NXP Semiconductors N.V.

Good day, and thank you for standing by. Welcome to the NXP third quarter 2023 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker, Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Shannon, and good morning, everyone. Welcome to NSP Semiconductor's third quarter earnings call. With me on the call today is Kurt Sievers, NSP'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 and 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 macroeconomic impact on specific end marks in which we operate, the sale of new and existing products, and our expectations for the financial results for the fourth quarter of 2023. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statement. For full disclosure on formative 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. Resilient to Regulation G, NSP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2023 earnings press release, which will be furnished to the SEC on Form 8K and available on NSP's website in the investor relations section at nsp.com. Now I'd like to turn the call over to Kurt.

Thank you very much, Jeff, and good morning, everyone. We appreciate you joining our call today. I will start with a review of our Q3 results, discuss our guidance for Q4, and provide our early views of 2024. Now let me begin with Q3. NXP delivered quarterly revenue of 3.43 billion, 34 million above the midpoint of guidance, and essentially flat year-on-year. Revenue trends in our mobile, industrial and IoT and automotive end markets all performed in line or better than anticipated, while our communication infrastructure and other end markets was slightly below our expectations. Our distribution channel inventory during the third quarter declined slightly to a 1.5 months level, well below our long-term target of two and a half months. Non-GAAP operating margin in quarter three was 35%, 30 basis points below the midpoint of our guidance. This is primarily due to an unforecasted potential legal liability of approximately $14 million, which is reflected in SG&A. Non-GAAP operating margin was down 190 basis points versus the year-ago period, primarily as a result of higher R&D investments, and the noted potential legal expense. Now let me turn to the specific trends in our focus and markets. In automotive, Q3 revenue was 1.89 billion, up 5% versus the year-ago period, and in line with the midpoint of our guidance. In industrial and IoT, Q3 revenue was 607 billion, down 15% versus the year-ago period, so above the midpoint of our guidance. In mobile, quarter three revenue was 377 million, down 8% versus the year-ago period, and above the high end of our guidance. In communication, infrastructure, and other, quarter three revenue was 559 million, up 8% year-on-year, so slightly below the midpoint of our guidance. During the third quarter, from a geographic perspective, we experienced incremental improvement across most regions, with China solidly improving quarter over quarter, so our shift-through rates to China are still down versus the year-ago period. From a channel perspective, sequential growth was led by improved sell-through in our distribution business. At the same time, our direct business sequentially declined, a reflection of NXP actively managing inventory digestion at our direct customers. Overall, our distribution business represented 57% of sales, up from 51% in the second quarter. And now I will turn to our expectations for quarter 4, 2023. We are guiding quarter four revenue to 3.4 billion. This is about 3% versus the year-ago period up and represents a sequential decline of approximately 1% at the midpoint. We anticipate the following trends in our business. Automotive is expected to be up in the mid-single-digit percent range versus quarter four 2022 and flattish sequentially. Industrial and IoT is expected to be up in the high single digits on a percentage basis versus both quarter four 2022 and quarter three 2023. Mobile is expected to be down in the mid single digit percent range versus quarter four 2022 and up in the low single digit range on a sequential basis. And finally, communication infrastructure and other is expected to be down mid-single digits on a percentage basis versus quarter four 2022 and down in the upper teens percent sequentially. Our guidance for quarter four contemplates ending the fourth quarter at a 1.6 months of distribution channel inventory. Zooming out, the combination of our third quarter results and the midpoint of our fourth quarter guidance indicates the full year 2023 revenue will be flattish versus 2022 in a challenging and cyclical market environment. When we now turn to our early views on 2024, we continue to see an operating environment with a number of cross-currents. Clearly, the macro environment remains weak, including subdued demand in China geopolitical challenges and elevated inflation, which is constraining demand. At the company level, lead times have normalized and we anticipate a more neutral pricing environment going forward. And already since early this year, we have actively engaged with our large direct customers to drive a reduction in on-hand inventory where needed, rather than just blindly enforcing NCNR commitments. Furthermore, we have demonstrated over several quarters proactive management of our distribution channel, resulting in a very lean channel inventory position of one and a half months at the end of quarter three, versus our long-term target of two and a half months. Through all of these proactive actions, we believe we will enter 2024 with a comparatively balanced customer inventory position, with some remaining pockets of inventory digestion yet to occur. Hence, we will also begin to replenish the channel sometime in 2024. In terms of NXP's focus and markets for 2024, we are assuming global auto production to be up 1% as anticipated by S&P. We assume the mixed shift towards semiconductor content-rich hybrid and battery electric vehicle continues and reaches about 40% of all cars produced in 2024, up from 33% in 2023. This is very supportive of the NSP-specific secular content drivers, such as radar systems, electrification solutions, and high-performance processes for software-defined vehicles. Turning to core industrial, we see the trends, including especially content growth, to be pretty similar to automotive. In our consumer IoT and mobile business, After over a year of weak demand, we see an incrementally improving environment. Finally, we do believe the weak demand in communication infrastructure and other likely continues, as we have satiated pent-up demand in our secure cards business, anticipated weak environment in mobile base station build-outs, and expect end-of-life in some of our network edge products. When putting it all together, netting the positives against the known headwinds, we continue to navigate a soft landing for the business and anticipate a return to year-on-year revenue growth throughout 2024. For the first quarter, we expect seasonality to return more to the typical pre-COVID seasonal patterns in a range of down mid to upper single digits sequentially. And now I would like to pass the call to you, Bill, for a review of our financial performance.