NXP Semiconductors N.V.

Hello, thank you for standing by, and welcome to the NXP fourth quarter 2022 earnings conference call. At this time, all participants are in listen-only mode. After the prepared remarks, we will conduct a question and answer session, and instructions will be given at that time. I would like to hand the conference over to your speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Michelle. Good morning, everyone. Welcome to NXP's fourth quarter full year 2022 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 first quarter of 2023. 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 reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2022 earnings press release, which will be furnished to the SEC on Form 8K and available from NXP's website in the investor relations section at nxp.com. Now I'd like to turn the call over to Kurt.

Hey, thanks, Jeff, and good morning, everyone. We really appreciate you joining our call this morning. I will review both our quarter four and our full year 2022 performance, and then I will discuss our guidance for quarter one. Beginning with quarter four, our revenue was $12 million better than the midpoint of our guidance. with the trends in the mobile and industrial and IoT markets performing better than our expectations, while automotive was in line and communication infrastructure below our expectations. Taken together, NXP delivered Q4 revenue of 3.31 billion, an increase of 9% year-on-year, while maintaining channel inventory at a 1.6 months level, well below our long-term target. Non-GAAP operating margin in quarter four was a strong 36.5%, 160 basis points better than the year-ago period, and about 50 basis points above the midpoint of our guidance. Year-on-year outperformance was a result of good fall-through on the higher revenue, better gross margin due to high factory utilization, and disciplined expense management. Now let me turn for the full-year performance. Revenue was a record 13.21 billion, an increase of 19% year on year. When passing the revenue growth, approximately 14% was due to higher pricing and was due to a combination of volume and mix. And here as a reminder, we have executed a consistent pricing policy to pass along the inflationary increases of our input cost while not padding our gross margin. Throughout 2022, we consistently found ourselves in a situation where robust demand across automotive and core industrial markets outstripped available supply, even as production levels both internally and from our supplier partners improved through the year. And now we do see a continuation of input cost inflation in 2023, However, not at the same pace and level we experienced in 2022. The full year non-GAAP operating margin was solid 36.3%, a 340 basis point improvement versus the year-ago period, as a result of higher revenue, improved factory loadings, and positive operating leverage. Now let me move to the specific trends in our focus and markets. First, automotive. Full-year revenue was 6.88 billion, up 25% year-on-year, a reflection of higher pricing, our strong company-specific product drivers, and accelerated content increases thanks to the secular growth in sales of SUV vehicles and prioritization by OEMs of premium-class vehicles in a limited supply environment. For the fourth quarter, automotive revenue was 1.81 billion, up 17% versus the year-ago period, and in line with our guidance. Now moving to industrial and IoT. Full-year revenue was 2.71 billion, up 13% year-on-year, primarily due to higher pricing and the strong competitive positioning of our solution offering comprising industrial processors, analog attached connectivity and security. For the fourth quarter, industrial and IoT revenue was $605 million, down 8% versus the year-ago period, so better than our guidance. Mobile. Full-year revenue was $1.61 billion, up 14% year-on-year, primarily due to higher pricing and continued traction of our secure mobile wallet. For quarter four, mobile revenue was $408 million, up 9% versus the year-ago period, and better than our guidance. Lastly, communication infrastructure and other, full-year revenue was $2 billion, up 15% year-on-year. The year-on-year growth was due to higher pricing and a combination of sales growth of network processes, RFID teching solutions, secure transit and access products, and RF power products for the cellular base station market. For quarter four, communication infrastructure and other revenue was $494 million, up 8% year-on-year and below our guidance. Now, as discussed earlier, I also would like to provide you a progress update on our accelerated growth drivers. At our analyst day in November 21, we highlighted our expectation to grow total company revenue to approximately 15 billion in 2024, coming from 11 billion in 2021, within a compound annual growth range of 8 to 12% over that period. Embedded within this outlook, we highlighted six company-specific revenue drivers across all our served end markets, which we anticipated to grow in aggregate to about $6 billion in 2024 from a $3 billion level in 2021, representing about a 25% three-year compound annual growth range. Additionally, we shared the view that our high relative market share for business would grow to $9 billion in 2024, from 8 billion in 21, reflecting about a 5% three-year compound annual growth range. Overall, we are confident to achieve the anticipated growth rates for both our accelerated growth drivers as well as our high relative market share core business. Moving to the segments. Within automotive, the accelerated growth drivers are 77 gigahertz radar, electrification, and the S32 domain and solar processors, all of which are tracking ahead of plan. According to market research company YOL, NXP is confirmed as the clear number one revenue market leader in automotive radar solutions, as well as individually in radar RF transceivers and radar processors. Furthermore, we just announced the industry's first 28 nanometer RF CMOS radar one-chip IC family for the next generation ADAS and autonomous driving systems. Turning to our efforts in electrification, our sales, including battery management solutions, inverter control, and other XEV control processes, has doubled year on year and achieved record custom design wins. Finally, within automotive, the customer enthusiasm for the S32 domain and solar processor family, enabling the software-defined vehicle are far in excess of our expectations. This includes the awards by a major automotive OEM, which selected the S32 family of automotive processors and microcontrollers to be used across its fleet of future vehicles beginning mid-decade. Moving to industrial and IoT, we are in line with our expected growth range of about 25% three-year CAGR for our accelerated growth drivers. Both our crossover and i.MX application process of families grew nearly 50% year-on-year in 2022. However, we did see a deceleration in revenue in the consumer IoT portion of the end markets during the second half of 2022. Finally, we announced our new MCX microcontroller portfolio that is scalable, optimized, and a foundation for energy-efficient industrial and IoT edge applications. addressing the heavy real-time workloads for the next wave of innovation. In addition, we recently announced our new analog frontend family for high-precision data acquisition and condition monitoring systems for factory automation. Moving to mobile. We are below our expected revenue growth range for the accelerated growth driver Ultra Wideband due to the well-documented weakness in the Android handset market which is the focus mobile market for our ultra-wideband solutions. However, for ultra-widebands, the ecosystem build-out and design wind activity and traction in both mobile and auto are going well. And we believe as the Android market rebounds, awarded design winds will result in the expected revenue growth for ultra-widebands. Lastly, Within communications and infrastructure, we are in line with our expected revenue growth range for RF power amplifiers. The industry transition to gallium nitride from LVMOS technology has occurred faster than expected. The revenue for our gallium nitride-based solutions has doubled year on year, and demand continues to outstrip our increasing supply capabilities. In review, 2022 was a very good year for NXP, with strong execution resulting in record revenue, solid profit growth, and a healthy free cash flow generation. Additionally, we experienced unprecedented year-on-year design interaction across the entire portfolio. Now let me turn to our expectations for Q1 2023. We are guiding Q1 revenue to $3 billion, down about 4% versus the first quarter of 22. From a sequential perspective, this represents a deceleration of about 9% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the mid-teens percent range versus quarter 1.22 and flat versus quarter 4.22. Industrial and IoT is expected to be down in the low 30% range year-on-year and down in the low 20% range versus quarter 422. Mobile is expected to be down about in the mid 40% range, both on a year-on-year and sequential basis. And finally, communication infrastructure and other is expected to be about flat, both on a year-on-year and sequentially. In summary, as we head into 2023, our automotive and core industrial businesses remain supply-constrained in select areas. Within automotive, the increase of global production levels and the secular adoption of XEV are tailwinds to continuous content increases. In industrial and IoT, we expect relative strength in the core industrial sub-market, as our products enable critical infrastructure and companies to be more efficient. However, the consumer IoT and the mobile segment will continue to be dependent on a cyclical rebound. And lastly, in communications infrastructure, we expect our supply capability to improve against pent-up demand, specifically in our RFID pecking solutions, secure access products, and e-government identification. Within the 5G base station market, growth in 2023 will be dependent on the build-out, especially in India. At the same time, we do believe, from an external macro perspective, the general demand environment is offering much higher levels of uncertainty than last year. And in the very short term, we are expecting a dip in China due to the spike in infection rates following the policy shift related to COVID. Additionally, we expect continued cyclical weakness in demand for consumer-oriented products and a potential correction of customer inventory. In this more uncertain demand environment, we will focus on prudently managing what is in our control. And especially while we have plenty of orders, we will continue to very vigilantly manage channel inventory to a 1.6-month level. which is about a month below our long-term target, equalling approximately 500 million of revenue. We intend to maintain that 1.6 months channel inventory in the first quarter, while we are well positioned with our on-hand inventory to increase channel inventory, even when demand in China rebounds. So far, quarter to date, our distribution sales in China is off to a slow start, as is incorporated in our guidance. Over the mid-term, we are cautiously optimistic given customer engagement levels, design win momentum in our strategic focus areas, and a potential rebound in China. And now I would like to pass the call to you, Bill, for a review of our financial performance.