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

Good morning, everybody. My name is John Vinh. I cover semis here at KeyBanc Capital Markets, and we are pleased to have Bill Betz, CFO; and Jeff Palmer, SVP of Investor Relations from NXPI, join us this morning. Welcome, guys.

Great. Thanks, John.

Maybe we're -- kick things off, right? Obviously, the chip shortages and the tight supply has been a really big topic, especially within the automotive end markets. I'm wondering if you could just talk about where you guys are in terms of adding capacity this year internally versus externally? And is the softening that we're seeing in consumer end markets freeing up capacity for you, particularly with your foundry partners? And then when could we start to see your lead times start to improve?

Yes. Let me take that one, John, and good morning, and thank you, everyone, for attending. Great to be here. The way to think about your capacity questions is, first off, we have been adding capacity both internally and externally with our foundry partners over the last 8 quarters, and you can see that. Specifically when -- and it's important to reiterate what Kurt mentioned during our Q2 earnings call is that we're only supplying to 80% of our derisked demand. Again, our demand is up here. We derisk it for double ordering; we derisk it again for analytics; and our supply is gradually improving quarter-over-quarter, but we still have that gap of 20% that we can't serve for 2022. If I think about the CapEx, our long-term model is between 6% and 8%, what we said this year, we'll spend roughly 10%. In Q1, we spent 9%. In Q2, we spent 8%. So the second half will be greater than the first half related to CapEx. And that CapEx dollars is going roughly 50% to the front end and 50% to the back end. If we think about NXP's manufacturing footprint, we do about -- in the front end, 40% internally and then in the back end, about 85%. So if we focus on the front end of that 40%. Think of that as a 90-nanometer or greater technology, proprietary type of technology such as BCD, GaN, SGI and so forth. Where the workhorse of our future growth comes from is really in technology nodes that are 28, 40, 55, 65 and 90, and we outsource that, which is 60% of our business. As we look ahead over time, we still have some 90-nanometer internally. We look to outsource that from a foundry standpoint, our CMOS technology, and we'll continue to ramp our specialty technologies internally. Now related to the foundry, we have -- about 8 quarters ago, our long-term purchase obligations were 0. Since then, we have entered into over $4 billion worth of purchase obligations, and that has gradually increased, and that's spread over 5 years. And we are getting a portion of that $4 billion this year that allows us to improve that supply over a quarter-over-quarter basis, which will help continue to allow us to grow our revenue. And then lastly, answering your question related to the PC, the mobile market, the consumer market is soft. But what we see is those technologies and nodes with our foundries are not one-to-one compatible with what we need on our more mature technologies. And there are a couple of spots that we'll be able to get some more wafers. But again, I would say it's more of a grind and a longer-term trend that we will be a supply-demand imbalance with our foundry partners for quite a while.

Great. Wondering if you guys could give us an update on how your key kind of growth franchises in automotive are doing? I think historically, you've talked about those gain being radar domain controllers, e-cockpit and xEV.

I'll take that one, right, Bill? So maybe I'll just do a real kind of quick recap what we said at our Analyst Day in November 2021. So we identified 3 accelerated growth drivers in Automotive, as you said, John. Radar, which was $600 million business in '21. We expect that to grow to about $1.2 billion in '24. For electrification, this is both battery management and inverter control as well as some other new technologies. That was about $200 million in '21, growing to about $500 million in '24. And then the domain processors, which is really a very long-term architectural shift in the auto industry, was about $300 million in revenue in '21, expected to be about $600 million in '24. Now those are the 3, what I would call kind of premier prime growth drivers. We have other things we just didn't articulate a lot. Some of those things tend to be like next-generation vehicle connectivity both wired. So Ethernet for Automotive, ultra-wideband in the car, next-generation Wi-Fi in the car. These are small today, and so we really didn't put a number on them. Maybe we'll articulate how big they are when we get into -- do our next Analyst Day. In terms of things like the eCockpit, it's a good franchise. It's growing as we expected. All in, we think that all of our accelerated growth drivers together could grow about 20% CAGR over the next several years. So no new update this year -- well, midyear so far. What we do plan to do is at the end of '22 on our Q4 call is to provide an update kind of year-to-date, how things are going. And we intend to do that every year until we get to that 24% to kind of give you some updates.

Great. Just maybe I want to follow up and maybe talk about EVs a little bit. I know you guys in the past have talked a lot about your BMS franchise. You obviously have a high-profile win there with VW. Are you able to talk about just other customer wins or about -- or maybe about your position in the marketplace in terms of number of OEMs or number of Tier 1 wins you have in BMS? And then also, maybe can you talk about just what the split today is of hybrid, plug-in EVs versus pure EVs that you have?

Yes. So we're we were lucky to be able to talk about the VW Group MEB platform. It was an unusual opportunity to talk about the OEM. Most OEMs won't let us talk about design awards. So what we have said is we're designed in at 16 of the top 20 OEMs globally. Doesn't mean we're exclusive at all those OEMs because they all have different platforms. We're on some. Other competitors are on other platforms. We're feeling very good about the business, underpinning the growth. We're actually ahead of where we thought we should be year-to-date. But I really can't disclose other customers at this time.

Okay. Can you give us a sense of how much of it is hybrid versus pure EVs?

Well, really, for us, the core part of the -- of our electrification strategy is around battery management systems. And our solution is a system solution, meaning that it's made up of what's known as analog front-end devices that sit out on the battery cells. We connect all those together to a back-end processor, where we run load balancing software on the processor. That system is sold as a complete solution and it's scalable. So on something like an 800-volt Porsche Taycan, that has the maximum number of content we can get. And that's probably a $120 type solution, maybe a little higher. It scales down depending on battery density. But I don't have a metric to say, of that business, x percent is pure EV, x percent is plug-in hybrid, John.

Great. I think Kurt talked on the last call that I think 30% of the attach rate that you're seeing is 30% xEVs and premium vehicles. Can you talk about what your content looks like on an xEV versus premium vehicles? So what is the kind of combustion there?

So what we'll do is I'll provide some insight as kind of industry metrics, that's probably the better way to do it. So for an ICE car, roughly, it's a little under $500 of content for the industry overall. An xEV on a comparable vehicle is probably about just under $1,000, about $900. Now what's really interesting, we looked -- took this data and we took the kind of car conceptually apart. Clearly, with the big step-up in content is in the powertrain. And that's where we do the battery management system, the inverter control, DC to DC charger and some domain propulsion control. But what's interesting is in the rest of the car outside the powertrain, there's actually more content in the xEV versus the ICE as well. And so when we start thinking about why is this and we talk about it to our customers, they're making XEVs more technologically attractive because the buyers of those cars tend to be a little more tech-savvy. So you tend to have higher orders of eCockpit type of interfaces. You have more safety features like more radar nodes. And so there's just generally more content. I would say, in general, it's probably low teens content uplift from an xEV versus an ICE ex the powertrain. And we see that continue going forward.

Nice.

Now for us, we don't give specific content per vehicle for NXP because we're in so many different types of platforms, there's -- all I would end giving you would be an average that would really be not valuable. I mean we have certain cars where our content is $1,000, just NXP content alone. And we have the other cars where it's $50.

Got it. I think Kurt had recently kind of walked us through just the -- I guess, the concerns around the disconnect between auto semi growth, which has been outsized over the last several years, versus kind of SAAR growth. And I kind of -- I think you kind of said over a 3-year period, what you guys have found historically is that it's roughly a 9% to 10% kind of premium over SAAR. So I think right now, we're on pace to grow a global SAAR of 5%. And next year, 8%. So if we take that 9% to 10% premium on top of the SAAR growth of 8% that's being forecasted, is that kind of the right way to think about your Automotive business growth next year?

I'll take a stab at it and then you can do it. So I think -- let's go to how we portray our business in Automotive. So at our November Analyst Day, we said our Auto and our Industrial franchises would both grow at 9% to 14% CAGR. In those numbers for Automotive specifically, we only assume very low single-digit unit production or SAAR growth, right? So there was no big build in resumption of SAAR growth. That would be a benefit of tailwind. Two, we didn't contemplate any incremental pricing. And clearly, there's been an inflationary environment here in '22. Pricing is a much more significant tailwind than it was in '21. So clearly, if you look at just the printed numbers, it looks like our Auto business has grown quite a bit above SAAR, there is a pricing element. There's a content element, and there's a unit production element.

Okay. Yes, that makes sense. I think one of the things that investors are really concerned about is, obviously, we're running into a period where we're seeing a little bit of software around consumer. Several of your peers have come out and talked about wanting to renegotiate and de-commit from some of the long-term wafer purchase commitments that they've put in place last year because of the softening mobile markets out there. I think there's a little bit of concern that if we do see a correction within Automotive and Industrials, that a lot of your customers are going to come back to you and kind of renegotiate kind of these NCNR orders with you guys. What are your thoughts on this? And how do you see that?

Yes. So I thought it was unusual that data point you gave about one of our peers. That's kind of unusual so far in the cycle. For us, about 18 months ago, our customers came to us and wanted to place noncancelable, nonreturnable orders on us. It had been a model we had never really entertained in the past. Some of them wanted to put NCNR on us over multiple years. We declined. We kept it to kind of a 12-month window because what we want to do is avoid any asymmetric risk. If you put an NCNR on me, I need to have the supply for my vendors to have a balanced book, right, if you will. We've actually very -- knock on wood, seen very good behavior of our customers with their NCNR orders. We've not seen anybody try to back out of their commitments. They've taken product. There have been no commitments. There have been no push-outs. So we feel very good on that side. And we're balanced on the other side on the supply side. As Bill said earlier, supply for us will get incrementally better every quarter. There won't be any 1 big discontinuous clearing event where we've got supply-demand's completely in balance. We think we'll be in a tight spot for the technologies we buy for at least the rest of this year, and it looks like '23 could be still a tight environment as well.

And just maybe just to add, just to give you an idea of the size of the NCNR is what we said in the past, for this past year, it's greater than our long-term purchase obligations of $4 billion. We can't service all of them. And we just kicked off, as Jeff mentioned, our 2023 allocation, and those are at similar levels of our NCNRs as of this year.

Great. Are there any questions? Great. Okay. Maybe we could switch to -- and talk about some of your other nonautomotive businesses such as Industrial & IoT. Maybe can you talk about just what the growth drivers over the last year have been there? I know wireless connectivity is a big part of that business. But what are the key end markets and applications here that you guys are focused on? And geographically, I know historically, this business has had a strong China exposure here. Is that still the case?

Sure. So I'll take that one, Bill. So let's talk about the end markets is. First off, it's a very, very diffused market. Tens of thousands of customers, very long tail. There's no one customer or one end product type that makes up more than a few points of revenue for the whole Industrial & IoT segment. What is -- our product set there is it really starts around building what we call secure processing. So the idea there is you win with customers the processing requirement, then you add to that analog attach, whether that's power management or analog interfaces, and then the customers usually want some type of connectivity, whether it's wireless, WiFi, Bluetooth, NFC, we can offer that. And also what's becoming much more important is security. We can either offer security embedded into the processor or security as a distinct device. What we do is we take those components and we build basically a reference design. And we take care of all the technical gazintas and gazoutas, if you will, of the different chips, and we provide a software layer that our customers can pick up and really replicate very quickly in a scalable fashion across different end markets. So that's our product set. Processors are the largest portion of industrial and IoT, analog is the second, and the connectivity, just from a rank ordering perspective. In terms of end markets, we recognize revenue on a ship-to basis, not a consumption basis as most semiconductor vendors do. And about 85% of industrial IoT goes through distribution. The exposure to China is only slightly higher than our corporate average. Our corporate China ship-to numbers just under 40% last year. So Industrial & IoT is just slightly above that. It's really nothing that abnormal. But that's on a ship-to basis.