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

Yes. Well, we just finished Q2, right? It was a record quarter for NXP, record quarter in automotive, record quarter in Industrial. We just guided also a very strong growth. I think Q2 was close to 20%. I think once you exclude sensors, it was 20%, similar trajectory that we grew in Q3. So that, kind of, tells you the demand environment is strong, right? Q2 growth came from all regions in all segments. So that, kind of, gives you confidence of the demand environment that we have, I think visibility has also improved. We have extended our lead time. So that has also helped having the conversation about what is the products that our customers need and requires so it gives us visibility to make sure that we build in the right products for Q3, for Q4, for Q1 next year. And so I think the demand environment today, for the most part, in industrial and IoT and automotive and some of the demands that we have on comps and infra are quite healthy.

Very good. And then in terms of, sort of, the balance sheet metrics and inventory levels, I think your internal inventories are down on days, flattish in dollars this past quarter, the inventory flattish 11 weeks. You also talked about though increasing book-to-bill trends, lead times and more customer expedites on the margin. So how do you, sort of, characterize your OEM customers' behavior at this point, their willingness to potentially increase their own inventory levels of components or not. And if you -- they have not started restock yet, what do you think might prompt that because that's normally behavior we start to see at this point in the cycle?

Yes. So I think -- let me address the inventory comment first. I think the inventory, I think, is under control. I think our inventory days went down to 156 days. So we're down quarter-on-quarter. The channel inventory that we have kept steady at 11 weeks, so it's quite normal and this is consistent with our long-term growth targets. With respect to visibility on the end customers' inventory, I would say that inventories continue to be lean. And none of the forecasts and the projections incorporates this changing, right, that we have. And by the way, when you speak of OEMs, I mean, it could be Tier 1s, it could be OEMs, but at the end of the day, at the right customer, I think that, that inventory is basically kind of consistent, right? The level of inventory is consistent. What would change that? I think the fear of putting lines down at the expense of carrying that -- getting that capital stuck with inventory. I think that will change that. But silver lining, I think, is that leads extending has helped us with disability. And so the conversations even though customers have not increased inventory, conversations are quite constructive. It is heavy visibility into what they need, when they need it, having a conversation about the tightness of supply because it's just a tighter -- there is tightness in supply. And I think that those conversations are a lot more constructive, a lot more transparency, which overcomes the fact that these -- some of these companies are being squeezed, and they're taking care of the working capital in a very, very disciplined way. I think we have to acknowledge that the value of some of these products has decreased in Tier 1s. And so cash flow is important for them. But having said that, I think we work with that to make sure that we have transparency all the way from the OEM to the Tier 1 to be able to make sure that we build the right things and we deliver the right things on time.

Yes. Excellent. Now among investors, it seems like the hardest debate right now relative to analog is the topic of pricing. Now you've talked about starting to see some pricing increase selectively, but that's not had a positive -- net positive impact yet on your margins. Help us understand when investors should help to -- expect to see some of the biggest impact of pricing for the company and some of the product groups where those price increases or changes could be most significant.

Well, let's just talk about pricing in general, just because I think the landscape of pricing is changing even at a structural level, right? I think -- and let me talk -- I'm going to address your comment that I think it was more on the reactive side of inflationary supply. But just step back, what's happening with pricing in the landscape is very different than what happened in the previous 10 years in semiconductors. And I would say they start with the fact that semiconductors have become a bigger part of the value proposition of the new systems, right? They are at the core of innovation. They are the core of the value proposition. It is the core of the ROI of those devices and that carries a significant amount of weight. So innovation carries a significant amount of weight, and customers are willing to pay for that innovation. And of course, I'm not saying that, that removes price pressure or competition. All I'm saying is that the heavy headwinds of price erosion on a yearly basis they used to have back in the past 5 to 10 years is going to be different, more and more going forward just because of how critical it is to deliver the value proposition of our product through semiconductors. And the pace of innovation that is happening more and more, the next generation delivers more value, integrates more BOM and by definition, that price will continue to go up with true value capture. So that is a very important structural change that is happening on pricing. And the second one is that right now is supply is tight and input costs have gone up. And so now you have more of how we react to these disruptions in the market and both are combining to a price environment that is significantly more benign for semiconductor companies. I think the impact that you used to model and your pricing over time every year by several points of price decline. I think that's just going to get better from a semiconductor perspective. It's going to get better. Now the question you asked about how we see the impact, now we see it already, okay? I mean it's just gradual because you deploy price increases by having conversations with your customers, some of them you have contractual obligations. So there's timing associated with these price increases. You deploy gradually through some selected products and over time, you kind of deploy it. So the impact to your top line in terms of these price increases is gradual, but it accumulates like every month, it's a little bit more and more and more because it's not one step function is there, it's a gradual impact. We expect to see that more and more in Q3 and Q4 and going into next year because it's just going to accumulate more and more.

Great. A couple of questions there on end markets. I think we covered automotive fairly thoroughly. On data centers for a second. With market, you've guided to revenue more than doubling this year versus last. It kind of appears to be shaking out to be a pretty strong business segment for the company as with many of your peers. Maybe speak to some of the specific opportunities for NXP in data center and how you're positioned there?

Yes. So the way we approach that data center is very much as an infrastructure play for us, right? We approach the data center, invest in a lease portfolio for us as particularly the control plane. These are top of rack, which is in processing that goes into the boards that handles and monitors the well-being of the rack, right? These devices are very complex systems and making sure that you manage uptime and cooling and power into these devices, is fundamental for the investment of these racks to actually be up and running all the time. And so we invested in areas where we have strength, which is part of our industrial play. This business has grown and we'll grow it to -- we provided guidance this year of 500 growing from 200 last year and it probably continues to kind of grow into the next year on 20%. This is based on the current design wins and the current portfolio that we have. But the trend that you see right now in data center is if you go now and look at what's happening on the data plane. These -- our networking products are going from 400 gigabits to 800 to somewhere in 1.6 terabytes. And so when you have speeds -- they're going at that level, the infrastructure required to manage that -- those racks need to also go up in performance. And so there's going to be a lot of opportunity as the complexity of these racks goes up, I think there's going to be plenty of opportunities to continue to drive innovation and the control plane associated with controlling the fans, the type of connectivity that you have, the type of crypto that you actually deploy into it. And so monitoring that the well-being of that rack is going to become more complicated. And I think there's going to be more innovation. And so today, we gave you the forecast that we have with the current products, but you should expect NXP to continue to expand our product portfolio to expand our SAM and hopefully continue to grow faster in this market. And as we make progress with the visibility of those products, we'll provide updates.

Great. And then maybe switching gears for just a second to touch on physical AI and humanoid robots, which you've kind of led with. What do you think about the available market for NXP and your portfolio in the humanoid and sort of what are the biggest components that drive that?

Yes. I think autonomous machines, in general, right, it's just a matter of not if, but when, right? And you mentioned, obviously, humanoids. And I think human is the ultimate expression of physical AI and robotics, right? It's probably the most complicated form factor. And today, I think there's this notion that the big challenge in robotics it just compute. It's a big -- put a big brain in there and things will happen. And in reality, I mean, humanoids -- particularly humanoids is a system problem. And so we have done analysis on what we're doing right now with robotics, and we see the fact that intelligence for robotics, very similar to what happens. Intelligence and humanoids, they're very similar to what happens to intelligence in the human body. I mean, it's just very similar. It's not about one big brain, it is about having a hierarchical level of intelligence through -- throughout the humanoid and what does this mean is very similar to us. We have a big brain. We have a cerebrum that is powerful. It does a lot of reasoning you're going to have a similar, kind of, reasoning layer of intelligence and robotics. Then you have the next layer of demand, just coordination in our body as a set of elements, the ability to actually be able to walk without really thinking about it, super low power, high performance, intelligent, but not intelligence as our ability to reason with the body. Well, we have a similar concept in humanoids and in robotics, which is coordination layer. And for instance, in a car that will be the equivalent to our S32M product, which is our central compute platform, which is just heavy networking, heavy compute power processing, but it's still real-time performance and low latency. And then the third level in humanoids will be the reflex layer, which is the equivalent for us for our spinal core things. Think about our ability to react very quickly to things. This in a robot will be actuators and motor controls and anything on the limbs and the nodes. And now you have 3 layers of intelligence or coordinated or align and that's the system solution for robotics. Of course, things need to happen in many ways, areas that we envision to participate, and I'll tell you, I mean, if we were to take an estimate of western robot today from a BOM perspective, it can go from anything from $1,500 to $4,000 from a BOM perspective. And I think with the current portfolio, NXP can address about half of that. And these are areas where we just talked about the different processors or an AI. We talked about -- there are about -- by the way, there are about 300 to 100 joints in a robot. Each one of them requires some kind of motor peripheral and so motor control is a big part of it. You have connectivity, basically low-latency deterministic connectivity. So think about TSN and Ethernet that also participate for us, sensing whether it's vision, whether it's radar, whether it's UWB, the ability to actually kind of figure it out what happened around it. That's another area that we can participate on it. Battery management, obviously, and so I think we're quite excited. Of course, this is -- I would say there's more of a 2032 type of, kind of, market. But between now and then, there are other form factors that they're important in robotics, drones, AMRs, robotics in smart factories. And so for us, a path to humanoid involves making sure that we're very relevant with our robotic customers today, in different form factors, and form factors that are a little bit more constrained, factories, law enforcement, delivery, things that are a little bit less challenging from a form factor but you still apply the same principles of hierarchical AI, sensing, perception, battery management and actuation.

Yes. Got it. Speaking of somebody who needs a bigger cerebrum, I hope you're right. Okay. So want to hit on 2 more common investor questions. One is on financial targets. In 2024, you laid out financial targets for 2027 for compounded revenue growth of 6% to 8%, gross margin of 57% to 63% and op margin is 34% to 40%. Since then, you've made some divestitures, acquisitions we just talked about. So looking forward to next year, what's your level of confidence in, sort of, hitting those targets? And are there any caveats investors to be aware of when considering your performance next year?

Well, if you look at the performance that we had on the first half of the year, and the guide that we gave you. I think you can probably see that -- I think we are on track from a revenue perspective on hitting those targets. And nothing today would indicate that this will give the rail. I mean, listen, things could happen. But I think right now, the trajectory that we have on our revenue, the customer traction, the design wins that are shipping already. I think that, kind of, leads to a very high conviction that we're going to achieve our growth targets in 2027. Gross margin we just guided to about 58%, I think 58.5% -- 58.5 in Q3. And we expect that leverage on and continue this projection towards the [ 6 ] handle of gross margin to continue to actually increase as we grow revenue. The operating income, I think, is within kind of inches away from 37%. So I think the targets that you gave me there are well within reach. So you can see that we're actually creating a lot of leverage as revenue growth. And I think in 2027, this will continue. Now where I'm focused on 2027, it's not necessarily on the targets that we have because I think we're on track. My biggest desire is to make sure that 2027, especially towards the end, it, kind of, has that momentum to even bigger opportunities in 2028 because some of the things that we talked about this new platforms for SDV and the new platforms for physical AI, they don't even start ramping until right literally at the end of 2027. So for us, okay -- okay. The results that you gave me, yes, it reflects some of the portfolio that we have now. But the traction of the new portfolio, I think it's even more exciting and it's going to reflect on some of the things that happened towards the 2027.

Yes. Okay. Final question. One question I get a lot from investors are -- is if we have heck of an industry upturn ahead of us and that last longer and stronger than any of us expect today, how do you think about the available capacity to satisfy that higher level of demand? Your strategy has a mix of internal fabs, external foundries, joint venture structures, maybe address the overall manufacturing strategy, especially the JVs, VSMC, ESMC. How they fit in your business model? And then why are those JVs a good use of shareholder capital?

All right. It's going to be challenged for me to answer that in one minute, but it just kind of tell you the following, right. When you look at a manufacturing strategy, there's 3 goals, right? One is access to supply. It's very important. Two, supply resilience. And that means a lot of things, but many once our customers require diversity, and we want supply resilience. And then lastly, but not least, is access to cost, right, competitive cost. And so what we have established from a manufacturing strategy is that we decided to go asset light on the fab and so right now, we're 60-40, meaning 60 -- 60 external, 40% internal. And we're moving that to even 80-20. And that reflects the portfolio that we have. More and more of our products are moved to 16 nanometers, 5 nanometers in. So that reflects a little bit of the strategy we have in the portfolio. We created 2 JVs. I think the JV is a 10% ownership that we have on ESMC in Dresden in Germany and about 40% in Vanguard. That gives us not only access to capacity, it gives us assets to cost right? And also structurally, we move a lot of products that are in 200-millimeter fabs into 300, right? And so that also structurally is a better cost. So -- and then on top of that, we decided to actually own our own back end. So our back end is about 80% internal, 20% external. And so we have this external fabs internal back end and that gives us enough flexibility to do the things that we need to have.

Excellent. I think with that, unfortunately, we're out of time. Rafael, Mike, thanks for being here.

Appreciate it.

Appreciate it.