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

Well, good morning, everyone, and thank you very much for joining our 2024 NXP Investor Day. It's great to see you all here with us in Boston. A beautiful day even though the shades are closed. This is our fifth Investor Day we've held, and I think you're going to enjoy the program today. A couple of housekeeping items, as you know, I love to go through before we start any event. This event is being simulcast on our website. There's slides that you'll see today, will be available for download within 24 hours along with a replay of the video. As you know, we will be speaking to some non-GAAP measures today. A full reconciliation of those non-GAAP measures will be in the back of the deck as well as other information on our website, as you need it. In terms of the program today, I think we've got an exciting program. We're going to start off with Kurt Sievers, who's our CEO and President. I think most of you know Kurt. He's been with the company since the very founding as when we were carved out of Philips in 2006, and he was part of the strategy development. He's going to give you an overview of our strategy that's going to help drive growth. Our theme today is bringing intelligent systems to the edge. We're going to then move on to the industrial and IoT reportable segment. Rafael Sotomayor will take that for us. Most of you may know Rafael, he came to NXP about a decade ago. Prior to that, he was at Marvel running -- Broadcom was running the wireless business there. That was a Freudian slip. He'll give you an overview of our industrial IoT business. And then Jens Hinrichsen will get up and speak to you about our Automotive business. As you know, between Rafael and Jens, that represents about 75% of our total revenue. This is our strategic focus as a company. Jens has been with the company since its founding. He's held a number of roles starting out with Advanced Analog, taking care of all of our analog products, a lot of our automotive products. And now he runs all of our automotive products, so very important to the company. You may wonder where some of our other team members are. We have most of our [ team ] here today. But two people can't be with us today. One is Henri Ardevol. Henri has moved into a strategy role for the company. And then Torsten Lehmann is on medical leave right at the moment. Then we're going to do a short Q&A after Jen's presentation. Then we'll do a break and come back and we'll hear from Andy who will talk about our hybrid manufacturing strategy, which we think is a unique differentiator in our ability to drive growth for the company. And then lastly, Bill will come on up and give you a sense of the financial model that I'm sure you're all patiently waiting for, for the next number of years. And with that, I'm going to pass it over to Kurt.

Yes. Thanks, Jeff, very much, and good morning, everybody. Good to see full house this morning. I remember vividly, our last Analyst Day in New York in November 2021, was a very special one because it was actually literally the first week the travel ban was lifted, and it was like a personal reunion with a lot of friends. I'm glad that through the last 3 years, we had much more frequent opportunity to meet and see each other and discuss the future of the business. Now today, as Jeff just laid it out, I will speak about our strategy to bring intelligent systems to the edge. I will also provide the updates to our long-term financial model. And maybe most importantly, I will introduce then after me, as you just said, Jeff, Rafael and Jens and Andy, who will give you much more detailed and much more underpinning insight into the future growth of the NXP business. I know that you speak too much to Bill and I. In that sense, we really try to make sure today you get a much broader exposure to our management team, who will provide you a lot of good detail. Now above and beyond all of the detail, there are three plus one things, I really want you to take away from today. And those three plus one are the following: NXP is going to grow high single digit organically through the next couple of years. NXP is going to expand its gross margins, non-GAAP gross margins above 60% over the next couple of years. Thirdly, NXP is going to continue to get all of our excess free cash flow back to our owners, 100%. And if you put the 3 elements together, we can all easily calculate that NXP is going to double its earnings per share by 2030 plus. And the next 4 hours will be dedicated to underpin and give evidence on how we're going to do those three plus one outcomes. Talking about future in our business clearly needs understanding of some of the strategic moves of the past, which, is why I want to get started here with taking a look back into the history of NXP starting from our IPO in 2010. And I will speak about this with a lot of passion and conviction because I've been a member of the management team of this company since that very beginning with the IPO back in 2010, and I became president in 2018. So I have a lot of heartburn about that journey, which we are speaking about here. And that journey, I would cluster, in hindsight, into two phases. The first phase was about refining the strategy, which was about making sure that we deploy our R&D into those areas, which would provide the most sustainable growth going forward. We were divesting assets. We were acquiring assets and the most notable one was clearly the acquisition of Freescale in 2016. That is very important because the legacy NXP before that time had a lot of strength in analog, RF and cybersecurity. What we got on board with Freescale was leadership and embedded processing and functional safety. And that, together with the NXP legacy strength formed actually the foundation for what is our future strategy in bringing intelligent systems, systems to the edge, not components, but systems. Over that entire period, we have about tripled our revenue, and we have doubled the operating margin performance of the company. We are okay with that performance. We clearly want to do better than this going forward. Now looking more closely at the report card against what we gave you as targets, 3 years ago in New York, I would personally say the environment has been more turmoiled than I was hoping for. When I think about the supply crisis, when I think about the ever increasing trade tensions, when I think about the ins and outs of COVID-19, then things certainly have been a little bit more troublesome than we would have been hoping for. And in that context, we are kind of okay with the mid-single-digit growth, which we have achieved through the period. What I want to clearly state, we missed the mark. We gave a target of 8% to 12%. We achieved mid-single digit. Where we've done quite well is on the non-GAAP gross margin front. We managed to operate at the high end of our target, which was 55% to 58%. Which, over the period, gave us now a 200 basis point expansion of gross margins from 56.1% to 58.1% this year. And finally, earnings have increased by about 20% from '21 to '24. So an okay result in a pretty turmoiled period. What I think matters a lot to the future of the company is trust into and from our investors and investment into the future of the business. So it's nice to quote here that we have $11 billion investment done cumulatively over the period into R&D and CapEx, which I would really call what manifests the future investment into the company's growth. At the same time, we have returned about $11 billion to our owners over the same period. Now going even a little bit closer into the scorecard. In this last Analyst Day, we had introduced the concept of differentiating between the growth of the core of the company which is all of those high relative market share franchises, which typically grow more with market since we have such a high share that we cannot outgrow the market versus what we call the accelerated growth drivers, which are really new application fields where we are growing far above market. And if you look at those two, then the core has grown at 2%. Those accelerated growth drivers have grown at 11%. Where it really worked out to our satisfaction is automotive, where we've shown a 9% growth over the past 3 years. And you see underneath at the bottom of the slide, the individual growth drivers, which were contributing positively to this like our S32 processing for the software-defined vehicle electrification and even Radar. And I will speak about Radar later, it looks a little bit below target, but there is -- there are reasons for that, which have to do with inventory digestion. Where we are not satisfied is the performance in the industrial business over the 3-year period. Clearly, missed the mark. But I want to remind all of us that we've done something different through the period, which is a great learning from past failures of NXP, we have not stuffed the channel. Our strategy of soft learning is asking us to a lot of discipline to not overship in the channel. Most of that industrial business goes through the channel. So some of that underperformance stems actually from very disciplined channel behavior which should be a strong starting point for the recovery, when and if it comes in the future. Mobile growing roughly with market over that period, which is very understandable when you know that most of our mobile business is to secure mobile wallet, where we have a very high relative market share. So we, by definition, grow with market. Now we also plot here a 5-year benchmark. And I do that because the business is so cyclical that sometimes if you just take 3 years, you take the wrong benchmark. So 5 years, we felt like 2019 to '24 here is a better benchmark for how we've done through the cycle where you see the company has grown 7%, Automotive 11% and Industrial, 7%, which is much more back to the norm, which we would actually also expect going forward. But I come to the new targets in a minute. With that, I move our minds to the future, to the strategy, to the growth to the new model. And I really zoom out far. This is the total semiconductor market. According to McKinsey, a $1.3 trillion opportunity by 2030. And if you look over the past years, growth has been driven by long waves of mega applications. Between 2000 and 2010 compute was the name of the game, Intel was the winner. Between 2010 and 2020, that was the age of mobile smartphones, of tablets, companies like Qualcomm and Broadcom really emerged strongly through the period. And since then, it is for sure cloud computing, AI, generative AI in the cloud with NVIDIA, the absolute rising star. And we think from here, the next big wave is intelligent systems at the edge, which will actually benefit from the artificial intelligence from all the cloud computing, all of these edge applications, be it in the home, be it building automation, be it factory automation, be it the car as the ultimate edge device. They are all connected to the cloud and will benefit from that success the cloud is currently scoring. Now from a consumer perspective, if you think about what technology is doing to us. The way I would describe that history is a little different. I would say in this computing age, our environment, which we experience as human beings in our households, at work, et cetera, was pretty analog. From 2010 to 2020, it was more this on-demand environment. You could electronically order all sorts of things. But what comes next and where NXP is going to be strong at is what we call anticipate and automate. The idea is technology will know what you need next. And then technology is going to automate the delivery of that. And that is about all the help we are getting from robotic lawn mowers, from eventually autonomous cars. All of that is about anticipating what is next and then delivering it in an automated fashion. And these are all these edge applications, which I will explain how NXP is going to exploit their opportunity of growth. And they go about automotive, factory automation, building automation, smart home and health care. My colleagues, Jens and Rafael in the next 1.5 hours will give you all the ideas, all the customer traction, all the product road maps, how we are engaging across those markets. And they all follow the same scheme. It is about automation of tasks, it is about trust, which these applications have to provide and trust comes with cybersecurity and functional safety. And this is about efficiency increases. Rafael is going to speak about the horrible numbers of today's factory downtimes across the world, which is an enormous waste of value, which edge applications in Industrial will significantly reduce. So the output of factories will get much better, just as one example. So putting this in numbers, this is the McKinsey forecast of global semiconductors from '21 to 2030. So it's a long period of time. And what really sticks out is that automotive and industrial, which you can easily hear me speaking about a lot here because that's the future focus of NXP. Those two other than generative AI are the fastest-growing subsectors of the total semiconductor market with 12% in Automotive and 10% opportunity in Industrial. And mind you that those 2 together, with $170 billion represent about 1/4 of the future growth opportunity of the semiconductor market. And it's interesting to note that this is just as large as 2 well-known markets together, which are wireless and computing. In the past, wireless and computing were the holy grail of semiconductors. Now automotive and industrial offers the same growth opportunity over the next years as wireless and computing together. Now what are the underlying assumptions for that growth? And Jens will go in much more detail in automotive. The highlights are significant penetration growth of software-defined vehicles, which is about the digitization of the electronic architecture in the car. Significant continued growth of the penetration of assisted safety systems, ADAS, eventually autonomy. I want to highlight here, we don't need autonomous cars to hit these numbers. Eventually, they will still come, but also continued penetration of xEVs. I know there's been a bit of a debate more recently. Is it slowing? Is it moderating? Is it more hybrids? We still believe and all the market research tells us that by 2030, about 70% plus of the global car production is going to be electric. And by the way, this is going to be led by China. Similar in the industrial space, we see a quadrupling of the market for robotics. Gigafactories growing. And all of that is trying for edge efficiency, which Rafael is going to lay out, how we're going to serve that. Now where this comes together for NXP is the technical requirements for all of these applications. And those requirements are universal across automotive and industrial. It's not different between the two. We need functional safety and cybersecurity. All applications are connected. They have to be cyber-secured. Most applications become robotic-like applications, full automation. They need to be functionally safe. AI and ML is coming down much more to the edge. We have it today in our radar solutions. Rafael will explain how it comes to the industrial edge and how we are going to embrace AI at the edge, dedicated AI. Ultra-low power, and maybe most importantly, real-time performance. When people often ask us, how are we differentiating against Qualcomm or maybe NVIDIA trying to get to the edge. It is the real-time performance of our processing solutions, which is very different to media processing, but you need real-time control in machines which have to operate safely at all times. I think Jens, you're going to speak about this in more detail in a minute. Now next to specific technology requirements. There is a whole list of industry requirements, which are a result of how the industry has transformed. The first one is a very positive one for NXP. It's the ecosystem shift. Since the supply crisis, we have moved so much closer to OEM customers. But that also means we come into a position that we have the obligation, I would say we have the opportunity to resolve the complexity they are faced with. Many of these large industrial automotive customers come from a mechanical background. They are struggling with the enormous complexity of electronic hardware and software systems. This is where we can cut in. Software, most edge systems are software-defined. And finally, and Andy, you're going to speak about this. The geopolitical turmoil is firmly demanding more resilient supply chains, geographically more resilient and a certain level of sustainability, which we are anchoring in our hybrid manufacturing strategy, Andy, which you will lay out in a minute. So here we go. NXP is in a fantastic position, and we've worked hard over 10, 15 years to build that position to respond positively to those trends. It is, a, our complete portfolio, which is a result of a lot of homegrown, but also of acquisitions and tuck-in acquisitions, which we will continue to do. Deep core competence. I mentioned cybersecurity a number of times. Think about the franchise for electronic ID for mobile payments. This is where we've grown our security footing. Now we move this into automotive and industrial. Functional safety. Freescale, which we acquired in 2016 has been forever, a leader in airbag and ABS systems, which is all about early functional safety designs, which we are now porting into software-defined vehicle. Resilience, hybrid manufacturing, I get -- Andy you get there. And I think maybe most importantly, the simplification for our customers, which is system solutions. We are working with companies which cannot cope with the complexity of the requirements they are faced with. And we have to scale this over long-tail small customers. Rafael, you will explain how we translate from lead customer learnings, into the long tail channel served customer base, which, by the way, is margin wise very accretive. I'll come back to that. So in summary, we sit and have built and continue to evolve a very strong and complete portfolio for the intelligent edge, which is compounded by trust, safety and security, and the capability for system solutions. We are deploying that into 2 main market segments, which together comprise about 75% of our revenues, which is Automotive and Industrial & IoT. I mentioned the subsegments before. And really important to understand the underlying IP, the underlying deep core competence in the company is universal across the two of them. This is not like two separate companies inside NXP, there is one strong core, which is being deployed into two end markets. Now the opportunity is always larger than what we can afford and you all want from us profit growth. So Bill's and my job at all time is to focus our investments. We have very successfully applied a relatively simple but strikingly strong measure over the past years, which helped actually to grow our gross margins, which is a matrix of, is the opportunity which is at hand, above-market growth. And secondly, do we have a path to achieve relative market share leadership? Relative market share leadership allows us to out-innovate competitors because we spend more dollars on the same application than any competitor can which yields sustainably higher gross margin. We have absolute evidence that where we have that RMS leadership, we are leading in gross margin performance. That stays. What I show here, we've done for many years, and we absolutely continue to do this. But we are augmenting it by one element, and that one element is we have to invest into what forms then a system solution. We cannot only look at product leadership, for our lead at the intelligent edge with OEM customers. We need system leadership, and that's the third angle, which we are adding to this matrix in order to focus and funnel our investments. This is a very, very living tool. So Bill and I and the whole management team of NXP, we run through the whole portfolio of the company every quarter. And if something falls off the grid, they get a second chance for another quarter. And if not, we stop and then we invest into something else. So it's a pretty rigid process, but it has proven to drive gross margin performance. Now what it all comes down to is the new growth algorithm for the company. I said in my intro high single-digit organic growth or translated into 6% to 10% for the next couple of years. We continue to apply the differentiation between core business and accelerated growth drivers. There is a small reclassification I want to hint your eye to, which is, 2 of the former accelerated growth drivers from the past 3 years. Namely applications processes for E-cockpit and automotive and the RF transistors for mobile base station networks. Those two are moving to the core. So they are not lost for the company, but we just moved them from growth to core, which is why you find there -- little reclassification. If you take the new classification, 40%, almost 40% of the business by 2027 will fall into growth, which is a good thing. So a large part of the company falls into the bracket of what it's supposed to grow between 15% and 25%. The core, we think, is going to grow at about 3% in the years to come. Now diving a little bit deeper into this. This is the new scorecard. So every year, we're going to update these numbers and we're going to let you know how we are scoring against those new growth targets. Another element here is new, which is the assumptions on the right-hand side. Over the past years, we often get the question from you what are your boundary conditions? What are you actually assuming in this turmoil environment, which is a bit of a -- to make it a bit more firm under what conditions you can achieve that growth. We listed the key, from our perspective, the key conditions here, which is a low single-digit SAAR, which is a low single-digit ASP erosion per year, which is kind of back to what we had pre-COVID. Very important to again emphasize, this is not falling back down to the pricing levels which we had pre-COVID, but it is going back on a curve, which is a low single-digit decline per year which we can easily overcompensate by operational efficiencies. I will come to the margin in a second. Content per vehicle, and Jens, you're going to go into this in more detail, mid- to high single digit. We assume over the longer period, the GDP globally of more than 2.5% and a manufacturing PMI above 50. Those two are clearly not in place today. So those two will have to improve going forward. We assume the geopolitical stress on our supply chains will continue. So the regionalization of manufacturing will hold on. And we assume over time, a normalized supply chain relative to Tier 1 automotive inventories which also means that we will go back to our target channel inventory, which is the famous 2.5 months or we translated now in weeks, all of our peers speak about weeks. So we are providing 11 weeks just as a better benchmark to competitors, which again is a significant difference of how NXP has operated through the past years versus peers. So we kept it very, very low which gives us some tailwind actually into the future. Now value creation comes from more than revenue growth. And we just know we have a higher margin entitlement than what we have achieved so far, while we've had a good trajectory. So we had an increase of 200 basis points over the last 3 years. And the new model, which we are laying out today for the next 3 years is 57% to 63%. So a midpoint of 60%, which is facilitated by continued operational efficiency, higher utilization. We told you in earnings just 2 days ago, that we are in the low 70s when it comes to utilization today, fall through from revenue growth. And there is another strategic element, which layers in here. We have worked hard over the past years to expand the customer reach in the long tail through the channel. So those many, many mass market customers, which we are touching through distribution. We want more of them. And we are working very intimately with our distribution partners to grow that number of customers. The revenue from those mass market distribution customers is accretive from a margin perspective to the whole company, which is helping here for the next years to further grow the margin as much as our innovation work. I talked about our focusing of R&D funds on high RMS products that comes down in the NPIs, the new product introductions being typically accretive to the existing business. So with new products coming in over time, the mix is actually mixing up to better margins. Now while the semi business is often surprisingly short term, a lot of the strategic actions we have to take are very long term. So I'm offer you here a bit more perspective about gross margin trajectory because a lot of the actions which we take today are playing out in gross margin benefits in '27 and beyond only, not in the next 3 years. I think this summer, we talked about the VSMC joint venture with Vanguard, which we put in place in Singapore, which is giving us access to 300-millimeter factory at cost and we said this would add about 200 basis points of additional margin once it runs full out, 200 basis points for the whole company margin. Now there is more than this. With that factory coming online, we can start to consolidate the existing 8-inch facilities of NXP. So we will further bring down the fixed cost basis of the company because we are adding space in 300-millimeter manufacturing capability. And of course, we continue with fall-through. We continue with mass market and NPI. And that together, we assume will be about 400 basis points additional gross margin expansion, non-GAAP gross margin expansion above the range, which we gave you with 57 to 63 for the next 3 years. And that gets me back to the three plus one points, I mentioned in the beginning of my presentation this morning. We look at a high single-digit organic growth over the next 3 years. 6% to 10%, midpoint of 8%, driven by two main elements: the S32 processing platform for the software-defined vehicle and the Intelligent Edge Systems in Industrial. We will drive gross margins above 60%, non-GAAP gross margins above 60%, which is a continuing journey. If you go back 8 years, and I think, Bill, you're going to show this -- we've ever increased -- and we see there is more headroom we can go for. And we continue our strict policy of 100% of excess free cash flow to you to our owners. And that, in summary, should double our non-GAAP EPS by 2030. And with that, I thank you for the early morning attention here in Boston this morning, and I hand over to first Rafael, who is going to shed much more light in how that growth algorithm of 8% to 12% is going to work out in the industrial space.

Thank you, Kurt. Good morning. I am Rafael and I will be discussing our industrial -- our strategic vision for industrial. And before I start, I'll take a page out of Kurt's playbook, and I'll tell you that in this presentation, I'm also going to leave you with three points. And the first point that I want you to take away is industrial is going to -- industrial is going through a transformation. It requires, it demands innovation. It demands new products. And while you may not think of NXP as an industrial player. This shift towards innovation is creating a tremendous opportunity for us. The market needs to align very well with our technology strength. Kind of makes it fall right in the sweet spot of what we do best. Second point I'll make is Kurt talked about how edge systems are becoming complex. And how solving that complexity is the path to leadership. Well, in Industrial, we will embrace this concept of solving complexity for leadership by developing comprehensive solutions with our key customers. And three, I'll tell you is we take these solutions to the broad mass market. And this last step is crucial since a significant portion of the market. And we do with a strategic sales plan that is aligned to really target and reach this fragmented market. Now what is driving this transformation? If -- just in manufacturing, this is a manufacturing number, manufacturing represents about 60% of the global GDP. So there's not -- it's not a coincidence. The governments, the industry, they're trying to really attack the issue and enable -- augment efficiencies, reduce downtime, increase resilience. But if you look at the numbers here, we have a long way to go. When you focus on this number here, $1.5 trillion in plant downtime. That's a number -- that's an estimate that came from Siemens of a wasted -- this is for the Global 500 industrial companies. They have $1.5 trillion of losses due to unplanned downtime. This is 10% of the revenue. So a long way to go, clearly, a market that is prime for improvement. So what's driving the transformation? Economics. So the megatrends, at its essence, these megatrends are based on the need for efficiency and the need for sustainability. And the technical drivers driving these megatrends are all the technologies drive autonomy, energy efficiency, like low power, electrification and resilience, security, safety, and these megatrends are best realized -- these drivers are best realized by systems at the edge, right? Edge systems will reduce dependency on the cloud, lowering power consumption, strengthening data protection. They are most of the time, autonomous, real time. Like they handle data, they do decisions locally. Modern systems now are software upgradable. So you're always secure with the latest countermeasures and updated with the latest features. So the systems now are having longer -- they live longer. They adapt to evolving needs through time. So this very interesting, fascinating time for industrial. This need for innovation is disruptive. This need for new solutions is driving an upgrade cycle. So in this environment, incumbency is not a given and for us this presents a really interesting opportunity, a very desirable opportunity. So I'm going to shift now to one, why us? What makes us so uniquely positioned to take advantage of this opportunity. So if you look at -- this is our game plan. This is simple. It's a simple game plan. But let's not overlook the complexity of execution. As a matter of fact, we think the execution complexity is part of our competitive moat. So first, we developed great products, always starts with great products that we partner with customers and we develop -- codevelop system solutions. And when these system solutions are mature and these products are mature, we take it to the broad market, which you can see from the chart, it represents the largest opportunity of the segment. Simple game plan, tough to execute. Products, so even though it takes more -- even takes more than great products to be successful in industrial, it does take great products. Differentiated products, products that are designed fit for purpose, not re-purpose from other markets like some of our competition, fit for purpose. Industrial applications are unique, very diverse. So it requires great insight into the use case to develop the right specifications, the right products. So before I dive into our products -- which we're quite excited about. I want to revisit once more this premise because it will come through in my rest of my presentation in the premises of solving and simplifying complexity because it is at the core of what we do. And the reason I want to revisit is because it's critical to what we do in our strategic plan. We know that our -- what our customers are going to be doing tomorrow is very different than what they're doing today. This leap into tomorrow is not easy. The technology needed for tomorrow's solutions are challenging. Sometimes they're even out of reach from our customers' technical capabilities. So this is where we come in. This is our job. This is our role, is to make sure they're always within reach that we not only pioneer solutions and innovative solutions, but we make it easy to use, make it easy to deploy. Our goal -- and we aim to make this complexity an asset, an asset to drive growth and to drive leadership. And the reason for that is important because the technology is needed to do -- to make industrial products -- many are large. They continue to grow. We need to continue to invest in new IP. We continue to invest in new hardware and software platforms. And so we need to make sure that when we release them, they all come together relatively easy for the customers to use with very low investment and low effort on their part. Now the foundation of our industrial strategy is our processors. Our processors is the most strategic decisions that our customers make when they select a silicon vendor. This is where their investment goes. This is where their IP goes, most of the investment, and this is a very strategic step in the selection processors. And we have a broad range in our portfolio. We have three main product categories: MCUs, Crossover MCUs and Application Processors. The value -- having this breadth is a significant part of the value proposition that we offer to our customers. The ability for our customers to leverage the software investment from small, low-power devices all the way to high-performance application processors. We offer our entire breadth of processing capabilities and performance, as our customers can come to us for any type of MCU or any type of solution requires MCUs and application processors, we become one-stop shop for them. You will be hard-pressed to find another industrial player with this portfolio. Yes, some more competition have created some positions in MCU, but they have significant gaps in the high-performance segments. They have significant gaps in connectivity. They have significant gaps in security. Some of our competition comes from the analog world trying to enter the digital space and the processing space. That's hard. What you see here, this is difficult to replicate. It takes generations. So starting with our MCUs, this is, just to be specific, these are 32-bit ARM based micro-controllers. The MCX is the next -- our next generation micro-controllers, we released this a few years ago. We released the family, we released the product line with 6 families. Each one of them targeting a different part of the segments of the market. NXP MCUs are known for innovation in the market. Let me state -- let me kind of explain to you a few breakthroughs that we introduced first in the market in MCUs. If you look at the bottom here, the MCX N, this is our high-performance product. This was the first MCU in the market with an integrated AI accelerator with the performance and the security needed to run AI applications. In an MCU, if you look at the top level here, the MCX A, this is our workhorse. It's got the goldilocks balance of performance and cost. This is the first MCU with a 10 base T1S integrated for Ethernet applications over a single pair of twisted copper wire. This is to actually take a advantage of legacy environments simplify cabling. And again, differentiated features for MCUs, the MCX E is a category of products that targets functional safety. What does that mean? That means it ensures reliable operations under faults. What are faults? Faults could be memory issues, logic issues, timing issues. Sometimes you have blips and electrical issues that cause timing. All these products are very resilient to noise with high EMC standards. They're used for mission-critical applications or applications that control motion. What I'll leave you with here is each one of these segments has a unique value proposition and an innovation angle. And yet at the same time, we maintain software consistency. We have tremendous respect for the investment of software for our customers. Now following -- just migrating now to following the continuum and performance from MCUs, I wouldn't jump into crossovers. Crossovers. We invented crossovers about 7 years ago. At the time, there was this performance need and gap that MCUs couldn't fill. And the only way to do it was to jump to an application processor. But the moment you did that, developers -- well, lost the real-time characteristics in MCU. The [ BOM ] costs went up significantly. And most likely, you had to invest more in software. Sometimes this move was not viable. So enter Crossover. That gives you a performance -- significant performance boost with an MCU platform. NXP is the benchmark in this category of products. And since we enter the market, we created a market, we continue to kind of invest and deliver many, many, many firsts. We were the first with a dual core, running at one 1 Gigahertz with integrated graphics. If you look here on the top, this is a new product, the RT1180. This is tailored for factory automation. It's got integrated TSN switches, enhanced security. Then we created the first tri-band radio, an MCU, monolithic integration of tri-band radio with an MCU. And then here at the bottom, this is literally the latest. This is hot of the press, the RT700. At risk of sounding pretentious, and I'm going to say it anyway. This product is a bit of a technical marvel because it attempts to solve a paradox. It is architected for ultra-low power applications, that need high performance. So this device is dual core, it's got dual DSPs. It's got accelerator for AI. It's got graphics, it's got security. It's got an independent system to manage all the IO at extremely low power. There's nothing like this in the market with this level of performance and a power profile. And this is actually customers waiting for it. They're actually going to go to production with this device in rapid time, you will see products next year on it. In the scan -- anything from scanners to handheld devices to wearables. Quite a unique product. Now we walk through that continuum of MCU to Crossovers. Now we're in the performance of application processors, very similar than Crossovers. An application process for industrial, NXP is the benchmark, i.MX is a franchise. The i.MX 9, this is our latest family and our latest generation application processors. We deliberately entered the market with 3 families. All targeting different ranges of cost, performance features. In 93, it's entry-level Linux box. The 94 targets industrial applications, heavy with networking and then 95. It focuses on graphics, HMI, multimedia. Now what makes these processors different, is that they're uniquely designed for industrial. They're not generic application processors. They have features to uniquely enable applications and features that are needed for industrial. So let me give you some examples. For instance, the heterogeneous compute, these application processes not only run Linux or Android, but they have these dedicated MCUs or subsystems, autonomous MCUs, integrated into SoC with their own peripherals, their own operating system. Their own timers, their own IO, and these devices are able to run real-time applications like motor control or sensor fusion with the same level of precision that a discrete MCU would do. These products have industrial networking. They have TSN switches. And we also support different industrial protocols like PROFINET or EtherCAT among others. They have integrated AI accelerators. They have real-time safety islands. This provides a fail-safe mode that is independent of the host, meaning no customer application can interfere with it. And this allows for a fail-safe mode operation, think of robotic arm, the malfunctions, the ability to return this arm to a rest, safe state is done by this feature. These application processors are unique. And this is the reason why the i.MX has become the standard in industrial application processors. Now when I speak of -- and I think you sense when I speak of the value proposition of the different products that we have, MCUs, Crossovers or the Application Processors, you sense that most of the time, the differentiation comes from differentiated IP. It's anchored on differentiated IP. So we chose these 12 technology pillars as a source of differentiation for us. We believe that we can add considerable value by investing in these IPs by sizing them properly, depending on the product they're going to go to, by controlling the time to market, by controlling the requirements that they deliver. Each one of these IPs represents a dedicated investment and focus for NXP. And that investment is what makes us different. So let me -- I'm going to go through two examples real quick, just to kind of illustrate why this is a source of differentiation for us? And I'm going to start with something that we're known for, which is security. Security -- un-compromised security is fundamental for edge systems. More and more of these systems are connected or interconnected and they represent a large attack surface for bad actors. So a security breach, could compromise the system with massive ramifications. So we invest heavily in security. We probably, in the industrial space, we're probably the largest players in security. Again, Kurt mentioned it. In the security IP DNA comes from the hundreds and hundreds of millions of products that we ship in the market like mobile wallet, passport, credit cards. We take those products that require high levels of security. So we take that know-how and that differentiated IP, and we apply it to edge devices. So we invest quite a lot on IP. We are pioneers on post-quantum cryptography. Quantum computing has the potential of rendering current crypto useless. So PQC standards will prevent that. By the way, industrial customers want that in their products today. Those products are going to be in the market for 10, 15 years in the field. So they want to be protected. Now having great IP and security is not enough. You have to design your chips and your SOCs with security in mind. And you also need to make sure that the customers implement security properly, which that has been a bit of a pain in the past. So we took a page of our secure elements, which is another product that we have, and we created an independence of system that gets integrated in all of our chips. And this independent system handles all the security aspects of the chip and makes it easy for the customers to use security properly. So this is definitely a source of differentiation. Customers in the past took security for -- as an afterthought. And that is not a case anymore. We have the strongest offering in security. And the reason, it's so relevant because we see a trend of regulation coming. Governments are realizing the potential impact of cyber attacks and they're creating higher regulations. Taking for instance, in Europe, the Cyber Resilience Act, is requiring compliant devices by 2028. And we see similar efforts in the rest of the world. So all these regulations is going to raise the bar for security. And good thing is with NXP, customers are going to be covered. Now the second one, this is a new area of focus for us and new areas of investment, which is AI. And what I mean here by AI is, I mean the ability to run AI models at the edge. This new investment focus for us. If you look at AI, AI models are usually created in the cloud, and they're inferred in the cloud. But that inference is now moving to the edge. And when you move the inference to the edge, the data stays at the edge. And then you have benefits obviously, with privacy, with security, with robustness of operations, we had to depend on a reliable connection to the cloud, you have benefits of latency in real time. So our investment with respect to AI at the edge is in three areas. One is we invest in accelerators. These are very efficient and scalable accelerators, so we can put the different sizes and performance in the different category of products. We invest in software, especially on the SDK. We call our AI SDK, eIQ. This is a software that enables the creation of models and the optimization of models. And the last 1 is pre-optimized models. There are hundreds, okay, of open source models today available for voice, for audio, for text, for video, for text to speech, for speech. You name it. So you have to actually optimize and pretune those models to running your target hardware. Now that's the last step is critical to run for -- and it's what makes edge AI different, okay? When you grab these models that were created in an unconstrained environment, remember, now the edge is a constrained environment. They're concerned with memory. By the way, AI is very, very hungry with memory. These edge devices are constrained with memory, constrained with power, constrained with computing capabilities, you need to tune these models. You need to quantize these models. And when you quantize these models, you lose precision. And the whole concept here is to do it and lose precision, but not lose accuracy because the moment you lose accuracy, you lose the use cases. So these areas are critical, and that's what makes running AI at the edge different than running on the cloud. It's a delicate balance. So now why do we want to own our own destiny? This chart shows you there's two horizontal axes here. You have one on the top with performance, this is on TeraFLOPS and you have one in power, which is Watts. You have the different Edge AI use cases that at least today, we get requests from our customers. And you can see that the performance requirements, both in power and AI performance quite different. And you look at this and you think, wow, this looks very similar now. The decisions we make for processing for Edge devices, AI at the Edge also needs to be fit for purpose. And this is the reason why controlling the destiny by controlling the performance, the size and the timing of this IP is critical. We intend to contribute to the adoption of AI at the edge by making AI prevalent in our products, prevalent completely in all our i.MX products and application process in a significant portion of our MCUs. So in Phase I, we focus on developing a foundation, okay, or products, differentiated products with differentiated IP. Now I move to Phase 2 and this is where we tackle complexity and innovation at a system level. We engage with our customers to develop system solutions. And by doing so, we not only guided through technology selection, we ensure all these pieces and components come together to deliver the right KPIs, the right metrics and the right functionality for them. So when you go from discussing products to discussing how to solve challenges at a system level you elevate the discussion. You elevate the conversation. And now it's all about how to really seize the opportunity. How to actually -- we go from how -- unlocking the transformational potential of your technology. And the moment you do that, you become a trusted adviser to your customer. You create tighter bonds. And so in order to kind of bring that concept to life, I'm going to now give you a testimonial of the CEO of Johnson Controls on how he perceives their relationship with NXP. [Presentation]

So just before I jump into the slide and I appreciate George's gracious to actually kind of give us this small video here. I want to just kind of highlight how these relationships with our key customers take time, right? This is not a one-to-one relationship, but it's actually many engineers at Johnson Controls talking to many engineers at NXP, co-creating, developing trust and collaboration added towards creating innovation and develop system solutions. So these solutions, these relationships that help us create solutions are very valuable. Now this slide here shows you our focus markets. Our focus markets, and this is where we develop products and we develop solutions in these target markets in industrial from factory automation, home building, power and energy and health care. And this -- why these segments? Well, these are the segments driving the megatrends. They're driving the transformation in industrial. So it's not a surprise, they're also the fastest-growing part of the segment, growing at almost twice the rest of the segments in industrial. Now I'm going to give you an example -- a few examples now. Well, I'm running out time, maybe one. Give you an example of our reference design. Remember, the reason we make these designs, the system solutions with our customers. One is to understand a bit more of where the market is going, the technical needs that we need to put into our road maps and also to enhance, right, our relationship with our customers. This -- and I'll get to it, this is an example of our reference design we did for factory automation with a leading European customer. And this was a very powerful example because not only allow us to really understand the system but actually create it also and help us design, in this case, our crossover MCU here, the 1180, which I already mentioned before, in our analog front end. They had a say into what those features of those products needed. Now before I get into the weeds here on what this design -- this reference design this system solution attempts to solve, let me kind of step back and maybe create a picture of the problem statement here. Factories -- yes, in factories, the operations rely and synchronized systems reacting constantly to data coming from sensors, all corners of the factory. They don't need to be acquired and they need to be delivered to probably hundreds of POCs and those POCs is analyze the data and they take action and they send commands to actuators, which they in turn move motors, conveyor belts, robotic arms, you name it. Now all these tasks have been a precise cycles from a few hundred microseconds to a few milliseconds. So synchronization is required. And at the same time, data is analyzed. And they monitor trends, they try to detect anomalies. So this reference design is for remote IO. So remote IOs play a critical role in the system, right? They talk, they gather the data from the sensors, they collect data from the sensors, they connect to the actuators and give them commands, the -- it communicates to the POCs, it just basically are at the center of maintaining data synchronization, that's where remote IO is. So when do you need in a system like that? Well, you need really good networking, you need deterministic, low latency encrypted data communications, you need a programmable, high-resolution AFE. Why? Because this AFE collects data from the sensors but it needs to be programmable because they're different sensors in their factory, right? Sometimes you're talking to one type of sensors, you're talking a different type of sensors, but you do it with one remote IO. And at the same time, you need robust security. All these connections are vital and mission critical for the operations of the factory. Now when we did this with this lead customer in Europe, it deliver incredible insight on what real market needs are. But it gave us one more insight, and that's more of an internal insight that you know because we consider this a value proposition for us is that the products stopping product road maps. The road maps and the way we think about our products is different now. They are interconnected. And then you start thinking about not no longer about isolated product roadmaps, but about systems, about platforms. And all of sudden, Europe, individual product road maps become integral road maps. And the only way you can do this is that you have all the components to create the system. And if you have the insight of where the system is going, so we see this as a strength for us in the future. Sake of time, we have similar reference sizes and different other areas. We have referenced [indiscernible] for vision. They go through the different markets. Power and Energy Solutions is a big one as well for us. We -- this is the same technology that we use in electrification and auto here in Jens is going to explain to it. But this, again, with the same with the same purpose that is to get insight to get closer to our customers and to stay ahead of future requirements in industrial, which I remind you, is a diverse segment with all sorts of unique requirements. So understanding the system is critical to stay ahead. So that gets me to my last step, the final step, which is critical. It's a critical step to our path to leadership, which reaching this segment is fundamental. So we not only want to be a trusted advisers to our key customers. We want to be a trusted adviser to thousands of customers. So how do we do that? Well, we need to do things different. We have to act and think differently. So we have to take this concept of collaboration in solving complexity to a new level. We need to put these concepts on steroids. And so we amplify, we do it through a global sales distributor network, e-tailers, design houses. We invest in a strong digital presence. See friction, in this segment, friction is the enemy, the main enemy. So anything that could generate a customer objection should be eliminated. And that is usually around access to collaterals, ease of your -- use of your material training support. So one, we need strong collaterals. Technically, we need to make sure that these collaterals are accessible, applicable for this type of customers. And so we developed a very robust and scalable hardware platforms that allows the customers to develop software code on a target hardware with minimal upfront investment. We have also a application Code Hub. This is a online repository with hundreds of software samples that customers can use at their disposal, they go search, look for their solutions. And this is free. I mean this is free for NXP. Our goal is to make sure that we jumpstart their development, right? We also need a vibrant channel to be able to disseminate and customize our collaterals, to train and support the customer at every phase of their development. So we have a very well-trained global sales distributor network. We have strong partnerships with e-tailers. We have a very robust partnership or I would say, a very robust ecosystem of embedded board solutions, EBS partners are very important for us. So let me give you an example of when things go well, what happens. We developed this design with one of our EBS partners that grab our application processors, put some functionality for touch sensing graphics and voice capability. And rapidly, this particular board becomes a market leader in coffee makers. You think, okay, this is not a big deal, this not -- that's not changed the world, but niches like that are everywhere in the market. We ship about 6 million units in the health care business with EBS. So we have to think different about this market. A grain of sand doesn't way much, but a bucket of grain of sands weighs a lot and so every MCU that you sell, you create an annuity, a small annuity. So the game here is to create layers and layers of annuity, so it becomes material. There's no small customer in this market. It's -- the key is here the ability to reach the customer in a cost-effective way. The investment that we have in empowering this channel for demand creation is critical. So unlike our competition, which decided to do this on their own. We don't consider this just a distribution network. This is a critical part of our strategy to create leadership and growth in this segment. And for us, it requires a multi-pronged approach. And NXP is very good at executing this game. So before I go to the last slide, one more commercial and video from one of our key partners. This is a key partner from us, which is Honeywell and they're going to give us their perspective on why they partnered with NXP. [Presentation]

So that takes me to my last slide, and I'm going to tell you what I told you, which is the industrial market is changing, it's transforming. It requires innovation, that innovation -- that need for innovation is creating a tremendous opportunity for us since we're focused our products and our technology kind of fit very well in the market needs. In order to attack complexity, we're going after system solutions that creates a tighter bond and -- tighter bond with our customers to get an insight to where the market is going. And then we take these solutions to the mass market with a strategy -- sales strategy that is tailored to address that fragmented set of customers. And with that, our plan is to grow between 8% to 12% in the next 3 years. And with that, I will pass the baton now to Jens, my peer who's going to have a conversation with you about automotive.

All right. So very good morning from my end. My name is Jens Hinrichsen, and I'm in charge of the NXP Automotive business. In the next 40 minutes, I'd like to give you some insights into the automotive market dynamics and an update on the NXP Automotive strategy as well as an update on the success of our automotive accelerated growth drivers. And actually, building on what Kurt has said, that NXP focuses on bringing intelligent solutions to the edge, the car is the ultimate edge device. And not only that the car is an edge device in the larger context of all the connected things. Now if you look at the car electronics outlined to the very left, with all the computer, with the wiring, the central processing and the end nodes, the car is a very complex system. So at the end, the car is the ultimate system of system. And NXP is very well tailored to support this very complicated application. So we have many years of automotive expertise and round about 56% of our revenues are going into this vertical. So we really know what that means. And explicitly, like also Kurt said, the ultra-low power capabilities, our security know-how and especially the functional safety and the real-time processing capabilities support this application very nicely. So accordingly, automotive is an important growth driver for NXP. And we are leveraging very clearly the megatrends in the industry such as the digitization of the vehicle, which we call the software-defined vehicle, the ADAS support as well as the electrification. And in the next slides, I'd like to give you a bit of an update on the market as well as on how NXP is strategically positioning this one and leveraging the full potential of the opportunity. So if you look at the market and if you look to the very left, you can see that in the strategic horizon, the light vehicle production is just moderately growing. But you can also clearly see that context and complexity is accelerating the need for automotive semiconductors. And the numbers in the bars are always in million units, the light vehicles and in light blue, I have outlined for you there are also a little bit on what the contribution from China is around this. And you can see that the digitized vehicle of the future, so the software-defined vehicles are growing with a 48% CAGR in the strategic horizon the ADAS equipped vehicles with around about 8%, and the electrification continues with strong growth around 20% CAGR. This all drives the need for automotive semiconductors. That's a fantastic opportunity the market is providing. I have a few more information also for you outlined here down below. And let's focus on the middle there, you can see that the line of codes and the data in the car in the next years are literally exploding. This requires a lot of semiconductors because you need software and software always require semiconductors to run on. I also have outlined here to the right, an important element, which is the power consumption of an average ECU in the car. And you can see that the power consumption is significantly increasing. So managing the power in the car, managing the energy efficiency of the car and managing all the power of all the electronics becomes a very important element going forward, especially if the AI moves into the edge, driving the power consumption up. So this also requires very intelligent semiconductors and gives another fantastic opportunity for the semiconductor industry. And then to the very left and very important element, and I will come to this a few times in my presentation, the time-to-market requirements are significantly reducing and especially emerging carmakers, they can spin already these days. And especially Chinese, they can spin a vehicle platform in 12 to 24 months. So the carmakers need help in leveraging engineering efficiencies, they need help to reduce their development cycles also that one requires semiconductors and that's a fantastic opportunity for us. Looking forward, you can also really see that the industry is shifting, right? And we see a completely new way of thinking about the future mobility. And the consumers, they look at the car more as a consumer device and they want seamless user experience, and they are increasingly appreciating either functionality for safety and convenience reasons, and they constantly want to have their car up to date. And they increasingly want to upgrade the car, actually even personalize the car over the lifetime to make it a real personal device like you are maybe used to in other applications like your phone, et cetera. And accordingly, the carmakers, they have to change the way of making cars, right? So they have to digitize the car to enable software-defined and intelligent features, and they have to handle this one across all their brands, all their models and their platforms literally, they have to completely reinvent the car a scalable connected electric. And everything I have said so far is clearly driving more features, more functionality, more software and that drives complexity. And our customers and the carmakers, they need help in managing complexity. Very similar to what Rafael has said also in the industrial part. And if you look to the left, you can see on how the future car is having way more software than the current cars. And just simply any additional feature, any additional function is adding an ECU and requires more software, but then also over-the-air updates and then the increasing involvement of ADAS and IVI is driving software. And finally, really data-driven use cases and service-oriented architectures that really the element of software in the car explore. This is driving complexity and the vehicle architectures of today, which you see in this fantastic car there, which is very hardware defined, this is not able to handle this complexity. And this is what I call the legacy complexity. And I have here a quote from a carmaker, who's actually a European carmaker and making a statement here that they say if they want to introduce one new feature into their existing architectures, they have to touch more than 50 software modules and more than 10 ECUs to be modified. And this is just simply if you want to add maybe a seat functionality in the car that requires an ECU that is additional hardware, and they run software on top of it. And then this is -- you need to be connected with all the rest and the interoperability is really a nightmare. That's a true challenge. So the existing vehicle architectures has many components from many vendors across multiple Tier 1s with the individual software, and that is driving complexity and that complexity hampers clearly innovation time to market and total cost of ownership. So the carmakers, they need something different, they need a more efficient, more software-defined vehicle architecture. And this is basically what we call the digitization of the vehicle. This is where the software-defined vehicle comes in. And based on a very scalable and super powerful hardware platform, most of the functionalities and features and actually experience is defined in software. And what the carmakers really like to do is they like to extract the software from the hardware. So whenever they want to introduce a new feature like I have explained on this slide before, they don't want to modify the hardware just put it into software. And therefore, obviously, the car needs to be updatable and upgradable over lifetime. They want basically that there's a perceived value increase over lifetime because you start to personalize the function of your cars and maybe you only activate features and functions, you personally want at a certain point of time. And that is only possible with a digital vehicle. And also, and I mentioned this before, the carmakers need help in reducing their development cycle. So they want to have the reusable hardware platform, and they want to have a reusable software platform that helps them to achieve the engineering efficiencies they require to be competitive in the time-to-market. You have seen probably slides before. I know Kurt had presented those days a few times these slides. There are different ways towards this future vehicle. And you can basically think that more emerging carmakers have a very revolutionary approach and the more, let's say, legacy carmakers or established OEMs, they have a more evolutionary approach. And the impression might be that maybe they're, let's say, revolutionary approach seems to be the easier one, but actually, it is also not easy. Now these carmakers, they have to get familiar with the automotive technologies. They have to get familiar with the automotive ecosystem, security functionality and quality performance is really partly new to them often in the development of the vehicle architectures, they are doing this without Tier 1s and they lack the system integration capabilities. So also not an easy path. The legacy carmakers, well, they can use all the experience and all the know-how of the past, right? And they are familiar with the automotive ecosystem and which the technologies but more digital technologies, data software, that's also pretty new to them. And then also, especially also nontypical automotive technologies are also not familiar to them. And the biggest challenge is they have to manage this across all their models, all the blends and all their platforms, so not easy. There are 2 pathways, but very clearly, any of the customer needs help towards the software-defined vehicle. Let me zoom in a little bit deeper, and let's have a look on this one here because the fundamental element to drive the digitization in the car is the vehicle architecture. And these are a lot of bubbles and boxes and lines, but let me try to explain this. On the left, you see the current domain-based architecture, which is typical popular, which is ramping right now, and it will all still be around for a while. However, then, if you move to more a digitized vehicle architecture, you find different ways towards it. And very clearly, and that's super important to understand every carmaker has its own interpretation. Every carmaker has its own path towards that. And it is also not a static environment, it's evolving, it is really changing. And sometimes, they make step functions and start to the left and go more to the right very dynamic, and there are constant subsets of these architectures in reality. So which is basically also an environment we really like. But for the sake of simplification, NXP is basically clustering the future architectures basically in 3 groups. And you can find on the very left, the distributed zonal; in the middle, we call it the vehicle compute and zonal; and the very right, the consolidated compute power. Let's start with the very right because this is, from our perspective, the most digital vehicle architecture we can see and we can think of and carmakers are driving towards. Here, you see that there is a very strong vehicle compute engine in the middle, a high-performing compute engine for the vehicle compute next to the IVI and the ADAS and this vehicle compute engine is basically running all the core vehicle functions in that central compute so that all the remaining zones become very, I call it a dumb. They are just simply IO aggregators or maybe they are basically the connection between the Ethernet network, which is the more the wider lines towards the end nodes, which is based on CAN and LIN. That is the most digitized architecture. It has got a very, very streamlined wiring, and this is probably also from a total cost of ownership, the most optimized set up. The one in the middle is a bit of a hybrid. It also has got that vehicle compute in the middle but maybe the app integration of the vehicle core function hasn't happened to the full extent, like to the other extreme, and there's a lot of compute power still in the remaining domains or in the zones. And so also the zones and the domains require high compute engines to make that all work. It's more a compromise in the middle. The one to the left is probably the most fastest and easiest to implement one. That's maybe the most pragmatic first step approach you can see. And here, you don't have a central vehicle compute other than a gateway and all the compute power is still remaining in the zones. This is the least digitized from our perspective and is also probably having the least optimized wiring and network in this particular field. But it is the fastest to implement. And therefore, we see emerging carmakers and 1 or 2 Chinese carmakers jumping on the very left here to the distributed zonal because it's easy to implement and do a fast step. The one in the middle, most of the Chinese are on that one and also most of the high-volume legacy makers are in that middle platform to what we see in the very extreme to the right, the most digitized one is basically approached by the more high-end carmakers in the industry. But everything exists and even subsets as existing. Later, I will show you how NXP is supporting any of these vehicle architectures. But before I show that, let's wrap up a little bit the dynamics in the market and the changing customer needs. And you see them here to the left. First and foremost, I'd like to highlight, this is still a high-tech industry, and therefore, our customers and regardless of where they are, they want innovations. They are differentiating via innovation. And so that is from us, still the most important thing, the innovation leadership is essential. However, then more importantly, in the industry, you can see increasingly more that R&D efficiency is requested. They like the rescalability and the scalability and the reuse of the hardware and software to basically achieve very fast time to market and optimizing their total cost of ownership. These are changing dynamics in the industry. And the automotive strategy of NXP is tailored towards supporting this in a very nice way. And it is based on 3 pillars and I will go through this in more details. It is, on the one hand, the innovation. So we're continuously driving innovation leadership. It is the system play, a bit similar to what Rafael has shown in the industrial part and then also to very right, similar like Rafael has said, is collaboration. We need to be sought an innovation leader in this ecosystem of automotive and drive collaboration forward. In the next page, I'd like to give you a little bit more detailed insights and I'd like to start with the innovation part. And if you look at innovation, the strength NXP is having is explicitly the deep application expertise and insight and we nicely combine this with our broad technology we have available and especially the combination and Kurt referred to this one, especially the combination of the strong processing platform, which all the analog we are having in the security and connectivity makes us to achieve really true innovation leadership positions in the market. I think you are very familiar with the positions I have outlined here. I will not go through this one in detail but really strong proof points of our innovation capabilities. And important is also that we are not staying there, right? So we don't remain there. We drive this forward, so we were the first ones offering a 28-nanometer 1 chip radar solutions. We are way ahead of our competition rolling out our ultra-wideband-based mobile phone car access solutions, really leading in the industry in this field. And recently announced we were the first ones announcing an automotive 5-nanometer processor for the vehicle core based on ASIL D functionalities. We continuously drive innovation because this is the essence of the high-tech industry, but never forgetting our strong heritage of automotive, quality, functional safety and robustness. And I have for you and not a video, but I have for you a quote here from Hyundai, which is, from my point of view, very powerful. They are a very innovative car maker and you can please read through this, and they awarded us as one of the first semiconductor vendors in '22 as the supplier of the year, explicitly appreciating our game changer mentality and our innovation spirit. So this is a real innovation partner for us, and we are very grateful for this powerful quote. Let's move to the next part, and that requires a little bit more time because we need to dive into this one because this is really essential and important. It's a real game changer from my perspective, that system solution, that's a key element of our strategy. So let's resume. We have clearly seen the carmakers, our customers, they do need help because they are facing a dilemma. They have to drive innovation, they have to improve the time-to-market, they have to optimize their total cost of ownership in an environment of significantly increasing complexity. So they need help. And the way to overcome this dilemma is for us that we have strategically decided as outlined by Kurt, that we step up beyond a normal traditional semiconductor component vendor, we are offering system solutions and we are leveraging explicitly our strengths and not many in the industry do have that, that we have this very powerful processing platform, can connect this with all the analog and the power and link it all together with our wired and wireless connectivity. So we basically engineer system solution. And what I mean with this is we are not just simply putting the components together and hope it sticks. Now right from the beginning, we really developed the products in a way that we are optimizing them on system level. So we really make them as companion ships and the combination of their sum, the value of this system is higher than just simply the sum of the components in itself. It is creating a real system, additional value. And then on top of it, we basically supported with pre-engineered software to offer truly solutions for our customers. And that helps them to have a true engineering jumpstart, that helps them to really optimize their performance on system level and managing their interoperability on system level. And that helps them to manage total cost of ownership and not only maybe improved component cost. It's really a system view. And that's a real differentiator NXP is using. So let's dive into this one a little bit. So let me start first to tell you on what we are doing in this system play. So where do we focus on what is it what we are doing? And NXP is focusing on the vehicle core. So what is the vehicle core. The vehicle core are basically all the functions of the car that make the car operate and make the car move, so really, the things like the vehicle dynamics, the vehicle propulsion, the gateway, the connectivity body and comfort. These are the core vehicle functions that really make the car operate and move. And this is where we focus on. And I tell you basically why we do this. But in the system play for these vehicle core functions, we are offering the complete processing platform and this is for the central, for the domain, for the zone and for the [indiscernible]. We have them basically all supported with our networking and power management solutions. On subsystem level than in this vehicle core architectures from a safety perspective, we're continuously driving our radar solutions forward, Radar Fusion and safety systems are really in our focus. In the electrification field, the battery management and the inverters, we presented this a few times in the Analyst Day are very successful and we drive them forward. And from a user experience point of view, car access, radio functions and also our eCockpit solutions are on our radar screen and focus for our system solutions. And the NXP technology fits very well to support the vehicle core because basically, the lifetime requirements, functional safety and robustness requirements of these true automotive SoCs for the vehicle core differ a lot more consumer-oriented SoCs for the IVI and for the ADAS. And the most important thing, and this is also why we really believe and you have seen this in the architectures that the vehicle core remains to be a dedicated stand-alone domain in itself is the vehicle core has to be security, hard protected. It cannot be that you can hack into the vehicle core functions. If you hack into the vehicle core function, the damage and the car can be severe. So it needs to be security, hard protected, that's really essential and we know very well on how this is to be done. But then also think about the vehicle core functions. This is an environment of zero latencies. So that means if a radar system is maybe identifying any object on the road, the car has to break immediately in any millisecond count, so this is not an environment of latency. So that basically means our hardware enforce isolation capabilities and then enabling the real-time processing is really allowing us to run all the vehicle core functions in parallel without jeopardizing at any point of time the performance of this core vehicle. So there is no latency allowed in this vehicle core. And as there is no latency allowed, there's also no lack of functional safety allowed. This is a very super safety critical environment and you cannot basically back down your processing because it is running on certain applications for -- data on the application processor it needs to be instantly ensuring functional safety. It's like in an airplane. You cannot jeopardize functional safety at any point of time. And again, also here, this is only possible because of our real-time processing capabilities. And of course, no need to mention anymore. Clearly, this is true automotive quality and robustness requirements. So I told you, we focus on the vehicle core, but now how do we do this? How do we do the system play now? And this is where the CoreRide comes into the game, and this is what we have recently announced. You might have seen it. The CoreRide platform is basically a platform for our customers to basically develop and produce vehicle architectures. And here, we do exactly what I've said in the interest slide of the system play. We are combining here a hardware platform of our compute engine, the networking and the system power management and then we complement it with software, which is basically coming from our CoreRide partners, which I have outlined here below -- or to the right. The CoreRide partners by building with us a joint development platform. So we take our hardware. You see that they're in green. We have our drivers on top of it, but then the OS, the hypervisors, and the middleware comes from our CoreRide partners. And we do the system integration altogether the carmakers that basically allows them the carmakers to focus on the application software because that is, from a consumer point of view, really differentiates the car performance is the application and then the carmakers can really focus on what really matters while we wish the CoreRide partner do all middleware integration and providing them a very powerful hardware and software platform. So what we literally do is we are offering system-verified, production-ready reference designs on hardware with pre-integrated software, which gives now a really, truly our carmakers an easy path to manage complexity and an accelerated path to drive the digitization in the vehicle architecture. The CoreRide is a key element of driving this forward. And I'd like to come back now to the vehicle architectures I have introduced already earlier on. And here, you can see now on how we are able to support all of the vehicle architectures regardless on what kind of construction you can look at. And here, to the left, again, the CoreRide platform a little bit more in detail. And again, the building blocks the hardware and the software, you can find here to the left. And it is all tailored around a bit similar what Rafael also explained in the industrial field. It is tailored around our very powerful and scalable processing platform. And it starts with the very high performance S32N, leveraging the 5-nanometer technology all the way down to a simple legacy node 90-nanometer technology microcontroller to support any of the processors you can use in the platform on the right. And then you can see it comes with the network. So this is Ethernet, but also CAN/LIN, and we are clearly a leader in this field. And every processor has got a functional safety, SPC and the PMIC to be powered, complemented by the software of our CoreRide partner. And now, hopefully, the color code comes out. You can see that a little bit. The more darker blue ones are nicely tailored to support the vehicle compute and the central functionalities. They are really driving the digitization of the vehicle architecture. The lighter blue ones are nicely tailored to support the zones and the gray ones are the smart actuators and the end nodes, we have it all. It's like Lego blocks, you play, you get it. And regarding of what kind of topology the carmakers are using even subset out of it, we can support very nicely, very efficient. That's the path to digitize the vehicle architecture. And I like to keep your focus once more on the darker blue ones, especially on the S32N platform because I come to this one, that is really truly then enabling the digitization of the vehicle architecture because remember, the carmakers want to abstract the software from the hardware, define the functionality in software and run them virtually all centrally on a compute engine. So you need a really powerful compute engine to do this digitization, and that's where our vehicle processors come into the game. And that's our real differentiator in this system play. I come to this in a minute. But let's have a look on a quote from Leapmotor. So it is a leading carmaker in China, and this is a nice EV with a range extender and they are using our S32 platform, and they leverage the platform exactly in the way I have said, and you can read it there, they are basically using it to centralize the vehicle core function and reduce the wiring. So they are really totally optimizing the car and digitizing the car based on the platform exactly in the way I have outlined to you. So very nice and also a big thanks to Leapmotors for providing us this quote. Before I wrap up now the system solution part, I just want to give you a very brief overview that there is more than just the vehicle architecture. This is the element here to the very left, and you have seen on how we do this. We continuously drive also the energy network on a solution level because you have seen on how the power consumption in the ECUs are increasing. Every watt counts, energy efficiency is very important. Electrification, you are very familiar with this one, the BMS and the inverter solutions are really key in the infotainment field, we're continuously driving our system solutions and also on the radar side. I'd like to take now the time a bit similar to Rafael and dive a little bit into some system solution examples, how we really truly bring this to reality. And one is this vehicle compute engine. I have said the other one is the battery management and the other one is the radar. And these are also very much the accelerated growth drivers of the automotive strategy, and therefore, they are very interesting. And here, again, I have clearly said that the carmakers are starting to digitize the vehicle and that there will be a central vehicle compute engine, which is there in the middle of the future architecture. And based on to those -- the main base architecture, you see how now the vehicle core functions are all resulting into the vehicle compute engine. And the element, the solution on driving this one is the S32N platform. It's actually not only one device, it is a road map, and there are more devices to come. We have only one device so far announced. That's the S32N55, that's the first 5-nanometer automotive processor with functional safety capabilities, but there is more to come. And this S32N platform is basically a platform to enable scalable, cross-domain super integration. That's that thing that is digitizing at the end, the vehicle core functions and therefore, the vehicle architectures and especially with its in-build hardware isolation and virtualization technology, the carmakers are then able to integrate dozens of ECU into this engine without jeopardizing any of the security and functional safety performance of these vehicle core functions. And you can imagine that thing comes, I believe, which is 16 split lock arm Cortex-R52 cores. This is such a powerful real-time engine so you can really extract in this case, the function from the hardware and put it in software and virtually run this in the central computer without jeopardizing any of the performance or functional safety at any point of time. And there is more to come. And you see that the S32N55 on the all -- on the breadth of all the core vehicle functions we are focusing on is largely focusing on the real-time essential functionalities first, and there are more devices to come, which will do next to the real-time processing on top of it, also application processing, even more powerful engines so that you also can then collect the data centrally and run the data centrally and then also enable ADAS fusion safety features as well as OEM applications as well as services. And that is also really enablement for AI functionality and use cases even in the vehicle core. So this is what we are planning to do. This is really driving the digitization. Radar, I think you are very familiar with this one. We are the leading semiconductor vendor in the field of radar, and we are leveraging here our scalable radar solutions all around the radar sensors, the radar fusion as well as the radar processing, and we can offer any solution the customer wants for their car. I have outlined the car here down below, and you can see that nicely, the one chip very highly integrated, very efficient edge radar or corner radar solutions are nicely tailored for the edge radar solutions. Typically, 4 of those go into the car. And then the imaging radar, typically one system goes into the car sits typically in the front and provides high resolution imaging radar capabilities. But also, I'd like to highlight our distributed radar capabilities, which is basically now having multiple smaller radar sensors typically in the front, and they are pretty small. And the radar sensors talk to each other very nicely and they create a gigantic virtual antenna, and they can improve the resolution even by another 50% in creating really high resolution, also image and radar quality in the car and this is also a very nice set on leveraging this. And then the radar information will be combined in a radar bridge and or in a radar fusion engine. So very powerful. You see the customers can do plug and play. And for every radar node see here on top, everything comes from NXP, the processor, the connectivity, the power management very nicely as a system solution. Last but not least, our battery management solution is very successful. I have presented this a couple of times in the Analyst Day, also to you here in blue, once more everything that comes from NXP are very nicely the components coming together. And very clearly, battery management is more than just the battery cell controllers. It's more than just the analog front end devices, which are part of the cell supervision circuit, a way more components around the processor, the connectivity and other devices, which are really critical to make the applications. And typically, these are multiple boxes in a battery management system. So there is, on the one hand, multiple cell supervision circuits, there is the battery junction box but also the battery monitoring unit. And for everything we are providing also here, system-verified production-ready reference designs, like you see here with the board and then the carmakers can really build the full electronics for the battery, which is shown there to the left -- to the right. And this is clearly very appreciated by emerging customers extremely successful in China because of the capabilities to adopt very, very fast our solution, which are nicely pre-engineered. All this hopefully gives you an idea that [indiscernible] are really true system place, and we bring this nicely to reality to life in our automotive play. Before I come to an end, let me conclude our strategic part with the last remaining pillar. That is the collaboration. And you see that the industry is in transformation, and that the carmakers really truly need help. They need help in this dilemma to drive innovation while they have to also reduce the time to market and to reduce the total cost of ownership and this in an environment of increasing complexity. So the way of working has to change a bit, and it is changing. And the very traditional more sequential supply chain, you can see here to the left, our engagement model, you can see here to the left, is evolving over to a more modern ecosystem collaboration. And NXP is right in the middle of this one, being a real true thought and innovation leader in developing this ecosystem. We are very, very strongly engaging with the carmakers driving innovation forward, but never to be underestimated and forgotten, the Tier 1s are still very important. They also drive innovation but on a different level, and they are needed to do the system integration and do the model making. But also ODMs, IDHs, EMSs come into the play in parallel to the Tier 1s. So we are engaging with all of them fostering this very nice ecosystem. We need to bring the partners together to do joint investments, bring the partners together to drive standardization. That's what we do. And you see here a couple of examples. internally, for instance, here on NXP, I show you on how we are providing -- this is based in China, where we are providing our customer an enablement center for our battery management solutions if they don't know how to bring this solution into the car, we can really help them. That's what we do. The CoreRide partners are there. The SDVerse, which is basically a marketplace for software in the digitization of the software-defined vehicle. And then you see a couple of OEM and Tier 1 engagements. I'd like to highlight a little bit Foxconn because this is really essential. You might have seen a couple of announcements here. We have a joint lab with Foxconn to accelerate the development of the software-defined vehicle. And I also have a little video for you where the Chairman and the CEO of Foxconn reflecting a little bit on what I have said, please.

Here at Fascon, we see big. Our growing electromobility automotive portfolio leverages our excellence in ICT and our strength in time to market and time to cost. Our long-standing partnership with NXP excites us because NXP also sees big. Collaboration is critical to success during transformative times. NXP is a key partner for us. They provide the technology and system expertise to enable Foxconn's EV development. NXP is a leader and the ideal partner in uniting the automotive ecosystem. By leveraging NXP's broad portfolio and working with them on their CoreRide platform with pre-integrated software and hardware, we are able to accelerate software-defined vehicle development significantly. Together, we revolutionize towards cleaner, greener and smarter.

All right. We are also very thankful for this video. And with this, I come to the last slide, and I'd like to wrap up the automotive session. And you can see also here the growth model going forward based on the key assumptions to the left. You see that we have nicely been able to grow from $5.5 billion to $7.1 billion in the last strategic horizon and look forward to grow close to the $10 billion going forward with a growth of 8% to 12%, significantly supported by our accelerated growth drivers, which I have presented to you. And if there are 3 things, like Kurt also summarized it, I have for you to take away, it is very clearly the industry is transforming, driven by the digitization of the vehicle, by the electrification of the vehicle and by ADAS. The second thing is our customers need help. They need help to drive innovation, faster time to market and improve total cost of ownership in an environment of complexity. And there, the NXP strategic play, especially the system solution play based on the CoreRide platform is nicely tailored to enable our customers to achieve that. And the last and very important item is also we clearly have a leading position in the processing architecture of the digital vehicle of the future. With this, I'd like to conclude and give it over to Jeff, I think, for Q&A. Thank you.

Great. So I'd like to call Kurt and Rafael up to the stage and we'll hold Q&A for the next 20 minutes, 30 minutes or so. What I'd like to ask you when you -- the microphone comes to you first, say your name, the firm you're with, and we're going to do this fast-round robin, so everybody can get an opportunity to just one question to start with. Mr. Seymore? Ross?

I am Ross Seymore from Deutsche Bank. So a question on the auto market in general for either Kurt or Jens. The adoption of the software-defined vehicle, all the technology seems quite obvious. China is leading the way. But I guess a 2-part question. First, in China, how is NXP positioned relative to the desire of the country to have more in-source local production? And second, in the Western companies, how are you seeing them respond to it? Can they keep pace economically? Or are they -- is the pressure from the Chinese vendors allowing them to slow down if they put tariffs into place or accelerate to fight against the Chinese? How are you seeing the kind of Eastern versus Western adoption curves?

Yes, Ross, let me take a step at this because it connects actually to something we will have after the break. So the local competitiveness of NXP. I hope you heard from what Jens said is actually very good. I mean we are leading with battery management systems. We are leading with processing solutions. And in spite of everything you might hear left and right, we are not faced in those sectors with any serious local competition yet. I say yet because obviously, we stay paranoid about it, but we don't have that as of today. The one requirement which comes up very hard in China to stay competitive is local manufacturing capability. Chinese OEMs, Chinese customers want us to give evidence that we have a plan that we can produce locally, and that's mainly about front-end production, what they want to purchase from us. And Andy is going to speak after the break, what our strategy is to follow that requirement. What I can take ahead already is that I think given our hybrid manufacturing strategy, given more outsourcing, leaning more on foundries, we have a significant differentiator here versus several of our peers, which are more internal manufacturing oriented. and they cannot follow that requirement the way we can. So that is a clear advantage. Now from a global perspective, Ross, I think the numbers speak for themselves. Western car companies are losing out currently broadly against Chinese because all of the transformation, which Jens was speaking about, at the moment, at least, is mastered better and faster by the Chinese than by the Western companies. I will not comment if tariff policies, et cetera, will be a lasting weapon against it or not. That's a political question. What we see on the ground is that the Chinese companies are actually ahead. And I would say Asian at large, Jens, you spoke about Hyundai, which we see as a mass volume company also being pretty successful from a global perspective. Now our position in China is at least as strong as it is in Europe and the U.S. So at the moment, we are actually benefiting from the fact that China is running ahead. I say that, however, with the necessary paranoia because clearly, China is a very turmoiled place. So we have to continue to work hard to stay competitive in China. Today, we are, but I don't want to say this is a given that this stays always like this. We are working hard on it. There is 2 angles. The one angle is what is what Andy is going to explain, which is local manufacturing. And the other one is actually very straightforward. It's simply competitiveness on the product and system level. Everything you said, Jens, is just -- is an offering to Chinese customers where we are a step ahead. to local competitors in China. So it's not rocket science, but this is really where it comes down to. So we are optimistic about keeping that advantage, which we have. But clearly, we have to work hard. And I will also reveal here, we have started to dedicate and deploy R&D funds more to China, more to Chinese customers' requirements than we've done in the past. In the past, Western OEMs were our lead customers, and we would then sell the resulting products to Chinese customers. Given the advancements of the Chinese OEMs in STV and electrification, we start to use them and leverage them as lead customers and eventually sell them to the West. So that is actually falling upside down. And it is culturally, and that's what we are working on hard across the company. Industrial is doing exactly the same thing, by the way. It is, of course, for us, a change, and we are very aware of this. We have to give more preference to the specific requirements from China than we used to do in the past, and we do so.

Great. Team, why don't you come to Chris Caso right there?

Chris Caso from Wolfe Research. I guess a question on some of the growth projections that you provided. And specifically kind of what are the starting points for that? And going back to the last Analyst Day, when the growth projection provided different market conditions, things are pretty strong. So coming off a strong base, harder to grow off a strong base. Now you're still in a situation where your customers are burning their inventory now. So interested in how you accounted for that going forward.

Yes, Chris. And that accounts for the whole business. So I will take that question. We have indeed moderated our growth ambition. We had 8% to 12% last time. We come down to 6% to 10%. This is largely indeed attributed to the current weakness because it is obvious that calendar year '25 is likely a touch below model. So if over the 3-year horizon, we want to achieve the ambition, we just have to account for the first year of the 3 years, which is why we had to bring down the overall algorithm. So that current weakness, which we talked in earnings 2 days ago, obviously reaches at least to some extent into next year. As we said, we don't know how long, but it does reach into it. And in order to be reasonable about this starting point, we have moderated the total from the 8% to 12% to 6% to 10%.

Right. And just as you were looking at this over the years, and it's a quick -- it's derivative questions, not a new question. But you've talked about looking back a couple of years and saying, at the current level you're at, it reflected no industry growth. So that was why you were confident that you were still undershipping demand. And is that the case? And is that baked into your assumptions as well?

Yes. So as -- that goes to this whole soft landing strategy. As of today, and I say that holds for the past 6 quarters, we are undershipping end demand, absolutely. When that returns to shipping to end demand is a function of when is the macro recovering and when is the inventory burned away, which is still sitting at direct customers. I say it again, I've said it 100 times. We are very disciplined in the channel. So we are not having that burn inventory issue in the channel where we are at 8 weeks at the moment. We have that challenge with direct customers to a certain extent. And given the negative mood in the macro currently, they even further reduce their inventory targets, which means we bring it even further down. Now you know the trick, Chris. Following that, it's going to come back even harder. I mean that we've seen this a number of times before. But yes, we are undershipping. I think we started undershipping earlier than our peers, which we have -- which is why we have in '22, undergrown our peers and which is why we are now overgrowing our peers. I mean, this year, with the guidance we gave on Tuesday, we're going to be down like 5% on a year-on-year basis. All of our typical peers, which you have in your benchmarks are much more declining this year. And that is a function of us tackling that problem earlier, never shipping too much. And for me, that also means we come out better than the others. That's the consequence. I mean that's at least our thesis.

Tammy, how about here, Mark down in front?

Great. Mark Lipacis, Evercore ISI. Thank you very much for the very informative presentation. I really appreciate it. Kurt, a question for you, I guess. Obviously, the system solution is an important message that you all are delivering today. And I'm wondering how far up the value chain do you think NXP can get? Can you get to the point where ultimately, you're like the de facto standard, like a Wintel where you get -- you're automatically 80% designed in. And I imagine the software element is an important part of that. Can you share with us what your software spend has been 5 years ago today, where do you think it has to get?

Yes. The software spend, and Rafael and Jens might detail this, has surpassed the 50% of our R&D bill in our processor businesses. So it was less than 50%. It is now easily above 50%, and it keeps going in that direction. We are also often asked about tuck-in acquisitions and how -- where is it that we see gaps. Clearly, the software side is an area where we are strengthening the muscle. So that ratio will even tilt more into software. That doesn't mean we neglect hardware. Hardware is an important platform element for the scalability, which my 2 guys talked about, but the software becomes very prominent. Secondly, we don't want to be a Tier 1 supplier, right? I want to be very clear. It is not our ambition, absolutely not our ambition to become a direct supplier to OEM customers, especially not in the automotive world. There was a lot of reasons why we don't think that's our natural place. We also think they continue to have a certain place in there. But for the digitization of the car, for the digitization of these industrial systems, we are becoming a very, very, very important innovation partner for the OEMs because we oversee the whole thing. These Tier 1 customers, they only have one system or one application. The whole processing platform, which is across different applications, which Jens talked about, none of the Tier 1s has that breadth. We have it, which is why we are a very much wanted collaboration partner. I will not repeat the name you had for who we could become. But yes, it does become more of a winner takes it all game, where we used to win in the past many, many, many, many deals and design wins with Tier 1s. We make now much larger deals on OEM level. which are then deployed back into the Tier 1. So the whole mechanism of design wins is actually changing. And eventually, I think it moves much more into a winner takes it all mechanism. So the answer is yes.

C.J. right here.

C.J. Muse with Cantor Fitzgerald. Kurt, a question for you. A broader question on the competitive landscape at the edge for both industrial and automotive. You have digital players attacking, you've got microcontroller competitors and others attacking from the other direction. Curious what you think gives you the biggest advantage? Is it the system? Is it software? Is it the breadth of your entire offering? And in is it kind of the first-mover advantage that drives the stickiness? Would love to hear kind of your rank order of what's driving that competitive position for you.

Let me first speak about industrial and Rafael is going to jump in there because you made the argument, Rafael. I think when you guys think about industrial, you think about these large analog companies. But the industrial, the core of the industrial market moves to intelligent systems at the edge, which is about processes. That doesn't mean there is no analog products, and we are also happy to sell our analog products. But the core is scalable platforms and software. And the breadth which we have in processing for industrial, and Rafael, you went through this from relatively simple low-cost microcontrollers, all the way to very, very complex applications processes we have no competitors which has that, CJ. I mean, just to be very clear, there might be high-end competitors trying to come into industrial with the very high end, but then they don't have the scalable platform. They just have that high-end price point. We have a number of microcontroller competitors in the industrial field, but they don't have applications processes. I will not give you the names, but you know it. I mean they cannot scale up to what Rafael was explaining. So when you heard then the CEO of Johnson Controls speak, everything was about platform and scalability because they cannot afford to write software for each of their applications separately. They want one reusable block of software, which needs then to scale across performance levels. And that breadth is where the big advantage of NXP is. Rafael, I want you to give a bit more color, just to say upfront, it's exactly the same in automotive. It's the same thing. But here, it is compounded by real-time performance and functional safety performance. This 5-nanometer device, which you spoke about, Jens, there is nobody else in the industry, which has a fully ASIL-D-compliant 5-nanometer processor in automotive, just not available. It is only NXP, Rafael.

Yes. And the way to think about industrial is it's a different paradigm, right? The paradigm has completely changed. And people are trying to -- you can see our competitors trying to use the playbook in the past, the playbook of the PC or the playbook of the phone, which is I develop a turnkey, I complete the BOM and I complete a turnkey software and I own the market. And then you come into industrial and you realize there are thousands of applications, hundreds, not thousands. I'm sorry, sorry, not hundreds, but thousands of applications and thousands of customers. And then you start kind of thinking, how do I get around this massive fragmentation of requirements and customers and trends. And so our strength here, right, and this is what is one is our focus. And when I talked about system solutions, one thing that maybe didn't come across very well is about this transversal functionality that you can apply and dominate. You create platforms that deliver certain functions for AI and then you apply to the different needs by having a very scalable and focused platform. And so we're modifying our playbook as these edge system solutions start taking hold. But very clearly, the playbooks of the past don't apply to the industrial segment. And again, I mean, this is part of our opportunity.

Great. Vivek.

Thank you, Jeff. Vivek Arya from Bank of America Securities. So Kurt, if I look at the last 3 years, your automotive business, so I'm kind of trying to separate the cycle out of this. Last 3 years, your automotive business grew roughly 9% CAGR. Units grew 5%. Pricing, I imagine, grew a few percent also. So it doesn't really seem content played a part in those 3 years. And if I look at the next 3 years, units are not growing, pricing is declining. So is it all content that's going to drive this growth? Like what am I not -- what am I missing in this -- looking at the past 3 years versus the next 3 years?

Yes. Maybe I build on this one, and you can chime in. So first of all, I prefer in automotive to look at a longer horizon, right? So 3 years is a little bit difficult. But if I go either back, maybe '18 to '23 or maybe going forward, looking '24 to '30, I can clearly see that we are strategically growing with a double-digit growth in automotive. But then at the same time, if you look at the SAAR, maybe especially if you go back from '18 to '23, the SAAR is actually even declining. So there is a significant growth above the SAAR. And this is largely driven by content, right? And that is basically 50% that there are more semiconductors in the car around about, and it is 50% that there is a higher value, a higher ASP in the car. And the ASP is largely driven the mix because the value of the semiconductors are significantly growing. If I look forward, it's nearly the same math. Maybe even if I have a little bit of low single-digit growth in the SAAR, there is still close to double-digit growth above the SAAR going forward. So -- and that is typically 50-50 more content and higher value.

And Vivek, when Jens says higher value, that is not the dump price increase. It is that per unit, we charge higher price because these units are getting bigger and more powerful. Jens showed the integrated radar solutions. We used to ship discrete radars in the past. Now it is 1 chip which does the whole etch radar. Jens talked about the S32N and you were very humble, Jens, but you didn't hint to the slide but I know you guys all took a little note. That is a processor which says between $50 and $130 per piece while we are selling microcontrollers in low single-digit dollar numbers. So that value increase, which Jens is referring to is not the price increase, which also happened over the past years, but it is actually the value because we have higher integrated and higher performance products. It's a very important mechanism, which if you allow me, you forget in your algorithm.

Great, Gary, I see in the back.

Thank you, Jeff. Kurt, I wanted to ask something a little bit less obvious. I wanted to ask about the 25% of the revenue that's not necessarily highlighted at this event. I noticed that in your long-term projections looking forward, there's a big tick-down in growth expectations on the mobile side, 900 basis points at the midpoint and as well on the comm side. So in mobile, is that market-related tick-down? Is it more of a strategic focus? And then as well, maybe the mix -- the offsetting factors to consider in comm as well?

Yes. Thanks, Gary. I completely acknowledge your point. Let me be specific. We are guiding our mobile business 0% to 4% over the next 3 years, which at the midpoint is about market growth. We think the mobile market might grow at probably 2% CAGR. And given our position, and you know it, which is this enormous leadership in the secure mobile wallet, which is the main part of our mobile business, we think it's just fair to assume we grow with market. So that's the simple secret behind the sauce. Comms infra is more complicated. And I'm glad you asked because it's always a bit of a, yes, what is it? So comms infra is guided at 0%, so as being flat over the next 3 years. Underneath, there are 3 pieces in the comms infra revenue segment. One is our former, I call it former Freescale legacy digital networking business, which is a business which we actually haven't invested in since we acquired Freescale. It is starting to go end of life. So over the next 3 years, just assume and model this business to come down. That's a negative contributor. Then we have the radio power transistors. You've all seen it in the past years. It's always a lumpy business. I say very clear, it's not my favorite business because it's very hard to forecast. So we don't want to give too much merit to that business. It could turn out better, but I think it's reasonable to stay conservative. The third element in this segment is our secure card and RFID business, which is growing. So that is the element with under the cover of the total, which actually contributes pretty nicely and positively to growth. If you put the 3 together, it is reasonable to assume a flat line. But again, those 3 are completely different. They also serve different dynamics in different segments. The one which is, say, strategic for us relative to investment and growth expectations is RFID and secure cards.

Will?

Will Stein from Truist Securities. Kurt, one of the sort of long-standing very positive views of this sort of diversified analog and microcontroller category is that the design wins, especially in automotive, were always perceived to be very long duration, share shifts moved at a glacial pace. And I think one of the points you're making today is that innovation is accelerating. And as the Chinese become more effective, they're increasing that pace, which means there's some opportunities but some risks also for everyone, right? How does that influence your thoughts about strategy and also value and your investment in R&D because it's less of an annuity?

Well, Will, no risk, no fun. Let me confirm what you say. Jens clearly said that these new players and mostly they come from China currently, cut down the development time for our platform, I think you said to 1 to 2 years, where they used to be 4 to 5 years in the Western world. We consider this an opportunity because that means that our newer products, and that goes back to the value argument I just had with Vivek, our newer products, which, on average, have a higher value per unit can go to market faster. And that in itself offers a growth opportunity. Now of course, we don't ignore the risk that, of course, faster somebody else could come from the side and take the business away. Yes. But I mean that's what we do. This is our job to go compete. We actually like the fact that the dynamic is going to a faster pace because it offers us a faster path to growth.

Great. With that, we'll hold it here. We're going to take about a 10-minute break. Don't worry. We're going to have another Q&A after Bill finishes up. So we'll get to everyone, right? We'll see you in about 10 minutes. Thank you very much. [Break]

Hello. Could we take our seats, please? We'd like to get started again. Good job. Great. Thank you very much. We'll have plenty of time to socialize later, ask more questions. Now I'd like to introduce Andy Micallef, who is our Head of Operations. Andy?

Good morning, everyone. Welcome to the manufacturing section of our presentation today. I'm Andy Micallef, and I lead NXP operations and manufacturing. I'm excited to update you on our hybrid manufacturing execution strategy, which enables NXP growth, resiliency, flexibility and cost. In order to deliver the 6% to 10% growth that NXP revenue looks at going forward, operations needs to deliver 50% more wafers than we do today. servicing our 25,000 end customers with over 10,000 products in our portfolio today, and we expect these to grow going forward. At the same time, the technology shift is mixing. This is a good thing for NXP. More and more customers are adopting to our new products and platforms. And to address the Q&A session of the last time, we see product life cycles shortening. Jens mentioned this. And so it's accelerating. Historically, a lot of our products were produced internally at 130-nanometer and older technologies. And moving forward into 2030, that's going to accelerate to more advanced technologies. And again, I think it's a good thing. It's something we have to manage. It's something that's difficult in transition. So we'll use our hybrid manufacturing strategy with really 4 principles in mind. We developed a strategy over the last few years when the supply crisis, we were fighting all of that. And so control of supply and geographic resilience are at the forefront of our strategy. We need access to competitive cost to expand our gross margins, and we'll do that through the 200-millimeter fab consolidation as well as migrating existing products to 300-millimeter platforms. And we'll do all this with a low environmental impact. So our hybrid manufacturing strategy has several great points for the company, have several benefits, primarily controlled access to supply, minimizing structural cost, which expands gross margin. So what we've seen, which is driven by the technology shift of older technologies to newer ones, that acceleration also is accelerating less need for internal capacity utilization within NXP. When I joined NXP in 2021, it was about 50% internal and 50% external. Going forward, we can see it migrating to 2030 at 20% internal and 80% external. NXP has a very long history of technology deployment and manufacturing. We have 4 internal factory fabs today, 3 in the United States, 1 in Europe. We also operate a joint venture with TSMC called SSMC in Singapore, where NXP is the majority shareholder. Now we also have a global footprint of partners around the world with foundries in order to cover all of our other needs outside of these internal manufacturing sites. So controlling the supply going forward is going to have to be actively managed through this migration forward. okay? At the same time, we want to manage the control. So we'll be investing in joint ventures in Europe and Singapore. And through this transition, we actually improve our control by 4 to 5 percentage points. Today, we have 40% control. And at the end of this transition by 2030, we'll have 44%, 45% control of our supply. So again, huge manufacturing footprint, opportunity to manage and expand gross margins through the consolidation of our 200-millimeter factories into 300-millimeter factories, primarily through the joint venture in Singapore. Assembly and test is an area of strength for NXP. We have a huge advantage for our customers as well as a cost advantage through our internal manufacturing and assembly and test. I didn't believe this when I joined, so I tested it. And I know that our cost is at par with any OSAT you can consider taking out their gross margin. We do not have to be 100% utilized or 80% utilized in order to have competitive cost. And we've got the scale and the team and it was already in place. So I inherited this excellent supply -- area of supply. And we're also geographically dispersed. We have a factory in Kuala Lumpur, Malaysia. We have a factory in Bangkok, Thailand, a factory in Kaohsiung, Taiwan and a factory in Tianjin, China. So this gives us internal geographic diversity going forward. Now during the supply crisis, we exercised a lot of dual sourcing between these sites and both inside, outside. So we improved our flexibility during the supply crisis because we had bottlenecks we didn't expect. With this, we expect to maintain our 80% inside and 20% outside throughout the horizon because this gives us great supply control and low-cost delivery to customers that even though it's Asia-centric, much like our competition, much like the industry, this gives us good geographic resilience between the different sites that we own as well as we use other OSATs to complement that for package types and test platforms that we don't have in-house. Our smart hybrid manufacturing plan is in motion. I introduced the word smart because we will introduce a lot of automation in these factories, certainly 300-millimeter factories are fully automated and any assembly and test sites that we use increased automation and all the AI tools and the yield enhancement tools that are available, they will be implemented and also rolled out to the rest of our internal factories. Huge umbrella of geographic resilience. Over the last 2 years, we've made multiple announcements that improve our ability to grow at competitive cost with flexibility in mind, a lot of dual sourcing and the ability to expand our gross margins going forward. So let's quickly walk through these, and then I'll go through in detail. So the European semiconductor manufacturing company is in Dresden, Germany. VisionPower semiconductor manufacturing company in Singapore. We're announcing today a second factory in Malaysia, which we call ATKL2. So that's another internal factory to support our growth of 6% to 10% and maintain our 80% internal, we need another factory. And we think that Malaysia is a great site to do that. And then we'll talk about our China supply chain. Already a question earlier today about that. We've got a great plan that we're sharing with our customers. We've already started implementing it, and I'm happy to share that, too. So again, minimizing fixed costs, migrating to more a variable model with control in mind, geographic resilience and flexibility. Now let's go through each one of these. So ESMC, let's start with TSMC first. TSMC has been a 30-plus year partner of NXP, going back to our 1999 joint venture, SSMC in Singapore, where NXP is actually the majority shareholder. TSMC is the world's most advanced pure-play foundry and the most capacity in place of anyone else. We are participating in their globalization strategy through ESMC, along with Bosch and Infineon, each of the 3 of us having a 10% equity stake. This is their globalization strategy. It's an alternative source to Taiwan. TSMC sees 28- and 16-nanometer as a huge growth node for the industry. They've announced that they're going to add new factories in Kaohsiung, Taiwan, in Japan and in Europe at 28 and 16-nanometer. Now today, NXP sweet spot, our largest volume node is 40-nanometer. And it makes logical sense that as we move forward along Moore's Law, the next logical node for us to grow into as our highest volume node would be 28 and 16. Time will tell if that's true, but we believe that this is a great project for us to participate in to give us controlled supply. This will have 40,000 wafers volume capacity by the end of 2027. And this is a $500 million investment by NXP and supports $2 billion of incremental NXP revenue going forward. So to summarize, this is controlled capacity with our 10% equity stake, gives us geographic resilience for customers who want European supply, okay? So European customers are very happy about this. American customers are very happy about this. And so we're really excited to get moving on this project, which is already under construction. VSMC is a joint venture with Vanguard. Vanguard International Semiconductor is a publicly traded Taiwan company. We have a long history relationship with them. They're a specialty analog mixed signal, high-power boutique firm. They're owned minority owned by TSMC. A lot of the executives at Vanguard are ex TSMC executives. So we're really excited about this project. We'll have a groundbreaking in early December. We announced it earlier this year. NXP is a 40% shareholder here. The most exciting thing about this is it gives us that migration to these legacy technologies for which there is huge demand. And we expect this to be very successful from the day we open and have our first outs in the second half of '27. Many of our competitors, even some of our customers, we're already working with, with Vanguard in order to secure their orders because TSMC has said they're not going to invest in any technologies older than 28-nanometer. And this is an area which is geographically resilient in Singapore where we expect it to be full from day 1. And we're really excited to participate in this project. So there's going to be 3 initial nodes, 40-nanometer, 90-nanometer and 130-nanometer. This will be built in the same blueprint as TSMC Fab 15. So it will have a Phase 1 and a Phase 2. It will eventually be a giga fab. Phase 1 will have peak wafers at 55,000 wafers starting in 2029, but first outs will be in the second half of 2027. So NXP contributed $2.8 billion into this joint venture for Phase 1, and this enables $4 billion of incremental revenue to NXP. Now this will be the primary landing spot for our 200-millimeter consolidation. So we'll gain the efficiency of moving from 200 to 300. And also, as Kurt mentioned earlier, this is access to cost, okay? ESMC will be market wafers. These will be cost plus administrative fee. So to summarize this one, huge control of capacity, access to cost and geographic resilience in Singapore. Area of strength for NXP is assembly and test. We're building a second factory in Kuala Lumpur, Malaysia. It's going to be the same industrial park as our existing factory. We bought an existing building from Windstrong. And so we don't have to build a greenfield factory. So this is something that we just have to modify and move forward. We'll control this expansion. So the reason we didn't make a big splash announcement when we started this project was because it's being managed within our existing capital structure that Bill is going to talk about in the next presentation. So this supports our growth, 6% to 10%. We need another factory, great geographic location in Malaysia. This will ramp to 6 million units a week. We'll control this with demand. We're not going to accelerate. We are doing product qualifications there today and putting some assets in there to build out some flexibility and geographic resiliency for products that are currently made in either Taiwan or Tianjin. This is $1 billion of capital that we're going to slow roll and contain over time. And it supports $3 billion of revenue, not incremental. So this can handle wafers from any fab or foundry. And so it's not incremental $3 billion as compared to the $2 billion and the $4 billion that I talked about with the other projects. So this provides us great flexibility because of the opportunity to dual source, cost-competitive site and geographic resilience. China. China is a great market for NXP. 35% of our revenue today is in China. Half of that or 18% stays and goes to end China customers. So we expect that to grow, and we're investing in China. However, we're not -- we're going to partner with local foundries in order to redesign our current designs or develop new designs in order to serve that market in close collaboration with our customers. So just listing a few of the partners that we're investigating with, TSMC Nanjing for 16/28-nanometer. SMIC, we already do business with SMIC at our largest technology node, I shared with you, 40-nanometer. That's a source for 40-nanometer. And we're looking at Grace for analog products. So this will require us to redesign and target specific technologies in a China for China supply chain. From an assembly and test perspective, NXP Tianjin is our largest site for assembly and test, very cost effective. So we have a huge benefit there with an existing team in manufacturing. Then we've got a design center in Shanghai. So this sort of works for NXP. For the remaining, we'll do -- use the existing OSATs, JCET primarily TFME, ATX, that's the companies that we do business today for the 80/20 mix, and we'll use that going forward. So this gives us great flexibility, the ability to dual source between China and other sites and to introduce new technologies into China to make sure that we're cost competitive for that market. We're committed to a sustainable future. This is an important part of our manufacturing strategy. We've published our goal for carbon neutrality by 2035. We've remained on target to our annual goals. You can see the 2023 achievement there for water recycling, renewable energy and carbon emissions. We'll continue to fund this as part of our capital structure that Bill outlined on the next slide. And we remain committed to our 2027 goals for all these things. So continued importance and investment in renewable energy and a sustainable future for NXP. So to summarize, our hybrid manufacturing creates value for our customers. and creates expanded gross margins for NXP through controlled access at non-structural costs. We need to grow our capacity to enable the 6% to 10% growth. Lots of attention, as you could tell, not only around control, but geographic resilience for our different customers, regional supply chains that require that, geographically neutral locations for those customers who desire it. Focus on JV partnerships rather than a lot of investment in really heavy fabs and high risk for technology as life cycles move shorter and shorter. We'll be consolidating our 200-millimeter factories into 300-millimeter factories, both a benefit of the consolidation. When you announce a consolidation, the factory immediately goes to full utilization as you work with customers on last time buys. Also a benefit going 200 to 300 millimeter, you get less -- higher yields through edge. So there's also an economic value there. continued investment in our strength in assembly and test, and we'll do all of this with minimal impact to the environment. Thank you. That's the end. So I'll pass on to Bill Betz, our CFO.

All right. Good day, everyone. And thank you for joining our Investor Day here, especially our owners and supporters. I plan to obviously cover the updated financial model in a little bit more detail than Kurt shared earlier, as well as refresh our capital return strategy to you all because there is no change, and we're very disciplined here going forward. But before doing so, I think it's always good to zoom out and reflect on the value we have created so far. So real quick, 1 slide on it. And I chose the same period that Kurt chose earlier of a 5-year history because I believe this represents the portfolio and the markets we serve, along with the many macro-economic factors outside of our control. And now despite, again, you heard living through a global pandemic, experiencing global supply crisis, increasing global tensions and several semi cycles over the last 5 years. Despite all that, still grew our revenue at 7.3% compound annual growth rate over that 5-year period. Gross margins, we're very proud of this. Over the last 5 years, representing the quality of our portfolio, grew by 460 basis points over the same period. Furthermore, we continue to return 100% of our free cash flow back to you all as our owners in this room and many that are online listening into today's event. And the size of that is $12.3 billion over 5 years, and again, representing just over 100% of total free cash flow. And then finally, I think we're delivering a respectable non-GAAP earnings per share growth rate of 11.5%. But this is history. And we can only learn from the past to improve the future. So with that, let's transition into the future and recap our revenue growth rates that you heard from Rafael and Jens in great detail of where we plan to grow and how we will grow. So on the left, we have our revenues for 2021, our 2024 guidance and our 2027 midpoint of our CAGR for the next 3 years. The light blue is our accelerated growth drivers and the dark blue is our core businesses. And on the right, is the total NXP growth, core and business, what we plan to grow at. And then more importantly, our end market segments that we plan to grow over the next 3 years. And again, 75% of our business is Auto plus Industrial IoT markets. And we plan to grow this between 8% to 12% CAGR over the next 3 years, representing over 80% of our revenue in 2027. Mobile, Kurt answered this during the Q&A. We're just assuming we're a niche player, we'll just grow along with market. And then, of course, our comm and infra, again, Kurt shared earlier, we have two effects going on, our digital networking business declines, but that is being offset by the strength in our secure card business, including RFID tagging. So summing this all up, we believe this is a good growth a reliable reasonable growth for the next 3 years, especially where we are in the cycle. And we do expect to grow 6% to 10% CAGR over the next 3 years. So let's recap on our non-GAAP gross margin journey. Over the last 3 years, we have expanded our gross margins by 200 basis points. And we remained at the high end of our model over the last 2 years. And again, as I mentioned many, many times over the last 3 years, 58% is not our final destination. As we look ahead over the next 3 years, we are confident to continue to expand our gross margins by the many levers that we talk about in our earnings calls. And they're labeled here, very simple. And then finally, you get a glimpse and Andy shared some of this as part of a hybrid manufacturing strategy. You heard this deep in our accelerated company-specific growth drivers, growing at 20%, which have better margin than our existing portfolio. So we believe after 2027, as we continue to grow and focus on innovation in our R&D portfolio, our go-to-market mass market strategy of focusing on that long tail that Rafael explained, huge opportunities there, as well as the improvement of our cost structure, and this is important. VSMC as shared, over the summer will boost us up by 200 basis points alone. So half of that 400 comes from our VSMC investments that I'm going to talk about and lay out the timing of those cash that we're investing in. And again, more importantly, this reduces our total fixed cost structure as a company. When I joined 10 years ago, actually, it's almost 12 now. Our fixed cost structure was 70%. And now today, we're at 30%. And in 2027, we'll be at 25% and in 2030, we're below 20%, as we continue to work on making NXP more variable, more focus to access at competitive costs, as well as supplying in order to control our supply longer term, bringing that geographically resilience to us. So with that, let me move to the financial P&L, the scorecard that many of you are waiting for patiently before lunch. So I do appreciate that. Again, quickly sharing our financial metrics. On the left, we have our targets in 2021, we have our 2024 where we're estimated to be, and again, revenue is a bit disappointed because of the macro, and we talked about that. Gross margins, I think Jeff will give me a silver star for hitting 58%, not yet that Gold Star, we got work to do. Operating expenses, this is timing. Some periods we're below, some periods we're above. But we know in order to foster that organic growth, we do have to spend 16% in R&D. You heard it earlier, we're investing in more software, and so as we invest in that R&D, we're going to produce more quality products that increase our gross margins, but it takes time, and that's called our new product introductions over time. And again, I think we have leverage in our SG&A model, and we expect that to fall through as well at different times over the next 3 years. And again, putting this all together, again, through the help of gross margin, we're able to be above our midpoint of operating margin at 34.6%. Below the line, again, for tax. We did what we say we do, non-controlling interest of the joint venture that we do consolidate. This is the TSMC portion of those profits. And again, we just tightened up that range. That will be always a little lumpy within the quarters. And again, we came toward the low end of that over the last 3 years. And then finally, we have this new line that we have to add, and we want to add because we're investing in our VSMC and ESMC joint ventures. And so as you heard Andy earlier, we just broke ground. And so we're starting to see and feel the small losses that will occur for our share, our equity share, which will be part of our non-GAAP earnings as we move forward. And now in blue here is our new model. We hammered away the 6% to 10% already. I talked about the 57% to 63% gross margin model as we move ahead. No change to our operating and expense plan, 16% and 7%. And that leads to an operating margin of 34% to 60% (sic) [40%] with 37% being in the middle. Now again, below that line for modeling purposes, for 2025, I ask you to use 17% for our non-GAAP effective tax rate. And after 2025, please use 18%. And again, really not much change on the non-controlling interest from the JV of SSMC. I do want to highlight, we are -- our portion and the construction of these factories will impact our P&L in the short term, but they will become a profit sometime in '28, '29. So the next 3 years, we will be recording roughly a $200 million loss because of those equity investments that we're making inside ESMC and VSMC over that time. And obviously, in the quarterly earnings report, we will provide those numbers and best estimate to you as we move forward. Overall, we believe this P&L is attractive and rewarding to you all. I mean it's very achievable as well. And so we're confident that we can do that. Now our next slide, I want to do the same about our allocation -- capital allocation strategy and the source and uses of our cash. Again, very simple, similar to the P&L metrics. We want to break out, starting with our non-GAAP free cash flow. Clearly here, over the last 3 years, we didn't achieve the 25%. And you could see mainly the reasons is in our working capital. Again, in a supply crisis, unfortunately, we had to pay our vendors a bit earlier than we would like to make sure we can get that supply. And so you see an impact in the DPO metric on why we didn't achieve 75 days. You also know very well on our inventory, it's above our long-term target, and we're holding over 3 weeks in our finished goods at the moment. 21 days of it, and we expect to replenish that channel sometime in 2025, allowing us to improve our free cash flow. And then this new item that you could see it's called Capacity Access Fee. And what this is, is part of -- it's for VSMC. So we have an equity position for that 40%, but guess what? We need more than that 40% the first 3 years. So we're buying capacity above our 40% equity position so that we can ramp and secure our customers' revenues that we will likely generate as well as a competitive cost structure similar to a cost plus, as Andy shared earlier. And so if we keep on going down, CapEx of revenue, again, we said 6% to 8% over that period over the last 3 years. We delivered slightly better as we controlled our CapEx, as the revenue fluctuated throughout the last 3 years. Stock-based compensation, 3 years ago, we set our set of targets. We are on the high side of this, so we're going to tweak this a bit lower as we go forward. And then equity investments, a total of that $500 million for ESMC, and the $1.8 billion for VSMC, we've already spent up to the end of 2024 $343 million. And again, there is no change with our capital return policy, we returned $6.7 billion back to you all, in the form of buybacks of $3.9 billion, and dividends of $2.7 billion. Now you're all going to ask me why is this not 100%? Very simple back in March of 2024, we took $1 billion that we generated through our cash flow of operations and retired debt and reduced our gross debt for the company. So if you add that back in, you'd be very close to 100%. Now going forward, looking ahead in blue, again, we feel very confident we can get this free cash flow metric back above 25%. And from a working capital standpoint of the metrics, there are no changes, except for our inventory DIO metric. We are increasing this from 95 days to 110 days, about 2 weeks. And the reason why we're doing this is we're learning a lot. And as we learned from the past, we want to be able to service our customers, especially those short-term orders that come in within the quarter, there's a lot of that happening. And we realized that holding a little bit more finished goods, we'll be able to ensure we get our fair share of the market and be able to continue to improve our market share throughout all our businesses as well. And then again, the Capacity Access Fee, we have $800 million left. And the way to think about that $800 million, $500 million goes out in '25, and $300 million goes out in '26. CapEx percentage of revenue, we're bringing this down. Obviously, we're making a lot of equity investments. This will run below 5% and this will fund ESG and all the back end, including ATKL too that Andy talked about. That's where this line would show up over the next 3 years. SBC, we're going to run this as a percentage of revenue. It gives us a little bit more flexibility, so it doesn't run up on us. And we're going to run this around 3% over the next 3 years as well. And again, there's no change to our dividend policy, very simple. The way to think about it, our cash flow from operations, we take 25% of that fixed right off the back, and we give it back in form of dividends. So as the company grows, our dividend will grow as well. And then buybacks very, very simple rule of thumb. We base this all on our capital optimal structure, that we like that in a way because you've got to find that sweet spot. And that sweet spot for us is between 1x and 2x net debt ratio. So we're very comfortable when our net debt is below 2x, we'll be buying back shares, very comfortable to buy back shares at that time. When we're above 2x, that's when we pause to make sure we get back into model, because we want to keep our investment grade, and we want to continue to have access when needed to grow the company. And then finally, again, we plan to return 100% of our free cash flow back to you all. Now I thought it would be important to help illustrate our return capital strategy over multiple years. And so there's a couple of dots and there's data. Let me just start at the bottom. There's our net debt leverage ratio. That's inbounds out of bounds, the way to think about it. And then you have these blue bars, which includes both our dividends and our buybacks over those periods. And the blue bars represent the cume. And then you have these arrows, they're swooshing over, and between those 2 blue bars is what we returned in that period. And so I mentioned we returned $6.7 billion. You can see that over the last 3 years, and that's where it is. And then that white dot is the cumulative returns over the cumulative free cash flow since we started this strategy back in 2018. And so again, at the end of 2024, we would have returned $19.2 billion back to our owners. And still, that's representing about 109% of our free cash flow. Now many of you probably are trying to have -- folks trying to pencil in all this and what does that number mean for the next 3 years? What sort of capital return we plan to return back to you all? And so we did that model for you. And we plan to return anywhere between $9 billion and $11 billion. And by the end of 2027, over a 10-year period, NXP would have returned approximately $29 billion back to you all. And again, we believe this is quite attractive and we believe we can deliver it, and we will deliver it because there's no change in our capital return policy. With that, I have one last slide that I'd like to review with you all, and then we'll open up for Q&A. And so I'm going to do something that Kirk did, Rafael did Jens did in their presentations. So you heard a lot from us. For me, a lot of numbers, a lot of content. But there's 3 things I want you to remember today. And first, is we plan to grow the company over the next 3 years from 6% to 10%, as a leader in bringing intelligent systems to the edge. Second, we plan to expand our gross margins to over 60% with that new range of 57% to 63% and there's more after that, but it takes time. And that's through the innovation, improving the quality of the portfolio that Jens and Rafael shared in many, many details and examples of what we're doing. Our go-to-market in that long mass tail as well as the hybrid manufacturing strategy and our investments we're making as we move forward. Thirdly, no change. We will return 100% of our free cash flow back to you all in forms of dividends and buybacks. And again, that amount is approximately $10 billion over the next 3 years. And if you only want to remember one thing, remember this, NXP will double their non-GAAP earnings per share by 2030. And with that, I would like to say a big thank you to you all coming out here and for sharing and supporting us over the many years being with us and I look forward, we look forward and super excited to bring NXP to new heights. So thank you.

We're going to start another Q&A session. I'm going to invite all the presenting MT up to the stage for right now. And we're going to go with Blayne Curtis right here. And if you could say your name, your broker you're with and one question, and then we'll keep going.

Blayne Curtis of Jefferies. A question for Kurt, maybe Bill, just on the China for China strategy, obviously, there's a lot of talk about China for China. So I understand the motivation. I'm kind of just curious in terms of other multinationals matching what you're doing as well as local competition. So when you say we need to get the price point down to remain competitive, I'm just trying to understand who is that first, and obviously, you had a great presentation to show why your products are better than most. So would this be -- you're being conservative and maybe down the road, you actually can sustain the ASPs and the cost is lower? I'm just trying to understand the moving pieces of it.

Yes. So Blayne, on the local competition, we have a paranoia about this. And I see it in two phases. Today, there is not a competitor, which is in any of the strategic areas, which we do competitive from a performance perspective. There is a lot of focus from the local Chinese competitors in discrete power which is very understandable because it combines manufacturing capability with device manufacturing. So they can do both at the same time. Since we neither do MOSFET nor silicon carbide, nor gallium nitride or any of these things, that doesn't touch us, and it takes a lot of their effort away. The other thing we see them doing is low-end microcontrollers, which where is Rafael, here, which touched the very low end of what Rafael was showing that would be the MCX portfolio. We think that the total revenue these Chinese competitors currently achieve is in the $300 million to $400 million range, so it is still relatively small. But there is an enormous stickiness through software plane. I don't know, Bill, I think you asked earlier about these faster cycles. The stickiness of the product goes away, but the stickiness of the platform goes up because the investment of the customers and that holds also for China, is in software. So as long as they cannot offer a processing portfolio, where software can be reused from the low end all the way to the high end, it isn't that useful at -- so we -- I mean, again, I don't want to talk them down, but we haven't seen a lot of progress from these companies to come into where we really play, which is the mid and higher end of processing. So therefore, when I say two phases today, they just don't really compete with what we do, but we stay absolutely paranoid, and we see this on two axis, one is manufacturing, that is why Andy showed you how we invest actually into relationships to offer Chinese-made product which is partially a government-induced requirement, Blayne. Cost is one side of this, but the bigger side is that it becomes a tick box item. If we cannot quote a product which is locally manufactured, we fall off the list. Now there was a burden to start with, but when Andy offered us a great strategy, how we can deal with it, it becomes a differentiator for NXP because most of our peers have their factories in their Western home countries and cannot flexibly move into China like we do. So it's actually a good thing. The other one is following the lead customer requirements in China, which I think I spoke to Will or somebody about earlier, which keeps us competitive. Why does it matter, Blayne? And I think last earnings was kind of very illustrative for this, what currently grows in automotive and industrial is China. It's not the Western world. It is the Chinese customers. And my sense is they will continue to make more advancements into the world with their not only cost structure but also competitiveness and from a performance perspective. I mean let's not say this is just cheap -- it is -- they are actually very advanced. I mean you talked about SDVs, Jens. Chinese companies are managing this transformation very successful currently. So for NXP and you had the number, Andy, 35% of our revenue is in China. We think half of it is China for China approximately. And at least the way the economy currently goes, we think that will grow as a ratio of NXP.

Josh, right down here.

Thank you, Josh Buchalter from TD Cowen. I wanted to ask about the gross margin target. I guess I'm a bit surprised to see it widen and I'm not -- compared to the last one and certainly not trying to dismiss that it's going higher. But coming out of a very volatile cyclical period and as you move to sort of more outsourced manufacturing, can you maybe explain why the gross margin target doubled in width? And maybe within that is should we expect more volatility in cyclicality going forward? I guess is your broad industry view, in particular, China takes more of the Auto and other markets. Thank you, and thanks, Jeff, for the assist there.

Sure. Let me take that. If you think about next year and when I said doing earnings, obviously, we don't want to be right out of model the first year and revenues playing a role in that. So that -- I would just say that's the only thing to be honest with you, taken into the short term on the widening. But we are very confident to get toward that 60% based on all the levers we talked about, Josh.

Quinn, at the very back.

Quinn Bolton with Needham. I wanted to ask a longer-term question on the manufacturing strategy in VSMC, say you'll be consolidating the 200-millimeter facilities into VSMC over time, do the 200-millimeter facilities go away entirely? Do you keep operating those for supply chain resiliency or redundancy purposes? And then as you manage that transition, are you anticipating building up significant buffer stock to manage that transition? Or just how does that process work? I know it's kind of a 2027 to [ '23 ] question, but just sort of thinking about that.

Yes, sure. So -- it will take about 10 years to make this migration. We work closely with our customers, last time buy forecast, product transitions to other NXP products to make sure. But again, as I mentioned in my presentation, once you start that project, the utilization immediately goes to 100%, and it can take 2, 3 years in order to satisfy those last time buys. So that's utilization benefit to gross margin, right? But -- and to answer the second part of your question, no, they would be exited completely. So we're not going to maintain some of the small pilot line or anything for geographic resilience. We're moving to geographic resilient locations. And I think that hybrid structure works for us.

David, please. David O'Connor.

It's David O'Connor from BNP Paribas. I just want to go back to the systems point of view that Rafael and Jens mentioned earlier, and maybe also you can chime in there, Bill. You all talked about more computing need, more reference designs, more software, more accelerators, things are getting more complex. At the same time, I'm just wondering how you're getting paid for that? Because you still talk about pricing down -- single digit. And then but on the gross margin, I don't really see anything on the system side of things. Maybe it's in there on the mix, but it seems to be not a big part of that. If you just talk around how you're getting paid for the approach.

All right. Yes, let me take that because this is also really a key element of our CoreRide platform. And basically, if you talk about the processors and you have your embedded software, typically you don't get extra money for that. That's part of the hardware price, right? So the enablement software, that's really typically part of the hardware. But if you go into the CoreRide model where we are approaching really the system level reference designs where we have this system verified and production-ready reference designs. We do see basically 2 effects. On the one hand, the entire bill of material is becoming bigger as we pull away more components into the deal, right? So the amount of products we are selling is accelerating, and it is growing plus we have the possibility with this approach to get also way more opportunities from the customers. We heard that a little bit. One takes it all. They want the solution from one player, and they want it from the low end to the high end. So this is pulling away more hardware with it. So -- but then the element of the software, where we do the middleware integration with the CoreRide platform partners together, the business model is basically made as such as the reoccurring revenue from the software, from the middleware, for instance, is still going to the CoreRide partners because we also don't want the liability, et cetera. They still do the reoccurring revenues. But we will have an adder on our hardware for the integration work we are doing to bringing this all together. So there is a bit of a financial reflection on this activity as well.

That's what we call mix in NPI. So as we move up, it's more valuable product that we're selling over time. So that's where you get the mix up.

So the -- let me just kind of capture just a subtlety on the answer for industrial. There are three ways -- at the end of the day, NXP needs to get paid, right, especially if you add value, you need to capture a portion of value. There are three ways. So the first one, the way you think about it, especially in industrial, is today, we have about -- every time we sell a processor at the average, it doesn't matter what processor rate is, we have about 25% uplift in attach. And the whole thesis is that as the customers use more and more of these systems, we are going to have a multiplier in the attach from 25 to. So we have a particular target and the thesis is that we can actually go and double this in the next 3, 4 years. So that's one way of saying -- that's one way to get paid. The second one is, by definition, the value that you're adding, you will be able to command more gross margins. And the last one is the insight that we get with the customer and the stickiness that we create with the customer, we have created longevity. So the amount of time that we last on that socket will last. And so the thesis is with 3 ways that we get paid in industrial is those 3 that I explained.

And I want to highlight your last point, Rafael, is really important because it touches a lot of earlier questions. The stickiness of our portfolio moves from the component to the platform, which gets the customer bought into the software, which is written on the platform, independent of the individual product. So the stickiness expands then to the total lifetime of the platform, which is a total transformation of how our business operates. It's not a gross margin answer, but it is an answer on where is the future stickiness of the NXP portfolio, it is in across those processing platforms in the software which customers have invested.

Ross, right here.

Ross Seymore from Deutsche Bank. Bill, one for you on the free cash flow side of things that you want to have the 25% target, it seems like there's some significant differences in just how money is going out the door where CapEx in and of itself doesn't capture it as much as it used to with all the JVs, equity investments, et cetera. So between -- how do we think about when the total cash will start to grow from that perspective? And does the DIOs that you had going from, I think, 95 to 110 , does that include some buffer inventory for the fab consolidation you're talking about? So it could go above that? Just trying to think through working capital and then the equity side to get really what cash is doing.

Sure. So the working capital that I shared in '24 of the 19%, I call a point is tied up in DPO, about 2 -- a little over 2 points are tied up into inventory and then that capital access fee is probably another point. So next year, we won't be a model, obviously because we have a lot of cash going out for those two investments that we talked about, both on a combination of capacity access fee as well as the equity investments we're making in both those factories. But after that, as it tails off, we will then improve our free cash flow as we move ahead. Related to the inventory target of 110, really, that just takes into account of ongoing operations of servicing our customers and really focused on those churn orders that we receive in the quarter. What we're realizing in this environment, especially with some bad behaviors by our customers, we're trying to -- we're getting so many orders late, and now we're able to service them. Related to any consolidation, they probably take about 2 to 3 years, and we haven't shared exactly the timing of it. Clearly, we would love to find partners out there that are willing to take over the factory, which I'm sure we're exploring at the moment. But more importantly, when that occurs, we will then say, okay, how much of that prebuild, what impact does it have on inventory, and I would share that with you on a quarterly basis, of course.

Mark?

Mark Lipacis, Evercore ISI. Bill, I take a follow-up from Ross' question, here, when you talk about the free cash flow that is available to be returned to shareholders, the investments in the JVs, is that -- are you kind of considering that to be like a CapEx that would come out of the cash flow from operations before you have the free cash flow available? Or is that something so if you could sell that out there?

The $10 billion number I included, includes all that. So after we paid includes we generate to be able to deliver $10 billion.

So those investments effectively are like CapEx?

Correct. That's the way we kind of treat it even though it shows up on a different P&L line item -- I'm sorry, cash flow line item.

Vivek?

Vivek Arya from Bank of America Securities. The 57% to 63%, the gross margin model, is there a way to think about incremental gross margins, right? Or does it literally correspond to kind of the bottom and low end of the grid? Like how sensitive is that to the actual growth rate? And if I can squeeze in kind of quick part B of that. I think, Kurt, during one of your presentations, you mentioned that for next year, you expect to be a touch below model. And I was hoping I could just push you a little bit more on how to think about '25 based on that comment?

I answer this, and then you go, Bill, I said a touch below model or I meant, maybe I didn't say it clearly enough for revenue, because that was associated with the revenue question, over the 3 years, somebody asked, I think Chris was asking or somebody, why is your revenue target moderated versus the former one? And I said the revenue target is moderated because we just don't know with all the uncertainty for next year, and I want to capture this in a somewhat lower CAGR for the 3 years. Bill will explain to you now that we will be for all the rest of the P&L totally in model. Right, Bill?

Yes, that's correct. So the way to think about it we have a step down in Q4 in revenue and we guided a seasonal -- normal seasonality down into Q1. So revenue has effect. And then you also know our internal utilization, what we're running at are in the low 70s. So again, at some point in 2025, when we start to sequentially grow, you will then start to see the lift back to our gross margins because of the fall-through over our fixed costs through the improved utilization. It's just timing, the way to think about it. And then mix and NPI and everything that Jens and Rafael talked about, that NPI of moving up the quality of our portfolio staggers on over time. It just takes time as they ramp, best way to think about gross margin and VSMC is 200 basis points, but that's post 2027.

Toshiya?

Thanks, Jeff. It's Toshiya Hari from Goldman Sachs. I wanted to ask about your go-to-market strategy, which so far really hasn't come up too much. Distribution has been 50%, 55% of revenue. A couple of your peers are taking a fairly -- well, I guess one in particular is taking an extreme route. A couple of others are no longer paying for demand creation in some instances. How are you guys thinking about the balance between direct and distribution and in your long-term model from a profitability standpoint? What's embedded?

The business through the channel is accretive to NXP with our focus, especially on the industrial market, which is characterized as Rafael showed by 75% long-tail customers. We have a strong focus on that. We definitely want to continue to go with distribution partners. So we don't take that step, which others might have taken or not. We need the distribution partners as well as other design partners in order to actually serve that multiplied distribution channel. Such that on a go-forward basis, where today, it's often like 50-50 between direct and distribution. It might and should touch up in favor of the business, which goes through the channel. And that is accretive. I also had, I think, in what I said and what Bill repeated as one of the margin levers we had mass market as a statement, and that is the expansion of mass market customers. So it's not more business with the same customers, but it's simply touching more customers. And that is adding to the margin, but of course, it also adds in the relative way to revenue in favor of the channel. But we are committed to the channel. Let me just be very clear. There is no -- we don't do anything else. We couldn't do without.

Will?

Will Stein from Truist. Can you talk about your anticipated spend on M&A? I don't think that was really discussed in any detail in the capital allocation plan. I know that on the call, I asked about this, and I think it was discussed that this was going to be software focused. But any comment in terms of sizing or potential for something that would be sort of a material contributor to revenue?

So it was about M&A. It was hard to hear. So that's the same question you asked before. Will -- you will get the same answer. We -- I think you saw that my two friends to my right-hand side have an unsatiable hunger for innovation, rightfully so to deliver growth to our customers. And we will continue to, and we have done tuck-in acquisitions, small size -- sometimes we publish them, sometimes they fall under the threshold and we don't. And the growing part of that, Will, is in the areas of software, which goes back to this CoreRide platform idea, which goes back to the software, which is pre-integrated in the solutions from Rafael. So that has been part of the strategy, and it continues to be part of the strategy. And we do not have a big part in our portfolio where we have a big need. So we don't stand here and say we have a huge gap in our overall portfolio, where we absolutely need to acquire something to fill a striking gap. On the transformational M&A, Will, you heard that song before. I personally -- I am a big believer that the semiconductor industry needs more consolidation from a global level. That's a philosophical statement. And it's a philosophical statement because I continue to believe that the regulatory environment is not allowing easily deals on that level. Therefore, in our book, in our planning, these tuck-in acquisitions, which are helping the strategy you heard about today.

Jerry?

Thank you. This is Jeremy from Stifel. I guess if I could, two quick questions. First one is regarding a little bit more clarification on the mass market strategy. Can you talk a little bit more about what specifics maybe that you're doing? Is there more investments that you may need to do, more tools that you can provide to these smaller customers, maybe an e-commerce strategy and what kind of investments this might entail? And a really quick clarification on the capital or capacity access fee. It sounds like it's not a deposit. It's a cost, how does that flow through the financial statements? Is there any impact on the gross margin?

Yes. So on the mass market, that's very straightforward. We found out that on -- from a competitive benchmark perspective, we should touch more customers, small customers, but we need more. We benchmarked ourselves against a number of peers. And we just found that they touch more customers through the same distribution network. So we are working with our distribution partners to expand actually our reach to a broader basis of individual customers. That takes some investment, but it's all captured in the P&L and in the model, which Bill just showed you, but it's not material. The other question, I think, was the capacity access fee, and I don't know, Bill or Andy?

I can take that one. Again, what we're doing with the capacity access fee because we need to ramp, we need the capacity. So we're buying more capacity above our 40% at a cost-plus model, it's different than buying it on a foundry model, and then you can do the math, it has an impact to gross margins. That's favorable.

And the key thing I just want to add, Jerry, to Kurt's response. The mass market doesn't imply new products having to be developed. These are our existing products, taking to a longer tail of customers. With that, CJ, right down here.

Great. Bill, I wanted to clarify just one thing on free cash flow. Are you including the equity investments in that calculation or you're excluding?

I'm including.

Within the CapEx line?

No, not in the CapEx line, below, I called it out as a separate line. But when we generate the free cash flow, the $10 billion, the $9 billion to $11 billion, we included it.

So your adjusted free cash flow include...

Yes.

Okay. And the main question was really around Auto. And one of the great aspects of the business is long-life cycle is very sticky. You're talking about China now moving to a very fast annual type of cadence. Is that a good or bad thing for the industry?

Maybe I jump on this one. Basically, I do see it as a good thing because this really helps us to drive innovation way faster. And you can clearly see that, especially in China, this is also why I really like the engagements in China, and you have seen also some of the quotes and the references I gave, they are really, really fast pace catching up and implementing innovation, way ahead of the rest of the market. On the one hand, because the innovation cycles are so short, but also because they just simply try and take the risk. And what they typically do is they spin a car platform in 12 to 24 months, but it follows right away with a 6 to 9 months improvement cycle of the platform they have done. So they take the risk, they go fast, they implement it. They bring the innovation to reality. It's fast time to market also for me. And then they work with me on driving the total cost of ownership. They do improvements, et cetera, right after. That is spinning way more, it's super helpful for us. It's content driven, significantly stronger in China.

Chris Caso?

Chris Caso, Wolfe research. Bill, I just wanted to clarify the equity investments because it's a fairly big number. I'm not sure it's been fairly fully dialed in. So we should be assuming it's $200 million a year, '25, '26?

Not per year, it's the cume.

The cumulative, right. Okay. So that's an important number. And then essentially, that's -- well, I guess it's more than offset by the reduction in CapEx on the model because you've reduced the CapEx on that.

That's correct, as well as eventually getting our wafers a cost-plus model as a JV partner versus a true foundry where there's margin stacking to be had as well. And then eventually, that turns positive, so we get a return on that investment as well of our 40%.

Yes. Right. And that's assuming that the market goes well, that the JV is turning in profit.

Correct.

And during a downturn, you would see unutilization from that JV fab on the non-controlling...

Yes. But Chris, don't forget, we fill more than 40% of the factory. And we fill it by amongst others, not only by amongst others consolidating our other 200-millimeter factories. So we can make sure it's full. It is in our control, which has been a double positive because we have then more business running in 300-millimeter at cost, while the fixed cost burden of the company on our internally owned 200-millimeter factories comes down at the same time.

Great. I think with that, Kurt, I'm going to pass it to you for any final closing remarks that you might want to make.

Yes. I will not ask you for the 3 things to remember because I know you know. So I'll just mention number four, doubling of the non-GAAP EPS by 2030 plus. And since all of you, I have thanked you to come, you on the webcast to join. I want to just send one word of big, big things to the NXP team globally, to the NXP team here on the ground supporting the event. But much more so to the global NXP team to facilitate the business, which, as Bill has shown you, has delivered proper results and returns over the past years, and we want to drive even much harder and much better in the years to come. So thanks very much to the entire global NXP team. Thanks to you. We will have a lunch now, I think just next door, and I look much forward to see you both over lunch, but also at the next conference. Thank you very much. Thank you.

That brings to close our formal presentation. As Kurt said, we will have a lunch out and around the hallway here, and we look forward to seeing you there. Thank you very much for all your support.