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

Hi, everyone, my name is Francois-Xavier Bouvignies from UBS. I'm the Head of the European tech hardware and semiconductor team at UBS. So thank you all for joining. So we are very happy to have NXP. And of course, Rafael, the CEO of NXP joining this on time. Perfect. Thanks, Rafael. Bill, CFO; and Jeff, Head of IR. So just a reminder, NXP is the top 3 semiconductor auto semis in the world. So that's a very -- good to have your insight, especially on the automotive side, but you have a lot of opportunities in the industrial that we will discuss, of course, as well. But in any way, a leading global semiconductor analogue company in the world. So thank you for being with us. So let me start, maybe, Rafael, with the first question, or Bill actually, one of you, on the short term. So if you look at the next quarter, which is something that you just guided, you guided for revenues up 4% quarter-on-quarter in Q4, seasonality is flat to up. So you are above seasonal, which is kind of better than most of your peers that are more in line and some are even below. I won't name anybody. But can you explain maybe the drivers of this outperformance and why you are standing out here?

Yes. Let me take that one. And so indeed, we're guiding 4% sequential growth, which is above seasonality, typical seasonality. And if you look at the drivers, they're mostly company-specific drivers. Mobile is growing, let's put that one aside. We're guiding industrial 10% up sequentially. And that is driven by design wins that we had early on energy storage and building automation. These are starting to ship. We also have early contributions now of Edge AI with wearables and some smart devices actually starting to ship as well. So these are company-specific drivers in industrial, a strong kind of industrial recovery there. In auto, I think auto, you can see resilience in auto, despite all the noise that we hear in the market. The company-specific growth drivers in SCD and radar and electrification continues to perform. And so the content growth for NXP continues to kind of be there in auto. And the least, I guess, normalization of inventory, right? I mean we're starting to ship now finally to end demand. So all these 3 things are contributing to a better Q4 guidance.

And maybe, Bill, where do you see the inventories now in the channel and on the direct one as well. So on both sides, in another word that I'm asking you is like, where do you think we are in the cycle right now?

Related to the cycle, I would say it's very early innings. We've been consistent there. The signals that we see quarter in, quarter out continue to improve regarding our distributions backlog, our backlog improvements, I think the sell-through is very healthy. As Rafael mentioned during our earnings call, we targeted to be either 9 or 10, and that's a function of what sell-through does. And I think sometime in 2026, related directly to the channel itself. We should be back to that 11 weeks. And the way we look at that is consistent year-over-year growth. And I think what we guided, we turned back into the model, plus 6% for NXP in Q4. We signaled Q1 of growth year-over-year, again, back into our financial model. So we're pretty -- feeling pretty good to make sure that we have the inventory in place to service our customers, especially in those fast turning parts from a channel perspective. I'll let Rafael comment on the direct side.

And I think -- what is standing out when you speak to many of your peers in the industry is that there is still a lack of visibility still. I mean we all sit on the companies that sit on a lot of inventories on their balance sheet, your customers, they know that. So I guess the lead times are quite strong still. But still, you are still very optimistic versus your peers. So it's why I'm turning to you a little bit as to where is it coming from, if we have no visibility. So it's very interesting to hear from you.

Yes. I mean the short-term cycle orders continue to improve quarter in, quarter out since Q1. We see customer escalations increase across the portfolio. And we see short-term orders improve across specifically with our growth drivers, our company-specific growth drivers, they are all intact to that, I think we said 15% to 25% across the board depending on 1 of the 5. They're all intact, and we'll share what those results are at the end of the year, like we usually do. But we're seeing -- with inventory digestion behind us, as Rafael said in his opening remarks, we feel pretty confident at this point in time based on the signals and the data trends we see across the board and they continue to improve.

Francois, you just take back, right? And the reason we are optimistic, right, is if you look at the dynamics behind the business. We mentioned channel inventory right now. We manage channel inventory. We manage it differently in the downturn, and we're managing it very carefully right now. So we believe that we have a nice setup right now from a channel inventory perspective on 9 weeks going to 10, potentially to finally 11, right? So we have control of that channel inventory. And second piece is our growth drivers. These are company-specific growth drivers, whether it's SDV, whether it's radar, whether it's some of the edge compute in the industrial, they're actually quite performing and performing well. And the last one is we talk a little bit about normalization of inventory and the direct customers in auto, that normalization is happening, right? That digestion of inventory, I think, is behind us. And what's going to happen now is that we're going to start shipping to end demand. We're going to start having visibility now. And shipping to end demand is already very good for the industry. It's very good for NXP and auto. And so when you look at these 3 things combined, that provides a really robust momentum towards the end of the year and going into 2026. And so that's what it really captures the optimism that we have in NXP moving into next year.

Makes sense. And maybe if I move, it's a good transition for my question on '26 as a whole. We talked about more short-term Q1 But you mentioned that content is an important driver. So if we look at '26 right now, what are the main content drivers for NXP that you think will help? You can maybe some design wins, ADAS components, infotainment, electrification BMS. I mean, you can name a few drivers -- key drivers that you see for '26 for NXP?

Yes. The really important design wins both in auto and industrial, those design wins have been captured already, right? So now we're entering this phase in '26 and 2027 with these products now starting to launch. I mean, they move to SDV and auto is undeniable. It's just a better way to make a car, it's just the future of the vehicle. And so the way we are positioned in NXP with our portfolio, both for personal and central compute, it's quite unique and probably unparalleled the industry. ADAS adoption, driving a lot of radar sensors for us and that NXP being the leader in radar, we get benefit from not only more nodes per car but also more complexity of radar nodes per car. And then I guess the cognification of everything in industrial is driving a high-performance compute. We see low end MCUs, now transition into heterogeneous compute architectures, which drive our i.MX portfolio, which is industry leader in industrial processors. And so we get benefit from that cognification of the industrial space which brings connectivity, we bring security. And so we also have an attach rate story that is very compelling.

Yes. Maybe if I can just add some colors of the size of the buckets that Rafael just talked about. The SDV, our company-specific group system solution, that business was only $500 million in '21. It doubled to $1 billion in '24, and we're going to double it again in '27 to $2 billion. The radar business, again, was just shy of $900 million in '24, and that's expected to be over $1.3 billion in '27. Related to electrification that surpassed the $500 million mark in '24. And we'll probably be just shy of $900 million. And again, as I mentioned, these are all intact 4 quarters in to our 12-quarter journey. And then lastly, which is our newest one is connectivity, and connectivity was only about $100 million in '21. It went to $400 million in '24 and we're expected to be above $700 million in 2027 on the company-specific growth drivers, specifically for auto. Industrial IoT related to processing, connectivity, security. I'd say that the growth drivers there were about $600 million in '24, and we're on track with the design wins and the ramps that Rafael just talked about to double that to $1.2 billion in 2027. So we feel very confident on the company-specific drivers, which will drive the growth of the company and deliver to our financial targets as we go ahead.

Very clear. Thank you for all these details. Gross margin, Bill, I guess it's for you this one because obviously, top line is an important driver, but gross margin is also key. And I have to say, again, you have been standing out on the gross margin side in this down cycle. Of course, you're have much less volatility, very steady gross margin. As we came out of this down cycle as you seem to allude to. How should we think about your gross margin? Do you think you have a lot of operating leverage in line with this top line story? And what are the drivers?

Thank you, Francois. I think if you think about 57%, 63% is our model. We got into a model in Q3 after a first slow start on the top line in the first half of 2025. We guided Q4 at 57.5%, we expect 2026 to be back into model for the full year. The short-term drivers, the way to think about it is our internal utilization, as you know, they were in the mid-70s. They're now going to the high 70s. There is leverage when we bring them into the mid-80s. So that will be a benefit just from -- as well as if there's 200-millimeter consolidation, we just started that Phase 1, we announced will carry about 6 or 7 extra days at the end of the year. But we'll have -- that's a journey, right? That's probably a 6- to 9-year journey on that consolidation efforts, which will trigger benefits into the gross margin for NXP. Other areas is typically Q1, we have the low single-digit price gives, but we offset those through productivity improvements throughout the year. So those 2 kind of wash, I would say. And then you have more of the company-specific growth drivers. And typically, the mix can play a role in any given color. But we feel very comfortable of delivering that 60% mark at $15 billion. Again, the rule of thumb for modeling purposes that we provided think about every $1 billion worth of revenue at 100 basis points. And that incorporates all these puts and takes that we managed quarter in and quarter out.

Very clear. Rafael, on the China side, I wanted to ask, obviously, it's a very important topic in the industry. We all see China trying to localize as much as possible. It's a threat potentially to share, but also pricing, the economics in that region. Can you remind us, first, what is your percentage of China business right now? How much was the growth maybe or is the growth in '25 or in China? And what do you see for the China business in the short term and medium term for you?

So China, I do confirm China is an important market for NXP. We -- I think Q4 -- sorry, Q3, our ship to revenue in China was mid-30, say, high 30s to 38% or so. And the way you think about that revenue, about half of that is for Chinese OEMs, Chinese indigenous headquarter companies and half of them is for multinational for reexport. So about half of that revenue is China for China. And China is a competitive market. In all aspects, right, is in auto, they're extremely competitive among each other. I think in industrial, they are very competitive. And then when you look at indigenous Chinese semiconductor companies, we see emergence now, companies doing IVI infotainment products, ADAS. We see catalog, analogue cars showing up. We see low in MCUs coming into either auto or industrial in some places. And these are areas where NXP has either little exposure or we decide to compete in highly differentiated segments of those categories. Our positioning in China is very specific to the vehicle core architecture of the car. That's where kind of where we decided that we are going to create our differentiation through innovation through time to market is making sure the OEMs in China have a safety anchor with processing from NXP. And so that's our differentiation, right? The vehicle core architecture that requires a lot of IP and functional safety requires a lot of IP and security, isolation, redundancy. And so these are products are quite unique. The way we address China right now, we don't fight for sockets. We fight for architectures because that's the way we actually add end-to-end value with our central compute architectures and products and our inner Zonal architectures. And that's our playbook in China, innovation and speed. In many ways, I think the way we see China, we embrace the competition in China in many ways because for us, it's more of a fitness center right now, especially in EVs, that a fitness center. So if you're able to deliver innovation to win in China, that kind of really strengthens your ability to compete everywhere else.

And is EV very important for you in China?

Well, what is important for us is SDV. It just happens, the EV is the lion's share of the production in China. But SDV,this is where we tie our kind of our strategy in automotive is independent of the powertrain. It could be EV, it could be hybrid, it could be ICUs. And SDV is the secular trend that we really tie to most of our innovation and most of our products that we -- the NXP does ships in auto.

So what was your growth in China in '25? Or what is your current performance there?

You're talking about profitability growth...

More on the top line actually.

On the top line, it's in the...

It's about 1/3 of the business, Francois.

And growing this year?

Yes, it has been growing, yes.

Yes, yes. And you expect to grow as well in '26, it would be...

Absolutely. Indeed. I think China has actually been one of the bright spots for NXP, right?

Yes. Maybe moving to more long term. I mean, NXP targets $16 billion in '27. You mentioned a bit the building blocks, Bill. So that's a 6% to 10% revenue CAGR. But based on '25 numbers, if I take the consensus and your guidance actually midpoint, it implies a 14% CAGR, '25 to '27. So you have actually -- it's a guidance that is more H2 loaded for the reason that we know. Are you still very confident? I mean, is there any risk to this guidance? Because obviously, it's a bit of a hockey stick right now. So I just want to have a view on that?

So I acknowledge, Francois, the math, especially when you start with kind of a slow 2025. But the reason we -- I mean, I'd say we remain committed to what we've said in our Analyst Day in 2024. And the reason we remain confident even though I'm not going to comment -- I'm not going to guide 2026, so I'm not going to comment on the linearity between now and the 2027. The reason we remain confident is because the growth drivers are intact. They're not only intact, I think they're getting strength to move to SDVs is getting strength. They move to more autonomous driving with -- and the pull-through for more sensors is getting stronger. I think the push for AI at the edge, whether it's auto or industrial, it just continues, right, the more connectivity, more security. And so I think the drivers on our S32 platform and our radar and our i.MX, our connectivity and auto continues to be intact. And not only that, they're performing today, they're performing very well. And I think you heard from Bill what we -- the trajectory we have on those growth drivers. We also operated in 2025 for most of the year in a trough period. So now we are kind of going back into normalization. And so we're going to enter at a minimum, a period of normalization inventory, we're going to start shipping to end demand and that already is going to be very good and not even counting restocking for that. And so I think when you put it together, I think we remain committed, normalization, the growth drivers that we have for the company. That is what keeps us confident that -- and remain committed to actually achieving the targets that we set forth.

Makes sense. Thank you, Rafael. Bill, on the gross margin side, I forgot to ask you about the China business, we talked about the top line drivers. But is it accretive to the China business or group average? I mean, how is the profitability in China?

Yes, we don't break out the profitability of the gross margin. But as we said, generally, with our end segments, the gross margins are all kind of similar in the same ZIP code. We've improved that over the years through our disciplined approach of getting out of low-margin business or through the R&D investments we make through the hurdle rates to drive future gross margin for the company as we go forward.

Rafael, I mean, you did not recently joined NXP. But as CEO, it's recently new. So maybe can you tell us about your experience, what's your strategy as a CEO. Now you have been a few months into the job. Do you want to do something differently? Anything you could bring to the company as a fresh ideas?

I've been at the company since 2014. And so I was intimately involved in crafting the strategy for NXP with Kurt and with the rest of the -- to the management team with Bill. And so you should not expect kind of a hard turn left on the strategy, right? Where you should expect is an acceleration of the execution of it. I think we have -- one of the things that probably is kind of lost is we have a massive opportunity with these complex devices and systems at the edge to move from component to more of a system architect and co-creation of systems with our customers. And so we have this massive opportunity to actually become much more intimate with our customers. And my goal is to actually go and accelerate that. And if you look at the products that we have in processing and connectivity and AI and some of the acquisitions that we've done on to actually fill the gaps that we have to complete the system and look at TTTech Auto from middleware for SDV, the gaps that we fill with Aviva Links to kind of create high-speed links for both industrial and auto. And link in our own AI, we're starting to fill the gaps that complete the system from a technical perspective. So I'm quite excited to just go and accelerate our vision of bringing intelligence systems to the edge in auto and industrial, and that's what we're focused on.

Okay. And when you say accelerating, you have been through -- you did a few M&As recently. Is it what you mean by accelerating? Or is there anything concretely that you mean by accelerating like R&D, CapEx, more M&A coming just to get more ideas on that?

Well, I mean, there's a lot of layers. So let's just go into the M&A acquisition, the M&A that we just completed, 3 acquisitions happened. We're not only integrating these teams. We're also integrating their technology with the integrating the portfolio, we're bringing them into the rest of the NXP portfolio, validating integrating and then delivering these 2 either auto customers or to the long tail and the channel for industrial. So we are going to really augment the portfolio with the acquisition of these companies and we just need to make sure that's seamless for our customers. Culturally, internally, we are focusing on agility. I mean we talk about being competitive in China. I believe that speed is going to be a new parameter, a new variable in industrial and auto. And it's not just going to be a China factory. And so I think adopting a more agile culture is going to be also part of what I'm focused on.

And maybe moving more to the longer term on the gross margin side, Bill, I mean, 57% to 63% is your target for '27, which is a very nice target to have. Now if you think about more longer term for the company, can you go into this high 60s, mid-60s at some point? And what would be the, I mean...

We're not stopping at 60% because, again, if you think about our longer-term play in the gross margin, there's 2 fundamental foundational shifts that we focus on. One is the portfolio and how we manage our R&D and continue to move up the stack. The value we provide to our customers. And that's a hurdle rate. So today's hurdle rate around 60%. And so all new R&D has to produce products 3 or 4 years from now at those type of rates or above. And so that gets layered on. The other shift is the hybrid manufacturing strategy. We've talked about this for the last couple of years. We're super excited with our joint venture of BSMC coming on board in 2027. We believe it will be fully ramped in 2028, which will add an incremental 200 basis points to our gross margin wherever our gross margin is in 2027. So we're excited about those levers. Obviously, there's much more, and we'll probably share more about that in our 2027 Investor Day, Francois. But I feel very comfortable with gross margins hitting 60% at that $15 billion mark and then going beyond 60% as we continue to grow the business and execute to it.

It's a good teaser. For your divestments strategies, I mean, obviously, you have been very agile as well in the way you run the business in terms of divesting some business that you believe are not fitting anymore your targets. So is this still the case today, you feel like you have some portfolios that you might adjust?

Yes. I mean, this is nothing new. I think NXP has a track record of reviewing their portfolio on an annual basis. We kind of do it on quarterly, on a performance standpoint, but annually, we go through our strategic reviews. We're not shy of stopping or getting out of certain businesses. We've demonstrated that in the past. And as you know, Francois, over the summer, we announced the divestment of our sensor business to one of our peers. And that works out very well for us. It also works out very well for our peer. The main purpose of selling this business is the fact that it was slightly below the corporate margins. It only grew 2% or 3% for us. And we saw a gross margin headwind challenge with this business because guess who manufactures those front-end wafers for us? It's that peer. And so it made sense at this time where it's better off in somebody else's hands and they can do more with that business. So it was a win-win, I would say. But we constantly look at the portfolio. If there's opportunities to prune, we will or to divest other parts of the business, absolutely. But really, think about that divestment of $950 million help fund the higher profitability businesses that we just acquired for about $1.1 billion, $1.2 billion of TTTech, Aviva Links and Kinara. So we like that trade-off.

And you mentioned about accelerating the business, Rafael mentioned it. Is there any impact on the capital allocation that NXP will have? Maybe you can remind the capital ratio policy and how you think about that?

I think the capital allocation strategy inside NXP is very sound. For the last 10 years, I think we returned close to or above $20 billion in the form of dividends and buybacks to our owners. We're going to continue to do that. I think we share that from now until 2027, we'll add another $8 billion or $9 billion to that level of returns. The way to think about it is we'll return all excess free cash flow. So think about 100% of free cash flow back to the owners. Clearly, we still have some investments that will go out in 2026 linked to our joint venture with Vanguard called VSMC. But once we get past that, I hope to be able to even get more money back to our owners through the form of both dividends and buybacks. But the way to think about it very simple, we manage this through our net debt leverage ratio. As long as this is at 2 or below, we are actively buying back the stock.

Rafael, maybe a very important topic is AI. Many of your peers start talking about data centers, AI tractions. Can you maybe lay out the opportunities there for data centers, AI more specifically? And how do you intend to capture some growth there?

Yes. First of all, I want to be specific in the way we address AI because I think NXP, we see -- we play in the systems. What's happening in the market right now is everything is getting software defined. So let's start with that. So our play is at the edge, both in auto and industrial. So everything is getting software defined. And that creates the foundation, what comes next with the next frontier, which everything is AI defined. This next phase, and you see all the investments that are happening on AI at the cloud, the true transformation is when all this phenomenal IP, this great models move to the edge. And they really transform our everyday devices and they will transform really impact the way we work and we play. That playbook of bringing AI to the edge has not been written yet. And so this is what we intend to play. And we -- our road map is focused on bringing that intelligence to the edge because AI at the edge is application-specific, resource constrained, fit for purpose, and that's where NXP actually does very well, bringing complex technology and deploying it to the masses in the channel. And you will see a portfolio that is going to be unique and unparalleled with the competition.

Great. Thank you. We're running out of time. And thank you all for listening, and thank you for being with us today.

Thank you, Francois.