NXP Semiconductors N.V. (NXPI) Earnings Call Transcript & Summary

All right. Good morning, everybody. And welcome, everyone, to the KeyBanc Technology Leadership Forum. I'm John Vinh. I cover semis here at KeyBanc Capital Markets. We are pleased to have Kurt Sievers, CEO of NXP join us today. The format of this session will be a Q&A fireside chat. [Operator Instructions].

Hey, so Kurt, well, welcome. Maybe we could just start out at a high level. Obviously, you guys just reported very good results and guidance, and you sound pretty bullish about the sustainability of this cycle. I think you talked about seeing sequential growth through the end of the year. Can you just highlight to us how far out do you have visibility right now in terms of your backlog. And I know you talked about maybe the tightness maybe easing a little bit to the first half of next year. But how long do you see this up cycle lasting for you?

Yes. So first of all, thanks, John, for having me today. And yes, I guess the headline of our earnings was really that we do see sustained continued demand growth. And that actually across all of our end markets. So I would say in a nutshell that we think we are more at the beginning of a longer cycle rather than anyway near to the peak. I say that because there was a lot of concern about are we coming close to the peak already, et cetera. Now from a visibility perspective, I mean, it's important to understand we are still in a situation where demand is outstripping our supply. But we are working hard to improve supply. And I mean, we just guided to 10% increase sequentially into the third quarter. I guess I also said on the call that we will be in the fourth quarter, again, in absolute revenue terms, above the third quarter. And we also said that next year will be bigger than this year. So you see us being indeed confident about the growth going forward. Relative to the visibility, it is actually strong term because what is currently changing in the industry, at least in the markets we are serving is that customers are very prepared to give us long-term binding orders. So what we call NCR orders, so orders which are neither consumable nor rescheduleable and we get that kind of orders from many of our customers all the way up to the end of next year. So I would say in -- especially in automotive and industrial, there our business is very application specific, very differentiated we do have, from that perspective, a lot of visibility. Another way to look at it is actually our distribution business. So a lot goes through the channel for NXP. And unfortunately, I would say our long-term stated target of 2.4 months of channel inventory has dropped to 1.6 in the first quarter. And again, in the second quarter, we were down at 1.6. And I also don't really see this picking up from there anytime soon. So it's not going to pick up from 1.6 in the third quarter. I also don't think it's going to get back to target in the fourth quarter. And also that gives you a feel on the strength of the backlog, which we are seeing. And all of that is still in a supply position, where we are improving. I mean it's not like we have a standstill on supply, supply is improving. Revenue is growing from the year, but still demand continues to be strong.

I wanted to follow up and talk about inventory. Obviously, pretty transparent to kind of see where your distributor inventories are. As you know, it's a little bit harder to get a sense of where your end customer inventories are. But I'm wondering if you could comment on that in terms of what gives you confidence that your customers aren't over ordering and haven't built up excess inventory at this point?

Yes. Let me pass this first in a more anecdotal way and then into a couple of numbers. From a more anecdotal perspective, but it's -- I think it's very powerful. I spent the vast majority of my time every week, and that for the past 6 months on the phone with the CEOs of customers, of the customers of our customers, and it's all about shipments. And I mean they wouldn't take the time. We wouldn't have these conversations if there was the true shortage. You can also think about it from an automotive perspective when you read about all the stoppages in factories. When you think about the fact that dealer inventories for cars in the U.S., I think, are at a historic low. The same in China, which is a very, very clear reflection of a -- an undersupply from a semiconductor perspective. And that's why hindering production. And I can tell you from all of this, I've never seen in 25 years, the extended supply chain from a semiconductor perspective so empty as it currently is in the automotive market. Now there is a big positive in all of this, which is, of course, that we've got much closer to the car companies, to the car OEMs. I mean you know the model we are shipping to Tier 1 companies, but in the end, the car company is building the cars. And we got much closer to them, much more transparency, much better understanding into which applications do our ICs go. And from that, we both understand the content growth. We know why it's going up so much, but we also understand that it is indeed still short and there is absolutely not a single piece of excess inventory. On the industrial market, it's admittedly a little bit harder to say because it's many more customers. It isn't that transparent relative to the customer lineup. However, also there, we are serving large customers, and I have the same say, a privileged experience and exposure to shortages. Think about large industrial relation customers like Schneider or ABB or Siemens is just the same as in automotive. I talked about the distribution inventory earlier, which dropped and dropped and dropped. I mean -- and I think actually, if we could ship more. And by the way, if we only went back to our 2.4, 2.5 months target, it would be $500 million more revenue per quarter. That's the delta between 1.6 months and 2.4 or 5 months. But I think if we would ship more, it would immediately sell through. Because again, there is no inventory on the far end. So I think a lot of data points, a lot of visibility, which we have gained into end customers giving us that strong certainty that no inventory is being built at this time.

Great. Great insight there, Kurt. I thought it was also interesting on the last call that you're saying, "Hey, if you look at the latest HS numbers, that you endorse looks like global SAARs on HS for 10% this year. We probably entered the year at 13%, 14%, but because of the shortages were down 10%. And it sounds like you're also pretty confident that we'd be looking at another 10% global SAAR next year. If I look at my model and kind of your guidance, I've got you growing your auto semi business, roughly about 40% this year, kind of plus or minus. And while I know you've got some really compelling outsized content drivers related to your radar initiatives, domain controllers, eCockpit in EV. Why is the content premium so great this year versus historically, as you know, it's been pretty consistently 300 to 500 basis points there. And is there any reason why this content premium that you're seeing this year can sustain into next year?

Yes. So a couple of points to this. The one is that the content is indeed accelerating. That is a matter of fact. A large reason for this is the accelerated pace of xEVs, so hybrid electric vehicles and battery electric vehicles, which are just growing faster as a portion of the total car production than it was anticipated. I think where it was like 12% of the car production last year, it's already going to be a quarter or more next year. So it's really a very fast growth. And they carry up to 2x the semiconductor content of an internal combustion engine car. So think about $450, $460 in a traditional ICE car. And think about $900-plus in an xEV. And NXP is very favorably exposed to this. So that's one. The other one is that we have company-specific growth drivers, which just let us grow indeed faster than both the content increases, but also faster than the market. Think about our radar business, think about the eCockpit business, think about Battery Management Systems, just to name a few. But stepping a little bit back from this, I think the math you make on comparing to last year is irritating. And I -- we went through the same cycle of trying to understand this. I think the better way to do it is to compare back to 2018. So take 2018 NXP auto revenues and car reduction as a basis and hold it to what we do this year. Why 2018? Because '19 was already a bad year since China had this massive decline in their car production, and that consumed a lot of inventories, et cetera. Well in 2020, we all know was, of course, totally corrupt given COVID. If we do the math against '18, then actually the SAAR over the 3 years declined by 7%. And our auto business grew with 3%. And that delta of 10% in the CAGR, we can perfectly match and bridge with the 300 to 500 basis points of content increase per year, plus company-specific share growth of NXP. So again, it is actually very understandable and very robust if you hold it back to '18, which makes us also understand and comfortable relative to that this is not shipping to inventory that we are actually clean. And then now I come back to the initial part of your question. Yes, with that, a 10% SAAR growth next year that should be indeed good for us because I believe we will enter next year with a very, very clean inventory position. The content increases will continue. So there is no reason we should grow very nicely ahead of the SAAR again next year.

Okay. That makes sense. And just to clarify, Kurt, obviously, the comparison to 2018 makes sense. But if content gains are accelerating, fair to say that whatever global SAAR ends up being next year, your content gains should be above kind of the historical 300 to 500 basis points.

Let me put it that way. Directionally, yes we will have our Capital Markets Day, I think, mid of November. We will then come out with more specifics. How we think about the future model in automotive growth. But I mean, it's not a secret. I think the direction is clearly that this is accelerated from historic levels. Yes.

Great. So Kurt, obviously, you're attributing much of this content increase in the acceleration, obviously, to xEV. I'm wondering if you could just help us understand kind of your positioning of xEV. Can you give us a sense of how you feel about -- how your BMS solution compares versus your competitors? And then how are you positioned, right? I think there's a view that you're really well positioned with European OEMs? Are you also exposed to North America and Chinese OEMs in Asia?

Yes. So the one thing is, indeed, the BMS is probably the flagship, which we've talked about a lot relative to EV and xEV exposure. But I just want to sign post here. We have more exposure to xEVs than just Battery Management Solutions. Again, this is something we're going to speak about a bit more in mid-November then, but think about gate drivers for inverters, where we have actually started to gain a really good position. And also think about domain computers. So that's our 16-nanometer base S32 family for hybrid control. So there's a whole new class of microprocessor requirements when you think about these mixed powertrains between electric and combustion engine, which is a great, great application field for our new 32 bits microprocessors. So it's not just BMS, but indeed, BMS is the one which we have talked about most. It might feel a little bit like it's a European focused position in BMS, which is probably because, indeed, we proudly spoke about the win of the MEB platform at Volkswagen, which is a great win, and it's just starting to unfold the way. It's a great win because Volkswagen, including the brands of Audi, SEAT, Skoda, et cetera, is, of course, a very high-volume brand with a lot of ambition in xEVs. However, the matter of the fact is, it just happens to be that they did allow us to speak about it. The reality is we are in many, many more OEM brands involved in BMS shipments. It's just that we are not really allowed to speak about it. I mean one adjacent one, which I can mention here is joint venture between Ford Water Company and Volkswagen in Europe, where some smaller car platforms of Ford will be actually leveraging the MEB platform of Volkswagen, and that's naturally also going to sit on our BMS platform. But again, way beyond that, there is many more globally where we are very, very successfully in Boston. I think in 16 of the 20 OEMs globally, we are involved with our BMS solutions. Now we also have another way to market, by the way, and that is very focused on Asia, which is working directly with battery companies. So if you think about CATL or Samsung, we work directly with them because what they offer them to the OEMs is a complete solution, which is a battery and the battery management of electronics. And that's another angle to think about it. And also there, we have a lot of success, especially in and around China and Korea.

Great. Thank you, Kurt. I'm wondering, obviously, we spent a lot of time this point talking about xEV. But I'm wondering, I would assume, one, if you could clarify, is xEV one of your fastest-growing subsegment within automotive? And then maybe can you touch on some of the other kind of key growth drivers like radar, domain controllers, eCockpit? And how do those growth rates compared to EV right now?

Yes. So I'd say we will holistically about the whole xEV segment in the Capital Markets Day. But yes, it is growing very fast. And if you pick out the BMS piece, we are very much on track with the 60% CAGR, which we also guided over a 3-year period of time. So we think that a particular market is 30% plus, but we do 60%, so that's very successful. More material from a size perspective is clearly radar. Radar think about it as being like 10% of our total automotive revenues, growing 25% to 30% against the 20% market CAGR. So again, here, we are gaining share that helps in what I explained earlier in outgrowing the industry. And it's pretty material from a size perspective. The other big one in automotive growing faster than the average is eCockpit, which is audio video application processes for the eCockpits. Where we grow in the mid-teens and the size of that subsegment is also like 10% of -- like radar, if you will, 10% of the total automotive revenue. So those 2 radar and eCockpit obviously, together 20% of total auto revenues are carrying a big part of the faster growth. Now it is important to note, and we will try to find an algorithm for this, that also those applications are benefiting from xEV because the xEVs tend to be higher featured cars when it comes to electronics. So it is not just that xEVs pull the logic products, which you would imagine there, which have to do directly with the electric drivetrain, but they also pull a lot of other electronic features simply because they typically are more up market from an electronic feature perspective.

Great. Thank you, Kurt. I wanted to spend some time on some of your other segments. I know a lot of people spend a lot of time on your automotive segment because it's obviously a key driver for you. But I noticed the industrial IoT segment grew nicely for you in the quarter. I think you grew over 30% in the June quarter. What have been -- what has been the key driver of growth in industrial IoT?