3.43 billion, $34 million above the midpoint of guidance and essentially flat year-on-year. Revenue trends in our Mobile, Industrial & IoT and Automotive end markets all performed in line or better than anticipated, while our communication Infrastructure & Other end market were slightly below our expectations. Our distribution channel inventory during the third quarter declined slightly to a 1.5 months level well below our long-term targets of 2.5 months. Non-GAAP operating margin in quarter three was 35%, 30 basis points below the midpoint of our guidance. This is primarily due to an unforecasted potential legal liability of approximately $14 million which is reflected in SG&A. Non-GAAP operating margin was down 190 basis points versus the year-ago periods, primarily as a result of higher R&D investments and the noted potential legal expense. Now let me turn to the specific trends in our focused end markets. In Automotive, quarter three revenue was $1.89 billion up 5% versus the year-ago periods and in line with the midpoint of our guidance. In Industrial & IoT, quarter three revenue was $607 million, down 15% versus the year-ago periods. So above the midpoint of our guidance. In Mobile, quarter three revenue was $377 million down 8% versus the year-ago periods and above the high end of our guidance. In Communication Infrastructure & Other, quarter three revenue was $559 million, up 8% year-on-year, so slightly below the midpoint of our guidance. During the third quarter from a geographic perspective, we experienced incremental improvement across most regions, with China solidly improving quarter-over-quarter. So our shift to rates to China are still down versus the year-ago period. From a channel perspective, sequential growth was led by improved sell-through in our distribution business. At the same time, our direct business sequentially declined, a reflection of NXP actively managing inventory digestion at our direct customers. Overall, our distribution business represented 57% of sales, up from 51% in the second quarter. And now I will turn to our expectations for quarter four 2023. We are guiding quarter four revenue to $3.4 billion. This is about 3% versus the year-ago period up and represents a sequential decline of approximately 1% at the midpoint. We anticipate the following trends in our business. Automotive is expected to be up in the mid-single digit percent range versus quarter four 2022 and flattish sequentially. Industrial & IoT is expected to be up in the high single-digits on a percentage basis versus both quarter four 2022 and quarter three 2023. Mobile is expected to be down in the mid-single-digit percent range versus quarter four 2022 and up in the low-single-digit range on a sequential basis and finally, Communication Infrastructure & Other is expected to be down mid-single-digits on a percentage basis versus quarter four 2022 and down in the upper teens percent sequentially. Our guidance for quarter four contemplates ending the fourth quarter at a 1.6 months of distribution channel inventory. Zooming out, the combination of our third quarter results and the midpoint of our fourth quarter guidance indicates the full year 2023 revenue will be flattish versus 2022 in a challenging and cyclical market environment. When we now turn to our early views on 2024, we continue to see an operating environment with a number of cross currents. Clearly, the macro environment remains weak, including subdued demand in China, geopolitical challenges and elevated inflation, which is constraining demand. At the company level, lead times have normalized, and we anticipate a more neutral pricing environment going forward. And already since early this year, we have actively engaged with our large direct customers to drive a reduction in on-hand inventory where needed, rather than just blindly enforcing NCNR commitments. Furthermore, we have demonstrated over several quarters proactive management of our distribution channel resulting in a very lean channel inventory position of 1.5 months at the end of quarter three versus our long-term target of 2.5 months. Through all of these proactive actions, we believe we will enter 2024 with a comparatively balanced customer inventory position with some remaining pockets of inventory digestion yet to occur. Hence, we will also begin to replenish the channel sometime in 2024. In terms of NXP's focused end markets for 2024, we are assuming global order production to be up 1% as anticipated by S&P. We assume the mixed shift towards semiconductor content-rich hybrid and battery electric vehicle continues and reaches about 40% of all cars produced in '24, up from 33% in 2023. This is very supportive of the NXP-specific [indiscernible] content drivers such as radar systems, electrification solutions and high performance processes for software-defined vehicles. Turning to Core Industrial. We see the trends, including especially content growth to be pretty similar to Automotive. In our Consumer IoT and Mobile business, after over a year of weak demand, we see an incrementally improving environment. Finally, we do believe the weak demand in Communication Infrastructure & Other likely continues as we have satiated pent-up demand in our secure cards business, anticipate a weak environment in mobile base station buildouts and expect end-of-life in some of our network edge products. When putting it all together, netting the positives against the known headwinds, we continue to navigate a soft landing for the business and anticipate a return to year-on-year revenue growth throughout 2024. For the first quarter, we expect seasonality to return more to the typical pre-COVID seasonal patterns in a range of down mid to upper single digits sequentially. And now I would like to pass the call to you, Bill, for a review of our financial performance.

Operator:

Thank you. [Operator Instructions] Our first question comes from the line of Ross Seymore with Deutsche Bank. Your line is now open.

Kurt Sievers:

Hey, thanks, Ross. Let me indeed first of all say that these fluctuations between 1.5 and 1.6 are partially beyond our control, to be honest. I mean, you know, it just ticked down a little in the third quarter. We think we are anyway sitting at the absolute minimum where it should be, so we felt it is appropriate to move it back to the 1.6 level. What I think is more important in the bigger context of that channel management is that over 1.5 years now, I would say, we have kept it intentionally very, very lean, always around this 1.5 or 1.6 level in the dropping environment so in an environment where demand was weak and rather dropping. Going forward, as I said in my prepared remarks, we think the environment is more stable or up again, which is why we did say that at some point through next year, we will also start to refill the channel again. The speed of that and the magnitude will really depend on the environment. We will not go higher than the 2.4 or 2.5 level, which is our long-term target and which has been our long-term target in the past. If there was a sharp rebound in China and we set the same last quarter, then of course, we would probably go back relatively quickly. But in a more stable environment, as we anticipate into next year, we will start to refill next year, Ross. Because we think that is important to make sure we hold competitiveness in the channel for our long-tail customers. So there will be a moment where it will be just important in a stable environment to have enough product on the shelf to remain competitive.

Bill Betz:

Sure. So let me address the current -- the last couple of quarters. As mentioned, our internal utilizations are running, call it, low-to-mid 70s, and that headwind is being offset by our distribution mix. It's richer in margin, and that represented about 57% of our composition of revenue this quarter, which is up from 51%. So they're sort of offsetting each other in the short term and we see the same to occur in Q4. Now, if we look ahead, what are some of the levers that perhaps can drive gross margin higher over the long-term, and I think we've talked about these in the past, but again, higher revenues over our fixed cost structure is one, obviously, we're going to have continued productivity gains, clearly, you know, eventually we're going to [Technical Difficulty] demand from our internal factory standpoint. So think about higher utilizations. Kurt talked about, next year we're seeing neutral pricing. And then, you know, really, I think a focus more longer term is expanding our long-tail customers in the mass market. And then eventually what we've always talked about with where our R&D investments go is that ramp of our new product introduction. So some of those are the levels -- levers that we have that get us comfortable on continuing to bring gross margin above our current high end of our model. Again, 58% is not the end goal. It's not our final destination. We're going to continue to work on this from a company initiative.

Operator:

Thank you. Our next question comes from the line of Vivek Arya with Bank of America Securities. Your line is now open.

Kurt Sievers:

Hey, thanks. Good morning, Vivek. Yeah, it's clearly that the revenue is driven and the demand is driven by content increase much more so than SAAR. At the same time, you are, of course, right, the latest SAAR update for this year, which I saw is actually almost 8% up over 2022, which is a, by the way, every quarter that was taken up further. So kind [Technical Difficulty] this year. And yes, indeed, also the forecast which we used from S&P for next year I think is just 1% up. So it's almost flat next year. Now, if you take NXP Automotive revenue, Vivek, if you take our Q4 guides, then this year's annual revenue growth of NXP will be like 9% or so. So 9% Automotive NXP in '23 over '22. With that number, I believe we are under-shipping demand and we are actually intentionally under-shipping demand because, as we've always said, we did not want to create this wave of inventory ahead of us, which will lead to a cliff to drop down from. That's why since early in the year we have tried to make sure to not enforce NCNRs to an extent that it would not build excess inventory. And as we discussed with Ross just a minute ago, we kept the channel very lean. And mind you, also in Automotive 40% of our revenue goes through the channel. So the channel is a pretty significant part also of the Automotive business. So what I mean to say here, Vivek, is that we think we are through this inventory digestion at some point next year, which means the revenue growth in our Automotive business will return more to levels which are reflecting the true end demand. I can't tell you when exactly that's going to be next year, but maybe it's safe to assume that through the first half. We are still a little bit working ourselves through this inventory digestion, but in the second half, we should be clean from that. Including then the replenishment of the channel and that's why I make that statement of growing year-on-year throughout the year, every quarter. By the way, that statement was relative to the whole company. It -- we discussed it now for Automotive. But in principle that whole pattern which I just explained is also true for entire NXP. And that's why we continue to be confident that we are properly managing that so-called soft landing. Since we have just anticipated this inventory issue relatively early, have proactively managed it, which means we do not run into this cliff and then resume into year-on-year growth as early as quarter one of next year.

Kurt Sievers:

Yeah. Look, Vivek, I think we really went quite far in this call, given the turmoil around us and some of the uncertainty created by some of our peer companies. We went quite far here in order to give quite some color on next year. We really don't want to go down the path of providing that color by segment -- by revenue segment by quarter. That would be just one shock too far. So stay with me with what I said of a more seasonal pattern for Q1, for the whole company, which was a mid to upper single-digit sequential decline, which is, by the way, what we've always had pre-COVID. So there's nothing really strange about this. In a normal pricing environment, with normalized lead times, everything pretty much back to normal. The other half of your question was about the commitment which we had given in, I think, in November '21 in our investor day about the three-year growth, which indeed was an 8% to 12% corridor. And, yes, Vivek, we stand behind that corridor. We do stand behind hitting that corridor of 8% to 12%, like all the rest of the model by the way. I mean, Bill just talked about the gross margin being more at the high end of the model. On the revenue, we will also be in that corridor of 8% to 12%, there we will be in that corridor. Really depends on a couple of macroeconomic factors, including especially more of a return of China and the timing thereof, which is very hard to judge. So we can't -- we just can't go there. But that should not get us either way out of this -- out of that corridor. We should hit it.

Operator:

Thank you. Our next question comes from the line of William Stein with Truist Securities. Your line is now open.

Kurt Sievers:

Thanks, Will. That -- I see where you are going and let me try to be as clear as possible. First, yes, I did talk about what the category is called xEVs. That is a combination of the hybrid electric and the fully battery electric vehicles. It's a category used by S&P. So it's not our invention, but it's basically every car which has either only an electric drivetrain or also an electric drivetrain next to a combustion engine drivetrain. That's what matters for us because that is the stuff which calls for more semiconductors. And yes, we do believe it continues to grow quite sharply. So this year the latest forecast is, and since we are in November, I guess it's quite accurate, 33% of the total car production, which is in the order of, I think, 89 million units this year. 33% of that 89 million cars produced this year are xEV and that number is forecast to grow to 41%, which is a 29% year-on-year growth. So if you go in absolute terms, then there will be 29% more of these xEVs next year than this year. Now, where does it come from? Look, well, I think it is a little misleading to look at this from a US perspective. The US car producers are actually, from a global perspective, relatively small. Europe is a little better, but where really the main volume is driven, that is China. And on top of that, China is the one which is also driving the dynamic now in the electric vehicle space. So I think if you just take some of the commentary and some of the adjustments in investment programs which were published of US companies, then that is not representative of what's -- what is going to happen on a global level. But long story short, yes, we do believe this xEV category is moving to a solid 41% of the global SAAR next year, which is obviously very supportive to our semiconductor content growth. By the way, beyond pure electrification systems, as we discussed earlier, those cars tend to be higher featured in electronics above everything. So also ADAS systems like our radar and the whole SDV, Software Defined Vehicle introduction happens faster with these cars, which is why it is so supportive to our revenue. We believe in that. We do not see a massive slowing in the electric vehicle penetration.

Kurt Sievers:

On the handset side, nothing really new. We are still waiting for a bit more dynamic in the Android space, which has nothing to do with ultra-wideband, which is more a mobile-wide industry situation where you might have seen in our guide for mobile for the first -- fourth quarter, excuse me. We are again sequentially up a little in mobile, which is also driven by Android. So given our very lean inventory also in Android space, we think if there is now a bit more dynamic in the Android space, we're going to benefit from it and with that, ultra-wideband, because it's going to go proportional, then up. In the Auto space, we feel very good. So we are ahead of what we wanted to achieve in ultra-wideband. So we have, I think, something like seven platforms in production. So there is seven car platforms which are in production with our ultra-wideband automotive product. To my knowledge, something like 18 to 20 new platforms are awarded or 18 of 20 are awarded to NXP. So there is two small platforms which have not gone to NXP out of 20. Actually, we rejected them because they were under the security standards which we want to ship and would have been margin-dilutive. So that means, overall the momentum in ultra-wideband automotive is very, very good.

Operator:

Thank you. And our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is now open.

Kurt Sievers:

So the answer is yes and yes, Stacy. That delta between -- well, now it's actually even a little bit bigger because to be perfectly precise, the $500 million, I think, came from 1.6 months going to 2.4. Since now we are at 1.5, it's probably even a little more than the $500 million, but it's immaterial. So the answer here is yes. That is. Secondly, no, we do not need the $500 million to grow next year, because that whole channel replenishment next year is something we will do some time to some amount. So that cannot be the basis of a guide for next year.

Kurt Sievers:

Okay. So let me peel the onions, Stacy. First of all, maybe rely on a company level. The reason why we do comparably better if you look at the quarter, to our peers is, again, a soft lending navigation, which we have entered into already early this year and when you think about the channel already middle of last year. We have certainly shipped less over that period, Stacy. And you find that if you compare our growth rates, say, a three-year CAGR over the last three years versus some competitors, especially in auto, and you see that even more sharply, if you look at this year's order growth, as I said earlier, which I think is 9%, we have undergrown competitors. And that undergrowth is still be that we ship less on inventory than we believe some of the peers have done. That, of course, also explains that going forward, we don't see this sharp decline. It's just a softer management through this cycle. Now we do it very, very intentionally because we believe this is very beneficial to our gross margin trajectory, which is not going to suffer that part from under loading factories too hard. So that's actually where the direction has been coming from. Now on the geographic side, Stacy, you have to ask this because I do know that what we just guided, especially in Industrial IoT, and that is largely relative to China is very different to what you heard from a lot of peers. So I just want to repeat, we have both sequentially and year-on-year, we just guided quarter four up by a high single-digit percentage which is in sharp contrast to what several of our competitors have said. We simply think this is because we saw and had our trough in Industrial IT already in quarter one of this calendar year. If you look at the numbers, we had a sharp drop there. We have made absolutely sure we would not increase inventories from there. So we are very close to the pile of the demand. Since then, since Q1, we have been readily going up. And that was long messaging, which might have been a bit confusing around China. What I meant to say is we keep moving up incrementally quarter-to-quarter-to-quarter, while it's still down from a year-on-year perspective. So we are still waiting, and we don't put this in any of our numbers on the big rebound in China. So that's not there. But incrementally, sequentially, it keeps improving. It has improved the past couple of quarters, and it does improve again now in Q1 into quarter four. So that was the commentary on China. So it's cautiously positive. But again, it is simply because we had our trough there already in quarter one, and it was a tough trough. I mean you just do the math. It was really deep. We just did it much earlier than many others.

Operator:

Thank you. Our next question comes from the line of Gary Mobley with Wells Fargo. Your line is now open.

Kurt Sievers:

Yes, Gary. First of all, it's our business. It has been our business and will continue to be our business to be competitive. So I come back to your specific point, but I mean in itself, it's nothing new. Our whole game, our whole priority in life is to be competitive wherever we play. So in China, indeed, so far, the competitors, which we do see in the automotive space, which you focus on, have been largely our Western competitors plus relates from Japan. So we have hardly seen any local competition. So that's absolutely right. Now over the past, I'd say, couple of quarters, local competition in China came more up in low-end micro controllers. However, not in automotive. We haven't seen that entering into automotive at all. We also don't play that much in the low-end microcontroller space. So I mean, we've been seeing it, but it's not been a big event for us at all. Secondly, we do see a significant focus of local Chinese up-and-coming semiconductor companies on silicon carbide. I mean I just spent 1.5 weeks in China, and it was obvious that there was massive investment and a massive focus both in factory engineering and device engineering on silicon carbide in China. The good news, if you will, is that this doesn't really matter for us because that's one of the businesses we do not do. But I think it takes some of the focus away from the things we do. My personal take would be that probably going forward, we will see a start of more competition in the simpler analogic signal world in China, which would then probably also touch automotive. I don't say, Gary, we have it, yes, it's not like we are losing or being under pressure there today. But my take would be probably that's the one segment where local Chinese semiconductor competitors will also focus on going forward. But again, I mean we've seen this in Korea. We've seen this in Japan in the past. So it's not the first time that we are confronted with local competitors. Yes, we stay paralleled about it, and we'll make sure that we have made an long-term strategies, which are on top of that.

Kurt Sievers:

Well, those are multiyear commitments. So I guess you referred to, I think in the Q, we have something like a $3.9 billion commitment sitting, which is a multiyear commitment -- which is badly required and badly needed to support our growth over the next five-plus years, which is what this is referring to. So nothing unusual, nothing to worry about. It's just needed for those third-party foundry wafers, which continue to be very tight from a supply perspective and where we are glad we have these commitments to support actually the customer growth. This whole supply situation. Lead times have normalized. That does not mean, however, that we are in every place completely out of the woods. So there is still a couple of technology nodes where we are actually short, which are also leading to quite a few complications. And there is quite a few others, and that's actually quite a few where we are just fine, but where we have very stringent discussions with our customers that they need to make sure they give us mid- to long-term forecast because once the business comes back out of this inventory digestion cycle, we really have to make sure we don't enter into a similar period like we did in the second half of 2020, which is not -- that's not far away from a supplier capability versus demand perspective. So that's why those long-term agreements, which we have there are really needed in the mix of our future revenue growth.

Operator:

Thank you. Our next question comes from the line of Joshua Buchalter with TD Cowen. Your line is now open.

Kurt Sievers:

Hey, Josh, good trial. As I have to say to, I think, Vivek earlier, I will not guide now on the segment level 2024 but I can give you at least some of the dynamics at work here. Yes, the SAAR -- the underlying SAAR growth next year is going to be less than it was this year. I think the mix of the penetration to xEV vehicles is better, as we discussed earlier, so going to the 40-plus percent level. So that's supported relative to this year. So it drives further content from where we are. I agree with your statement about more neutral pricing. I think that's a fair assumption across the Board. And having said all of that, the only remaining piece next to our company-specific growth drivers, which are well in place. The only remaining piece is the cycle of inventory digestion and going back to normal end demand, which is kicking through to our revenue. Currently, I can only repeat it, we are undershipping demands. And again, we do this intentionally. We've done it for a few quarters already. It's going to be another couple of quarters, but maybe it's fair to assume by middle of next year that is behind us and then the revenue growth rates in automotive and everything else will go back much closer to what the real end demand is. Think about it this way. But so it is really misleading to just look at annual revenue growth in Automotive against SAAR because there is so many other things that work, especially this inventory cycle.

Kurt Sievers:

That's not our model, Josh. That might be a model you made, but we haven't really said that. So what we do say and what fits also to your earlier question, is that we do see a continued strong content increase, which is independent of SAAR. And I think that is something which is probably in the 5% to 8% bracket. And that keeps going. Again, there is no reason that would be slowing next year. But again, it is overlaid by the inventory cycle.

Kurt Sievers:

Thank you.

Toshiya Hari:

Hi. Good morning. Thank you so much for taking the question. Kurt, I wanted to ask about the pricing environment in '24 you mentioned that you expect a relatively neutral environment. When we spoke at our conference a couple of months ago, I think at the time, you sort of hinted that expectation back then was for '24 pricing to be up a little bit more than what you saw in '21, but a little bit less than '22. So I guess there's been a slight change in how you think about pricing A) is that correct? And B) if so, is this more demand-driven? Or are you seeing lower input costs that's enabling you to keep pricing a little more flattish into '24?

Toshiya Hari:

Great. That's very helpful. And then as my follow-up, you're guiding your comps and other business down, I guess, upper teens on a sequential basis in Q4. Is that primarily the base station business and the weakness in that market sort of catching up to you guys? Or is there something more to it? And is it fair to say that Q4 is the bottom for that market? Or could things stay relatively weak into the first half of next year? Thank you.

Kurt Sievers:

So I'm looking at time now. I think we are nearing the end of the call. And I would like to summarize there. Bill and I really think the main theme of this quarter is especially that since there has been so much say, different messaging from our peers, we really think that the fundamental content growth drivers in our key businesses being Automotive and the Industrial IoT space are in place, but all of this has been massively overlaid by to what extent people have proactively or not proactively managed the inventory cycle. We have tried to do this as productively as we could most notably for all of you in the reported general inventory numbers, which for six quarters now. We have kept very lean. And also earlier this year, we started to try and do a similar thing on our direct customers by not enforcing NCNR, by being reasonable by finding alternative commercial solutions putting us actually in a situation where we think we have -- due to this somewhat undershipped the demand more than our competitors which leads us now going forward in a situation which is much less pronounced relative to the dip and much more realizing the intended and envisaged soft landing, which we wanted to have. That is the main point here. Other than that business really going back to a more normal pricing environment lead times being normalized, all reasons to believe that this growth quarter from a quarter year-over-year perspective throughout all of next year, resuming growth. You see this in Q4 already. We have year-on-year growth and that should continue throughout all of next year. With that, I thank you all for the attention today. Thank you very much. Bye-bye.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day and thank you for standing by. Welcome to the NXP’s Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Palmer. Please go ahead, sir.

Kurt Sievers:

Thank you, Jeff, and good morning, everyone. We really appreciate you joining our call today. I will start with a review of our quarter two results and then discuss our guidance for quarter three. Now let me begin with quarter two. Our revenue came in at the high-end of our guidance or about $100 million better than the midpoint with the trends in all end market segments performing better than our expectations. Taken together, NXP delivered quarter two revenue of $3.3 billion, essentially flat year-on-year, while we continue to maintain our distribution channel inventory strictly at a 1.6-month level, which remains to be well below our long-term target of 2.5 months. Non-GAAP operating margin in quarter two was 35%, 50 basis points above the midpoint of our guidance, so 100 basis points below the year ago period. The year-on-year performance was a result of stronger gross margin, offset by higher R&D investments in support of our mid- and long-term growth targets. Now let me turn to the specific trends in our focus end markets. In Automotive, quarter two revenue was $1.87 billion, up 9% versus the year ago period and near the high-end of our guidance. In Industrial and IoT, quarter two revenue was $578 million, down 19% versus the year ago period and near the high end of our guidance. In Mobile, quarter two revenue was $284 million, down 27% versus the year ago period and above the high-end of our guidance. In Communication, Infrastructure and Other, quarter two revenue was $571 million, up 15% year-on-year and at the high-end of our guidance. During the second quarter, we had experienced incremental improvement across all regions with China also gradually improving quarter-over-quarter. Year-on-year growth was led by our Direct business. While our Distribution business continues to grow sequentially from the trough in Q1, though still down on a year-on-year basis. Now let me turn to our expectations for quarter three 2023. We are guiding quarter three revenue to $3.4 billion. This is down about 1% versus the year ago period and represents sequential growth of about 3% at the midpoint. We do anticipate the following trends in our business. Automotive is expected to be up in the mid-single-digit percent range versus quarter 3, ‘22 and up in the low single-digit range sequentially. Industrial and IoT is expected to be down in the mid-teens percent range versus quarter three ‘22 and up in the low-single-digit percent range sequentially. Mobile is expected to be down in the mid-teens percentage range versus quarter three ‘22 and to be up in the mid-20% range on a sequential basis. And finally, Communication, Infrastructure and Other is expected to be up about 10% versus quarter three ‘22 and flattish sequentially. Our guidance for the third quarter contemplates that we maintain the 1.6 month distribution channel inventory level and very consistent to our approach in prior quarters, we will manage sell-in to the channel tightly, so we may start to increase general inventory as and when we see consistent strength in channel sell-through for future periods. We are well positioned with on-hand inventory to satiate a possible rebound in demand as it emerges. Furthermore, we continue to experience higher input costs. Hence, we stick to our consistent pricing policy, which is to pass along the input cost increases to our customers, while not having our gross margin. From a more strategic standpoint, we focus on enhancing how we work with our suppliers and customers in order to enable long-term supply and demand assurance programs especially in the automotive and core industrial businesses. Now as we progress through 2023, we are gaining confidence that we will be able to return to predictable year-over-year growth of the business. Demand in the Automotive and Core Industrial businesses continues to be solid with only a few pockets of supply shortages persisting through year-end. Within the Mobile segment, we are seeing the expected strong seasonal trends in the premium portion of the market in quarter three. And our consumer IoT business appears to be accelerating from the in Q1. However, it does not show signs of a sharp rebound as of yet. And finally, in our Communications, Infrastructure segment, we see soft and lumpy demand in the cellular base station markets, offset by strength in our secured card and businesses. So taken together our first-half results and our guidance for quarter three give us confidence that we are successfully navigating through the cyclical downturn in our consumer exports businesses, while we do see continued strength in our Automotive, Core Industrial and Communications Infrastructure businesses. We believe quarter one was the trough in our business. And we anticipate the second-half of 2023 will be greater than the first-half of this year and also the second-half of 2023 will grow over the second-half of 2022. And this outlook does not contemplate a strong rebound in the consumer IoT business or the Android handset market nor does it assume the retail of the distribution channel to our long-term target of 2.5 months. So overall, we will continue to be very, very disciplined, manage what is in our control and stay within our long-term financial model. And before I turn the call over to Bill, I'd like to take a moment and thank our automotive processor team for achieving a very significant milestone for the enablement of the software-defined At the end of June, NXP out the industry's first fully automotive specified safe and secure 5-nanometer computer. This is a 4 billion transistor multi-core NPU based on an innovative chip architecture that allows the up-integration of new functions and consolidation of existing functions. The vehicle of the future will utilize new software-defined platforms to allow easy upgrades and new features to be added through the vehicle lifetime. Software-defined vehicles get more performance, more reliable, more functional with time instead of degrading as is the case today. In order to achieve this capability, auto OEMs require both flexibility in their compute architecture as well as the opportunity to tap into a broad ecosystem of application developers. At the top of the compute hierarchy in the car is the vehicle computer that runs the vehicle score services and orchestrates functionality across domains deployed into new and processes. With our S32 platform, NXP is the only semiconductor company which offers a complete portfolio to address a wide range of processing requirements across the entire compute hierarchy of the software-defined vehicle. The challenge the auto OEMs are facing with this transformation is the enablement of both software reuse and software scalability. And NXP's S32 platform addresses that challenge by enabling software reuse both horizontally across domains as well as vertically from low-end controllers, all the way up to the high-performance vehicle computer. Over the last several years, we have engaged with and enabled multiple automotive OEMs in their journey towards the software-defined vehicle. We have continued to receive significant OEM awards, including the new 5-nanometer vehicle computer, which will help accelerate our automotive growth very well beyond 2024. We are and I am really excited to be on this truly transformational journey with the automotive industry. And now I would like to pause -- to pass the call over to you, Bill, for a review of our financial performance.

Operator:

Thank you. [Operator Instructions] And our first question comes from the line of Gary Mobley with Wells Fargo. Your line is now open.

Kurt Sievers:

Yes. Hi, good morning. Thanks, Gary also for the feedback. Yes, we have indeed and that's a good thing, increased our distribution performance in the second quarter, which is also why I said in my prepared remarks that we saw the trough in our consumer exposed businesses, which are the main users of that distribution channel already back in Q1. So we went up into Q2. However, at the same time, we do not see a real rebound in China, so I think that the main trigger point for us would be upper rebound in China, which in our case would both be relevant to the Android handset business, as well as to the consumer exposed IoT business. That hasn't really happened to the extent that we would consider it consistent and persistence enough in order to move up with distribution inventory. And that's why we try to confirm indeed that all the numbers we just gave you for the guidance contemplate a strict 1.6 again, still we may move higher, but then we would also deliver more revenue accordingly in case we see that rebound in China coming. Today, it's not visible.

Kurt Sievers:

Gary, I mean, I'll let you draw your conclusions about the fourth quarter, which we don't guide here. But clearly, what I did repeat, and I think I said this last earnings already that the second-half is going to be larger than the first-half. Now we are adding indeed that the second-half is also going to grow over the second-half of last year. We don't want to tell it closer than this at this point. It's just hard in the current environment to do so. But I think the key point here is that it is really based on two separate legs, which are very important to contemplate. One, is consistent strength in the automotive core industrial and comms infra business pulling just continue to pull ahead. While at the same time, we left this trough in the consumer exposed businesses in Q1 behind us, which then also helps indeed in the second-half to resume the growth, which I was describing. Now for the fourth quarter specifically, let's see when we get there how that goes.

Operator:

Thank you. [Operator Instructions] And the next question will come from the line of Joshua Buchalter with TD Cowen. Your line is now open.

Kurt Sievers:

Yes, good morning, Joshua. Indeed, it was last earnings that we mentioned that there were about two. Actually as we said European auto Tier 1s, which seem to have some over inventory. In the meantime, this is all contemplated in the guidance you just heard. It is still a, I would say, an unstable situation, because in the meantime lead times have largely normalized. So we are back to a much more normal order pattern, which is good after 2.5 years of turmoil from supply challenges. At the same time, OEMs are asking very much more strict inventory targets from the Tier 1s, but that hasn't settled in all cases. So what we are -- say, seeing here is that in several cases, there is a bit of a 10 situation between the OEMs, the auto OEMs and the automotive Tier 1s, and how much inventory they should actually hold. And that mixed with those golden screw leftovers is indeed leading to a somewhat uneven situation, which in the end and that I mean, I've seen this two, three times before in those cycles. It is now the normalization of what we've had the -- over the past 2.5 years with not much more normal lead times. And in that sense, I think everything is contemplated. I'd say the situation has normalized relative to what I did say last time.

Bill Betz:

Yes. Joshua, this is Bill. Couple of questions in there mixed around. So first, let me talk about utilization. Do we expect those to be very similar in our Q3 in the mid to low-70s? And again, what we've guided is our improved mix a bit higher revenues offsetting those utilizations very nicely of everything we can see. On inventory, we expect inventory to go down from a day standpoint internally assuming the channel stays at the 1.6, right? So we're not counting on those 25-days to deplete our internal inventory. That'll be at a later date when we feel confident in the market. So remember, so we're holding about 25-days of extra inventory internally on our balance sheet and prepared for that. I think overall longer term, I would say we're more comfortable holding about a 105-days, I would call it a bit more normal than a 95-day target we said about a year and a half ago. We've learned a lot over the last couple of years and it's just good to have a little bit more inventory, so you can really churn those any orders inside the quarter under lead times and be able to upside revenue. And clearly, we've demonstrated that the past two quarters by upsiding our revenue, having the material in our die bank and being able to fast turn them through our back-end and deliver. So the team is doing a great job here.

Operator:

Thank you. [Operator Instructions] And our next question will come from the line of Ross Seymore with Deutsche Bank. Your line is now open, sir.

Kurt Sievers:

Yes. Thanks, Ross. Good morning, happy to -- I'm happy to do so, but let me maybe just respond to the initial part of the question on the shoe to drop in automotive. I think the shoe just fits, I -- we just don't see it dropping, because things are largely normalized by now, which means indeed we only have a few actually stubborn pockets of supply constraints left. But in the biggest scheme of things, I mean, they are nasty for customers, but from a revenue perspective or from an order size perspective, those are actually quite small. So this whole idea of a totally overstated backlog or huge inventory build, I mean, that's behind us. We've been working through this over the last three quarters. The automotive industry situation, in my view, is actually surprisingly good, I'd say surprisingly, because when you remember back to the SAAR forecast at the beginning of the year, they were more in the 3% range. I think last quarter, we talked about 4%. We keep quoting S&P and now they say 5%. And that's also the numbers which are being recorded from the different regions. So SAAR itself is on a solid path for this year. Yes, it still only returns then for the full-year with 87 million units to a number which is still lower than the 2019 peak volume. The more important part of it, obviously, is the top -- how many electric vehicles and hybrid vehicles are amongst that? And also they're very consistent. Any forecast we have says that about a third of the global status here is going to be either hybrid or fully electric vehicles, which is a 31% year-on-year growth in absolute terms of those type of reasons, which from a content increase perspective is, of course, a fantastic opportunity for the semiconductor business. So also here, nothing to worry about. Now the whole turmoil, I would say, which clearly we have been witnessing is in the supply chain. There was this complete supply crisis over a very extended period of time, which would totally drain supply chain, which has now normalized. And then with the golden screw that normalization has been a bit uneven in cases, but I think that's all coming to a point that things are more normal. Now when you say growing just around SAAR, well, we look at our trailing 12-months growth, which I think sits at 12% currently with the guidance for Q3, which is pretty fine. I mean, this is exactly where it needs to be. And if you look back over the last 10-years, there has never been one quarter, which is showing the mathematical formula of SAAR plus content increase. I mean, that just never happens. It always moves around per quarter. So I'd say with more normal lead times now, things are in the right place.

Bill Betz:

Sure. Thank you, Ross. And let me try to share additional color for our gross margin performance for Q2, the guidance we just provided talk about the next several quarters of what we can see after Q3 and even more longer term, so beyond the next year. And again for Q2, the guidance, we did slightly better, because of that product mix. Now if you look at our distribution. Distribution represented about 51% of our sales and this is up nicely from 48%. And again, distribution long tail has higher margin, lower volume type of customers and richer mix. And again, still not where it used to be more in the mid-50s. So this, kind of, is offsetting us very nicely as we really work our internal inventory down and adjust our foundry purchase orders, it just takes time to do that. And so we feel good at the right balance, these two offsetting each other. Q3 guidance more of the same. And again, as I mentioned earlier in another question, a response to a question is, I think, and we are planning for inventory days to go below the current levels as we get that back into control and improve our free cash flow. Now beyond Q3 and next several quarters, we expect I'd say remain at the high-end of the gross margin model of 58%, plus or minus the 50 basis points. And again, mix I believe is more of a tailwind, not as a headwind, because the distribution we're really focusing on that long tail and we expect that to really kick-in as we continue to go forward. Now much longer term, so think about beyond next year. I would say our ambitions are to see gross margins to expand further, driven by higher revenues. You have to remember this falls through on a 30% fixed cost structure that we have talked about. We should see productivity gains, especially when returning our utilization rates to more optimal levels, so more back to that 85%. We -- I would say we plan to focus on growing that long-term customers, which again are those lower volume, but higher margin business. And lastly, you've heard us talk about this. How our new product introductions become accretive over the long-term as they ramp up? It just takes time. So overall, we feel quite good to increase gross margins over the longer term above the current levels. Obviously, the next couple of quarters, we think, will be in this zip code of what we just shared.

Operator:

Thank you. [Operator Instructions] And our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is now open.

Bill Betz:

So, Stacy, let me take that one. So selling was up, sell-through was up that's the only way you can balance that 1.6.

Bill Betz:

So that's what the math is. In Q3, we expect, again, our distribution sales as a percentage of how we service our customers to be up again.

Bill Betz:

We've talked about a normal steady recovery, but no sharp rebounds that many are anticipating specifically out of China.

Bill Betz:

No. It's -- again, as you can imagine, six months ago, we had foundry purchase orders, we have internal utilizations that we're in, I don't know, in the '90s, right? So naturally, as we adjust our inventory levels to real demand we adjust both those levers. I mean that's just normal business.

Bill Betz:

Sure. I think there's a combination of tailwinds offsetting those -- that internal utilization. First off, the internal utilization in our factory footprint is much lower than it was three or four or even six years ago during different cycles. We're talking about 30% fixed cost structure, much lower than the past as we source 60% externally. The mix of our products, the quality of our portfolio have improved. And, so you can see as we work through the cycle, distribution was quite low, and I continue repeat on this distribution represents the long tail, which carries a richer mix, because it's low volume, compared to more of your direct customers, which tend to be higher volumes and a bit lower margin. There's really no difference between segment mix. We really looked at product mix, because all the segments are very close to the corporate average. That's what we drive. So we feel very comfortable where we are with these utilization rates to focus on our free cash flow and bring in slight little of that back in balance. Again, we're holding 25 days of that distribution inventory and then maybe we'll get another five or 10 days internally to get that back into balance, and we feel very comfortable to support the growth of our long-term business. But I would say we have quite a number of tailwinds and headwinds that can offset each other.

Bill Betz:

You bet.

Vivek Arya:

Thank you for taking my question. Kurt, how is NXP's content different in a hybrid or full EV versus a traditional ICE jar? And I ask that because when I look at your automotive business, so you mentioned it's up about 12%, 13% in the first-half, but it is slowing down towards, kind of, the mid-single-digit range in Q3. So, when we compare that against a SAAR production level that is quite decent, then we also add in some of the pricing tailwinds and some of the content tailwinds, wouldn't that suggest your automotive sales should be growing faster at this point? So just curious, how does that hybrid versus ICE mix play into how you look at your automotive sales growth?

Vivek Arya:

Got it. And then, Kurt, on -- as the supply environment in automotive normalizes, how are the discussions with your customers changing as you look over the next three, four quarters? Are they less willing to accept higher prices? Are they less willing to take on and hold inventory than they did in the past? Like how is this environment going to transition as we go from a very supply-constrained environment to something that is more towards a normal environment?

Vivek Arya:

Okay. Thank you, Kurt, very helpful.

Francois Bouvignies:

Hi, thank you very much. I have two quick questions. The first one is on the automotive. And Kurt, I think you have been very clear on the solid outlook for Automotive. I just wanted to check on the all the behavior that you have in Automotive in a way that you don't see anything on the P&L side, but I assume you have a significant backlog still to normalize? And what we are seeing in the auto OEM side is like the orders is coming down rather sharply also on the EV side of things, probably some macro impact there. But I just wanted to check with you if you see any impacts on the order behavior, although it doesn't impact your P&L, because of your backlog yet. Is there anything happening on these orders that you see coming through?

Francois Bouvignies:

Very clear. Thank you, Kurt for your answer. My quick follow-up would be on the pricing. Obviously, it's concern for investors, I mean, at least a big focus. And we are seeing some, sort of, pocket of pricing pressure from local Chinese for vast range of product. So I was wondering, you talked about the input cost increasing and that's putting the pricing up for your business. How do you see the behavior of some local Chinese or some discount that we see? It seems to be on the low-end side of the spectrum, but just want wondering if you see anything on your side? And maybe it would be great to have a quantification of how much of your business you would consider as low end versus high end, maybe would be very helpful?

Francois Bouvignies:

Thank you. Thank you.

C.J. Muse:

Yes, good morning. Thank you for taking the question. I guess, Kurt, I was hoping you could spend a little time discussing the trends that you're seeing in China, whether there's any green shoots at all, whether it's NIO and BYD or Android or other? Would love to hear your thoughts?

C.J. Muse:

Very helpful. As my follow-up, and I don't know if it's for Kurt or Bill, but Tier 2 foundry pricing has definitely weakened over the last few months. And just curious, are you seeing that potentially spread to the Tier 1s? And is that loosening up wafer pricing for you at all in any of your markets? Thank you.

C.J. Muse:

Very helpful. Thank you.

Jeff Palmer:

Hey Norma, we'll take one last question here today. Thank you.

Blayne Curtis:

Hey, thanks for squeezing me in. Maybe I'll just start by following on C.J.'s question, because you mentioned higher input costs. So I think it sounds like you're not getting breaks in the foundries, but I'm curious if you could just quantify where you're seeing the most pressure from rising input costs, external versus internal? And when does that start to layer in?

Blayne Curtis:

Great. And then I just want to ask you, Kurt, on lead times. You said a couple of times more normal ranges. I think if I remember right, last quarter, you still had a one-third that were greater than 52-weeks. So maybe just a little more color on what that more normal is, what your normal range is and all your products, for the most part, back into that normal range by that comment?

Blayne Curtis:

Thank you.

Bill Betz:

Thank you very much.

Operator:

Hello. Thank you for standing by, and welcome to the NXP Fourth Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the prepared remarks', we will conduct the question-and-answer session and instructions will be given at that time. I would now like to hand the conference over to your speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Kurt Sievers:

Thanks, Jeff, and good morning, everyone. We really appreciate you joining our call this morning. I will review both our quarter four and our full year 2022 performance, and then I will discuss our guidance for quarter one. Beginning with quarter four, our revenue was $12 million better than the midpoint of our guidance with the trends in the mobile and industrial and IoT markets performing better than our expectations, while Automotive was in line and Communication Infrastructure below our expectations. Taken together, NXP delivered quarter four revenue of $3.31 billion, an increase of 9% year-on-year while maintaining channel inventory at a 1.6 months level, well below our long-term target. Non-GAAP operating margin in quarter four was a strong 36.5%, 160 basis points better than the year ago period and about 50 basis points above the midpoint of our guidance. Year-on-year outperformance was a result of good fall through on the higher revenue, better gross margin due to higher factory utilization and disciplined expense management. Now let me turn to the full year performance. Revenue was a record $13.21 billion, an increase of 19% year-on-year. When passing the revenue growth, approximately 14% was due to higher pricing - and was due to a combination of volume and mix. And here, as a reminder, we have executed a consistent pricing policy to pass along the inflationary increases of our input costs while not patting our gross margin. Throughout 2022, we consistently found ourselves in a situation where robust demand across automotive and core industrial markets, outstripped available supply even as production levels, both internally and from our supplier partners improved through the year. And now we do see a continuation of input cost inflation in 2023, however, not at the same pace and level we experienced in 2022. The full year non-GAAP operating margin was solid 36.3%, a 340 basis point improvement versus the year ago period as a result of higher revenue, improved factory loadings and positive operating leverage. Now let me move to the specific trends in our focus end markets. First, Automotive. Full year revenue was $6.88 billion, up 25% year-on-year, a reflection of higher pricing, our strong company-specific product drivers and accelerated content increases, thanks to the secular growth in sales of xEV vehicles and prioritization by OEMs of premium class vehicles in a limited supply environment. For the fourth quarter, Automotive revenue was $1.81 billion, up 17% versus the year ago period and in line with our guidance. Now moving to Industrial and IoT. Full year revenue was $2.71 billion, up 13% year-on-year, primarily due to higher pricing and the strong competitive positioning of our solution offering comprising industrial processes and about [ph] cash connectivity and security. For the fourth quarter, Industrial and IoT revenue was $605 billion, down 8% versus the year ago period, so better than our guidance. Mobile. Full year revenue was $1.61 billion, up 14% year-on-year, primarily due to higher pricing and continued traction of our secure mobile wallet. For quarter four, Mobile revenue was $408 million, up 9% versus the year ago period and better than our guidance. Lastly, Communication Infrastructure and Other. Full year revenue was $2 billion, up 15% year-on-year. The year-on-year growth was due to higher pricing and a combination of sales growth of network processors, RFID tech solutions, secured transit and access products and RF power products for the cellular base station markets. For quarter four, Communication Infrastructure and Other revenue was $494 million, up 8% year-on-year and below our guidance. Now as discussed earlier, I also would like to provide you a progress update on our accelerated growth drivers. At our Analyst Day in November '21, we highlighted our expectation to grow total company revenue to approximately $15 billion in 2024, coming from $11 billion in 2021 within a compound annual growth range of 8% to 12% over that period. Embedded within this outlook, we highlighted six company-specific revenue drivers across all our served end markets, which we anticipated to grow in aggregates to about $6 billion in '24 from a $3 billion level in '21, representing about a 25% 3 year compound annual growth range. Additionally, we shared with you that our high relative market share for business would grow to $9 billion in '24 from $8 billion in '21, reflecting about a 5% 3 year compound annual growth range. Overall, we are confident to achieve the anticipated growth rates for both our accelerated growth drivers as well as our high relative market share core business. Moving to the segments. Within Automotive, the accelerated growth drivers are 77 gigahertz radar, electrification and the S32 domain and solar processes, all of which are tracking ahead of plan. According to market research company, Yole, NXP is confirmed as the clear number one revenue market leader in automotive radar solutions, as well as individually in radar RF transceivers and radar processes. Furthermore, we just announced the industry's first 28-nanometer RF CMOS radar one-chip IC family for the next-generation ADAS and autonomous driving systems. Turning to our efforts in electrification. Our sales, including battery management solutions, inverter control and other xEV control processes has doubled year-on-year and achieved record custom design wins. Finally, within Automotive, the customer enthusiasm for this S32 domain and sonar processor family, enabling the software-defined vehicle, are far in excess of our expectations. This includes the awards by a major automotive OEM, which selected the S32 family of automotive processes and microcontrollers to be used across its fleet of future vehicles beginning mid-decade. Moving to Industrial and IoT. We are in line with our expected growth range of about 25% 3 year CAGR for our accelerated growth drivers. Both our crossover and i.MX application processor families grew nearly 50% year-on-year in 2022. However, we did see a deceleration in revenue in the consumer IoT portion of the end markets during the second half of 2022. Finally, we announced our new MCX microcontroller portfolio that is scalable, optimized foundation for energy-efficient industrial and IoT edge applications, addressing the heavy real-time workloads for the next wave of innovation. In addition, we recently announced our new analog front-end family for high-precision data acquisition and condition monitoring systems for factory automation. Moving to Mobile. We are below our expected revenue growth range for the accelerated growth driver of ultra-wideband due to the well-documented weakness in the Android handset market, which is the focused mobile market for our ultra-wideband solutions. However, for ultra-widebands, the ecosystem build-out and design win activity and traction in both Mobile and Auto are going well. And we believe as the Android market rebounds, awarded design wins will result in the expected revenue growth for ultra-widebands. Lastly, within Communications and Infrastructure, we are in line with our expected revenue growth range for RF power amplifiers. The industry transition to gallium nitride from LDMOS technology has occurred faster than expected. The revenue for our gallium nitride-based solutions has doubled year-on-year and demand continues to outstrip our increasing supply capability. In review, 2022 was a very good year for NXP, with strong execution resulting in record revenue, solid profit growth and a healthy free cash flow generation. Additionally, we experienced unprecedented year-on-year design win traction across the entire portfolio. Now let me turn to our expectations for quarter one, 2023. We are guiding quarter one revenue to $3 billion, down about 4% versus the first quarter of '22. From a sequential perspective, this represents a deceleration of about 9% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the mid-teens percent range versus quarter one '22 and flat versus quarter four '22. Industrial and IoT is expected to be down in the low 30% range year-on-year and down in the low 20% range versus quarter four '22. Mobile is expected to be down about in the mid-40% range, both on a year-on-year and sequential basis. Finally, Communication Infrastructure and Other is expected to be about flat, both on a year-on-year and sequentially. In summary, as we head into 2023, our Automotive and Core Industrial businesses remain supply constraints in select areas. Within Automotive, the increase of global production levels and the secular adoption of xEV are tailwinds to continued content increases. In Industrial and IoT, we expect relative strength in the core industrial submarkets as our products enable critical infrastructure and companies to be more efficient. However, the Consumer IoT and the Mobile segment will continue to be dependent on a cyclical rebound. And lastly, in Communications Infrastructure, we expect our supply capability to improve against pent-up demand, specifically in our RFID packing solutions, secure access products and e-government identification. Within the 5G base station markets, growth in '23 will be dependent on the build-out, especially in India. At the same time, we do believe from an external macro perspective, the general demand environment is offering much higher levels of uncertainty than last year. And in the very short term, we are expecting a dip in China due to the spike in infection rates following the policy shift relating to COVID. Additionally, we expect continued cyclical weakness in demand for consumer-oriented products and a potential correction of customer inventory. In this more uncertain demand environment, we will focus on prudently managing what is in our control. And especially while we have plenty of orders, we will continue to very vigilantly manage general inventory to a 1.6 months level, which is about a month’s below our long-term target, equaling approximately $500 million of revenue. We intend to maintain that 1.6 months channel inventory in the first quarter, while we are well positioned with our on-hand inventory to increase channel inventory, if and when demand in China evolves. So far, quarter-to-date, our distribution sales through in China is off to a slow start as is incorporated in our guidance. Over the midterm, we are cautiously optimistic given customer engagement levels, design win momentum in our strategic focus areas and a potential rebound in China. And now I would like to pass the call to you, Bill, for a review of our financial performance.

Q - Christopher Caso:

Yes, thank you. Good morning. I guess to start, Kurt, perhaps you could speak to your comments on managing the channel inventory. And of course, one of the concerns investors naturally have is the worry that customers order more than they need given the constraints at the present over the last year and then potentially you overship that. Can you speak to how you're ensuring that what you're shipping to customers now is actually going to real demand rather than inventory? And I guess that's particularly as some of the foundry capacity loosens up, gives you a little - a little more access to wafer supply?

Christopher Caso:

Got it. Thank you. As a follow-up, if I could pivot to Auto. And question is what's a reasonable expectation for Auto revenue for the year, if not quantitatively, at least qualitatively? And it was flat last quarter, you're managing to be flat again. Is it - should it stay flat from here? Are you trying to get additional capacity in the process nodes needed for Auto. So that quarterly revenue would at one point rise and catch up on that backlog?

Operator:

Our next question comes from Vivek Arya with Bank of America. Your line is open.

Kurt Sievers:

Honestly, Vivek, we don't know. I would go over my skis to make a firm statement here. But indeed, Mobile, of course, has a couple of specifics which are driving it really low. There is a seasonal element to this, obviously. Secondly, we do have in Mobile executed our NCNR orders last year, which gives us a headwind from an inventory perspective, if you will. We firmly executed these NCNR orders because these are custom-specific products where we have no chance otherwise to move them around and give them to other customers. And then finally, there is the well-known and documented Android weakness, which continues to be. I'd say the following, as you see, we are very disciplined with customer inventory and mind you that our Mobile business, to the largest extent, is going through the channel. So if and when end demand picks up, rebounds, which I think it will, at some point, we should indeed very quickly see it. Is that exactly for the second quarter? I don't know, but we are very close to the post given the way how we treat this. I mean I'm glad you are asking, Vivek, because this whole thing around our almost brutal discipline on the 1.6 channel inventory moves us very close to as soon as there is pickup in end demand, we will also see it in our numbers.

Bill Betz:

Vivek, thank you for your question. Let me talk about Q4 and the Q1 guide and also looking ahead. First, as you know, we did slightly better than our guidance and I mentioned it was improved by product mix for Q4. Again, as we look into Q1, despite those lower revenues, we see this positive product mix offsetting lower fall-through on the revenue. Also, we have lowered our internal front-end utilization rates. In Q3, we were running in the high 90s. In Q4, we're about 90%. And again, remember, this is all linked to that non-auto industrial type of products because of market softness we're seeing. For Q1, we do expect to lower our front-end utilization again to about 85%, which is where we still remain constrained in our internal auto IP processing technologies and so forth. And again, I'd say, looking ahead, we expect to stay within our long-term gross margin forecast of 55% million to 58% as our cost structure today is more variable in nature than the past. Also, our factories, if you think about it, become more efficient when they run at normal utilizations and we have a disciplined inventory approach with their channels. So we're going to stay with that range. We're not revising it, but we feel very good about our gross margin performance.

Ross Seymore:

Hi, guys. Thanks for letting me ask the question. Kurt, I want to go back to your core Automotive and, I guess, Core Industrial business, not the consumer IoT side. I believe you said the demand was largely holding in well there, except for some of the channel dynamics in China. I guess overall, is that true? Is the core industrial especially holding in? And how do you delineate between the channel weakening and isolating that to a variable other than demand? Obviously, you can see this is coming out of China, and we know the COVID policy. But to the extent it's weakening, people aren't really going to care if the source is coming from this is having too much inventory or OEM slowly demand. Either way, it's kind of slowing even though the latter could by some sort of a temporary aspect. So any sort of color you could give on your core demand would be helpful?

Ross Seymore:

Thanks for the color. And I guess one kind of on utilization, inventory and gross margin all tied into one for Bill. It's impressive to see that your utilization is dropping and your gross margin is still staying at 58%. I guess, in the DIOs, is there a limit to which you would go on the upside there? I know your long-term target is 95%. I also know that you've been very clear as to why you're going above that right now. But is there a limit to how high you would go on days of inventory internally before you'd really have to ratchet the growth - the utilization down? And if so, how does that fold into what the gross margin that would be the outcome in that scenario?

Operator:

Our next question comes from C.J. Muse with Evercore. Your line is open.

Bill Betz:

I mean the only thing I would say that could cause gross margin to go below the long-term model that 55% to 58% is probably a prolonged global recession, that affects all of us, right? But if we're having the - what we're seeing right now, we think we'll - we will and plan to stay within that 55% to 58%, C.J.

Kurt Sievers:

Yeah, C.J. I'm happy to do that. Q4 was purely supply. We were a bit ahead of our, say, skis with the guidance because we know that more supply is coming up, and that's also why Q1 is now going much better. And that - there were some operational issues and we didn't get it going in Q4. So Q4 fail against guidance had nothing to do with demand, that was purely about a supply base. Now going forward, it is indeed such that I would say we are cautious when it comes to the radio power part of the business because the one area where we see build-outs in network infrastructure this year then it's India. So it's all about to what extent at what pace is this going to happen through the year. What is for sure is that it is much more and much faster leaning to gallium nitride versus LDMOS, which is favoring us and we just have to do a good job in increasing our supply capability to actually run up here. The one other piece within this Comm Infra and Other segments, which will matter this year, is actually the RFID tagging, secure and access cards and government identity products. There is a significant amount of pent-up demand C.J., which we could not serve the last 2 years which was our choice. I mean it is a technology which we have to use for other segments and other products. That is a classic demand, which doesn't disappear because it is about infrastructures, it is about government IDs, which people need around the world. So the demand is still there. Now we are actually moving the supply capability from other areas where the demand has softened into this and we are starting to serve it. So from a sub-segment dynamic perspective, C.J., think about this part being the one which is actually going to generate growth this year.

Joseph Moore:

Great. Thank you. I think you've talked about being for your Auto business having backlog coverage for the year. With the disruption in China, kind of would you still say that's the case? And as a follow-up, how are you guys thinking about NCNRs on your backlog this year? How flexible are you going to be if, for example, the China situation causes people to want to reschedule deliveries?

Joseph Moore:

Very helpful. Thank you.

William Stein:

Great. Thanks so much. The last couple of questions in particular are very helpful in understanding the sort of shape of demand. I'm hoping maybe we can talk a little bit about longer-term competitive dynamics, in particular, in the Automotive end market, you seem to be doing well in these growth areas. But Kurt, I'm hoping you can talk more about your position with the emerging Chinese OEMs, which especially in EVs have started to deliver some very strong growth. Can you compare your competitive position with those OEMs relative to how you've done historically with the bigger global ones? Thank you.

William Stein:

Great. Thank you.

Matt Ramsay:

Thank you very much guys for squeezing me in. Kurt, in your prepared script, you referenced the model from the Analyst Day sort of the $15 billion in revenue in 2024, and sort of reiterated the targets for sort of the core business and the new growth areas. But as we start on a sort of $12 billion run rate, and I know a couple of the segments are really down in the first quarter. But just on an annualized basis, I think we need to get to 6%, 7% growth or something like that for this year and next to hit that target. So maybe you could just give us a little more color on the specific drivers, not just in the next quarter or two, given the volatility, but over the next, like, 24, 36 months of how you see getting there from where we're starting? Thanks.

Matt Ramsay:

Got it. Thanks, Kurt. Just a quick follow-up for Bill. You guys pretty tight on OpEx in the first quarter. I think maybe a tiny bit above the 16% and 7% of revenue that you sort of laid out in the model, Bill, but on a pretty big down revenue quarter in a couple of segments, we potentially reaccelerate off the bottom in a couple of the segments that are challenged in China. Have you - are you going to reaccelerate OpEx at the same rate? Or is there a sort of - how should we think about that into the back half as the revenue potentially recovers? Thank you.

Operator:

Our next question comes from Stacy - yes, sir?

Kurt Sievers:

Yeah. Thank you - thank you very much, Jeff. Now as we have discussed, clearly, the level of uncertainty currently is higher than what we've had through the past couple of quarters. The stance we take is that we want to be prudent and disciplined to those elements, which are in our control. We just discussed about OpEx. But much more importantly, I think this is all about inventory management. There, we don't want to be blocked by a lot of over shipping into the channel and not having a deal anymore what the true end demand is. So that's why we focused on this call and also for our guide very much on that approach. For the channel, which mind you, is more than 50% for NXP, more than 50% of our revenues are going through the channel. So that discussion is a very important piece for us. With that, we are actually in a position to certainly navigate in a good way through this period of uncertainty and at the same time, remain very prepared for a potential rebound which we think could happen in the time to come, especially in China when the infection rates come down again after this policy change. With that, thanks for your attention. Thank you very much. I speak to you all soon. Thank you.

Operator:

Thank you for your participation. This does conclude the program, and you may all disconnect. Everyone, have a great day.

Operator:

Hello. Thank you for standing by and welcome to the NXP Third Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference may be recorded. I would now like to hand the conference over to your speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Kurt Sievers:

Thank you, Jeff and good morning everyone. We appreciate you joining our call today. Now, let me begin with a review of our quarter three performance. Our revenue was $20 million better than the midpoint of our guidance with performance in the Mobile, Automotive, and Communication Infrastructure markets all better than our expectations. For the consumer exposed IoT subset of the Industrial & IoT market, we started to experience weaker sell-through in the channel. And let me remind you that our consumer IoT exposure is approximately 40% of the Industrial and IoT segment revenue. It is made up of thousands of customers primarily in China and serviced through our distribution partners. Taken together, NXP delivered quarter three revenue of $3.45 billion, an increase of 20% year-on-year. Our non-GAAP operating margin in quarter three was a record 36.9%, 340 basis points better than the year ago period and 80 basis points above the midpoint of our guidance. Our results reflect strong execution with solid profit fall-through on the incrementally higher revenue and better than guided operating leverage. Notwithstanding our results, which surpassed our guidance, we are facing a tricky demand environment. On the one hand, the demand trends from automotive and core industrial customers are very resilient. And we continue to face supply constraints across multiple microcontroller and advanced analog products. And on the other hand, we see weakness in the broad consumer IoT and in the Android mobile market. Given that unbalanced dynamic of the demand environment, we are going to pull those levers that are in our control, namely stringent channel inventory management and discipline and discretionary operating expense. In terms of inventory, we have decided to take a Draconian approach to managing our distribution channel inventory. Specifically, our quarter four guidance contemplates a channel inventory at the 1.6 months of supply level, which is in line with quarter three and well-below our long-term model. We prefer to keep any incremental inventory on our balance sheet, where we have the ability to control and redirect shipments as needed. And in terms of discretionary spending, amongst others, we are slowing the rate of hiring. All-in-all, we believe these measures are a prudent approach until such time as we see a clearer and more consistent view of the demand environment. Now let me turn to the specific trends in our focus end markets. In automotive, revenue in Q1 was -- in Q3 was $1.8 billion, up 24% year-on-year, near the high end of guidance. In Industrial and IoT, revenue was $713 million, up 17% year-on-year, $32 million below our guidance. In Mobile, revenue was $410 million, up 19% year-on-year, $30 million better than our guidance. And lastly, Communication Infrastructure & Other revenue was $518 million, up 14% year-on-year, slightly above our guidance. Now let me look at key operating indicators relative to the noted demand dynamics, where we see the following. In terms of quoted product lead times, overall, we dropped to just below 70% of our portfolio with lead times that are greater than 52 weeks. This metric was greater than 80% a quarter ago. While this is in aggregate an improvement from prior periods, we continue to be sold out through 2023 in the automotive and core industrial end markets. In terms of our NCNR program, most of our automotive and core industrial customers continue to demand assured supply for 2023. Our 2023 NCNR order book continues to surpass our 2023 supply capability as well as the level of NCNR orders, which have been requested for 2022. And in terms of inventory, as noted previously, our Q4 guidance contemplates distribution channel at 1.6 months, well-below our long-term target of 2.5 months. With respect to on-hand inventory at NXP, our DIO has increased five days sequentially to 99 days, and it will increase further. Given the application-specific nature of our product portfolio, we are comfortable with this direction. Now let me turn to our expectations for quarter four. We are guiding revenue at $3.3 billion, up about 9% versus the fourth quarter of 2021, within a range of up 5% to up 12% year-on-year. And from a sequential perspective, this represents a decline of about 4%, at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the high teens on a percent basis versus quarter four 2021 and flattish versus quarter three 2022. Industrial and IoT is expected to be down in the low double-digit range on a percentage basis year-on-year and down in the high teens range versus quarter three 2022. Mobile is expected to be up in the low single-digit range year-on-year and down in the upper single-digit range versus quarter three 2022. And finally, Communication Infrastructure and Other is expected to be up in the low teens range versus the same period a year ago and flattish on a sequential basis. Now in summary, there is a real dichotomy in the various end markets that we serve. The potential for some demand destruction in the consumer end markets that we noted as a concern last quarter has materialized. While we could ship more into the channel, we are taking a proactive stance to limit channel inventory buildup. And conversely, we are seeing very resilient customer demand in the Automotive and core Industrial segments, where demand continues to outpace supply, which hinders us from shipping to the true end demand. So, overall, we remain cautious in the near term due to the uncertainties in the macro environment. And with that, now I would like to pass the call over to you, Bill, for a review of our financial performance.

Operator:

Thank you. [Operator Instructions] Our first question comes from Ross Seymore with Deutsche Bank. You may proceed.

Kurt Sievers:

Yes, good morning and thanks, Ross. Yes, the answer is a blunt yes. We could have shipped more into the channel against open orders actually in this fourth quarter, and that especially into the consumer IoT part of our segments. But as I mentioned, given the whole macroeconomic uncertainty, we just feel it is a much more prudent approach to actually limit this channel inventory at this very low level of 1.6 months and mind you that the delta to 2.5 months in terms of revenue would be about $500 million. And that's the level of open orders, which we would easily have, which we could serve. But we think it's more prudent because it's unclear how the macro is going to further develop and how the demand in that part of the market is going to develop. So we feel it's a better idea to keep what we have already in the pipeline to keep in-house and on the balance sheet, also for eventually being in a position to redirect it to other customers. Now that's the one side of the house. I just have to also remind you that at the same time, Ross, we have this real situation that in the auto and core industrial side of the house, we have the opposite situation. We do not have enough supply, so we continue to be sold out. And also there, we could actually -- if only we have the supply, we could make more revenue in quarter four. We have a lot of open orders, which are very real. We checked all of them, but can't really serve them. But again, back to your initial question, yes, we could sell more, but we found it is much more wise to stick to this very low channel inventory of 1.6 months at this time. It's not a long-term target, though, but at this particular period in the cycle, we feel it's the best thing we should do.

Bill Betz:

Yes. Thanks, Ross, for your question. And you're right, we did slightly better than our guidance driven by the higher revenues and fall-through. One area I think we need to understand a little bit better is that our internal utilizations remain in the high 90s as we are still well constrained specifically in our auto. And if you think about internally, more than two-thirds of our capacity is just pinpointed to our IP proprietary mixed-signal, auto-centric capacity internally. And we are constrained. As you heard Kurt mention, we are sold out, and we expect this to be well-utilized all throughout 2023. Second, as mentioned on previous calls, you're right, we mentioned we'd stay in a tight range, delivering toward our high-end model. And I think we've demonstrated that, and it's incorporated in our Q4 guide. And more longer term, what gets us to 58% is really those new product introductions, which are further out in the journey, I would say.

Kurt Sievers:

Thanks Ross.

C.J. Muse:

Yeah, good morning. Thank you for taking the question. I guess, the follow-on on Ross's question, I guess, can you comment on the ability at all to repurpose wafers capacity? My sense is internal versus external, the answer is no. And then as part of that, before coming to the recovery, you had a gross margin construct, I think, of every 5% change in top line, 100 bps growth in gross margins. Now that you see a clear mix shift here in terms of auto, core industrial holding strong, yet consumer weaker, is there kind of a thought process or model we should be thinking about on the gross margin side as we push forward into some sort of further correction on the consumer side?

Bill Betz:

No, nothing else there.

Q – C.J. Muse:

Thanks guys. Yes, just a quick follow-up. The China IoT piece, I would have thought that, that would have shown weakness earlier, so I guess, are there particular kind of sub end markets that have proven to be more resilient, at least until today, that's kind of enabled that to hold up or kind of can you give us a little more color on how to think about the key drivers within that bucket?

C.J. Muse:

Very helpful. Thank you.

Vivek Arya:

Thanks for taking my question. Kurt, for my first one, I'm curious to get your perspective on just the supply-demand equation in the automotive industry at your OEM and Tier 1 customers. Do you think they're still undersupplied or oversupplied or just kind of rightly supplied? And just what are the hotspots of over or undersupply right now? And just how is your visibility of growth into the first half of next year? I think you've added Q4 flattish, which I assume is more a supply variable. But just what's your perspective into the supply-demand balance at your auto customers right now?

Vivek Arya:

Got it. So my follow-up, you continue to build inventory on your balance sheet. And when I couple that with the fact that you mentioned you're sold out in automotive and core industrial, that's almost two-thirds of your business, so is it fair to assume that you're planning for next year, I know you're not giving 2023 guidance, but are you planning for next year sales to be at least flattish year-on-year with auto and core industrial growth offsetting any weakness on the consumer side, or is that stretching right too much the conclusion from combining the fact that you still continue to build inventory and your auto and core Industrial demand is sold out for next year?

Kurt Sievers:

Thanks, Bill. Let me maybe just add that one view on next year when it comes to automotive since you were asking earlier. We see no reason why the strong trend of content increase following, amongst others, electrification and ADAS would break. I think every quarter, we look at the ratio of electric cars of the total SAAR is higher than in the quarter before. For this year, we see now 27% of the total SAAR being ex EVs. And for next year, it's forecasted to be 34%. And you know what that means for the semiconductor content in a car. So from that perspective, I think there is, from a demand view, certainly good reason to believe that it continues to be a very strong and very resilient market, while at the same time, the extended supply chain in our view continues to be underfilled. It is still actually dysfunctional, because it is still too low level. So those two perspectives should maybe add to a pretty healthy view from an automotive demand perspective on 2023.

Operator:

Thank you. One moment for questions. Our next question comes from Stacy Rasgon with Bernstein Research. You may proceed.

Kurt Sievers:

Stacy, we have no cancellations or push-outs in auto or core industrial. At the same time, I don't have a crystal ball, and I don't want to take a position here to be the economic schedule is for the macro for next year. But -- so this -- also this guidance here is based on the orders and the supply capability which we have at hand for quarter four. But I can absolutely confirm no push-outs, no cancellations in core Industrial and Auto. And the one indicator which gives maybe a somewhat better feel on the longer term is the level of inventory sitting in the extended supply chains in those two markets. And from anything we can check and see there, that level continues to be super low. And that's why we continue to believe it should stay very resilient.

Kurt Sievers:

We will not speak about the mix because then it really becomes complicated. But it is not that we do not ship at all in the channel. We ship into the channel to keep a steady level of 1.6 months of inventory. So it's not to say that this is so dramatic that we have to stop all shipments. That's not how it works. We just -- we are very disciplined. Bill and I are actually sitting every week as we look at the sell-through and sell-in data with each of our distribution partners by segment. And then we make sure every week, that's not only at the end of the quarter, that's true for the quarter, that it doesn't surpass the 1.6. The change we wanted to communicate today is only that, so far, honestly, for eight quarters in a row, I was desperate to get it up. I mean, I would have wished we could have shipped more into it, in order to have a higher channel inventory. Now given those consumer trends, we are actually more disciplined to make sure it doesn't go higher, especially in those parts where actual demand is -- but it doesn't mean there is zero shipments.

Kurt Sievers:

No.

Kurt Sievers:

I'm not sure why you think it should be. No, it is not.

Kurt Sievers:

Yeah, Stacy, we are limiting shipments. But I mean I think about it this way. The industrial IoT segment is 18% of the total revenue of the company, and 40% of that is the consumer IoT, and that's still not at a zero shipment level. So it is not that dramatic from a change perspective.

Operator:

Thank you. One moment for questions. Our next question comes from William Stein with Truist. You may proceed.

Kurt Sievers:

We really don't have it broken down that way, but we’ll still -- the key shortages in the core industrial are indeed continuing to be highly escalated and quite painful. So I think I can repeat the statement I made earlier that while there continues to be a lot of public reports about the shortages in auto and much less noise about industrial, in our case, in the core industrial, we continue to be as short as we used to be before. I said it earlier, I think, in the context of a different question. Say for the next couple of quarters, I think about four or five quarters, we believe after risk adjusting our demand, we should have about 85% coverage against -- that used to be 80%. So you see we are five percentage points higher, but that is not necessarily because the supply capability in auto or industrial has gone up so much, it is just that the consumer IoT demand on the other side or for the total company has dropped such that in aggregate for the total we come up to 85%. But it continues to be equally painful in auto and industrial than it used to be.

Kurt Sievers:

Thanks, Bill. But that's a quick answer, no, we are not contemplating that.

Operator:

Thank you. One moment for questions. Our next question comes from Gary Mobley with Wells Fargo. You may proceed.

Kurt Sievers:

It's got nothing to do with channel or inventory, because we put the same discipline on all segments. Now it has to do with our strategy, which is really on content growth. Think about the mobile wallet. Think about the kicking in ultra wide bands. And we also have, I'd say, directionally, it's not black and white, but we have a bias to higher-end mobile phone market, which comparably is doing better this year than the very low-end Android. So I'd say, therefore two answers. Our company-specific content increase in share gains are working out. I mean, that is very much in line with how we put it a year ago at our Investor Day. And secondly, you might say we are in a good position because we are somewhat more exposed to the higher end rather than the feature phones, with the Android phones.

Kurt Sievers:

Yes. So first of all, of course, at all times, we will 100% make sure that we are in total compliance with any export control regulations, and so we are also after these latest changes. All of our assessment so far of these latest changes in the regulations show that, if anything, we have super immaterial impact on our revenues. When it comes to second or third order effect, which you were hinting to, also there I must admit we haven't really found anything, which looks like being an issue for us. But of course, we keep researching it. But at this point, I can only say no, if anything, only super immaterial impact.

Operator:

Thank you. One moment for questions. Our next question comes from Matt Ramsay with Cowen. You may proceed.

Kurt Sievers:

Yes, Matt. So we -- I give you here two answers. The one is the short term. So when it comes to the guidance for Q4 is really based on orders at hand. I mean we don't -- it holds a bit done, but we don't make these strategic considerations for the next three months. This is really about orders and supply capability. Longer term, say next year, again, I don't want to say I have the crystal ball. So we use IHS typically for the SAAR, which I think just updated their forecast for next year for a 4% SAAR growth to, I believe, something like 85 million units. However, it really isn't that important at all. What really matters is the content increase, which has a lot to do with the mix to e-vehicles, premium vehicles and other features kicking in. So I think the whole discussion around interest rates and recessions looming left and right, I agree with you it could have impact on the demand behavior of people buying cars. But unless that drops incredibly far down, I believe that the content -- semiconductor content per car is actually dumping the moves on the SAAR itself. And that is for us much more relevant. But again, I mean, we don't guide next year. I don't know what it is going to be, but we really should more and more start to look at this as a semiconductor company and industry from a content perspective rather than a unit perspective in automotive.

Kurt Sievers:

Well, actually, we not only look at it, but we work the system end-to-end. So we are also very busy with companies building and providing the charging infrastructure. I think we have revealed earlier, so I may use the name. We work closely with ChargePoint, for example, in the US. And that is not only on the charging, but that even includes payment to make this a very seamless process for the consumer. So our payment and identification and security technologies are also being included in this. So yes, we look at it as a -- from a total end-to-end basis. However, I have to say this still means we are not going into discrete power. So whenever these systems and wherever they need discrete power solutions, so like silicon carbide, this is not our focus. Our focus remains on the advanced analog and logic products, which we think is about 50% of that opportunity.

Operator:

Thank you. One moment for questions. Our next question comes from Joseph Moore with Morgan Stanley. You may proceed.

Kurt Sievers:

Yeah. Indeed, that is strategic requirement, which, in many cases, OEMs are and have been putting on Tier 1s. My guess is -- it's very hard to get the full picture of this, but my guess is that in some few cases, they start to be able to start building somewhat on a lot of those core products which are plaguing us and others from a sheer built performance perspective, they are very, very far from achieving anything in this, because, again, even before that would happen, the whole supply chain, the whole extended supply chain needs to build a higher inventory level. That's not just in one company, but it's just that the whole trade becomes more functional. So, I would say, given the end demand trends and how I would judge the supply capability of us and the industry, this will take all of next year still, before we come even close to that requirement.

Operator:

Thank you. One moment --

Joseph Moore:

No, I'm good, Jeff. Thank you.

Operator:

Thank you. One moment for questions. Our next question comes from Toshiya Hari with Goldman Sachs. You may proceed.

Kurt Sievers:

Yes, Toshiya, so as a good practice, as we've done for last year, we will provide the full year pricing impact for calendar year 2022 in quarter one of 2023. It's still very, very dynamic, I would almost say day-in, day-out. So we will give you and provide you the aggregate pricing impact on our revenue growth for this year in Q1 of next year. From an overall dynamic perspective, we continue to see quite sizable cost -- input cost decreases to us. That is from the foundry partners, but there's also a lot of other inflationary cost increases. And, of course, we absolutely walk the talk that we stick to our strategy to pass on those input cost increases to our customers to exactly that level that we can protect our gross profit percentage. And seeing how the supply-demand imbalance in our core markets is moving into next year, I guess, it is reasonable to assume that we will continue to raise prices also next year. We are now so much to the end of 2022 that I think it's fair to say it's highly likely that we will also continue next year's prices, just following those input cost increases.

Kurt Sievers:

Yes. Go ahead.

Kurt Sievers:

So let me quickly take the utilization, and Bill is going to speak about CapEx. On the utilization, yes, we will stay very, very highly utilized because, as Bill put it earlier, the majority of our internal front-end factories are working for automotive and core industrial. So that's exactly there where we see the strong demand continuing, and that's why the utilization rates there will stay very high. Bill, over to you for CapEx.

Toshiya Hari:

Thanks so much.

Kurt Sievers:

Yeah. I guess that gets us to the end of the call. So in summary, I would say we are cautious in the near-term given all the macro uncertainty. However, under the surface, we see what I call the dichotomy, which is really a very disciplined approach to a weakening consumer IoT market, where we want to stay ahead of the game and not trap the channel while, at the very same time, we continue to be supply constrained quite significantly in our core industrial and automotive markets, where we try to do everything in-house and with our foundry partners to get the supply the soonest in line with the pretty resilient demand signals, which we are having. And that sets it for the call today. Thank you all very much. Thank you.

Operator:

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good morning, ladies and gentlemen. Thank you for standing by and welcome to the NXP Second Quarter 2022 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator instructions] Please be advised that today's conference maybe recorded. I would now like to hand the conference over to your speaker host today, Jeff Palmer. Please go ahead sir.

Kurt Sievers:

Thank you very much, Jeff, and good morning everyone. We appreciate you all joining our call today. Let me begin with a review of our quarter two performance. Our revenue was $37 million better than the mid-point of our guidance with automotive and industrial and IoT above our guidance while trends in the mobile and communication infrastructure markets were in line with our expectations. Taken together, NXP delivered quarter two revenue of $3.31 billion, an increase of 28% year-over-year. Our non-GAAP operating margin in quarter two was a record 36%, 400 basis points better than the year ago period and about 30 basis points above the mid-point of our guidance. Our results reflect strong execution with better than guided operating leverage and profit flow through on the incrementally higher revenue on top of improved gross profit. Now let me turn to the specific trends in our focused end markets. In automotive, revenue was $1.71 billion, up 36% year-over-year near the high-end of guidance. In industrial and IoT revenue was $713 million, up 25% year-on-year better than our guidance. In mobile, revenue was $388 million, up 12% year-on-year in line with our guidance. And lastly, communication infrastructure and other revenue was $498 million, up 20% year-on-year in line with our guidance. Looking at the trends across our end markets, we are not naïve to believe. NXP is immune from the clearly weakening macro environment. We are highly alert and we review frequently and very closely several key indicators relative to the dynamics of customer demand versus supply, inventory per channel, per end markets and per geography. When we look at demand signals, we have a high level of confidence in the intermediate term outlook. This is especially true in terms of demand trends in the automotive and industrial markets, which account for the majority of our total revenue. While there is well documented weakness in the low end Android handset markets, it is important to note that our mobile business is more biased towards the premium-tier members. And in aggregate, our mobile business accounts for only about 12% of our total revenue. In terms of the PC and broad consumer electronics markets, there are much smaller contributors in the IoT portion of our industrial and IoT segment. In terms of customer behaviors, we do not see any substantial weakening within the auto and industrial customer base. Relative to long-term committed customer demand, a large percentage of our major customers continue to firmly desire our supply assurance, commitments which are facilitated by placing non-cancelable non-returnable orders with us throughout 2023. And currently, the level of NCNR orders into 2023 is greater than our ability to service. In terms of key operating metrics, which inform our short term decisions, demand continues to outpace our gradually and incrementally improving supply capability. Furthermore, even as we actively de-risk our existing backlog for potential double or any stale orders, we judge supply to only address approximately 80% of the underlying demand. Additionally, we continue to redirect shipments to those customers, which are at risk of going limestone thus avoiding excess or stagnant inventory buildup. When looking at customer inventory, we continue to see a dysfunctional supply chain, which struggles to get the right product mix and complete kits to the correct location in the extended automotive and industrial markets. Now, in terms of our own on hand inventory, it has increased through quarter two on a dollar basis consistent with orders placed with suppliers and internal built plans. The primary area of increase is in raw material and work-in progress in order to fulfill firm customer commitments in future and especially in quarter three. On a days basis, DIO was 94, an increase of five days sequentially and closer to our long-term target of 95 days. Now moving to the distribution channel, which services about half of our total revenue, inventory continues to remain stubbornly below our long-term targets. During quarter two, the months of supply in the channel was barely 1.6, which is about a month below our long-term target and it is now the seventh consecutive quarter of an exceedingly tight supply situation in the channel. Finally, let me speak to our ability to service customer requirements. Lead times continue to be extended with more than 80% the whole products being quoted at 52 weeks or greater, which is actually on a similar level to last quarter. So in summary against this dynamic backdrop, our second quarter and the first half of the year was a good beginning to what we view will be a positive year for NXP. We do continue to see the second half of the year greater than the first on an absolute dollar basis. Now let me turn to our expectations for quarter three. We are guiding revenue at $3.425 billion, up about 20% versus the third quarter of 2021 within a range of up 17% to up 22% year-on-year. From a sequential perspective, this represents growth of about 3% at the mid-point versus the prior quarter. At the mid-point, we anticipate the following trends in our business. Automotive is expected to be up in the low 20% range versus quarter three 2021 and up in the mid single digit range versus quarter two 2022. Industrial and IoT is expected to be up in the low 20% range year-on-year and up in the mid single digit range versus quarter two 2022. Mobile is expected to be up about 10% year-on-year and down in the low single digit range versus quarter two 2022. And finally, communication infrastructure and other is expected to be up in the low double digit range versus the same period a year ago and up in the low single digit range on a sequential basis. Let me summarize. The growth we have anticipated for 2022 is materializing, notwithstanding the clear macro cross currents and the continued supply challenges. We do continue to see strong customer demand in the automotive and industrial segments as well as within our company specific accelerated growth drivers. Overall, demand continues to outpace increasing supply. However, we are staying paranoid about the macro environment and hence we will continue to work very diligently and in a very disciplined manner to assure inventory across all end markets remains lean. And with that, I would like to pass the – Bill over to you – the call over to you Bill for a review of our financial performance. Bill?

Operator:

Thank you. One moment for our first question. Now, first question coming from the line of William Stein from Truist. Your line is open.

Kurt Sievers:

Yes, thanks. Thanks, good morning Bill. What I try to convey is indeed, first and foremost, that for the foreseeable period ahead of us we are actually only covered with 80% with our supply against true demand which we see. And when I say true demand then that comes back to the risk adjustment. For good reasons we have never revealed the size of our backlog through the past quarters, because I think I have always been clear that we’ve always believed inside the huge backlog there might be double orders which is just normally human behavior in times of slowness. Now over the past quarters we have clearly learned much more from a transparency perspective about the true minimum needs of our end customers across all markets. And we have very rigidly applied to that knowledge to try and actually risk adjust that backlog in order to come to a number which is mainly more meaningful. And I just want to emphasize after doing that Bill we still have only that 80% coverage of our increasing supply capability against that risk adjusted demand. So what we try to say is we try to be realistic around the size of the backlog that’s why we risk adjust it and that is different in each of the markets we serve, the result of it leads in the foreseeable future to 80% coverage of that adjusted demand.

Kurt Sievers:

Yes, clearly we absolutely stick to our hybrid manufacturing model. We continue to believe, and I think the results of the past six to eight quarters have given good evidence of that that this is for the portfolio we are serving a very superior model of serving the needs of our customers. And what that means is that indeed we are working on both ends of the equation, about 60% of our current wafer supply is coming from foundry partners and that is more and more predominantly tuned into seamless logic processes. Especially, when it comes to 300 millimeter and when it is below 90 nanometers. And in there, we are definitely ramping up significantly our partnerships and our strategic collaboration with key foundry partners. We've spoken about this in the past, and that is also what clearly is helping us in the past quarters. In the coming quarter, we talked about the sequential growth going forward and incrementally increasing our supply. At the very same time, we are remodeling our own factories, which are all 200 millimeter facilities to be the prime place for manufacturing proprietary, specialty processes which are unique to NXP. And by moving out more of the CMOS to our foundry partners, we are creating more space internally in our existing facilities to serve the increased and ever growing needs for these proprietary technologies going forward. So that is a refinement of the hybrid model, but it's still important that I really want to emphasize, we stick to the hybrid model, which again has also allowed us to outgrow our key pillars in that market over the last six quarters.

Operator:

Thank you. One moment for our next question. And our next question coming from the line of Ross Seymore with Deutsche Bank. Your line is open.

Kurt Sievers:

Yes, so thanks Ross. First of all, indeed, we try to make sure that you all hear loud and clear that we are not neglecting the cross currents in the macro, which have also started to be visible in our orders, especially in the mobile market. Now mobile is for us relatively small, so it doesn't really impact the whole company very much. But the principle we are applying is to be hyper disciplined and hyper paranoid to not grow any inventory down the chain. So, we try to stay there as disciplined as we can be. And the first area where we are applying this as we speak is in our mobile market and to a certain extent in the small portions of consumer, more consumer-oriented segments inside our industrial and IoT sector. Now, when you ask about the second half, yes, we are confirming within that more turmoiled macro that the second half is going to grow sequentially over the first half in absolute dollar terms. We just gave you the guidance for quarter three. I don't have a crystal ball for quarter four, but I can tell you that we remain totally sold out for the rest of the year. I also tried to highlight that supply continues to ramp up sequentially into the next quarters. So I cannot really make a firm assessment on what mobile and other consumer markets will do into the fourth quarter. But clearly from the strength in the automotive and industrial sectors, which we are serving, we are quite optimistic for the second half to also continue to grow sequentially.

Bill Betz:

Yes. First off, thanks Ross for your question. And I wouldn't read too much into it. First off, there is no change to our capital return policy. I stated many, many times we will return all excess free cash flow on a trailing 12-month basis. During Q2, in my prepared, remarks, we returned 132% of our trailing 12 months for free cash flow. Remember we also raised our dividend in the quarter by 50%, and we still have authorization buyback of over $3 billion from our board. At the end of the year, we do expect to return to be at least a 100% or higher consistent with our state of policy.

Operator:

Thank you. One moment for our next question. Our next question coming from the line of C.J. Muse with Evercore ISI. Your line is open.

Kurt Sievers:

Yes thanks C.J. That's not an easy question. I dare to follow IHS in the first place, which, I think, hasn't changed the forecast for this year for the SAAR very much. I think they continue to speak about like a 5% growth of the SAAR this year, which would get us to, well, just short of 81 million cars this year. However, that includes a 9%, half two over half one growth in car production this year, which is not a big surprise because, I think, half one again has suffered massively from semiconductor shortages. And especially in the second quarter, it has suffered a lot from the COVID shutdowns in China, which impacted mainly the Japanese, Chinese and Southeast Asian car production. I mean, there was a little less pronounced for the Western world, but a lot in China and Japan. And mind you that China continues to be the largest car country in the world. So, from a shorter term perspective, C.J., I think half two car production will grow quite nicely over the first half, finally. And that trend should also continue according to IHS into the next year, which I think, will be another 8% growth or so. All of that in our views is still probably short of consumer demand. Now it will depend on the macro and looming recessions in different geographies to what extent consumer demand is muted for cars. But we think the car production is so low and so far below the highs in 2018 or early 2019 that even if consumer demand is muting, there is still a gap such that, I think, it's very realistic to assume the car production continues to grow. Now at the same time and I know we've discussed it to depth before, the bigger factor for us, however, certainly remains the content increase. And from a content increase, it's just amazing every quarter I come with new numbers here, especially EV penetration has accelerated again. I think the latest forecast for this year is now the 26% of the global car reduction is going to be XUVs. I think last quarter we talked about 23%. I mean, these are massive numbers and, and this 26% this year is in absolute terms of 46% year-on-year growth in XUV production. And again, mind you that with our battery management, inverter control and many, many microprocessors and micro controllers associated with XUVs and an overall semi contact which is more than 2x relative to combustion engine cars, this continues to be a massive momentum ahead of the car production, which in it itself is now also growing. So sorry for the lengthy reply, but we are quite animated about the fact that there continues to be a big gap there. And the content increase is pulling the cart for us.

Kurt Sievers:

Well, first off of your question, yes. Second half, I will not comment to, because the matter of the fact is yes what I described will very naturally with continuously growing demand leads to a moment where our internal four walls existing capacity, even after the reshuffling I described will not be enough to serve future demand. So yes, we will do something about it, but there is various different ways of achieving this C.J. So it don't get – got locked down into the idea with TSM. There is all sorts of options, which we can do including, but again, not exclusively, but also including the opportunities which are being provided by the trip techs in Europe and the U.S. where the majority of our facilities are.

Operator:

And our next question, coming from the line of Vivek Arya with Bank of America. Your line is open.

Kurt Sievers:

Yes, thanks Vivek. Let me start with the second part, the pricing. Given the very stubborn imbalance between supply and demand in most of the technologies needed for automotive I have a very high confidence that the pricing is very stable. I would actually, and maybe unfortunately go a step further. We do continue to see our input cost rising also into next year which would indeed force us to also continue to raise our pricing. So rather than thinking about pricing to become software again, I believe that especially in the automotive environment where there is supply demand imbalance is heading into next year there is a chance that pricing continues to go up into next year again. And I think I said it [indiscernible] a number of times, we have a very and very much transparent policy here that we are increasing our prices to the customers in line with the input cost increases, which we are experiencing in order to protect our cross margin percentages. So on that side from a pricing perspective even with a flat car production or maybe, as you said – as you suggested, which I don't think is going to be the case, reducing car production, I think, that would still be the case because of the content increases, which are driving so much demand anyway. Now the other side was the supply situation, per se, in a way I answered it, given content increases, surpassing the impact or out balancing the impact of the SAR so much, I unfortunately believe that even in a soft reduction of SAR next year, we would continue to see in many technologies, an imbalance between supply and demand next year.

Bill Betz:

Hey Vivek, this is Bill. I'll take that question. So, related to the high end of our model, yes, we are performing at those levels at this current time. I would just like to remind everyone that we will focus on growing our top line or revenue and a faster growth at the top line of 1% will be greater and better than a 1% change in our margin as we go forward. We're not going to update our long-term model every quarter or every year. And we'll revisit this during our normal three-year long-term model that we provide, or if there's any material change to our business model. So no change, we feel very confident to run like I mentioned, last call in the – toward our high end of the model for the rest of the year.

Operator:

Thank you. One moment for our next question. And our next question is coming from the line of Gary Mobley with Wells Fargo. Your line is open.

Kurt Sievers:

Well Gary, I mean, we give a guidance with a midpoint and a range in order to comprehend risks and opportunities at the same time. I think the elements you just listed are certainly part of both potential risk and potential opportunities. Again, we carefully thought about weighing the upsides and downsides, and that's why we landed on the midpoint of $3,425, as we just guided a couple of minutes ago. I would say the following. For us, the overall sentiment is given the big percentage in our revenue is obviously dominated by how automotive and industrial markets are going. And here a guidance for the next quarter is really driven by what we hear from our customers. I mean, it's such a short period of time in a way that it is really just tuned into the short term customer confirmed orders and our supply capability. And the way I would put it Q3 upsides are probably more than anything dominated by our supply capability since we are sold out for the quarter.

Kurt Sievers:

Well, the six – the six accelerated growth drivers. I mean, we guided them for three years. When we did our Investor Day in November of last year that was really meant us a three year guidance. And you've also seen there the relative sizes between them and the relative growth speed. And I think, Bill, in his prepared remarks emphasized that we are – what did you say very well on track Bill for all six of them? So I think the way you should look at this is that all six are very much intact, and the relative contribution of them is in line with how we guided them at the Invested Day last November. There is no change, but what I think is important to say is that they're all on a very – on a very good track.

Operator:

Thank you. One moment for our next question. And our next question coming from the line of Joseph Moore with Morgan Stanley. Your line is open.

Kurt Sievers:

Yes, Stacy [ph]. That is an important dynamic indeed. So in general I'd say the OEMs try to leave that challenge with the Tier 1s. There might be exceptions here and there, but the, the more general direction is that the OEMs put this on the shoulders of the Tier 1s. Size of that is varying. We see and hear about requests, which are in the order of three months. We hear others which talk about six months of inventory. It is also not the same for each product. They categorize, I think more into very single-source, very strategic products versus more commodity like products. So it has all sorts of variations, but I think first of all general message more with the Tier 1s than the – than the OEMs. Has it started yet? No. The supply capability at least relative to NXP product, I mean, I can't make that that comment for my peers, but for our product, no, it hasn't started yet. Any inventory built, which accidentally might happen at Tier 1s at the moment is indeed more related to the golden screw problem where it builds for a while and then it flushes through again when the golden screw product becomes available, but that's not associated with or because of the intended safety stocks. I believe that someone in the course of next year that will Bill in a more methodical way start to be – start to be built. I do indeed believe that towards six months might be a consensus many of them want to achieve, but again only – only in the course of next year.

Operator:

Thank you. One moment for our next question. And our next question coming from the line of Stacy Ragson with Bernstein Research. Your line is open.

Bill Betz:

Yes. So probably that is a matter of fact for especially the mobile market where you saw that we actually guided sequentially a touchdown since we are not overly but we are also exposed to the low-end Android players in China. And I have a total paranoia to not build any inventory there. So I'd say there is probably indeed a risk adjustment on, from the macro perspective relative to mobile in that particular part of our business. There at the same time in auto and industrial for the third quarter, I can only repeat what I said earlier. We are sold out and the revenue capability is much more detail mind by our supply capability in the third quarter. So it's a mixed picture where the maturity is, is clearly continues to be supply constraint.

Bill Betz:

The risk adjustment – let me take one more.

Bill Betz:

The risk adjustment was also a longer term message which is really related to the assessment of about 80% supply coverage against demand. That is not just a statement for Q3. I mean, that is really a statement for the longer term period. I would go that far to say it includes very large parts of next year, actually where that judgment is done after risk adjustments and risk adjustments are also when we – when we get order patterns say in automotive from automotive customers and we add them all up and then we know what content increases should be. We know where the car production could possibly be next year. And then of course you see that all the different Tier 1s want to win market share. All the OEMs want to win market share against each other. And the sum of the parts is the bigger of what could be realistic. So then we make a risk adjustment to this because we know that the SAR can only be at a certain size next year. So that's, that's one of the elements, which I would label practically speaking risk adjustments, where we bring down what looks like overwhelmingly huge backlog.

Kurt Sievers:

Well, indeed. Sorry, I know that most part of an earlier question, I think I missed – I missed speaking to it. Well, it's like with every contract. There is clearly a legal system in place. But in the end of course reasonable behavior will prevail. What I can tell you, however is that so far every one of them has been – has been fulfilled. I mean, there is no – we don't see any in automotive industrial. There is no pushout, there is no cancellation. People want to have more products, now, how that looks at some time in the future, when maybe macro continues to change more, could be different. But fundamentally we put that system in place in order to make sure that our customers are serious. And think two times and three times about what level of orders they want to put on us and mind you that in many markets different products from different customers go into one end product. So we have to make sure that there is a proper allocation between them then otherwise the car company is only suffering in the end. I mean, if there is too much orders from one Tier 1 and the other one orders not enough, then it doesn't help the car company. That's another reason why we are really trying to put NCNR in arsenal place in order to hold people to the truth.

Stacy Ragson:

Got it. That's super helpful guys. Thank you so much.

Operator:

Yes. Our next question coming from the line of Matt Ramsay with Cowen. Your line is open.

Bill Betz:

Sure. Thank you for your question. Again, we continue to do very well here, as we are operating below the 23% long-term model. Q2 we finished at 21.9% and that was slightly better than our guide, and I think we just guided 21.7%. And again, that primary increase from an absolute standpoint is really being driven by our new college graduates joining the company and continuing R&D investment supporting our growth ambitions. Now, if there is a downturn, what will we do? We have a plan for that. It's well defined and it's all around protecting our free cash flow. Our plan actions would potentially include reducing variable compensation, reduced discretionary spending, reducing noncritical CapEx, we'll slow down our non-engineering hiring, and also right, our attrition runs around 10%, 12% we would obviously not back fill all of those depending on how severe it gets. But at all means we will protect our R&D engine of the company, which I've said in the past as well as Kurt is the lifeblood of our growth. And then similar with optimizing our costs, you have to remember the last two years we've been optimizing toward material shipments to prevent customer line downs, we haven't been focused on our mix or optimizing of costs or yields or cycle time. So that's another level that we have in our playbook to maintain our margins in our range that we shared during our Analyst Day.

Kurt Sievers:

Yes, absolutely. Matt, I guess that really has to do with the – with the mix of our end market exposure. So I would actually confirm that in mobile, we are probably moving away from supply constraints but those technologies are badly needed in other markets, which we are serving, which are heavily underserved while the demand there continues to go up. So it is of course a puzzle where we quickly try to redirect from where demand is softening, and again that's especially the low-end Android handsets. And some of the – some of the more consumer oriented products in China, which is little for us. I mean, that the whole point is this is not that much for us, but that little where we have it, we move it to other areas in auto and industrial, we are actually demand continues to go up such that in bottom line in the end we be unfortunately, and I really have to put it that way. We are still at a similar lead time pattern as we had indeed last quarter, which is did about 80% of the portfolio since at 52 weeks plus lead time, but it is different product. So that that's why I totally understand and support your question, it is not exactly on the same products because it's moving but in the mix it still – it still stays at that level.

Operator:

Certainly. And our last question coming from the line of Toshiya Hari with Goldman Sachs. Your line is open.

Kurt Sievers:

Yes. So first of all relative to the lockdowns, I mean, we had indeed also risk adjusted our quarter two guidance, which had to do much more with supply than demand that was about epoxy suppliers, leadframe suppliers and others. And as you can see from how we managed to make our actuals work, some of that exactly materialized, I mean, indeed we sold it, however, we see now since June pretty significant and impactful stimulus programs by the China government, which are starting to take effect, and that's both into the industrial as well as into the automotive market. So there is a slight optimism, notwithstanding the risk of further lockdowns, of course, in China, but from a government stimulus program perspective, there is optimism both for the industrial as well as for the automotive markets in China for Q3 and for the second half of the year. I had – I think, mentioned it briefly in my prepared remarks our channel inventory is sitting still only at 1.6 which is very low and mind you that the industrial business of NXP and with that especially in China is dominated by the distribution channel. So a lot of that is in China, and as you can see it, it really hasn't moved up much. I think we had 1.5 the last two quarters, 1.6 before. So we are still hovering at that very low level, which is a month below our 2.5 target actually.

Kurt Sievers:

Yes. I'll take that one. Thank you for your question. NXP is a global company. We're U.S.-based we're naturally hedge against the Euro. So I'm not really too concerned about it.

Kurt Sievers:

All right. So I think that gets us to the end of the call. And let me just highlight once again, we feel we have operated well in the second quarter in a pretty turmoiled environment. We are also very cognizant of the of the macro cross currents, which we also discussed quite a bit in this call. Yet the outcome is that in the majority size of our revenues which is the industrial and automotive markets, we continue to be sold out. We think the underlying secular growth trends especially from content increases both in industrial and automotive applications are also providing a pretty safe landing going forward relative to demand. The one thing which we are very paranoid and very hard working on is indeed making sure that our inventory down the chain remain low. We think today they are low. We have evidence of this in the channel with 1.6 months and our whole focus day-in day-out is to make sure that on the one-hand we organize more supply. But on the other hand we make sure that there is no excess inventory being built in the market down there. With that I want to thank you all on behalf of NXP for today's call, and see and speak to you all soon. Thank you very much. Thank you.

Operator:

Ladies and gentlemen [indiscernible] our conference for today. Thank you for your participation. You may now disconnect today. Good day.

Operator:

Good day, and thank you for standing by. Welcome to the NXP First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Kurt Sievers:

Thank you, Jeff, and good morning, everyone. We appreciate you joining our call today, and I can tell you, after two years, finally, I do very much look forward to a series of in-person investor meetings through the rest of this week. Now let me begin with a review of our quarter one performance. Our revenue was $36 million better than the midpoint of our guidance with automotive, industrial, IoT and mobile at or above our guidance. So trends in the communication infrastructure markets were just slightly below our expectations due to supply issues. Taken together, NXP delivered quarter one revenue of $3.14 billion, an increase of 22% year-on-year. Non-GAAP operating margin in quarter one was a strong 35.7%, 480 basis points better than the year ago period and about 70 basis points above the midpoint of our guidance. Our results reflect strong execution with good operating leverage and profit fall through on higher revenue, improved gross profit and modestly lower operating expenses. Now let me turn to the specific trends in our focus end markets. In automotive, revenue was $1.56 billion, up 27% year-on-year, in line with our guidance. In industrial and IoT, revenue was $682 million, up 19% year-on-year better than our guidance. In mobile, revenue was $401 million, up 16% year-on-year better than our guidance. Lastly, Communication Infrastructure and Other was $496 million, up 18% year-on-year just modestly below guidance as a result of ongoing supply changes. Overall, the demand in our strategic end markets continues to be robust, putting our customers' requirements in excess of our improved supply capability. And in that context, let me provide some data points of what we see in our daily engagements with our customers. In the distribution channel, which services about half of our total revenue, inventory remains [indiscernible] only below our long-term targets. During quarter one, the months of supply in the channel was 1.5 months, which is about a month below our long-term target. And it is now the sixth consecutive quarter of an exceedingly tight supply situation in the channel. Internal inventory days continue to be below our long-term target of 95 days. In quarter one, DIO increased by six days with all of the increase in support of our growth outlook for the second quarter. Lead times across the board continue to be extended, with more than 80% of all of our products being quoted at 52 weeks or greater. Essentially, we are supply constrained for all of 2022. The level of inbound supply-related customer escalations continues to be elevated across all focused end markets and regions. And lastly, let me zoom in on the trends we see in the automotive market. In the U.S., new car inventory at dealers is substantially below historic levels at 27 days versus the historic metric of 64 days. The pace to xEV vehicle penetration globally continues to rapidly accelerate hitting 19% of global production in 2021 and is expected to hit 23% penetration in 2022 and moving to 30% next year in 2023. With xEVs having roughly 2x to semiconductor content, this is another strong secular tailwind to semiconductor content growth. The Ukraine war has disrupted predominantly European Tier 1 suppliers and OEMs with shortages of wiring harnesses. In China, the COVID-related shutdowns are creating yet another level of significant supply uncertainty. The extended auto supply chain continues to be very lean, with reported days of inventory at the Tier 1s and at the auto OEMs out of sync with each other. And lastly, based on our very frequent and detailed customer conversations across the supply chain, the Tier 1s and OEMs continue to be challenged by kitting issues to complete module and vehicle assemblies. These kitting issues are not due to one semi supplier or shortage of just one common golden screw device. Against all of this dynamic backdrop, our first quarter was a very good beginning to what we view will be a positive year for NXP. In the face of the loaded customer escalations and elevated lead times, we are proactively and relentlessly working with our customers to redirect material to assure that customers get what they need, where they needed and when they needed. And zooming out, customers have begun to much better appreciate and embrace the strategic value of semiconductors play in their long-term success both from an innovation as well as a supply perspective. Hence, as a result of our adaptability, the level of engagements with strategic customers is resulting in unprecedented levels of customer intimacy. Our engagements are unlocking new and significant long-term customer arrangements and cooperation that is closer than ever, which will enhance our relative market share over the longer term. Now let me turn to our expectations for quarter two. We are guiding revenue at $3.28 billion, up about 26% versus the second quarter of '22 within a range of up 22% to up 30% year-on-year. From a sequential perspective, this represents growth of about 4% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business

Operator:

Thank you. [Operator Instructions] Our first question comes from Gary Mobley with Wells Fargo Securities. Your line is open.

Kurt Sievers:

Yes, hi, Gary. So indeed, it came down somewhat, which is simply a consequence of selling that part of it. So it's just the regular revenue, which -- so it was converted into revenue. Going forward, I would not exclude that we might again enter into longer-term obligations with our suppliers. Since the context and the environment of the, say, supply-demand situation has not fundamentally changed, which means we are effectively sold out for the rest of this year. Certainly in certain technologies and capacity buckets, we also see that demand will continue to outstrip available supply further into the future, so also going into next year. And with that, yes, I would not exclude that we also enter additional and separate supply commitments to the ones which are in place already.

Bill Betz:

Sure, what we've mentioned related to pricing from our customers is that we're only passing on the higher input costs and inflationary costs that we're seeing on to our customers related to it. If I look internally, we do about 43% in-house on our front-end manufacturing side. And we are running in the high 90s compared to a year-ago when we were in probably the mid-80s. So we're maxed out internally from a utilization standpoint, expect our margins to be, as I indicated in my prepared remarks, to be at these levels, plus or minus the 50 basis points we talk about mix in any given quarter. Our #1 priority is really servicing our customers with as lines are down, escalations are occurring, and we're doing everything possible firsthand for our customers.

Operator:

Thank you. Our next question comes from Vivek Arya with Bank of America. Your line is open.

Kurt Sievers:

Yes, good morning, Vivek. Indeed, I mean that question, we also watch that very carefully. And I can tell you from continued very personal experience. So I continue to spend a good time of my work week in escalation calls, especially with automotive and industrial customers. It is actually to the point now on this kitting that we are here and there redirecting product because it is falling so short in places that we actually go back to other customers and ask if not, they have a few parts, which they only maybe need a week later and then we use that week to redirect the part to somebody else. So I think we are extremely close to the pulse of the production of our customers and our customers' customers. So this is a triangular supply relationship with the Tier 1s and the OEMs, which is why I have a very, very high confidence that we are not at all over shipping but actually barely meeting the demand. I would actually say Vivek the reduction we have now seen from IHS in the forecast for the SAAR for this year, I think it came down from something like 8% to 9% in the last quarter to now a forecast of only 4.5%, so almost halved. A good part of that is due to semiconductors again. So all of these modulations you see there in terms of possible demand is actually above what we can service anyway. So that's why we still fight day in, day out to try to fill holes and actually meet production demand. From a bigger contextual perspective because you mentioned again this striking delta between SAAR and the, say, the semi shipments into automotive, it comes back to the same points we had mentioned earlier, which is a massive and accelerated content increase, thanks to the penetration of xEVs. And I have to mention also premium vehicles. So what we did now is we looked at the combination of premium ICE vehicles plus xEVS. And if you put that in one basket because it has similar levels of semiconductor content, you actually find it's about 30% of the global car production already. And along that is double from the levels we had in 2017 or 2018 pre this whole turmoil. So our content increase continues to be an accelerating very strong factor. Then there is certainly a portion of pricing. There are the NXP-specific share gains, which continue to be very much in check, I would say, with our planning. And finally, there is this inventory situation across the extended supply chain to actually keep it functional. And I can only say it continues to be dysfunctional, so the overall inventory level across the extended automotive supply chain is still too low, which means the whole thing is totally dysfunctional.

Kurt Sievers:

Well, Vivek, I would say, in principle, we don't guide here next year. And in the end, what counts is the model which we have given you in our Investor Day back in November of last year. Yes, I think I can give you a few bits and pieces to this question. Clearly, our gross margin benefits from utilization of our internal facilities at the moment. We are running full out. Secondly, and Bill just replied this to a different question. We are compensating our input cost increases with price increases to our customers. And I absolutely do not believe that pricing will go backwards going forward. I think the environment is simply such that we move now to a higher level of pricing. And this is to stay. So that doesn't mean that there are not ASP erosion again going forward but from that higher level. So don't worry about that impact on the gross margin. I think the pricing is a step function, which has been or is being achieved, and then we operate from the new level through the next years.

Kurt Sievers:

Well, we've given the model and we have the absolute intention to stick to our model, yes.

Operator:

Thank you. Our next question comes from Ross Seymore with Deutsche Bank. Your line is open.

Kurt Sievers:

Well, so in the first quarter, I think we actually quantified it. I think I remember we said about $50 million, which is really what it was, which was this one to two week shutdown of our own Tianjin facility in the neighborhood of Beijing. For the second half, what I just said is a couple of tens of millions, which we see as impact, which is baked into the guidance, which we just gave you. Now what I think, how I would qualify this, Ross, is this is entirely a supply discussion. And I say that because I know that some of our peers talked about demand issues. I want to highlight that -- in our case, we clearly talk about derisking from a supply perspective. And that has to do with logistics issues in the Greater Shanghai area, and it also has to do with all sorts of suppliers from the Shanghai area into our own operations. Think about epoxy suppliers, substrate suppliers, et cetera. And that's the impact which is baked into our guidance. From a demand perspective, Ross, it's a little different. We -- in the meantime, I have numbers that solidly more than half of our customers in the Shanghai area are fully operational again. So they are running 100% of their operations again. And another third is say partially operational and rapidly coming back now. And during their shutdown periods, they pulled all the products because they all knew they would come back very quickly. We have been under shipping them anyway for 1.5 years now. So that's why that doesn't have any demand impact on us. So all of this derisking, Ross is a supply consideration and a couple of tens of millions. So I leave it to you how you want to integrate this from an exact number perspective, but it is about our supply situation out of the Shanghai area.

Kurt Sievers:

Yes, we've been looking into this very carefully because indeed, we have certainly lots of discussions with our customers about longer-term supply assurance programs, et cetera. The solution to this is not to increase our internal inventory. So I have a clear-cut answer, Ross, no, the 95 days stand. I'm actually glad when we get there again because you see we are still below that. But no, we don't have an intention to change that because we kind of remodeled how we went into this crisis and what we find out is that even if we had more inventory, it would have -- it wouldn't really have made a significant difference to the whole situation at all. However, we are, of course, working with customers on all sorts of different models, their inventory at our customers in the chain, maybe distribution partners in cases is part of an overall package to have better supply assurance going forward. But one big element that you said it yourself is actually the transparency and knowledge about the ultimate end customer demand. I think in the past, we and I would dare to say the whole industry, we have too much relied on demand signals of our direct customers, not fully understanding and not having full transparency to the end customers. And that is something which in this relationship concept, which I mentioned, which has significantly changed over the last 1.5 to two years. So that gives me some confidence that we are in a better position to handle this going forward. Again, internal inventory is not going to be the one which is going to be changed.

Operator:

Thank you. Our next question comes from Stacy Rasgon with Bernstein Research. Your line is open.

Kurt Sievers:

Hi, Stacy, I think we are across the board continuously short of supply. So that applies to all of our four revenue segments. If I have to qualify it and I would say the worst case we have in industrial and automotive, so those two continue to have probably the biggest gaps between supply and continued growth in demand. And I also see that in those two, this is a longer-term situation ahead of us. When we speak about the gradual increase of revenue through the year then at least for this year, I would indeed say that is largely a function of supply becoming available, Stacy. So it isn't that much a question of what is the demand pattern in those four different markets. It is much more where are we coming closer through the year to the demand signal from a supply perspective. And as we discussed earlier, this is something -- it comes from different factories. It's internal supply ramping up. It is external, it's foundry supply going up, et cetera. So it's a pretty -- and it's also not the same each quarter. So I cannot qualify the revenue, the gradual revenue growth through the year by segment from a demand perspective because all of our supply is still under the demand signal anyway.

Kurt Sievers:

Stacy, obviously, I really cannot speculate and don't want to speculate about the specific strategies and situations of one or more of our peers. I just cannot. However, I can assure you that we put a lot of rigor and a lot of attention into assessing this particular question because it's been obviously very important for us to understand how to sit safely and confidently guide for this quarter in this turmoiled environment. Given that this is very near term, it is -- it really has to do with the order patterns we have on the books and with this particular customer situations we talk to. So this isn't much about strategic consideration, Stacy. It's really about what are we still getting out the next eight weeks of this quarter. And the bottom line of the analysis is, it is not about demand. It is all about the supply disturbances from this situation. And there, I feel we took a very balanced risk-balanced approach to figure that in. But again, I can't hold it against competitors because I really don't know what their exact chapters and other policies are.

Kurt Sievers:

Yes, well the impact is on the supply, Stacy. That's the problem. So if we did not have the COVID-related shutdowns in the Shanghai area, we had a higher guidance. Absolutely, that's the answer. So that's what I tried to say. The whole reason of derisking is supply out of China. And that's a couple of tens of millions. And if that China zero COVID policy wouldn't hitting -- wouldn't be hitting now our Shanghai and possibly Beijing later in the quarter, we would have a higher guidance, yes.

Operator:

Thank you. Our next question comes from C.J. Muse with Evercore. Your line is open.

Bill Betz:

Sure, C.J. This is Bill. As mentioned during last quarter and our Investor Analyst Day, our long-term model is 6% to 8%. However, we do expect 2022 will be a bit higher around that 10% and then come back within the range in 2023 and beyond. And just to look back again in 2020, we spent about 4.5%, 4.6%; at '21 6.9%. And as you can see here right, in Q1, we spent about 8.9%.

Kurt Sievers:

It isn't really units. I think the mobile market, as we can all read is -- well, it's a bit patchy maybe globally. But we are still on this content growth strategy. I mean, in the end, it is indeed about mobile wallet and the early stages of ultra-wideband penetration and both are very much on track. The fluctuations between quarters is really supply related. I mean I talked painfully about very, very tough supply constraints in mobile in quarter three and quarter four of last year. And I was anticipating it would get better. It got better now in Q1, but it's not perfectly permanent. So I think this is a -- it was a bit of a catch-up from a supply perspective in Q1 not perfect going forward since you saw that we guided single-digit down actually sequentially into the second quarter, where, again, we also have to -- and this is a constant process we have to balance our available supply, very disfungible between segments to the extent possible. So we -- every quarter, again, in this current environment, we have to see where we have the possibility to that we are rebalancing between the segments where technology or capacity buckets are fungible with each other. And this is where it hits a bit the mobile one in the second quarter. So don't read too much into it. This is all -- it all has to do with supply between Q1 and Q2.

Operator:

Thank you. Our next question comes from William Stein with Truist Securities. Your line is open.

Kurt Sievers:

That's a big question, Bill. So what we clearly communicate and break also to customers, of course, a bit more out in more detail as we can do it here is, A, what we do with the 10% CapEx, which Bill was speaking about. And I think still 6% to 8% probably in the coming years against the significantly elevated revenue. So this is from an absolute amount of significant CapEx increase to fulfill that demand. Secondly, and I think that was one of the first questions in this call. We have these long-term purchase agreements with foundry partners, which are assuring us capacity corridors going forward. Now the way how it plays out is that indeed, we see this year, but especially the next year. We see more strong increments coming online from our internal capacity expansions in the front end. I mean we have this all the time in the back end because you know that the cycle time to -- from putting tools and getting capacity out is much faster in the back drop. This is an ongoing process. But if you think about the investments into the front end, which is specifically in our mixed signal and analog processes in-house, that we see the positive impact from those coming late this year and then especially next year. And we work continuously with our foundry partners to give us more access to capacity. In the end Will, that is why Bill highlighted in his prepared remarks that we will grow second half revenue of this year over first half revenue, with gradual increase quarter-on-quarter. I mean that normally, we don't do this full-year kind of directional guidance's. But this since we have that supply in line of sight, unbroken demand signals, this is where -- what it's going to yield. Mid-term, I think, Will, the industry will continue to have quite significant capacity constraints, especially in the field of trailing edge. So if you think about technologies, say, above 16 nanometers, so especially in the area of 28, 40 and 90, I do believe that the industry in the end hasn't invested that much CapEx. Most of the CapEx went really into the leading edge. While the demand for those nodes, which is especially from automotive and industrial continues to be super robust through the coming period.

Kurt Sievers:

Well, I think Bill kind of hinted to this earlier. We are not passing price and units on a quarterly level, Will. We -- I think we gave you the information for last year where we said that pricing was a very low single-digit element to our growth in revenue. And you will get a similar information for the full calendar year 2022 at the beginning of next year.

Operator:

Thank you. Our next question comes from Blayne Curtis with Barclays. Your line is open.

Kurt Sievers:

Well, Bill can go into more detail, and I think he also in his prepared remarks, he hinted to how we see this. So Blayne, yes, I unfortunately, given this inflationary environment. We can, of course, not exclude continued input cost increases. But our principle stance that if that happens, we will raise prices to protect our gross margins accordingly. Now Bill, I'm not sure you want to add a little bit to this.

Blayne Curtis:

Great. And then I just want to ask, you said channel inventory is about a month below where they should be. When you look at sequential growth in over the year, it does brought some seasonality in your core end markets. I was wondering if you thought that you would make any improvement in that gap in the channel inventory?

Blayne Curtis:

Thanks Kurt.

Christopher Caso:

Yes, thank you. Good morning. The question on cash return. And last quarter, you did return more than 100% of free cash flow. Could you give us an update of kind of what your thinking is here? Obviously, the cash flow is very strong in this environment? And what are the plans for that?

Christopher Caso:

Thank you. And as a follow-on, just another question on OpEx. And you talked about the 5% increase for this quarter on the merit raise. Does that tend to flatten out as you go through the year? And just generally, are you comfortable with the level of spending that you're at right now. I know some others have spoken about just kind of difficulty in hiring and getting access to talent?

Christopher Caso:

Got it. Thank you.

Matthew Ramsay:

Thank you very much. Good morning, everybody. Kurt, there's obviously been a lot of conversation on this call about visibility and whatnot. But the one data point that really stood out to me was I think you mentioned 30% xEV penetration this year in the auto market in terms of units of production. And that was quite a bit higher than what we were modeling despite the bullish trends in EVs. So I wonder if you could give us a little context there. Is that supply constraints that are hitting ICE vehicles maybe more disproportionately than EVs? Is this new regulatory push? Is it infrastructure that's being build out more quickly for charging. I'm just trying to get an idea of why sort of a step-up or some bullishness on the xEV penetration? Thanks.

Matthew Ramsay:

Thank you for that, Kurt, and for clearing up the assumptions. As my follow-up, there's -- a lot of the call here has been focused on supply demand and visibility in the auto business. Maybe you could compare and contrast where you are closeness to customers' visibility in autos versus what you're seeing in industrial and comps? Thanks.

Operator:

Thank you. And our last question comes from Toshiya Hari with Goldman Sachs. Your line is open.

Kurt Sievers:

Yes. That is actually because the level we need to achieve, Toshiya, with our own wafer facilities will then be satisfied to the possibilities we have. So that doesn't necessarily mean it closes all the gaps to demand, but it's as much as we can do with the four walls and the facilities we have. That does not mean, of course, that we would not continue to push very hard to get a higher supply from our foundry partners. And because in the end, within our hybrid manufacturing strategy the share of external foundry supply to NXP is only going to grow. I think we are currently at a 55% to 45% level, so 55% external, 45% internal. And I would there to forecast that this -- it will not take that long. It's going to be more like 60-40, et cetera. So that's why if you think about a revenue generation and customer satisfaction from that perspective, then the internal part on the mid-term is actually the smaller part of this. And the bigger part is coming from the foundries. And of course, they keep investing and we keep getting there more.

Kurt Sievers:

Yes, that's just -- it's just the normal stuff. I mean we have our LDMOS production in the RF comms business, which is running in those facilities, which are also serving automotive and industrial customers, and they are just full. So we were too ambitious, to be honest. I mean it's just a couple of million in the end, but we were too ambitious in what we could get out to these comms customers. So nothing dramatic in the end because you saw it also -- it still continued to grow very nicely from a year-on-year and quarter-on-quarter perspective. But we just had a two ambitious plan from an output perspective, but nothing special in a way.

Operator:

This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day, and thank you for standing by. Welcome to the NXP Fourth Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Kurt Sievers:

Thank you very much, Jeff, and good morning, everyone. We really appreciate you all joining our call today. I will review both our quarter 4 and our full year 2021 performance, and then I will discuss our guidance for quarter 1. Beginning with quarter 4, our revenue was $39 million better than the midpoint of our guidance with most end markets stronger than planned and with the trends in the communication infrastructure markets more in line with our expectations. Taken together, NXP delivered quarter 4 revenue of $3.04 billion, an increase of 21% year-over-year. Non-GAAP operating margin in quarter 4 was a strong 34.9%, 440 basis points better than the year ago period and about 110 basis points above the midpoint of our guidance. Year-on-year outperformance was largely due to the impact of improved factory utilization and higher revenues. For the full year, revenue was a record $11.06 billion, an increase of 28% year-over-year. And as 2021 progressed, our customers continue to accelerate orders on NXP. We consistently found ourselves in a situation where robust demand outstripped available supply even as production levels both internally and from our supply partners improved across the year. We do anticipate a continuation of strong demand throughout 2022, likely better than we originally contemplated at our recent Investor Day in November. The full year non-GAAP operating margin was solid 32.9%, a 700 basis point improvement as a result of improved factory loadings, higher revenue and positive leverage on our operating expenses. Now, let me turn to the specific trends in our focus end markets. In Automotive, full year revenue was $5.49 billion, up 44% year-on-year, a reflection of the strong company-specific product drivers we noted at our Investor Day, the step-up in content per vehicle as OEMs prioritized premium vehicles in a limited supply environment and the accelerated transition towards electric vehicles, which have fundamentally higher semiconductor content. For quarter 4, Automotive revenue was $1.55 billion, up 30% versus the year ago period and slightly better than our guidance. Moving to Industrial and IoT. Full year revenue was $2.41 billion, up 31% year-on-year, driven by our solutions offering with a combination of industrial and crossover processes, wireless connectivity and our analog attached products, all driving the year-on-year growth. For quarter 4, Industrial and IoT revenue was $661 million, up 29% versus the year ago period and better than our guidance. In Mobile, full year revenue was $1.41 billion, up 13% year-on-year. During the year, we experienced continued strong adoption of our secure mobile wallet and early ramps of secure ultra-wideband solutions and a good traction for our mobile-embedded power solutions. These positive trends were modestly offset by a discontinuation of certain custom analog products. For quarter 4, mobile revenue was $374 million, down 9% versus the year ago period and better than our guidance. Lastly, I will move to Communication Infrastructure and Other. Full year revenue was $1.75 billion, up 3% year-over-year. The year-on-year growth was due to a rebound in demand for secure transit, tagging and access solutions as well as solid demand for RF power products for the cellular base station market, somewhat tempered by the anticipated moderation in demand for network processing solutions. For quarter 4, revenue was $457 million, up 16% year-on-year and in line with our guidance. In review, 2021 was an excellent year for NXP. We experienced significant design win traction across the entire portfolio and especially within the areas of our strategic growth drivers. Our priority has been to assure the health and safety of all our employees. And it is their engagement and performance which has been truly outstanding. We are extremely proud of their adaptability, dedication and hard work in the face of adversity. Now before I will turn to our expectations for quarter 1, I'd like to offer you some perspective on the coming year. For those who were able to join us at our recent Investor Day in November, you will remember, we offered a positive view of 2022, expecting revenue growth near the high end of our 8% to 12% long-term growth target. Now as we enter into early 2022, we are more optimistic about the opportunities in front of us, both in the short term as well as over the intermediate horizon. The demand signals from our customers continue to be very strong. Inventories across all end markets appear very lean, and our ability to supply continues to improve. Hence, we anticipate 2022 will be another year of demand/supply imbalance with lead times extending out across almost the entire portfolio and the level and intensity of supply-related escalation conversations with our customers remains elevated. Against this backdrop, we are guiding quarter 1 revenue at $3.1 billion, up about 21% versus the first quarter of 2021, within a range of up 18% to up 24% year-on-year. And from a sequential perspective, this represents growth of about 2% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the mid-20% range versus quarter 1 '21 and flat versus quarter 4 '21. Industrial and IoT is expected to be up mid-teens year-on-year and flat versus quarter 4 '21. Mobile is expected to be up about 10% year-on-year and up in the low single-digit range versus quarter 4 '21. And finally, Communication Infrastructure and Other is expected to be up in the low 20% range versus the same period a year ago and up in the low double-digit range on a sequential basis. In summary, we do continue to see growing customer demand outstripping our improving supply as the inventory across all end markets remains very lean. Customer engagement levels and design win momentum in our strategic focus areas continue to be very positive. This underpins our continued confidence of robust growth throughout 2022, and we do continue to be very optimistic about the long-term potential of NXP. Now, at this point, I would like to pass the call over to you, Bill, for a review of our financial performance.

Operator:

[Operator Instructions]. Our first question comes from Ross Seymore with Deutsche Bank.

Kurt Sievers:

Yes. Hey, good morning, Ross. Thanks for your question. Indeed, the commentary I made is that we have grown optimism that we can grow above the high end of our long term growth range which was 8% to 12%, so about 12%. So, indeed. Yes, we do have the supply capability. We are gradually building more supply capability through the year. It's a huge amount of different actions, both in our own back-end test and assembly sites, in our internal front-ends. And mind you, that this year, we will be running full out with our internal front-end factories. While last year, we had the winter storm taking capacity away and we had only started to ramp the factories full up during the first and second quarter. So from a year-on-year perspective alone, that does give us more supply. But also with third-party foundry suppliers, and Bill just mentioned our supply commitments and obligations here, we purchase from our prospective obligations here. We are growing our supply capabilities. So yes, the supply capability is here. And while we will not guide the full year, Ross, it was still important I felt to make that comment because the demand situation has continued to be very, very strong. And I say continue to be very strong since our Investor Day in November. And we see the inventories, both our own ones, and I think we talked about the 83 days, we talked about the channel inventory even coming a little bit down. But also at our customers, we think inventories continue to be super lean such that we see the potential of outgrowing the 12% high end of our long-term growth trajectory.

Kurt Sievers:

Yes, it is actually totally supply regulated. I mean we have more than enough demand. It is all a function of supply. And maybe here, it is worthwhile to note that you all might have seen that in the City of Tianjin in China, there was a controlled movement order, which actually meant factory shutdowns. One of our test and assembly back-end sites is Tianjin. So we had a factory shutdown there for between 1 and 2 weeks. Think about maybe $50 million impact for the first quarter. And that is all sitting on industrial and auto, which is another factor which is actually hampering supply a little bit further than we would have wished into the first quarter. Mobile, on the other hand side, Ross, you know that the last 2 quarters, we've been really struggling with supply in mobile. I think we talked about this consistently in the call. This starts to get better, which actually helps us to start to do much better in Mobile. So all of the, say, the movements quarter-on-quarter are much more a function of supply capability rather than demand.

Christopher Muse:

I guess first question on gross margins. You're 70 bps away from the high end of your target. And in your prepared remarks, Bill, you talked about expectations for gross margins to continue to expand. So curious how you're thinking about upward bias here in '22? And then moreover, I guess, '23, '24 as new products that carry higher margins come through the model?

Christopher Muse:

Very helpful. And as my follow-up, I guess, Kurt, you talked in your prepared remarks about making real traction with some of the newer products. And I know, in particular, on the S32 domain processor side, there's significant architectural decisions being made today by your potential customers. So curious, any update in terms of the traction there? And I guess how to think about maybe some of these new products? And which we should be focused on in terms of driving real incremental growth into '23, '24?

Operator:

Our next question comes from Vivek Arya with Bank of America Securities.

Bill Betz:

Hey, Vivek, I'll take that question. As shared in our EPR, as part of our annual year-end audit process, we did identify a potential material weakness associated with our general internal IT controls in the areas of user access, change management and documentation. At this moment, we are very comfortable there had been no impact on our current or past financial statements. We are actually very pleased with the fixes the teams are implementing, which just take time. And we feel confident that we'll be able to remediate these internal IT controls in 2022 and ensure the proper monitoring throughout the year. We want to disclose this now for full transparency. And we plan to disclose more about the details in our annual 10-K, per our normal scheduling in the late February.

Kurt Sievers:

Yes. Thanks, Vivek. So first, let me just highlight again that, indeed, we are not at all concerned about that delta between the 44% of our revenue growth and the 2.5%, I think, SAR growth last year. And that is given the content increases relative to premium vehicle mix changes and electric vehicle acceleration. But also the fact that in 2020 and already earlier '19, a lot of inventory in the very, very complex extended supply chain has been or had been depleted. And then, of course, I definitely see that we also have grown market share. So indeed, for the history, we are not concerned about this. On the contrary, I continue to be chased on a -- really on a daily level to ship more product into automotive. It's still low enough as we speak. Now the measures to cope with this are, one, a very, very much higher level of transparency, which we not only do with our Tier 1 customers, but also especially with the OEM customers. So we have a lot of direct relationships built up now with the OEMs and get multiyear forecasts, which are very specific by model, by equipment, which gives us a much better view into the future in what is realistic content growth and whatnot. And in the more shorter term, of course, we work with the NCR order concept, which I think Bill had in his prepared remarks, which we actually -- especially in automotive, not only in automotive but especially in automotive, which give us a confirmed and non-cancelable or non-reschedulable order pattern for the full calendar year 2022, which is a hell a lot of more stability than we've ever had in the past. I -- from just a directional perspective, I do believe the content increase continues to accelerate. And probably on the midterm, the 2 main factors are actually the acceleration of the share of xEVs, so electric and hybrid electric vehicles, which simply have so much more semiconductor content. But also the Level 2+, Level 3 autonomy efforts are getting more and more traction again, which is a big deal for us when you think about our position in radar. So we do believe that we will continue to outgrow this market, win share and have, at the same time, a faster market development given these changes. But with the NCR orders and our relationships to the OEMs, I think we have a good handle to keep this in good track.

William Stein:

There's been a clear imbalance between supply and demand for the last few quarters. It's triggering very extended lead times in the last year. I don't I've heard an update on that condition during the call or in the press release or presentation. I'm hoping you can update us as to how that's trended in the most recent quarter. I would imagine given the inventory decline that lead times are still quite stretched. Any normalization you anticipate for that through this year?

William Stein:

That really helps. One other, if I can. I'm going to ask the content, automotive content question a little differently. It's clear and you've made a pretty good case that some of this content is a more permanent shift, like the new networking architectures and the like. But I think it's fair to say that some of the growth that we've seen in the last year has resulted from favorable mix shift to higher-end models and higher-end trims within those models that probably drive a little bit better semi content that's more profitable for the OEM customers. What should -- what would you encourage investors to think about for this trend over the coming year? Does it continue? Or would it reverse as availability becomes more plentiful?

Operator:

Our next question comes from John Pitzer with Credit Suisse.

Kurt Sievers:

Well, in general, John, I absolutely want to reconfirm loud and clear that we will not use this current -- or have used, I would almost say, this current situation to pad our margins. So we do absolutely stick to the policy I've talked about before, which is that, of course, we are passing on the increased input cost and raise prices to our customers along with that. That is something we had to start doing last year and we have to continue to do through this year. This is a function of the kind and the type of business we are in, which is the opposite of a commodity business. It's very application-specific. It has, I think, very specific and long-term customer relations where this is the only way to do it. And trust me, it's not an easy one for us to do this. But yes, that's what we do. I anyway can't guide the year going out into Q2, 3 and 4. But I can tell you, John, that for last year, the impact of pricing was absolutely minimal to the revenue growth. So don't think about this being the key factor here. And maybe, Bill, you want to speak a little bit about the impact on OpEx?

John Pitzer:

That's helpful. And then as my follow-up, Bill, you talked about in your prepared comments, CapEx this year being above target. I'm wondering if you could give us a little bit more granularity as to kind of what number you're thinking about for the full year? And Kurt, as he answers that, I'm curious as to what your internal versus external sort of capacity strategy is, especially in the auto business where historically, you've done more of the front end internally and especially against some of your peers that are looking to really expand their internal capacity, how confident are you that given the strong growth you expect, especially in autos over the next several years that you can get everything you need from your outsourcing partners?

John Pitzer:

And that will [jump up] this year?

Kurt Sievers:

Yes, Bill, go ahead.

Operator:

Our next question comes from Stacy Rasgon with Bernstein Research.

Kurt Sievers:

Yes, Stacy, it's indeed 2 things. It is demand, and I speak about this in a second, and it is obviously supply. We've really been held back by supply the last 2 quarters. So Q3 and Q4 of last year, we clearly had a significant issue here from a supply perspective. By the way, not everything resolved, but at least improving into Q1. So that's one element. The other element is demand. And I mean I think I can understand why you are asking. But you know that we are not overly dependent on only one customer, on one mobile customer in that particular segment. So if you think about the mix of our customers, you will appreciate that there is a strong case to be made for demand going into the first quarter. And I also don't think about it as a spike, Stacy. This is not just a spike or something. It's -- I think it continues with our strategy of the attach rate of the mobile wallet. I mean that's the main factor in there and the more and more growing -- early growing part of the -- of our secure ultra-wideband solutions.

Kurt Sievers:

No, we don't see it at this stage, Stacy. I mean I'm reading the same news. Our main concern is in Tianjin, China much more about our own production, which -- and I said this before, is in the meantime, fully up and running again. But that is actually where we see the issue, from a demand perspective, which indeed is largely the industrial markets largely served through distribution. We do not see any slowing at all. On the contrary, when you think about the fact that our channel inventory has further dropped, unfortunately, you know that a good -- a solid portion of that is actually in China. So, no, we are not concerned here about the demand slowing in Industrial in China.

Christopher Caso:

Kurt, I wonder if you could go through a bit about some of the commitments that you've had to make to secure that additional capacity. What is the commitment now to the foundry partners? And how has that changed versus prior cycles? And I'm guessing by your comments that your feeling is that that's backed up by the commitments from your customers to you. And how resilient do you think that will be over time as conditions change? And obviously, this seems like this is something different for the industry.

Bill Betz:

Yes, that was in my prepared remarks. At the moment, we have $4 billion. And those are strongly supported by actually greater than our supply commitments, backed by the non-cancelable, nonreturnable orders that we see. So the demand continues to be strong. Our customers are actually coming to us. And unfortunately, we can't serve them all.

Christopher Caso:

Got it. That's very helpful. And for a follow-on question and we will return to pricing. And really kind of 2 questions on pricing. One is, obviously, we've seen foundry price increases announced last year. Do you think that is now behind us? Or with the continuing tight supply situation, is there potential for additional input cost increases as we go through the year? And then with that, I think there's an investor concern that some of these price increases are transitory because of the strong conditions and obviously, the input costs on you, you're passing along to the customers. So what's your view of the stickiness of these price increases that this is kind of a permanent ratchet up as opposed to something that's transitory just because of the supply conditions?

Operator:

And our last question comes from Joe Moore with Morgan Stanley.

Kurt Sievers:

So Joe, yes, first, I talked about automotive, but this is not just a phenomenon in automotive. I'd say with all of our direct customers, this NCNR pattern is a big desire because all of our customers consider this as a way to secure supply over a short- to medium-term period. So it ranges well beyond automotive. I should maybe also highlight that the shortages in the industry are at least as bad in industrial and other applications as in automotive. It's just that automotive continues to catch better headlines in the news, but it's not that the situation is any easier in any of the other segments we are serving. I -- if you think about the order visibility, customers want to have it longer. I said -- I think earlier I might have mentioned it already that they would love to have NCNRs for 2 years out. So yes, I'm definitely sure on your question if they want to continue to go with a 1-year horizon. They definitely want to. I think, actually, if we are prepared for it, there might be also more cases coming where people want to have it even lower, so more than a year. And again, think about this commentary really being commentary mainly about automotive and industrial markets with very sticky products, very long life cycles, so it fits the nature of those industries. So I think it's a learning from our overall industry in order to better deal with the requirements of those markets. I don't know if this is ever going to be the case in markets like mobile and computing. It might be different there, where also the end product cycles are much shorter. So that's why my commentary is probably biased to the automotive and industrial side of the house where I think it is a big learning out of last year for the entire industry. I think -- yes, sure. Joe. I guess we run now to the end of the call. So I just want to summarize and highlight again. We feel we come off a very strong 2021 with more than 28% revenue growth. Maybe it's also worthwhile to say that if we look at the revenue growth over 2019, which was the pre-pandemic year, it is still a 25% growth. So '21 over 2019 is 25% growth. So we feel we are very well on track to our projected 8% to 12% long-term growth target. And if we look into -- more into the near term into this year, we feel increasingly optimistic, as I said, that we can be above the high end of that 8% to 12% for the calendar year 2022.

Operator:

Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect.

Operator:

Good day. Thank you for standing by. Welcome to the NXP Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Q&A session. [Operator Instructions]. And now I would like to turn the conference over to Mr. Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead, sir.

Kurt Sievers:

Yeah, thanks very much, Jeff. And good morning, everyone. We appreciate you joining our call this morning. I will review our Q3 results and then discuss our guidance for Q4. Overall, our Q3 results were better than the midpoint of our guidance with the mobile end markets stronger than planned as a result of improved supply. At the same time, the trends in the Auto, Industrial IoT, and Communication Infrastructure markets, were all in line with our guidance. Taken together, NXP delivered Q3 revenue of $2.86 billion, an increase of 26% year-on-year, and $11 million above the midpoint of our guidance range. These are very good results given the constrained supply position we knew we would face entering the quarter. And we continue to view our channel and on-hand inventory metrics below our long-term targets. We exited quarter three with our distribution channels supply metric at 1.6 months, almost a full month lower than our long-term target. And we expect this to be the situation in quarter four again as well. Our non-GAAP operating margin in quarter three, was a strong 33.5%, which is 770 basis points better than the year-ago period. And 50 basis points above the midpoint of our guidance. Operating profit dollars were $19 million better than guidance, driven by higher revenue and lower expense. Now let me turn to the specific trends in our focus ends markets, starting with Automotive. Q3 revenue was $1.46 billion, 51% up versus the year-ago period, and in line with our expectations. In Industrial and IOT, Q3 revenue was $607 million, up 18% versus the year-ago period, and again, in line with our expectations. In Mobile, Q3 revenue was $345 million, up about 2% versus the year-ago period, and above our expectations. Lastly, in communication, infrastructure and other, quarter three revenue was 454 million, about flat versus the year-ago periods. And in line with our expectations. With this, let me move straight to our outlook for quarter four. We expect the midpoint of quarter four revenue to be 3 billion up 20% versus the fourth quarter of 2020, within a range of up 17% to up 23% year-on-year. From a sequential perspective, this is up 5% at the midpoint versus the prior quarter. And we again anticipate demand outstripping available supply in our quarter four outlook. At the midpoint of this range, we anticipate the following trends in our business. Automotive is expected to be up in the high 20% range year-on-year and up in the mid-single-digit range versus Quarter Three '21. Industrial and IOT is expected to be up in the high 20% range year-on-year and up in the mid-single-digit range versus Quarter Three '21. Mobile is expected to be down in the mid-teens range year-on-year and up in the low single-digit range versus Quarter Three '21. And finally, Communication, Infrastructure, and Other is expected to be up in the high-teens range versus the same period a year ago, and up in the low single-digit range versus Q3 '21. Over the course of the last 2 quarters, investors continue to ask how to reconcile the revenue performance of NXP's Automotive business with that of the global vehicle production numbers as they are reported by IHS. Specifically, NXP's Automotive segment revenue is expected to be up over 40% in 2021. Against this, the auto OEMs continue to struggle to match supply to strong consumer demands with the auto industry likely not able to meaningfully grow unit production versus 2020. Now let me make a few observations which may help you understand these diversions. First, the auto supply chain is very extended and complex, with multiple points of product transformation across the globe. This extended supply chain needs to coordinate the timing and delivery of up to 30,000 props and up to 1500 different semiconductors, from hundreds of suppliers to build just one single-car. During normal periods from the time at which NXP ships of finished components to when the final assembly is fitted into a finished car, it takes up to 6 months. And this is on top of the normal semiconductor manufacturing cycle times of 3 to 6 months. At each step of the transformation, thousands of parts move through a complex global network of suppliers. For the process to work efficiently, it is essential that all of the components needed to complete a car are available exactly where and when they are required. Now, we believe the extended auto supply chain significantly depleted on-hand inventory of all types of products, including semiconductors already by the beginning in the second half of 2018 and continuing through 2019 and most of 2020. That depletion was a result of global car production declining 6% in 2019 and another 16% in 2020. While NXP 's auto business, despite content increases, declined by 7% into 2019 and by another 9% into 2020. Let me illustrate the impact by using the NXP Distribution Channel as a proxy for overall auto supply demand trends, and how we have been directly affected. We consistently monitor and measure all component movements in inventory data at our distribution partners at the end-market level. Throughout 2021 these metrics for Automotive have been at record low levels, with on-hand inventory being about 1 month below our long-term target of 2.5 months, with demand in the intermediate term being consistently greater than our ability to rebuild inventory back to normalized levels. In our and my personal daily discussions with our customers throughout the auto supply chain, we hear the consistent message that they want significantly more products. And in some cases, Tier 1's are struggling to assemble fluid kits. And in other cases, the OEMs choose to build partially completed cars or hold their production lines all together. For NXP, lead times for about 75% of our automotive products continue to be above 52 weeks. Against this backdrop, our customers are placing NCNR orders to assure long-term supply. We in turn are making long-term supply commitments to our supply partners. In summary, we think the automotive supply demand equation, build continued to be out of balance through 2022. In addition, as a learning all of the current material shortage situation, and in order to mitigate the impacts of the Auto-AM's are experiencing today. Our Tier 1 partner explicitly demands that more supplies and inventories will be needed in the extended supply chain, which we believe cannot be broadly achieved before 2023. Now, with this currently dysfunctional supply chain as a backdrop, there are very clear and very positive trends that have simultaneously increased the demand for auto semiconductors industry-wide, as a consequence of content growth. We have seen multiple OEMs prioritized to production of premium vehicles, which require uploads of twice the semiconductor content from NXP and others. And another clear and emerging secular content driver for the auto semiconductor markets, is the fast exploration of fully electric and hybrid electric vehicles, which combines have moved from 8% of global production in 19% to about 20% of production in 2021. This is very impactful since the average semiconductor content on xEV is above $900, which is roughly 2 times that of an equivalent ICE vehicle. These trends have resulted in industry-wide content per vehicle increasing at 10% per year, over the last three years. And on top of all of this, NXP is consistently gaining share in our focused growth areas and increasing content. These content gains include 77 gigahertz radar safety systems, multiple electrification system opportunities, beyond just battery management, and new domain and zonal processing as well as others. Now for NXP, it's of course not just automotive driving our performance. Within the Industrial and IoT markets, we see our ability to provide complete turnkey connected etch processing solutions, consisting of processes, connectivity, security, and analog, all leading to increased customer traction. These are all just a few weeks samples that underpin our confidence in our Company-specific growth. As Jeff mentioned earlier, we plan to go into much greater detail at our Investor Day on November 11th, next week in New York. In summary, we continue to execute very well in a strong demand environment, notwithstanding the industry-wide supply challenges. From a Company-specific perspective, NXP is experiencing very positive customer traction of our newest products and solutions. Putting it all together, we are highly confident that the Company-specific drivers within our strategic end-markets, they will continue to build also beyond Q4 into Q1, as well as over the intermediate term through 2022. Now, before we move to the financial details of the quarter, I'd like to make a few remarks in the context of our recent announcement of Bill Betz as our new CFO. I have personally worked with Bill as a business partner and one of Peter Kelly's key finance leaders for over eight years. Bill brings both a strong track record and career in the semiconductor industry, as well as truly intimate knowledge of NXP and consistency to his new role. I personally drove the evaluation the interview process, in the viewing of wide number of external candidates, as well as Bill. And I concluded Bill is the right person to lead our NXP finance organization, and I'm personally truly excited to work with Bill and drive NXP's profitable growth going forward. At the same time, I would like to highlight the outstanding contribution Peter Kelly has played in the strategic evolution of NXP. Peter first came into the Company in an operations role, over a decade ago, and then quickly move into the CFO role to drive the financial discipline, our stakeholders have all come to expect. He has been a clear-thinking strategic advisor to myself, and a highly valued mentor to many on the NXP management team. Obviously, including both Bill and Jeff. We wish Peter the very best in the next phase of his life, and hope he gets to spend more quality time with his family. And with that, I would now like to pass the call to you Bill, for a review of our financial performance. Bill.

Operator:

Thank you. As a reminder to answer a question -- > [Operators Instructions] Our first question comes from the line of Ross Seymore. Your line is open.