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

Well, good morning, everybody, or good afternoon, if you're on the East Coast. I appreciate everybody joining us this morning. My name is Gary Mobley. I'm one of the semiconductor analysts here at Wells Fargo Securities. With us today, we have the CEO of NXP Semiconductor, Kurt Sievers. And Bill Bets was supposed to join us; he's the CFO. In his place, we have the Head of Investor Relations, Jeff Palmer, who many of you may know, a very seasoned guy, has been in NXP for a number of years. So we're certainly glad to have both of you up here today. But to lay the foundation for our discussions and our line of questioning today, Kurt or Jeff, I was hoping that maybe you can just give us a broad overview of the different product buckets or end market buckets and then we can just double-click from there.

Yes. Thanks, Gary. Thanks for having us. And yes, let me start about the macro because everybody -- I mean, all our meetings, it's always the first question, where are you and what does it mean to your sector exposure, et cetera. We use this nice language of a dichotomy in our earnings call a few weeks back, and that still really holds. So we do clearly see the weakness and softness in the android world and in all the consumer business we have, which, in our case, is actually the IoT business, which is about 40% of our industrial IoT segment. Weakness means a significant drop in demand. And you've also seen how we manage this. We try to avoid by all means to trim the channel. So we stick in a draconian way, I would almost say, to our 1.6 months' of distribution inventory, just to be sure that we don't ship in more than they can sell out. At the same time, and that's the dichotomy, we do continue to see very, very resilient demand in the automotive and core industrial. Now core Industrial IoT, that's all a bit confusing. Another way to look at it is the core industry is really the business-to-business industrial markets, where the IoT is more the business to consumer markets. Very resilient in core industrial and automotive means we continue to have demand is surpassing our supply capability, which has become better and better and better over all of the past quarters. But we are still sold out with the amount of NCNR orders in Automotive and Industrial, which we have on the books for next year with very select specific customers we enter into these relationships. We also have to face the fact that we continue to be sold out for next year. So we have about 85% supply coverage of demand for next year. And in my view, while the macro might certainly have negative impact on the SAAR, we do believe that the fundamental drivers for demand in Automotive should stand very strong because that demand has not been driven by the working from home through the pandemic, which I believe was really the driver for the consumer markets and PC markets and mobile markets. but it's a much more secular trend, which comes from electrification and other content increased trends in Automotive. So what I tried to say is within the semi market, 1 sector is really not like the other one because the fundamental drivers for demand were different ones. And in our view, the ones for automotive and pretty similar in core industrial should stand strong, while, of course, we stay also very cautious in this environment. I mean it's not an environment where you push the pedal. But we just see more signs for actually pretty positive development going forward rather than the drop in Automotive.

Okay. Appreciate that overview. It sounds -- that sounds very consistent with what you highlighted on your recent earnings call. Correct me if I'm wrong. Or has there been a change on the margin?

No, no change. I mean, we really -- I think this environment and this dichotomy is just the same as it was. So we -- also today, if you ask me, do you see cancellations or pushouts in Automotive and Industrial? No, we don't. That's the same as a few weeks ago. But at the same time, the softness in IoT and Android also persists I mean that hasn't got better, while the others haven't got worse.

Got it. I went back -- in preparation for this fireside chat, I went back to your Analyst Day from November of last year. And the quote that stood out to me in review was 60% of your revenue is generated from markets in which you have a leading market position. Maybe for the audience and to further discussion, you can lay out in which end markets do you have that leading position, in which end markets are you trying to catch up to the challenger?

Yes, Gary. So I'm glad that stick because it is a -- it is part of the philosophy and the principle how we run the company. It's about relative market share. We are big believers in how scale comes to work for margin revenue growth. And we think if we have this relative market share leadership of 1.5 or bigger, we are ultimately in a position to out-innovate our competitors. I mean in the end, we all have about the same R&D percentages. But if you have 50% more absolute dollars in revenue, you can spend 50% more R&D dollars in the same space, which should give you then a better road map and that should create more traction going forward. I mean that's the underlying principle why we are so obsessed about that. We have those leadership positions across our segments. I mean, famous examples are in Mobile, we have the mobile wallet, where I think we have a relative market share of 8. So here, it's really at work. We drive the penetration. That's an example which is at the far end here. Then you have situations like our radar business in Automotive, where I think we guided a 20% to 25% growth over 3 years, will be like $1.1 billion, $1.2 billion in 2024. So it's a sizable part. Now we are #1, but we don't have yet a RMS of 1.5. So we are somewhere between 1.0 and 1.5. So I'd say on the expansion path. So more work to do, but I think well underway. And then you also have more embryonic businesses where we just got started, where we don't have that leadership yet. And the good example is probably battery management in Automotive, which really rides the wave of the content increases from electrification. But we all know that ADI after the acquisition of Maxim is actually ahead of us. So we have an RMS, which is less than 1. But I think with the dynamic and the momentum we have in design wins, we are also underway. So it's not like the whole company is on 1.5. It is 60%, as you say. It also cannot be because we constantly have to invest in new businesses. And I mean you can't start on such a high level. So it's a machine which is ever evolving. But we believe if we stay in the 60% to 70% level of the total portfolio, we have about the right size, okay?

This is certainly not your father's NXP. And what I mean by that is if you go back in time 2016 through 2019, the revenue didn't really grow. But what is clear in the last few years as you've outperformed the growth rate of the market, you laid out at your Analyst Day, the idea that you can be an outperformer relative to the rest of the chip industry. What has structurally changed? Or is this new paradigm a function of your high automotive end market exposure explicitly?

Yes. Look, I mean, first of all, not my father's NXP. I'm a proud founding member of NXP. So I was actually part of the company when we did the divestment from Philips back in 2006. And we've been architecting this company to have a large exposure to automotive and industrial markets. I mean that's really been something which I would say since 2015, when we did the acquisition of Freescale, the focus has been on that. In the belief that those 2 sectors, automotive and industrial would be the more fast-growing sectors in the semiconductor market. And from anything I've seen over the past 2 years, people very much agree that very likely automotive and industrial will be the 2 fastest-growing subsegments of the semiconductor market through the next 10 years. So one answer to your question is, yes, we have the right exposure, which took a while to rearchitect the portfolio and actually get us into that place. The other one, however, is that clearly, between 2016 and 2020, we've been just very busy with portfolio changes in M&A. I mean we had the acquisition of Freescale. We had the failed acquisition by Qualcomm. We acquired the connectivity assets from Marvell. And we did divest our Standard Products business. So when you look at growth over the period, I mean, it's a bit lumpy because we sold stuff. We were busy with M&A. I think now the company for the past 1.5, 2 years is really exercising its muscle. The portfolio is where we wanted it to be. There is stability. So we start to outperform. So it's not just that we ride a wave of fast-growing markets, but I dare to say, and it becomes pretty visible over the past 2 years, we gained market share. So that growth is not just being on the wave but actually being ahead of the wave because we grow market share in those core markets. And I see no reason that would change going forward. So we have this year and we don't publish the number, but the design win size which we have achieved this year, also given a lot of new customer relationships out of the supply crisis, is ever than it has -- is higher than it has ever been before. I mean that's for us the best proxy for how the growth should go over the next couple of years. So it will continue to be not our father's NXP. It's a different one.

And Gary, I'd add to that, the decisions that Kurt and the management team made back in the 2016, '17 period with the merger of Freescale, those decisions only yield the benefits in the last few years, right? Our business is a long R&D design and then design to revenue cycle business, right? In automotive, it takes anywhere from 2 to 3 years to go from a design award to you actually seeing revenue. So decisions you made in '16 and then the revenue associated with it, you're just starting to get the fruition of that today.

Got it. And to be clear, for the audience, I believe your long-term revenue growth forecast is 8% to 12% on a blended basis. And related to that, at your Analyst Day, specifically on Slide 12, you highlighted an expectation of $15 billion in revenue in fiscal year '24. Now the current consensus view, over is a more modest $14 billion. I know you don't shape that consensus number or have any input on that. But in your view, has anything changed since November of last year? Or has the market softness that we're currently seeing change that view?

No. And I think to that specific slide now that I clicked into it, there was another key point, which is back in 2018, our accelerated growth drivers were roughly $1.5 billion of the total company. We expect by 2021, those accelerated growth drivers to double to about $3 billion. And from the Analyst Day, we expect that $3 billion to double again to about $6 billion in '24. And I think we can say today that trajectory of the really unique differentiated growth drivers are intact, if not ahead of plan. And that all sits on top of a base of business where we have a high core RMS, what Kurt talked about, and those high RMS positions are what allow us to fund some of these newer areas.

Okay. Related to the same topic, 2022 has unfolded to be a better-than-expected year. And what has surprised you to the upside relative to when you started the year? Is it ASP tailwinds? Or is it the strength of the automotive end market?

Yes. I think the speed of conversion to electric drivetrains in automotive is a surprise. Had you asked me a year ago at the Analyst Day, I would not have forecasted that the electric and hybrid electric cars would be, I think it's now 27% of the SAAR this year. It's going to be 34% next year. So say, a solid 1/3 of the car production is electric. I would not have forecasted that. So that speed is a positive surprise, is a big, big tailwind for NXP because we are over-indexed to electric cars, which is not just the drivetrain. I mean we shouldn't forget that electric cars have a higher electronic feature content across the board. So it's not just the drivetrain, which pulls more semi, but they also tend to have more ADAS features and more convenience features because the classic -- the buyer of an electric car expects more tech in a way. So that tailwind in the mix of cars is certainly something we have not expected. The second one is indeed pricing. The -- given that strong demand, we see a more persistent imbalance between supply and demand. By the way, also going into next year, which has led to obviously more pricing power. Unfortunately, also more needs to exercise pricing power because costs went up for this year. And I am now very, very busy, we are now negotiating and writing contracts with customers for more price increases next year. So this is going to continue all through next year because our input cost, unfortunately, also continues to go up next year. So the philosophy which we had applied for the past 6, 8 quarters of passing on the higher input costs to protect our gross profit percentage. We have to stick to that. We will stick to that. I mean we are not patting margins, but we are fully passing it on. And given the environment, given the continued strong demand and kind of limited supply, this will see a third year. I mean it's been the third year in a row of price increases. And that's a surprise. So admittedly, and Jeff, you were humble and polite when you answered the question about the $15 billion forecast for '24. I would actually say when we made that forecast a year ago, it did not really comprehend price increases. We didn't know. I mean that was really the surprise. We didn't know that. So in a way, there is a tailwind in place, which continues into next year, which is on top of the 8% to 12%, which we had given in the Analyst Day.

That's some great color. Appreciate that. Have you guys gone through the exercise of looking at all your design wins. How many of them are sole sourced? How many of them are you the lead supplier in an effort to evaluate the stickiness of pricing. So there will be a time in the future when supply and demand are in balance and maybe even supply exceeds demand, and then maybe you're seeing that now. So how do you feel about the stickiness broadly across your product portfolio?

Very high. It's just like how our portfolio is built. And you saw that through the supply crisis. I mean I had so many questions, why not customers would just walk to a competitor and take a product which is available from somebody else. They couldn't because these designs are unique. So I don't have a percentage for you, but it's a very high number of our product, which is in single source positions at customers. I think going forward, for 2 reasons, it's even going to get more sticky. The one is we try to build more core industrial business, which I had to learn. I mean, that's -- I'm not an expert from history in industrial. It's actually more sticky than automotive, has more longevity. So these industrial applications are incredible. I mean once you're in, it takes ages to get in. But once you're in, it's like cemented into the socket. That is something as we forecasted, which will grow 9% to 14%. So on a relative basis for the company, we will have more industrial business. So that makes it more sticky. Secondly, software. We clearly see that the biggest headache for our customers is actually the cost for software, the life cycle management of software in a car, the reuse of code when they go from one model to the next model. And what that in the end means is they are very much locked up to a certain process of choice. So once they have a certain processor from, say, NXP in that case, and put their code in our system, then it's very hard to walk away. And it's not the cost of the hardware, but it's the software cost, which they would face for switching. And since we have significant traction with our process of businesses, I dare to say that, that stickiness actually should continue to move up.

Got it. Jeff, you look like you wanted to add something?

No, I was going to say that everything Kurt is correct. I think what maybe investors forget occasionally is the size of our processor business across the whole company. I mean, in Automotive, processor is the largest part of our Automotive franchise. It's the largest part of our Industrial and IoT franchise, right? So I think most people don't really comprehend that. And we sell many products that are maybe called other things, but effectively, they're processors with DSPs, things like that.

And that's a good segue into my next question, which is something from Gartner. They show that 45% of your automotive revenues comes from microcontrollers I know you're not going to confirm or deny that. But how should we think about your positioning as automotive design wins move away from a common architecture of ECUs and more towards domain and zonal controllers. How is this shift a net benefit for you?

Yes. So I don't know exactly which chart you looked at from Gartner, but it's probably a combination of microcontrollers and microprocessors. And I emphasize that because it's really important because this is a continuum between technologies, which are needed in the future in the car. So it's about processing. If it's then strictly speaking of microcontroller or microprocessor, it's fading. But it's important to look at the 2 together. And indeed, we are the #1 player in this -- in automotive. It is very decisive for the future, Gary, because all of this concept of the software-defined vehicle, which is about these domain structures and zonal structures starts and comes and goes with the choice of the microprocessors in the car. So you are the first to sit on the table for future design decisions. And especially now where the world is really transforming into a world where we do this directly with the car companies with the OEs. This, I think, becomes decisive. If you only have a portfolio which is kind of peripheral, might be nice products. I mean we have them to analog mixed-signal products. You are the second in road they speak to because it's the architecture choice is made on the processes. And that's where we have indeed a very strong foothold. We win a lot of business now directly for these re-architected cars from a structural perspective. And I -- I mean, I'm very glad about the acquisition we did with Freescale years ago because that actually propelled us into this position. Now what we did, however, is we moved it away from powertrain. I mean, Freescale -- Freescale's portfolio was PowerPC-based for classic combustion engine powertrains, and now we totally morphed this into leadership for domain computing.

And that includes, I believe, variance of the S32.

That's the family name. That's the core of it. Correct.

And related to that, there's this perception or perhaps a misperception that you're kind of mid-tier and lower in terms of processing capability. And so from an architectural standpoint, can you address some of the new evolving applications like L2+ functional safety domain controllers with the existing products that you have today?

So the answer is yes. I mean, we are actually for everything which is vehicle infrastructure, which is not multimedia, we are, by far, the most advanced. I mean we ship big volume now in 16-nanometer chips, which is pretty advanced. And the biggest -- single biggest design win we made this year is in 5 nanometers, which is a monster design win in automotive, which is about a vehicle computer. It's 1 central computer for all of the vehicle infrastructure applications in the car. So it's actually the most advanced thing I can think of. And by the way, it's not going to be a 1 chip thing. It's actually on board which holds several of those 5-nanometer chips. So it's a pretty massive ASP impact. But you still need to hold continuum because cars at the same time, continue to have also, say, more mid-performance processes. But the trigger is to offer the customers, and this is this S32 platform, software compatibility between them because customers want to be flexible. They want to be able to scale up and down in performance and horizontally between different applications. So I think the fact that we have this very leading edge stuff and 16, 28 and 40-nanometer solutions, that is actually what makes us most successful. If you only have the flagship, it's not good enough because it's like a point solution in the car. You need the complete set. I have to say, however, there are elements which we don't do. So we have no ambition at this stage to do Level 4 or Level 5 self-drive computers. First of all, honestly, I believe this is far out from being on the road. Secondly, there is other people who have more matching computers to do this. I mean that's just not our cup of tea. And the same holds for the very high-end multimedia in the eCockpit. There is also other companies who do this. But everything which is vehicle infrastructure, which is the lion's share of processing dollars in the car, I think we are really in the lead. So if the perception you started with does exist, then we have to work hard, Jeff, to get over it because it's just wrong.

Well, I think I'd add to that, Kurt, the perception from some of those folks who maybe can do very high-end fusion processing or come from the smartphone marketplace. They would like you to believe that the car of the future is an iPhone on wheels, or a mobile phone on wheels. There's no partner that we work with who has that vision. The car is a much more complicated multidimensional. There's a lot more infrastructure there that goes on. And yes, there is multimedia parts that are interesting. There are the fusion processors that will fuse radar processing signals, camera processing signals, but there's no one we know who's going to build a mobile phone on wheels.

Appreciate that. For the other half of your Automotive revenue that isn't processor. What are you most excited about? Is it radar evolving into imaging radar, is it in car networking? Is it battery management systems? Is it ultra-wideband or all of the above?

They are all exciting, but from a -- the most material one is clearly radar. I think I said it earlier, it's growing from $600 million to $1.1 billion. I dare to say we are ahead of the curve. I mean, momentum is fantastic. And it still feels like it's the early days of the penetration. It's this 3-leg penetration. There is more cars, which will have radar per se, more radar nodes per car. And as you say, features like imaging radar, which is pushing the envelope from a performance perspective up, means a higher silicon value per node. So we have actually 3 levers for higher value. which is very well at work. By the way, this is another child of the -- you talked about fathers before. I talk about children now. It's another child of the combination of Freescale and NXP. NXP used to have spearheading the industry, the CMOS capability to integrate 77 gigahertz high-frequency radar in CMOS, where Freescale had the leadership in radar processing. So the baseband, if you will, and we put this quickly together, which gave us actually this massive leadership position we have now. So I think this is the one outside of the microcomputers having the biggest impact into the revenue growth of NXP and automotive. Now if you probably take the years after '24, I think BMS will be no short of this because also massive momentum, it just -- today, it's still a little smaller. But I mean, over a few years, it's going to come into the same size. And there is more which we have in the kitchen, which we will talk about when time is ripe. So I think in electrification, we started to talk about inverter control, and there is more to come. So I mean our electrification footprint in the end is going to be much bigger than only BMS. So lots of things to be excited. Ultra-wideband is typical automotive, it's kind of slow, not slower than we thought, but it just takes time because, first, it needed the mobile phone. So it needed the Android and iOS adoption of ultra-wideband because you don't want to have a car where then you have to find a mobile phone to open it. I mean the idea is the mobile phone you have should just work with your car. So now the penetration of ultra-wideband in mobile is actually starts to be in a good place. All of the automotive engagements using ultra-wideband, which I am aware of, are NXP exclusively 100%. There is 2 cars which are out in the streets, which use that feature already, which I think I can also speak about. One is the BMW iX, which is this flagship electric SUV from BMW. And the other one is a Hyundai Genesis SUV, electric SUV, which have fully enabled ultra-wideband access and other features which you can do with ultra-wideband. It goes beyond access. Many, many more in the pipeline. But as always, in automotive, it's going to take a few years until all of these models will come out. So I'm excited, but I think I will be more excited in a few years down the road because then I can speak about all of these cars.

And in the last few minutes, I wanted to ask about your commitment to the mobile market. Clearly, you have a well-established market position and have seen the secure element attached to that. And then you have some other I guess, custom solutions. So I realize it's a big market, but it's not a growth market. And so from an R&D perspective, what is your commitment level to this [indiscernible] market?

We clearly are not and don't want to be a mobile company. We have a focus on there through extreme relative market share leadership we can push content but are not that dependent on units. The mobile wallet is probably the best example. We still have miles to go from a -- from an attach rate perspective. I think was end of last year, we hit the 50%. Admittedly, Gary, over the past 6 quarters, the supply constraints actually led to defeaturing of mobile wallet because we simply couldn't -- we couldn't ship. We didn't have the product. So mobile phone companies had to defeature, which is a massive step. Now that's going to come back once supply works out again. And there is a next wave of ultra-wideband. So we're going to build on that same concept of a secure element and middleware, but with a different radio, which is an ultra-wideband. So this is complementary to NFC. So it's not replacing it, but comes on top of it for essentially the idea is you will like we moved your credit card into the phone, we want to move your keys into the phone. So wherever you use today mechanical keys, we want to enable mobile phones to do the job in a more secure and more convenient way. That is probably the main focus in mobile. So it's a very -- it's a laser sharp focus, not a broad mobile player, okay?

I wish we had more time, but we don't. So Jeff and Kurt and everybody in the room and online, I appreciate you joining us today. Thank you all.

Great. Thanks, Gary. Thank you, everyone.

Thanks, Gary.