NXP Semiconductors N.V.

Good day. Thank you for standing by. Welcome to the NXP 3rd Quarter 2021 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. To ask a question, you will need to press star 1 on your telephone. If at any time during the conference you need to reach an operator, please press star 0. And now I would like to turn the conference over to Mr. Jeff Adam, Senior Vice President of Investor Relations. Please go ahead, sir.

Thank you, Dexter, and good morning, everyone. Welcome to the NXP Semiconductor's third quarter 2021 earnings call. With me on the call today is Kurt Sievers, NXP's president and CEO, and Bill Betts, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the fourth quarter of 2021. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliation to the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2021 earnings press release, which will be furnished to the SEC on Form 8K, and is available on NXP's website in the investor relations section at nxp.com. Before we start the call today, I'd like to remind everyone of our upcoming analyst day on Thursday, November 11th, 2021. We're hosting a hybrid event. We'll be in person in New York City, but also simulcasting the event from our website for virtual attendees. After the event concludes, we will post the slides to the investor relations website. Now I'd like to turn the call over to Kirk.

Yeah, thanks. Thanks very much, Jeff. And good morning, everyone. We appreciate you joining our call this morning. I will read you our quarter three results and then discuss our guidance for quarter four. Overall, our quarter three results were better than the midpoint of our guidance with the mobile end market stronger than planned as a result of improved supply. At the same time, The trends in the auto, industrial and IoT, and communication infrastructure markets were all in line with our guidance. Taken together, NXP delivered quarter three revenue of 2.86 billion, an increase of 26% year on year, and 11 million above the midpoint of our guidance range. These are very good results given the constrained supply position we knew we would face entering the quarter. And we continue to view our channel and on-hand inventory metrics below our long-term targets. We exited quarter three with our distribution channel supply metric at 1.6 months, almost a full month lower than our long-term target. And we expect this to be the situation in quarter four again as well. Our non-GAAP operating margin in quarter three was a strong 33.5 percent which is 770 basis points better than the year ago period and 50 basis points above the midpoint of our guidance operating profit dollars were 19 million better than guidance driven by higher revenue and lower spend now let me turn to the specific trends in our focus and markets starting with automotive Quarter three revenue was 1.46 billion, 51% up versus the year ago period, and in line with our expectations. In industrial and IoT, quarter three revenue was 607 million, up 18% versus the year ago period, and again, in line with our expectations. In mobile, quarter three revenue was 345 million, up about 2% versus the year-ago period and above our expectations. Lastly, in communication, infrastructure, and other, quarter three revenue was $454 million, about flat versus the year-ago period, and in line with our expectations. With this, let me move straight to our outlook for quarter four. We expect the midpoint of quarter four revenue to be $3 billion, up 20% versus the fourth quarter of 2020, within a range of up 17% to up 23% year on year. From a sequential perspective, this is up 5% at the midpoint versus the prior quarter. And we again anticipate demand outstripping available supply in our quarter four outlook. At the midpoint of this range, we anticipate the following trends in our business. Automotive is expected to be up in the high 20% range year on year and up in the mid single digit range versus quarter 321. Industrial and IoT is expected to be up in the high 20% range year on year and up in the mid single digit range versus quarter 321. Mobile is expected to be down in the mid-teens range year-on-year and up in the low single-digit range versus quarter three, 21. And finally, communication infrastructure and other is expected to be up in the high teens range versus the same period a year ago and up in the low single-digit range versus quarter three, 21. Over the course of the last two quarters, investors continue to ask, how to reconcile the revenue performance of NXP's automotive business with that of the global vehicle production numbers as they are reported by IHF. Specifically, NXP's automotive segment revenue is expected to be up over 40% in 2021. Against this, the auto OEMs continue to struggle to match supply to strong consumer demand with the auto industry likely not able to meaningfully grow unit production versus 2020. Now let me make a few observations which may help you understand this divergence. First, the auto supply chain is very extended and complex with multiple points of product transformation across the globe. This extended supply chain needs to coordinate the timing and delivery of up to 30,000 parts and up to 1,500 different semiconductors from hundreds of suppliers to build just one single car. During normal periods, from the time at which NXP ships a finished component to when the final assembly is fitted into a finished car, it takes up to six months. And this is on top of the normal semiconductor manufacturing cycle times of three to six months. At each step of the transformation, thousands of parts move through a complex global network of suppliers. For the process to work efficiently, it is essential that all of the components needed to complete a car are available exactly where and when they are required. Now, we believe the extended auto supply chain significantly depleted on-hand inventory of all types of products, including semiconductors, already by the beginning in the second half of 2018, and continuing through 2019 and most of 2020. That depletion was a result of global car production declining 6% in 2019 and another 16% in 2020, while NXP's auto business, despite content increases, declined by 7% into 2019 and by another 9% into 2020. Now let me illustrate the impact. By using the NXP distribution channel, as a proxy for overall auto supply demand trends and how we have been directly affected. We consistently monitor and measure all component movements and inventory data at our distribution partners at the end market level. Throughout 2021, these metrics for automotive have been at record low levels, with on-hand inventory being about a one month below our long-term target of two and a half months. with demand in the intermediate term being consistently greater than our ability to rebuild inventory back to normalized levels. In our and my personal daily discussions with our customers throughout the auto supply chain, we hear the consistent message that they want significantly more product. And in some cases, tier ones are struggling to assemble full kits, and in other cases, the OEMs choose to build partially completed cars or hold their production lines altogether. For NXT, lead times for about 75% of our automotive products continue to be above 52 weeks. Against this backdrop, our customers are placing NC&R orders to assure long-term supply. We, in turn, are making long-term supply commitments to our supply partners. In summary, We think the automotive supply demand equation will continue to be out of balance through 2022. In addition, as a learning out of the current material shortage situation, and in order to mitigate the impacts the AutoEMs are experiencing today, our Tier 1 partners explicitly demand that more supply and inventory will be needed in the extended supply chain, which we believe cannot be broadly achieved before 2023. Now, with this currently dysfunctional supply chain as a backdrop, there are very clear and very positive trends that have simultaneously increased the demand for auto semiconductors industry-wide as a consequence of content growth. We have seen multiple OEMs prioritize the production of premium vehicles, which require upwards of twice the semiconductor content from NXP and others. And another clear and emerging secular content driver for the auto semiconductor market is the fast acceleration of full electric and hybrid electric vehicles, which combined have moved from 8% of global production in 19 to about 20% of production in 2021. This is very impactful since the average semiconductor content in an XEV is about $900, which is roughly two times that of an equivalent ICE vehicle. These trends have resulted in industry-wide content per vehicle increasing at 10% per year over the last three years. And on top of all of this, NXP is consistently gaining share in our focused growth areas and increasing content. These content gains include 77 gigahertz radar safety systems, multiple electrification system opportunities beyond just battery management and new domain and solar processing as well as others. Now for NXP, it's of course not just automotive driving our performance. Within the industrial and IoT market, we see our ability to provide complete turnkey connected edge processing solutions consisting of processes, connectivity, security and analog, all leading to increased customer traction. These are all just a few examples that underpin our confidence in our company-specific growth. As Jeff mentioned earlier, we plan to go into much greater detail at our investor day on November 11th next week in New York. In summary, we continue to execute very well in a strong demand environment notwithstanding the industry-wide supply challenges. From a company-specific perspective, NXP is experiencing very positive customer traction of our newest products and solutions. Putting it all together, we are highly confident that the company-specific drivers within our strategic end markets will continue to build also beyond Q4 into Q1, as well as over the intermediate term through 2022. Now, before we move to the financial details of the quarter, I'd like to make a few remarks in the context of our recent announcement of Bill Betts as our new CFO. I have personally worked with Bill as a business partner and one of Peter Kelly's key finance leaders for over eight years. Bill brings both a strong track record and career in the semiconductor industry, as well as truly intimate knowledge of NXP and consistency to his new role. I personally drove the evaluation interview process, interviewing a wide number of external candidates, as well as Bill. And I concluded Bill is the right person to lead our NXP finance organization. And I'm personally truly excited to work with Bill and drive NXP's profitable growth going forward. At the same time, I'd like to highlight the outstanding contribution Peter Kelly has played in the strategic evolution of NXP. Peter first came into the company in an operations role over a decade ago and then quickly moved into the CFO role to drive the financial discipline our stakeholders have all come to expect. He has been a clear thinking, strategic advisor to myself and a highly valued mentor to many on the NXP management team, obviously including both Bill and Jeff. We wish Peter the very best in the next phase of his life and hope he gets to spend more quality time with his family. And with that, I would now like to pass the call to you, Bill, for a review of our financial performance.