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

Day 2 of the conference. I'm John Vinh. I cover semis here at KeyBanc Capital Markets. And we're pleased to have NXP with us today. We've got Bill Betz, CFO; and Jeff Palmer, Senior Vice President of Investor Relations. Welcome, guys.

Thanks, John.

Thank you, John.

Bill, maybe we can kick things off and just have you give us kind of an update in your perspective on just kind of where you think you are in the cyclical recovery. Obviously, you're seeing signs of a recovery across most of your end markets. And maybe just talk about what you're seeing in terms of booking trends and book-to-bill.

Sure, absolutely. Since our -- we reported earnings recently a couple of weeks ago, really things haven't changed much. Things are progressing on what we saw based on the signals that we share. Our backlog continues to improve, especially quarters out. the 3 signals that we monitor internally, one being these late orders below lead times, they continue to happen. Customer escalations, not material from a size standpoint, but from an instant standpoint, they have creeped up as well. Now the good news is we have plenty of inventory on hand. So that's probably mitigating and reducing the amount of escalations that we are seeing, but we have that under control. And then as we look through our distribution partners, as you all know, more than 50% goes through our partners from a distribution standpoint. And we have clear visibility of their backlogs. And we work with them on a regular basis, weekly basis and focus on fast-turning parts, specific parts to make sure we're competitive on the shelf. And we do a lot of asset management with them. And that's why we keep quite lean on our inventory of roughly around 9 weeks. But we feel pretty good based on the order trends that we're seeing, similar to what we said a couple of weeks ago.

Yes. The only thing I'd add to that, Bill, would be for the last 8 quarters or so, we've been working with our Tier 1 partners, the automotive Tier 1s as they digested inventory on hand. So we've kind of been undershipping true end demand. We think that, that inventory is either at or normalized levels now, which is a great place to be.

Great. Just a couple of follow-ups there. So Bill, you talked about seeing kind of late orders that are below lead times. I think many of your peers have commented similarly that they're seeing a heavy emphasis on turns-based orders from the customers. So you're not seeing, I guess, a significant increase in some of the out quarter backlog. Is that limiting your ability to kind of see further out into the back half of the year at this point?

What I'd say is they continue to improve both of them in a way. The fast-turning orders below lead times continue. They're growing. But we are getting more visibility, slightly more visibility than in the past in the backlog, which gives us confidence of why we kind of soft guided Q4. We kind of see the backlog and therefore, felt comfortable we see a normal seasonal play out. So we're seeing both, to be honest with you, John.

Okay. And can you remind us just how you're thinking about Q4?

Q4, what we said was seasonally, typically, it's flattish, slightly up.

Okay.

Right. Not a hard guide, John. As you know, we try to only guide one quarter at a time, but we understand that's something people want to understand.

Understood. And then obviously, the other question that I'm getting a lot from is just in this environment with the tariffs. Can you talk about just to what extent you guys are seeing pull-ins at this point?

Well, we mentioned several weeks ago, pull-ins in Q2 were very minimal, immaterial in nature. At this point in time, we're not seeing any pull-ins either. We just see more natural demand, replenishing of inventory because, as you know, as Jeff just shared, inventory is somewhat normalized for our direct customers. We see that. And from a distribution standpoint, we are quite lean. We're still at 9 weeks. And we're navigating that very, very carefully in selective areas, just like on the way -- and the difficult market conditions we experienced, we navigate that quite well. We're going to take the same approach on the way up. And I know we mentioned we may tick up to 10 weeks. We'll make that decision come late September, and it will be in specific product areas. But again, a lot will determine on how we see Q4 and Q1 roll out. So we have that in our option just to make sure that we stay competitive and we can service our customers.

Maybe just on that point, Bill, just what -- just walk us through kind of the metrics or the KPIs that you're going to be watching and monitoring closely to make that determination of whether you're going to tick up the inventories going forward?

Yes, it's the same metrics that we shared during earnings. It's the customer escalations, it's the short-term orders. It's our backlog with our distributor partners that we can see. And obviously, we get sell-through every day, every week, and we can look at those trends, whether it's a quarter-over-quarter or year-over-year specific areas. And we monitor those very carefully on a weekly basis at the corporate level. So...

I'd say the only thing that's really important to understand is we do want to get back to 11 weeks. We understand that this -- we've -- at this point, the thought of just putting more inventory in the channel, if it doesn't sell out, wouldn't be received really well by investors. So we're cognizant of that. But at the same time, I -- we have certain products that have a high velocity. When we put them into the channel, they sell very quickly. We call it hero products. And so we want to make sure that they're there so we can have share of mind.

Got it. Maybe just to clarify on that point, I think you did mention on the call that you want to have inventory of certain products to be competitive. I think you called out S32. Can you clarify what that means to be competitive? If I think about 9 weeks, it seems like an ample amount of inventory to supply your customers, but what do you mean by that?

It's really around, if you think about it in a distribution setting, you're really fighting for mind share all the time. And I think here we are kind of at the trough of a cycle, and all indications point that the cycle is starting to reaccelerate. You want to make sure you're having a disproportionate amount of share of mind in the channel. And part of that is just having products such that if somebody calls and says, "Hey, do you have an NXP XYZ part?" The distributor says, "Oh, yes, I do, I have it. I can ship it right away." It's really as simple as that.

Great. Can you maybe just talk about what trends you're seeing within kind of the automotive market and maybe talk about it in terms of geos versus EVs versus ICE?

Yes. I'd say China continues to be very strong for us, right? The big kind of news out of our earnings cycle was the fact that the Western Tier 1s, which are our direct customers in North America and Europe, have finally gotten to that point where we think they're either at or have normalized their inventory. So the next move would be actually to increase sales into those Tier 1s. So that's a positive. For us, EVs, it's not just a class of product for us. We sell products into EVs and ICE cars and things like that. So I saw one of your questions, John, was about hybrids versus full battery electric. We're kind of agnostic. Our content is similar in both.

Great.

You did see S&P raise their SAAR outlook for this year slightly, a little bit for next year, not a lot, but it's a positive trend, right? I think that's maybe the message we want to deliver is that after almost 8 quarters of nothing but kind of downward deceleration from the cycle, I think we're finally at that point where we're turning. I think that's important. We think Q1 was the trough for us.

Great. I think there was an automotive Tier 1 recently who talked about that they were seeing some of their auto OEs start to kind of de-spec some of their parts to kind of lower cost in response to tariffs. Are you guys seeing that?

Yes, I saw that question, John. No, we've not seen that. So nothing we can echo on that one.

Okay. I think the other follow-up is if you think about just the regional and geographic trends that we're seeing, obviously, European OEMs are really struggling right now. It seems very clear that they're losing share to the Chinese. I know you guys have meaningful share with Chinese OEMs. But given kind of the share shifts that we're seeing, unclear whether those share shifts maybe reverse or stabilize anytime soon. Are you starting to think internally whether you should devote maybe more resources towards targeting the Chinese automotive market?

We absolutely have. That's absolutely the kind of aha moment we had probably about 2 years ago, right? One of the key things is a lot of the large Chinese OEMs, one of the key questions they ask us when you go in for an RFQ to compete for a design win is, can you manufacture this part locally, like a full front end and back end in China. And so we started to implement what we call our China for China manufacturing strategy probably 18 months ago. I'd say about half of our Chinese -- 1/3 of our Chinese customers, headquartered customers are using that flow today. It's really -- it's available to them. So it's not like we're forcing them into it. So that's a positive there. So yes, we are definitely focusing on where the innovation leadership is. And in EVs and in cars, it's in China right now.

And we also made an organization structural changes this past year where we have a business led in China. One of our management team members is Chinese and represents our China market, specifically for this to design to be the lead designer because they're actually leading in innovation. And what that means is it helps our NPI because they adopt our NPI much quicker than the West because they're just much faster on time to market.

An example of that, John, is like the S32 family, right? We initially designed that kind of spec-ed with some Western OEMs in mind, kind of some U.S. OEMs picked it up. But what was interesting is the Chinese OEMs actually picked it up and got to market before either of those other 2 geographies. It just shows the difference in their platform to market time.

Great. It does seem just given all the geopolitical tensions, there is a bigger push -- it's always been there, but it seems like there's been a bigger push towards China localization there. Maybe just comment what you're seeing from that perspective. And then given that you're headquartered in the Netherlands, are you perceived as kind of more of a neutral trading partner in that regard?

I think the answer is yes, but that doesn't last a whole lot, right? That doesn't differentiate you. It really comes down to the products and innovation, right? One of the things that the Chinese OEMs are very clear about is, as long as you innovate and bring us products that allow us to market a competitive platform, you have a place here with us. If you stop innovating, yes, we will design. It's very capitalistic, right? But you have to remember that part of the growth of the Chinese auto industry is for reexport. So they want to market cars globally that are as competitive as any product you can buy in those Western markets.

That's great. Are there any questions? Great. Maybe we can switch and talk about kind of the industrial IoT that's seeing a recovery for you guys. Can you talk about what you're seeing there in terms of the drivers?

Yes. So the industrial IoT for us for NXP, first off, we're not your bellwether for industrial, right? About 60% of that segment is what we would call core industrial. And what we focus on there is factory automation, building automation, power management and health care. That's kind of what we call industrial. The other 40%, which is what we would call consumer IoT is anything from wearables all the way to home automation. That's kind of how we parse the market, if you will. I would say Q2 was very much a consumer IoT-driven quarter in that segment. But the nice thing is going into Q3 and our guidance reflects it is both the core industrial and the consumer IoT are strong, both on a quarter-on-quarter as well as a year-on-year basis as well as all geographies around the world. And that's a change. I would say Europe had been kind of facing some headwinds for a couple of quarters. So that's kind of now subsided. So we're feeling very positive about that setup for that segment.

Great. I want to spend a minute talking about your recent acquisition of TTTech. Obviously, a software-driven acquisition. I think you talked about bringing over 1,100 developers. I think you had obviously optimized some of your OpEx in anticipation of that. Can you just walk us through just the capabilities of what TTTech brings to you, what sort of revenues it brings over and why you're excited about that acquisition?

So why don't you take that? Yes.

So before TTTech, our SDV revenue in 2024 was $1 billion. And we expect SDV, the whole platform of revenue to grow to $2 billion by 2027, and we're well on track related to that. Now what TTTech brings is post 2027, an acceleration of additional SDV revenue. And what TTTech has is they have their MotionWise software, which already was shipping to over 4 million vehicles. They have a nice -- plenty of design wins pipeline that we've inherited. And you take our CoreRide and their MotionWise together, basically we will put together a complete solution system for our customers which will expand, obviously, our gross margins because of the software play, you move up the stack. It creates for the customer ourselves the -- being able to upgrade the software on a regular basis, just like your phone and it just optimizes the cost for our OEMs, and they're super excited working with us. And so this is something we'll probably talk more about the revenue capability of that combined acquisition probably in 2027 Investor Day.

Yes, I mean I think the key for us is that what TTTech Auto brings to us is 1,100 very well-trained automotive software engineers, right? And in the group that the SDV has developed inside of NXP, there are more software engineers than hardware engineers. And so this just bolsters that capability. Because more and more when you go into a customer engagement, customers -- especially when you're selling processors like the S32 family, customers expect you to bring to them more and more enablement not just tools to write the code, but more firmware going up and up the product stack. And so what MotionWise provides through TTTech is it's a middleware software product. So basically, if you think about an SDV, software architects are defining these platforms, not the hardware guys. The software spec is usually available 2 years ahead of the hardware spec. So if we can intercept that software spec at an OEM level, gives us an insight into what the hardware requirements are going to be several years before just a pure hardware guy. And that's the thinking here.

Okay. So to clarify, does TTTech come with an existing book of revenues today?

Immaterial.

Immaterial. Because we're reusing and repurposing the type of revenue, stopping some of that revenue and more integrated into our total solution.

Okay. Are there any design wins that they have at this point in time that gives you visibility to...?

On the MotionWise product, yes. But again, that's further out.

Obviously, this isn't the only acquisition you've made. I think you also made an acquisition of Kinara. Can you just talk about what that brings to the...?

Yes. So Kinara is an NPU, the whole idea is bringing AI acceleration to the edge. So not doing training at the edge, but doing actually inference at the edge. So this is very much a product that's focused on the core industrial market, primarily factory automation and building automation to start with. We see a way to maybe apply it to auto, but initially, that's the 2 kind of sub end markets we're going to focus on. And the idea is it's an NPU device that slaves off of the application processor that's in a factory automation system and allows us to run smaller or large language models, very specific to that factory automation problem without going to the cloud and running the model in the cloud and coming back. So very, very early days. They do some work with a very large retail customer up in the Washington area. So they are already having some customers, not really much real material revenue, but we do think they're enough to prove out that the technology could be very valuable to our customers. We've been able to actually, within a couple of days of acquiring them, built a small daughter card with their NPU in our i.MX family and went into one of our large factory automation customers and ran their models live within a couple of days. That was enough for the customer to get very excited about what this could do for them.

Oh, nice. Can you talk about what your appetite going forward for M&A at this point in time is? Are you still actively looking? Or are you looking to maybe just...?

We've always looked, John, it's always been more tuck-in. I mean I think if you take a step back and look at the M&A landscape, large transformative deals are very difficult given the regulatory environment on a global basis. And while we do believe our industry does need more large-scale consolidation, we don't see that on the horizon just from a regulatory perspective. So what that leaves us is to constantly look for design teams, specialty products, specialty IP and invest in them as need be. And the fact that we did 3 acquisitions in a short period of time was just deal timing. It was just how they -- they've been all started at different times. They progressed through their pipeline, and they just kind of came to a close in a short window of time.

Are there any particular end markets you guys are actively kind of focusing on or...?

I don't think we're going to preannounce where we're going to make investments. But I think you've seen what we're doing with Kinara, which is an industrial AI play. The Aviva Links is a high-speed asynchronous data communication play in the car. And then TTTech Auto is really big, and it is core to driving the SDV event for us. So those 3 things, I think you should think are clearly key levers of our future growth as we see it.

Great. Bill, can you give us an update on your fab consolidation strategy?

Sure. So everything is progressing quite well with the 200-millimeter consolidation. Obviously, we have these factories that run greater than 90 nanometers. The reason why eventually you have to consolidate them because they come to their age over time. And so we're trying to manage those and transfer products because the majority of our future design wins and our revenue is going to come from 90 nanometers and below. And so we just started -- we announced that during our earnings. We start the process. We have a little prebuild occurring. And we'll talk about that as we go forward and size the inventory of the prebuild and the effects that it has on our financials as we move forward. Now related to the consolidation, some of that product will move into our joint venture with Vanguard called VSMC. That's progressing very, very well and ahead of schedule. Basically, I would say the shell is complete. Tools will start to move in, in the fall, Q4 time frame. And then from there, you start doing the transfers. Maybe first production early 2027. The full production and the full benefits that NXP would receive is probably not until 2028. And that's where we get a nice margin uplift of about 200 basis points on the NXP total P&L for gross margins.

Great. And then, Bill, just related to gross margins, doing really well on execution. You just recently just printed 57%. Long term, I think you've talked about 63%. Can you just walk us through what the bridge from 57% to 63% looks like?

Absolutely. I think there's 3 areas to focus on. The first one is obviously revenue. Revenue is our friend. I think a couple of quarters ago, I gave out a simple rule of thumb for every $1 billion of incremental revenue to NXP, think about 100 basis points. So if you do dumb math, at $15 billion, we should be at 60% gross margin. Now obviously, if you do a little bit higher than that based on our Investor Day model of 6% to 10%, which implies that, we should have even higher. So it creeps up based on that algorithm on revenue. Other factors that we have in the short to medium term are the utilization internal -- on our internal factories. We have the constant mix in NPI that's overlaying. We also announced a recent divestment of probably a business that sized about $300 million, which is below corporate margins. So that will help also improve the mix come once we close on that acquisition in the first half of 2026. So those are the levers in the short term over the next 3 years. If you think post 2027, which gets you say beyond 60% is 2 other factors. It's -- one is the VSMC that I just shared, the 200 basis points once that is up and running at 90% utilization. So we see that very clearly in the benefit on top of, say, if we're at 60%, then assume then you're at 62% in 2028. The other factor is once we finish the consolidation of our 200-millimeter factories and each one is time different phase, and it's all linked to demand, of course. And so you'll start to -- we'll start to reduce our fixed costs, and then we'll get a benefit there because we'll be more variable in nature. When you're more variable in nature, it helps your gross margins. And so therefore, that should be a good tailwind for us, but that's again post 2027.

And where we're at today, we're about 70% fixed cost and 30% variable. And at our Analyst Day, we said that long term, when we've rationalized all the 200-millimeter factories, we might be down to about 20% fixed cost, right? We're never going to be 100% fabless, but quite variable.

Let me just correct you. It's 70% variable, 30% fixed.

Sorry, Bill.

Yes, no problem. Moving the 30% fixed going to 20% fixed, probably around 20%, 30 time frame.

My bad.

No worries.

Great. Are there any questions? Great. Just on OpEx, Bill, just what are kind of the puts and takes on how we should be thinking about OpEx through the end of the year at this point?

As I mentioned in the previous 2 quarters, we'd like to get back into model. We feel confident that we can be back into model, and that's at that 23%. As you alluded to, we are doing a lot of allocation refocusing of our resources. Clearly, we made space for TTTech. If you look from a year-over-year perspective in Q2, we were down $40 million. Then we take on TTTech that comes in. We have some divestments, obviously, that we announced that makes more space, but that's more in Q1. There's other things that we're doing to continue to make space so that everything fits in the envelope of 23% or below. Yes, we could be off a quarter here or there, but we feel confident of the moving pieces with both -- we still have yet to close on Kinara and Aviva. We expect that to happen sometime in this quarter through the regulatory process. So once that closes, we believe we can fit that in there as well as part of the 23% model. But I think we've been quite disciplined over the years when it comes to OpEx. We have levers to control to make sure we're near or below the model.

Great. Jeff, I know you've been with NXP for a long time, and you know Rafael pretty well. Obviously, with the announced transition with Kurt to Rafael. I'm just wondering if you could just give us your perspective on what you think he kind of brings to the table. And I also think just given his background as being Head of IoT and mobile, do you think he brings more of a balanced focus to NXP versus being more of a historically automotive-focused?

Yes. So I think what you have to remember is Rafael has been with the company about 10, 11 years, right? And you're right, he started off running the mobile franchise and kind of expanded his remit a bit. But when you abstract what NXP looks like, internally, Rafael runs about half the company already today pre the new announcement. Jens runs all the automotive. But one of the key benefits that Kurt implemented probably 5 years ago when he became CEO is to really tear down those silos between automotive and everything else. So both Rafael and Jens share a lot of IP and a lot of road map direction. Maybe 1 year, Jens is kind of the pipe cleaner for a new process. Maybe the other year, it's the i.MX family. But I think what Rafael brings, let's say, a little different than Kurt, is he's a classic hardcore Broadcom schooled chip guy, right? He's all about execution. And having come up in the mobile space where you live and die every 18 months, he has a very time-to-market kind of focus. Whereas Kurt, I'd say, is much more strategic. Kurt, by his own initial tell, he couldn't run a chip project himself, but he has a different view of the world. So I think it's going to be very complementary. I think nothing really changes from the strategic direction that we've highlighted at our Analyst Day. You have to remember the way Kurt runs the MT with Bill and Rafael and Jens is all these gentlemen are part of the strategy development. It's not like Kurt sits in his room and says, let's do this strategy direction. It's very collaborative. And I think that you really probably won't see a big disruption from that perspective.

Great. That's a great perspective, Jeff. Thanks. Looks like we're out of time. Thank you very much, guys.

Okay. Okay.

Thank you for all the support.

Yes. Thank you, John.