NXP Semiconductors N.V. — 2024 Q1

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.

Yes. Look, indeed, you had it quite right for last year. The 9% growth of Automotive revenues was actually in a very strong SAAR year. I think the SAAR last year was something in the order of almost 10% growth year-on-year, so spectacularly high. And indeed, NXP did increase price from a corporate total company perspective by 8%. So yes, we totally undershipped already last year, which is -- which was part of the soft lending strategy, which we are pursuing. So we think we have already started to correct the Automotive revenue and the inventory situation in the direct customers since mid of last year and in the distribution channel already way back because we number went above 1.6. Now when you think about this year, Vivek, it is indeed -- the macro is a little different. The latest S&P numbers would suggest a 0% SAAR for this year and a bit of a moderation in the EV penetration.

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.

Sure. Let me break those 2 apart. So the agreement that we have with Impinj is the annual cross license, which will impact us on a go-forward basis, about $15 million in the second quarter and it rose slightly, but that could stop any time in the future once we have the work around complete. And again, I don't know exactly the exact timing, but that's something that we're pursuing internally. Related to our OpEx, clearly, you can see we're somewhat out of model in Q2, but that's really driven by our annual merit increases. So we have a combination of both those impacts occurring in Q2, the $15 million plus the annual merit increases. But what's offsetting some of that impact is also our proactiveness on our expense controls and you saw that in Q1 as well and some lower variable compensation.

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.

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.

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.

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.

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.

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, we really can't go there. I mean I'm already leaning out of the window here with giving kind of a directional full year guidance, which we thought is useful given the dramatic cycle we are all going through. But now calling it into Q3 and Q4 separately, I'm sorry, we don't provide that. So it is for the full year. And honestly, it's also hard to say, Stacy, because you know that inventory digestion is not an actual sheet. I mean this is a number of customers. Each of them has their own dynamic, has moving targets. So things could be settled earlier could be set a little later and calling that exact by the quarter end is virtually impossible.

Because we wanted to spread this out, Stacy, that was the whole idea. I think last quarter, we discussed about our understanding of that so-called soft landing strategy for NXP. Our whole target was to actually have not a sharp peak to trough in Automotive because there would be a bad impact on our factories and Bill would come back with heavy underloading and negative margin impact. So the idea was to spread this over a longer period of time, which is why we started early but didn't want to overdo it in any given quarter. So say we started in Q3 last year for the direct side of Automotive. And obviously, it goes at least until the end of the second quarter of this year. So that would be a full year of correction on the direct side, maybe a little bit spreading into the third quarter.

No, it's really the inventory. We don't see -- I mean, you have to take the offset from the SAAR, Stacy. I said earlier that last year, of course, there was a SAAR growth of 10%, this year, it is flat. That is a -- if you compare like-for-like, then that makes this year, of course, a less positive environment from a macro perspective. But everything else, which is the company specific positions we have, which is the content increase, which is offered by the industry per se, and the pricing, which is also flat for us this year is totally in place. So no, it's just inventory.

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.

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.

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

Yes. Chris, that's indeed a very -- that's a very important point. There is a clear ongoing and I'd say, increasing requirements from our Chinese customers in Automotive and beyond to go for localized manufacturing. We are pursuing this quite forcefully. We have chosen the Nanjing factory of TSMC, which happens to host the 16 FinFET, 16-nanometer technology, which is the core of our microprocessors for Automotive. We are working with SMIC, which we have done historically outside of Automotive and continue to do so outside of Automotive. And we just ended up choosing a third foundry partner, which I'm not going to name here, but a third foundry partner for the analog mixed signal space in order to produce our products in China for China.

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.