NXP Semiconductors N.V.

Good day, and welcome to the NXP 4Q23 earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will be given at that time. As a reminder, this call is being recorded. I would like to turn the call over to Jeff Palmer, Senior Vice President of Investor Relations. You may begin.

Thank you, Michelle, and good morning, everyone. Welcome to NXP Semiconductor's fourth quarter earnings call. With me on the call today is Kurt Seavers, 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 macro impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for financial results for the first quarter of 2024. 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 2023 earnings press release, which will be furnished to the SEC on Form 8K and available on NXP's website in the Investor Relations section. Now I'd like to turn it over to Kurt.

Thank you, 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 2023 performance, and then discuss our guidance for quarter one. Beginning with quarter four, our revenue was $22 million better than the midpoint of our guidance, with the trends in the mobile market performing better than our expectations, with automotive and industrial and IoT performance in line with our guidance, and communication infrastructure slightly below our expectations. Taken together, NXP delivered quarter four revenue of 3.42 billion, an increase of 3% year-on-year. Non-GAAP operating margin in quarter four was 35.6%, 90 basis points below the year-ago period and about 20 basis points above the midpoint of our guidance. The year-on-year performance was a result of solid gross profit growth offset by higher operating expenses as we continue to invest in new product development. From a general perspective, we maintained distribution inventory at a tight 1.5 months level, well below our long-term target of 2.5 months. In addition, we continue to partner with our direct customers on the normalization of their on-hand inventory. For the full year, revenue was 13.28 billion, an increase of about 1% year-on-year. Passing the revenue growth, we increased our pricing by approximately 8% in 2023, offsetting our higher input costs to maintain our gross profit percentage. And at the same time, our unit volumes were down by approximately 7% through 2023. We believe this underpins our view that we have intentionally undershipped fundamental end demands in order to limit inventory build in the channel and at our direct customers. Full year non-GAAP operating margin was 35.1%, 120 basis point compression versus the year ago period as a result of the improved gross profit performance offset by increased operating expenses primarily in product and system innovation investments. Now let me turn to the specific full year 2023 trends in our focus and markets. In automotive, full year revenue was 7.48 billion, up 9% year on year, which is a reflection of higher pricing, strong company-specific growth drivers, offset by lower shipment volumes. For quarter four, automotive revenue was 1.89 billion, up 5% versus the year-ago period, and in line with our guidance. Turning to industrial and IoT, full-year revenue was 2.35 billion, down 13% year-on-year, a reflection of our tight channel management in a cyclically weak end market, offsetting price increases. We saw the trust for the industrial and IOT business back in quarter one, 2023. For quarter four, industrial and IOT revenue was 662 million, up 9% versus the year ago period and in line with our guidance. In mobile, full year revenue was 1.33 billion, down 17% year on year because of weak trends and inventory digestion in the handset marketplace. For quarter four, mobile revenue was $406 million, flat versus the year-ago period, and better than our guidance. Finally, in communication infrastructure and other, full-year revenue was $2.11 billion, up 5% year-on-year. The year-on-year growth was due to a combination of increased sales of secure card and tagging solutions, higher pricing, and last-time buys of select legacy network processor solutions. And that was offset by declines of RF power products for the cellular base station market. For quarter four, revenue was $455 million, down 8% year-on-year and below our guidance. Now, like every year, I would like to provide the annual progress update on our six accelerated growth drivers, which we highlighted during our analyst day in November 2021. Starting with automotive, the accelerated growth drivers are radar, electrification, and our S32 processor family for the software-defined vehicle. Looking at our performance in 2023, both the S32 processor family and our electrification solutions are tracking ahead of plan. Revenue from radar is tracking below plan, as we took strong actions to limit shipments to customers who are digesting inventory. Taken together, the automotive accelerated growth drivers in aggregate are tracking above plan. The underlying core auto business grew in line with our longer term expectations. Within industrial and IoT, we are tracking below our expected growth range. We believe the underperformance is a reflection of significant cyclical end market weakness and of our disciplined approach to managing the distribution channel. So remember, we serve approximately 80% of the industrial and IoT end markets through our distribution channel to efficiently address the needs of tens of thousands of small customers, the majority of whom are in the Asia-Pacific and the greater China region. Within mobile, we are below our expected revenue growth range for the ultra-wideband accelerated growth driver due to the well-documented weakness in the Android handset market. Ultra-wideband traction in the automotive market, which is the first well-defined use case for ultra-wideband, is progressing very well. 18 out of 20 automotive platforms have been awarded to NXP, and another 15 platforms are evaluating NXP solutions as we speak. And at this point in time, the ultra-wideband revenue stream is being driven by about seven automotive platforms and a few premier handset OEMs. Finally, for RF power amplifiers within communications infrastructure, we are below our expected revenue growth range. The challenge we faced was the combination of weaker base station deployments globally in 2023 and the faster than expected OEM transition to gallium nitride from LDMOS technology. However, the underlying core portion of communications infrastructure performed very well in 2023 as a result of serving pent-up demand for various secure cards and tagging solutions, including RFID for intelligent labels. Taken together, we are ahead of plan for the communications infrastructure segment. Now let me turn to our expectation for quarter one, 2024. We are guiding quarter one revenue to 3.125 billion, about flat versus the first quarter of 2023. From a sequential perspective, this represents a deceleration of about 9% at the midpoint versus the prior quarter, which is consistent with our original outlook for quarter one to be down in the mid to high single digit range. Our tempered outlook for quarter one reflects typical seasonality compounded by our continued desire to enable the normalization of on-hand inventories at our direct customers. And we will continue to hold channel inventory in a tight range. Regarding pricing, we see improving input costs trend versus previous years, which allow us to assume flat pricing for 2024. So at the midpoint, we anticipate the following trends in our business during quarter one. Automotive is expected to be down in the low single digit percent range versus quarter one 2023, and down in the mid single digit percent range versus quarter four 2023. Industrial and IoT is expected to be up in the mid teens percent range year on year, and down in the low double-digit percent range versus quarter four, 2023. Mobile is expected to be up in the low 30% range year-on-year and down in the mid-teens percent range versus quarter four, 2023. Finally, communication infrastructure and other is expected to be down in the mid 20% range year-on-year and down in the low double-digit percent range versus quarter four, 2023. In review, during 2023, thanks to our company-specific end-market exposure, we experienced the variations of the semiconductor cycle at distinctly different points of time for the various parts of our portfolio. On the one hand, full-year revenue performance in our more consumer-oriented segments of industrial and IoT and mobile was underwhelming. However, following our tight channel management, these businesses troughed already back in quarter one, 2023, after experiencing a dramatic post-COVID reset. Ever since, we have seen a gradual improvement. And we do think these growth trends should continue throughout 2024. On the other hand, within automotive and core industrial, we experienced solid trends in the early part of 2023. but have entered the multi-quarter inventory correction phase with our direct customers starting in the second quarter of 2023. This should continue through the first half of 2024. In the second half of 2024, we expect also in the automotive and core industrial segments to shift to end demand and resume growth. Regarding our communication infrastructure and other business, we expect 2024 revenue to decline over 2023 consistent with our prior view we shared on the Q3 earnings call. So as we look ahead to 2024, we do think the macro has deteriorated from our view 90 days ago. We now expect the first half of 2024 will decline versus the first half of 2023 due to longer than anticipated inventory digestion at our direct automotive customers. However, we expect our company revenue in the second half of 2024 will grow over the first half of 2024, as we believe we will be shipping again to end demand by then. Overall, we have and will continue to manage everything in our control to navigate a soft landing for our business. As such, we have kept a very tight handle on our distribution channel, and we are supporting our direct customers to facilitate inventory digestion as appropriate. This enables us to take advantage of the cyclical improvement as soon as it materializes per segment. And based on everything I have said, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline. So now I would like to pass the call to you, Bill, for a review of our financial performance.