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Tawanda
Operator
Hello, and thank you for standing by. Welcome to NXP's first quarter 2024 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 the question during this 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. I would now like to turn the call over to Jeff Palmer, Senior VP of Investor Relations. You may begin.
Jeff Palmer
Senior VP of Investor Relations
Thank you, Tawanda. Good morning, everyone. Welcome to NXP Semiconductor's first quarter 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 macroeconomic 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 second quarter of 2024. NSP 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 NSP's underlying core operating performance. Pursuant to Regulation G, NSP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2024 earnings press release, which will be furnished to the SEC on Form 8K and available on NSP's website in the investor relations section. Now I'd like to turn the call over to Kurt.
Kurt Sievers
President and CEO
Thank you, Jeff, and good morning, everyone. We appreciate you joining our call this morning. Beginning with quarter one, revenue trends in all our focus end markets were in line with the midpoint of our guidance. NXP delivered quarter one revenue of 3.13 billion, essentially flat year on year. Non-GAAP operating margin in quarter one was 34.5%, 30 basis points below the year-ago period, and 60 basis points above the midpoint of our guidance. Year-on-year performance was a result of consistent gross profit generation offset by slightly higher operating expenses as we continue to invest in our future business. From a channel perspective, we held distribution inventory at a tight 1.6-month level consistent with our guidance and well below our long term target of two and a half months of inventory in the channel. Now let me turn to the specific trends in our focus and markets. In automotive, revenue was 1.80 billion, down 1% versus the year ago period and in line with our guidance. We continue to manage an orderly process of inventory digestion with our major direct automotive tier one customers. In industrial and IoT, revenue was 574 million, up 14% versus the year-ago period, and in line with our guidance. Our performance compares favorably versus the year-ago period when the business had dropped. Since 1Q23, we have seen a steady sequential improvement in the industrial and IoT demand trends, so not yet back to the long-term levels which we would expect. In mobile, revenue was 349 million, up 34% versus the year-ago period, where, again, the business had dropped already back in 1Q23. And lastly, in communication, infrastructure, and other, revenue was 399 million, down 25% year-on-year, and in line with our guidance. Let me turn to our expectations for the second quarter 2024. We are guiding quarter two revenue to 3.125 billion, down 5% versus the second quarter of 2023, and flat sequentially. In the automotive end market, revenue trends during the first half of 2024 reflect a continued inventory digestion process at our direct tier one automotive customers compounded by a soft automotive macro environment. In the industrial and IoT end market, we had already trust in 1Q23. We see improving demand in China, in part thanks to our lean channel position, as well as thanks to incrementally healthier end demand. This is expected to be partially offset by soft end demand in Europe and the Americas. In the mobile end market, we continue to witness the expected modest cyclical recovery. And finally, within the communications infrastructure and other end markets, our resumption of sequential growth is primarily driven by secure RFID tagging. Taken together at the midpoint, we anticipate the following trends in our business during the second quarter. Automotive is expected to be down in the high single digit percent range versus quarter 2.23 and down in the mid single digit percent range versus quarter 1.24. Industrial IoT is expected to be up in the high single digit percent range for both year-on-year and versus quarter 1.24. Mobile is expected to be up in the low 20% range year-on-year and about flat versus Q1.24. And finally, communication infrastructure and other is expected to be down in the mid 20% range year on year and up in the high single digit percent range versus quarter one, 24. So in summary, we are beginning to see incrementally improving demand signals for the second half of 24 across all end markets. Hence, during quarter two, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting quarter two. And if demand momentum continues, we will stage additional channel inventory during the second half, however, in a very controlled and targeted manner. So it is unlikely that we grow channel inventory back to our long-term target of two and a half months within this calendar year. And taken all together, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline, just consistent with our views from a quarter ago. Overall, we continue to manage what is in our control, enabling NXP to drive solid profitability and earnings in a challenging demand environment. Our first quarter results, our guidance for the second quarter, and our early views into the second half of the year underpin a cautious optimism that NSP is successfully navigating through this industry-wide cyclical downturn. And now before turning the call over to Bill, while we are very focused on managing the soft landing through the cycle, I would like to take a minute to highlight a couple of important innovation announcements which we made during the first quarter. This includes our S32 CoreRide platform for next-generation software-defined vehicles. It represents the industry's first platform to combine high-performance automotive processing, vehicle networking, and system power management, along with integrated software to address the complexity the scalability, and the cost efficiency required for the software-defined vehicle. And as part of that announcement, we also introduced our 5-nanometer S32N processor, a milestone in the expansion of our S32 processing family. Additionally, we introduced industry's first 28-nanometer RF CMOS single-chip automotive radar, which enables next-generation automotive ADAS systems This new product further expands our market leading franchise and it enables next generation highly performance coherent radar systems in a very cost effective manner. Lastly, NXP and Honeywell, who is a leader in building automation systems, signed the memorandum of understanding. This collaboration aims to help make buildings operate more intelligently by integrating NXP's neural network enabled industrial grade applications processes into Honeywell's building management systems. That agreement is another great example of how NXP will participate and potentially lead in the revolution of AI processing at the edge in industrial applications. And now I would like to pass the call over to you, Bill, for a review of our financial performance.
Bill Betts
CFO
Bill? Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q1 and provided our revenue outlook for Q2, I will move to the financial highlights. Overall, the Q1 financial performance was good. Revenue was in line with the midpoint of our guidance range with non-GAAP gross margin slightly above the midpoint of our guidance, while inventory in the distribution channel continues to remain below our long-term target. Turning to Q1 results, total revenue was $3.13 billion, flat year on year, in line with the midpoint of our guidance range. We generated $1.82 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.2% flat year-on-year, though 20 basis points above the midpoint of our guidance range. The incremental margin was due to an increase in the estimated useful lives of our internal front-end manufacturing equipment from five to 10 years. This was about 30 basis points favorable to the results which was not in our guidance. Total non-GAAP operating expenses were $736 million, or 23.5 percent of revenue, up $8 million year-on-year and down $55 million from Q4. This was $19 million below the midpoint of our guidance range, primarily due to a combination of reduced variable compensation and proactive expense control. From a total operating profit perspective, non-GAAP operating profit was $1.08 billion, and non-GAAP operating margin was 34.5%, down 30 basis points year on year, and 60 basis points above the midpoint of our guidance range. Non-GAAP interest expense was $64 million, with taxes for ongoing operations of $171 million, or a 16.8% non-GAAP effective tax rate. Non-controlling interest was $5 million, and stock-based compensation, which is not included in our non-GAAP earnings, was $115 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $10.18 billion, down $997 million as we repaid the 4.875% bond that was due on March 1, 2024. Our ending cash balance, including short-term deposits, was $3.31 billion, down $963 million sequentially due to the commuted effect of debt repayment capital returns, CapEx investments, and cash generation during Q1. The resulting net debt was 6.9 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of 5.4 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 22.8 times. During Q1, we paid $261 million in cash dividends, and we repurchased $303 million of our shares. Subsequent to the end of Q1 and through Friday, April 26, we repurchased an additional $97 million of shares under an established 10b-5-1 program. Turning to working capital metrics, days of inventory was 144 days, an increase of 12 days sequentially, while distribution channel inventory was 1.6 months or about seven weeks. As we have highlighted throughout the previous year, given the uncertain demand environment, we continue to make the intentional choice to limit inventory in the channel while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed. Days receivables were 26 days, up two days sequentially, and days payable were 65 days, a decrease of seven days versus the prior quarter. Taken together, our cash conversion cycle was 105 days, an increase of 21 days versus the prior quarter. Cash flow from operations was $851 million, and net CapEx was $224 million, or approximately 7% of revenue, resulting in non-GAAP free cash flow of $627 million, or about 20% of revenue. Turning now to our expectations for the second quarter. As Curt mentioned, we anticipate Q2 revenue to be $3.125 billion plus or minus about 100 million. At the midpoint, this is down 5% year-on-year and flat sequentially. We expect non-GAAP gross margin to be about 58.5% plus or minus 50 basis points, which includes approximately 60 basis points associated with the change of our useful life estimate for our internal front-end manufacturing equipment. As Kurt noted in his prepared remarks, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting Q2. Operating expenses are expected to be about $765 million plus or minus about 10 million. The sequential increase is primarily driven by our annual merit increases and the 15 million license fees paid to impinge as part of our legal settlement. Taken together, we see non-GAAP operating margin to be 34% at the midpoint. We estimate non-GAAP financial expense to be 63 million, with the non-GAAP tax rate to be 16.8% of profit before tax. Non-controlling interest and other will be about $5 million. For Q2, we suggest for modeling purposes, you use an average share count of 258.5 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $115 million. For capital expenditures, we expect to be around 6%. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.20. In closing, looking through the remainder of 2024, I'd like to highlight a few focus areas for NXP. First, from a performance standpoint, We will continue to navigate a soft landing through a challenging and cyclical demand environment with a cautious optimism for a second-half improvement in our business. Second, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model. Specifically, we expect our gross margin will continue to perform at or above the high end of the long-term model while maintaining internal FAB utilization levels in the low 70s for the remainder of the year. Third, there is no change to our capital allocation policy where we have returned $2.4 billion over the last 12 months. Furthermore, we will continue to be active in the market repurchasing NXP shares. And lastly, we are excited to host an Investor Day on November 7th in Boston. The specific details will be available soon on the NXP Investor Relations homepage. We look forward to you joining us. I'd like to now turn it back to the operator for questions.
Tawanda
Operator
Thank you. Ladies and gentlemen, as a reminder to ask the question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.
Vivek Arya
Bank of America Securities
Thanks for taking my question. For the first one, Kurt, I think you gave a very clear explanation you know, kind of a cautious optimism around automotive in the second half of the year. My question is kind of a more, you know, medium to longer term question. You know, in the past, you gave a 9% to 14% growth target for your automotive business. And since then, a lot of things have changed, right? With the slowdown in EVs and inflation and all those other things. What is the right way to think about NXP's long-term automotive growth prospect? Is it a simple formula that connects... production growth to your sales growth targets?
Kurt Sievers
President and CEO
Good morning, Vivek. First of all, let me augment what you said. The cautious optimism which I expressed for the second half is not limited to automotive. It is important to note that cautious optimism for second half growth over first half is actually across the company. It's very broad-based. It's across distribution and direct. and it is across all of our segments. Now, coming back to your original question, longer-term automotive growth, yes, we had a guide of 9% to 14% from 21% to 24%. Now we are in 24%. It's actually good to see that automotive is probably that one segment which is going to hit the target this year of the 9% to 14%. We will, as Bill said at the end of his prepared remarks, we will host an investor day in November where we will come out with the new growth targets for the next three years for all of our segments, including automotive. Now, so I will not be able to give you a number today for the next three years for automotive, but directionally, Vivek, I would say the algorithm isn't that much different from the history because we see the content drivers very much in place and you know that we are as NXP very well benefiting both from ADAS as well as from the electrification trends and mainly on the mid to longer term basis from a trend to software defined vehicles where our industry-leading franchise in processing is certainly going to win. So that continues, which means in the end the SAR as an underlying mechanism probably becomes less relevant. And I would also tell you that we think pricing will be certainly to start with sustainable from where we come from. You know that we have as NXP increased prices over the past three years. We said it will be neutral this year. And as I said earlier, for the coming years, maybe we go back to a very small, low single-digit ASP erosion per year. I mean, that is to be discussed in the coming years. But nothing out of the normal, I would say, and especially not surprising coming back to where it was pre-COVID. I mean, that's really important for that algorithm. So please bear with us, Vivek, for the November Investor Day and become with exact numbers But I just wanted to signal to you, you should not expect massive changes here.
Vivek Arya
Bank of America Securities
Got it. And then, Kurt, kind of a more near-term or sort of just calendar 24 question on your automotive business. So last year, your auto sales grew about 9% about in line with auto production, right? So despite better pricing, i.e. you're somewhat undershipped. What is the assumption for the entirety of calendar 24? Because you're auto sales seem to be declining sequentially in Q2. So is the assumption that they pick back up and they do better than production in the backup? Just what is kind of the puts and takes for how you are thinking about automotive for the entire year?
Kurt Sievers
President and CEO
Yeah, look, indeed, you had it quite right for last year. The 9% growth of automotive revenues of NXP was actually in a very strong SAR year. I think the SAR last year was something in the order of almost 10% growth year-on-year, so spectacularly high. And indeed, NXP did increase price from a corporate total company perspective by 8%. So yes, we totally undershipped already last year, which was part of that soft landing strategy which we are pursuing. So we think we have already started to correct the automotive revenue and inventory situation in the direct customers since mid of last year and in the distribution channel already way back because we never went above 1.6. Now, when you think about this year, Vivek, it is indeed the macro is a little different. The latest S&P numbers would suggest a 0% SAR for this year. And a bit of a moderation in the EV penetration. I say that very carefully, Vivek, because I think the headlines we all see about EV slowdown are more dramatic than what it really is. S&P is still talking about 20-plus percent unit growth of ex-EVs, so hybrids, and full EVs for this year, which is still a very strong growth. What really drives our revenue number, however, this year is the inventory digestion with the direct customers. Clearly in Q1 and now with the guide which we just gave for the second quarter, we are digesting inventory with our direct automotive tier one customers. If this is exactly done by the end of Q2 or if it takes a little bit into Q3, very hard to say. However, we have any indication that the second half in automotive this year is going to grow solidly above the first half of this year. And that is actually driven both by company-specific enablers. So we have radar platforms which are strongly ramping in the second half. But of course, it is also driven then by the normalization of the inventory digestion, which means we would move in the second half from undershipping end demand to meeting end demand again. I will not give you the full year growth number. We don't guide the full year by segment. Actually, we only guide the next quarter. But when I said the whole company is modestly up or down for the full year and automotive is more than 50% of the company, then you can guess that automotive is probably not that far from the same number.
Tawanda
Operator
Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Ross Seymour with Detri Bank. Your line is open.
Ross Seymour
Detri Bank
Hi, guys. Thanks for asking the question. Could I want to get into a little bit of the increased comfort that apparently you're feeling with the desire to start refilling the channel? I know you did a little bit of it in the first quarter, but the second quarter, it seems like your optimism has increased a little bit sequentially, even despite the automotive side being guided down. And, you know, I know you went through each of the segments. But if you step back at a higher level, what's giving you the confidence? What's improved to give you the confidence to fill the channel?
Kurt Sievers
President and CEO
Yeah. Hi, Ross. So first of all, Q1, honestly, the 1.6, and you are right, we came from 1.5 in Q4. It's just been hovering around 1.5 and 1.6. It's very hard to keep this strictly to one number. I'd say Q1 wasn't really intentional. It's just, if you look back over the past, I don't know, 12 quarters, we've always been jumping up and down between 1.5 and 1.6. Quarter two, yes, this is intentional. So we want to try to get it to 1.7 for the exit of quarter two. And indeed, it is based on growing still cautious optimism for the second half. Now, what is giving us that optimism? It is really a mix between cyclical considerations and very company-specific considerations. I think in the question of Vivek a minute ago, I mentioned in automotive we have company-specific platforms which are ramping in the second part, where we sit almost every day with our customers and discuss the organization of that ramp. So we just know that's going to happen. Secondly, and Bill mentioned that in his prepared remarks, we have the settlement with Impinj for the RFID tagging business. And the fact that the two market leading franchises or companies in that market space, NXP and Impinj, have settled here was a positive catalyst, I would say, to the market development for RFID tagging. So we see a positive development there. which is then also playing into the second half over first half in our communication infrastructure and other business. And then thirdly, and that's more on the cyclical side, We clearly see that the automotive tier one inventories will normalize. So then we just go back to shipping to run rates. So there's nothing spectacular happening. The demand is there already today, but we are still digesting inventory. And then the second half, so we don't expect that there is more car production or more EVs or anything. It is simply that we ship to end demand. But the same holds even more true for industrial IoT. where we come from an extremely lean channel position, that industrial IoT business is largely exposed to China. You might also have seen that the PMI in China is actually developing quite nicely. So we do see both in the core industrial as well as in this consumer IoT business, which is in that segment, we see sequential improvement. And that is the main reason actually that we are staging the channel. Because we absolutely want to be sure we have a competitive position on the shelves of our distribution partners entering into the third and fourth quarter.
Ross Seymour
Detri Bank
Thanks for those details. I guess since you mentioned the NPN side, Bill, you're doing a great job on the OPEX. You came in below your guide in the first quarter. The second quarter you included, you said, a $15 million payment for that. Can you just give us an idea of, one, is that impinge payment a one-time deal, and so it goes away after this quarter? And then, more importantly, what are your thoughts on the OPEX side of things? If the optimism on the revenue side is increasing, should we expect the OPEX to increase with variable comp or any of those sorts of drivers?
Bill Betts
CFO
Sure. Let me break those two apart. So the agreement that we have with impinge is an annual cross-license, which will impact us on a go-forward basis about $15 million in the second quarter, and it rose slightly, but that could stop any time in the future once we have the workarounds complete. And again, don't know exactly that exact timing, but that's something that we're pursuing internally. Related to our OpEx, clearly you can see we're somewhat out of model in Q2, but that's really driven by our annual merit increases. So we have a combination of both those impacts occurring in Q2, the 15 plus the annual merit increases. But what's offsetting some of that impact is also our proactiveness on our expense controls, and you saw that in Q1 as well, and some lower variable compensation. So as we think about the second half, and I think this is where you're going, you know, where are we headed with OpEx? And what we're going to try to do is make sure we get back into that model, as you know, around that 23% as we think about the second half. Thank you.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of C.J. Muse with Canterbury Sterile. Your line is open.
CJ Muse
Canterbury Sterile
Yeah, good morning. Thank you for taking the question. I guess first question on gross margins. You know, if I take into account the change in the depreciation on equipment, you're essentially pro forma guiding gross margins flat. And I guess I would have thought maybe you would have had a little bit of a kiss from the channel refill as you take it one more month. And so I guess if you can kind of comment what might be an offset there. And then, you know, considering your vision for utilization rates to stay kind of where they are through the remainder of the year, how should we be thinking about the trajectory for gross margins into the second half?
Bill Betts
CFO
Yeah, hey, how are you? Yes, you're right. So obviously, if you adjust for the accounting, basically, we're kind of flattish, guiding to flat. And again, but it's within our plus or minus 50 basis points. I'm not really that good for $3 million or 10 basis points. But again, there's all sorts of puts and takes in that. And part of the reason for the useful life, I would say, accounting change. You know, as you know, every year we have to go look at this from accounting and relate to this specific topic. There was a number of factors considered, which includes the NXP product lifecycle, age of tools, and the market analysis. And this is something that we just had to go do, and we did it. We think it's the right thing to do, and we're calling it out. So it's very clear. And to be honest with you, we expect now to run at or above our long-term model. versus our previous commentary where we said near or at the gross margin. And what levers we have, some of the tailwinds, as we mentioned before on our previous calls, CJ, is clearly our utilizations are running in the low 70s. So that eventually will go back up and becomes a tailwind. We've talked about higher revenues fall through over that 30% fixed cost. Again, that should help We discussed about replenishing the distribution channel. That's where you were applying with your question, just that dot one, you know, we should get something. But you're right, over time, when we bring that back up to target, that should be a lever for us to carry that higher margin. We're also, we talked about expanding customer reach within the mass market. That just takes time. And now, you know, internally, the team's focused on productivity improvements, cost reductions. And over the longer time horizon, we explain this many, many times, it's really our new product introduction layering on top of our business. So continue to move that. So, you know, we have an analyst day or investor day coming up on November 7th. We'll break that out in more detail and update that model. But hopefully you guys can see that even through this downturn, we're managing margins quite well. And 58 or 58.5 with the account adjustment, that's not our end destination.
CJ Muse
Canterbury Sterile
Excellent. And then a question for Kurt. You know, as you look back to the COVID period and kind of the initiation of NCNR programs, you know, it sounds like that was really done at the most senior levels, you know, with you and focused on volume, not price. I'm curious, just as you look forward, how did that kind of help nurture your customer relationships and what potential benefits, you know, might you see ahead as we progress in a world where NCNRs are no longer part of the business? Thank you.
Kurt Sievers
President and CEO
Yeah, a couple of considerations here, CJ. The one is just to remind everybody, our NCNR programs have ended with the calendar year 23. So since January 1st, there is nothing anymore under any NCNR program. However, I would very strongly say, and I point it out because I know that some industry peers have had very different opinion on this, the way how we had our program was actually good i would do it again uh it did it did help because in our particular case it did put us closer together and we learned much earlier about over inventory built because there was an agreement underneath which forced the customer to the table to tell us that things would be running too high if we don't jointly try to correct And that is the reason why we undershipped already all of last year in automotive. And I think I started to speak about this in the Q1 earnings call already last year, that there was a first signs of building inventory with tier one automotive customers. Again, we wouldn't have seen that, we wouldn't have learned about that without NCNR. Now, from a more strategic perspective, CJ, I think this is all about how does this industry learn from the supply crisis to to not run into the trap again to try and apply just-in-time concepts with semiconductor products which have a three to four months manufacturing cycle time. And I would say I have mixed emotions about this, CJ. On the one hand, I'd say the automotive OEM customers and some of the industrial OEM customers are very thoughtful and we have entered into long-term agreements, into programs where we know how to deal with inventory in a very specific way about those products which are most critical. So I'd say there is good learning in place and that's clearly a step forward beyond MC&Rs. With some of our direct customers, however, we clearly see that now under the pressure of working capital requirements, they tend to become very tactical when it comes to reducing inventories again, from my perspective, too far down. So I would go that far that we see inventory targets of some of our direct customers, not all, but some, which I believe are starting to pose a risk when I think about the next uptick. And what I mean with the risk is that we get again into supply trouble because the short reaction time which would be required then to ship again much more suddenly It's going to be very hard. And that is compounded by the fact that that supply chain is a very deep one. So it's not just one partner which we ship to and then it goes to the car company, but it's typically two, three or four stages. And they all reduce inventory. And at some point, they all will want to increase inventory again. And that is what drives the cycle. So I'd say on the OEM side, good learnings in the post-NCNR time, CJ. With the direct customers, it is a more mixed picture, unfortunately. Very helpful. Thank you.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line, of course, Dangley with Citi. Your line is open.
Dangley
Citi
Hey, thanks, guys. Kurt, just, I guess, a longer-term question on the automotive end market. You know, what are your thoughts on the relative growth rates of hybrids versus EVs? And then also it seems like, you know, BYD is doing a little bit better than Tesla this year. Do you expect those two trends to continue? And then what are the impacts, if any, to NXP? Or does it not matter?
Kurt Sievers
President and CEO
These are interesting questions, Chris, which we also think about very hard. Let me try and dissect it. The one is, and I think I said this in my prepared remarks earlier, the XEV, so if you combine hybrids and battery electric vehicles, continues to grow pretty well. But that is carried by China. And the reason why many media headlines suggest it is not going well is that Europe and the US are actually quite small in XEVs. To be more specific, If you take the total XEVs worldwide, only 12% of those are in the US and 24 are in Europe, while China holds 44%. And BYD indeed is a big part of that. And that China 44%, Chris, is growing this year according to S&P by 27% in volume. So what I try to say with that is the XEV in total certainly keeps growing nicely. Now, if you go into the split between BEV and hybrid, so full electric and hybrid electric, then I'd say it isn't that difficult. The battery electric vehicles are still only 15%, but they grow by 25%. Hybrids are 24%, but grow with 17%. So the one has a smaller base and grows faster. The other one has a bigger base and grows a bit slower. I think on the long run, Chris, and that's more from a technical perspective, BEVs will win the race. I think this hybrid thing is an intermediate period. I do believe on the long run it will all tilt to BEVs once battery and electronic technology gives enough range. I mean, then the whole concept of a hybrid is actually not meaningful anymore. Now, for NXP, it doesn't matter that much as it does to some of our peers. Because only very little of our product portfolio has a strict exposure to BEV only. It is actually only the high voltage battery management solutions. Everything else also plays in hybrid. So that's very different to people who have silicon carbide, for example, which only goes in the one and not in the other. So therefore, Chris, I don't know exactly how that plays out over the short term. But it's also not relevant very much to our revenue. On the long term, I'm sure it is going to tilt back all to BEVs again. Tesla against BYD, I don't want to call that, Chris. I would just say the Chinese, and there is much more than BYD, are extremely competitive and aggressive. I'm very glad that we have a great exposure to them because I do believe that a large part of the global electric growth will continue to come from China. Now, how Tesla plays with that or in that, I don't know, but certainly China is going to be the majority in the end, and again, that's BYD+.
Dangley
Citi
Great, thanks. And then just a quick follow-up for Bill. Bill, you said your utilization rates are going to remain kind of flattish in the second half of the year. What would be the catalyst
Bill Betts
CFO
uh to take them higher would it be some sort of inventory days level or you know an even better demand outlook or some combo of both can you share what would be a catalyst for higher utilization rates um you're correct it's a combo of both as you can imagine right now we're at the high end of our model when we look what's in the channel what do we have on hand uh so and then we're trying to balance that stage and appropriate for that second half growth so it's you know balancing out quarter from quarter But we want to make sure we continue to do the right thing here and keep inventory in check. And some of that inventory of the 144 days is coming from the fact related to the revenue drop off from Q4. And so revenue costs is probably impacting that drop by about 14 days. And then we actually decreased our inventory dollars in the quarter by about two days or 32 million dollars. So we're trying to balance all this, all the moving pieces, and I expect that, you know, we're going to focus on getting inventory maybe a little bit tighter in the second half, but if growth is higher than our current expectations, clearly we'll be able to run our factories that, you know, increase the utilization there.
OpEx
Great. Thanks, guys.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open.
Gary Mobley
Wells Fargo Securities
Hi, guys. Thanks for taking my question. Kurt, you seem to be implying that the second half revenue is about 12% higher than the first half, or in dollar terms, about $750 million higher. Correct me if I'm wrong, but I would imagine the majority of that delta is inventory restocked direct in through distribution, but maybe you can give us a sense of the magnitude of the impact from improving end demand or seasonality there? Yeah, hi, Gary.
Kurt Sievers
President and CEO
First of all, no, that's not what I said. What I said is that the second quarter is guided at 3,125, so you can calculate the first half revenue. And then I said that the full year is somewhere between modestly down to modestly up. And very importantly, I want to stress that that growth in the second half over the first half is not just coming from the channel. We clearly see, and we have the data points from all the patterns, et cetera, that also the direct business is going to grow in the second half over the first half. And I gave two examples, I think, with Ross earlier. One is automotive platforms, which are ramping. That is totally independent of the cycle. And there is no product on the inventory because it's a new product which just comes in at the customer. And it is RFID tagging. which is also with direct customers in parts, where it has nothing to do with the cycle, but it is the, say, the relief of the industry after the settlement between NXP and Impinj for that market. Very importantly, I also want to say that it is highly unlikely, Gary, that in order to do this, we would go to two and a half months of channel inventory. So what I said is, quarter two we take it to 1.7 so that's one digit up we are at 1.6 and we want to execute you at 1.7 and if then the demand continues to go the way we preview this we will slightly increase further in q3 and q4 i must admit i cannot see a scenario that we would get to 2.4 or 2.5 with that so the modestly up or down for the full year does not depend on taking the channels two and a half months. So I'm sorry if that was not clear earlier, so I'm glad you did ask, Gary, but that's really not the background to it.
Gary Mobley
Wells Fargo Securities
Okay. Just a quick follow-up for Bill. You did a good job of highlighting the increased depreciation schedule from five years to 10 years on internal front-end equipment. What does that do for the long-term capital intensity for the overall company?
Bill Betts
CFO
No change. Well, our current view is our CapEx is to spend 6% to 8%. Again, this is really accounting change that we just dealt with it and moved on. Thank you.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Stacey Radcon with Bernstein Research. The line is open.
Stacey Radcon
Bernstein Research
Hi, guys. Thanks for taking my questions. For the first one, I also wanted to sort of revisit the second aphorism. So it does seem clear if the full year is flat, plus or minus, you're up decent double digits, half over half. Does that start in Q3? Like, is Q3 above seasonal to get us there? Like, how would you, I guess, sitting where we are right now, how would you sort of characterize likely Q3 seasonality versus what you've seen historically?
Kurt Sievers
President and CEO
Hi, Stacey. We really can't go there. I mean, I'm already leaning out of the window here with giving kind of a directional full-year guidance, which we thought is useful given the dramatic cycle we are all going through. But now calling it into Q3 and Q4 separately, I'm sorry, we don't provide that. So it is for the full year. And honestly, it's also hard to say, Stacey, because you know that inventory digestion is not an excel sheet i mean this is a number of customers each of them has their own dynamic uh has moving targets so things could be settled earlier could be settled a little a little later uh and calling that exact by the quarter end is is virtually impossible okay so i mean so maybe to take that point and maybe step out a little more
Stacey Radcon
Bernstein Research
So on autos, last year you've already sort of indicated that you undershipped last year. You had strong pricing and yet you actually underperformed the market last year. So if you actually started undershipping last year, why are you still in an inventory correction now? So this is like six quarters?
Kurt Sievers
President and CEO
Because we wanted to spread this out, Stacey, that was the whole idea. I think last quarter we discussed about our understanding of that so-called soft landing strategy for NXP. Our whole target was to actually have not a sharp peak to drop in automotive because that would be a bad impact on our factories and Bill would come back with heavy underloading and negative margin impact. So the idea was to spread this over a longer period of time, which is why we started early, but didn't want to overdo it in any given quarter. So say we started in Q3 last year for the direct side of automotive, and obviously it goes at least until the end of the second quarter of this year. So that would be a full year of correction on the direct side, maybe a little bit spreading into the third quarter. Mind you that at the same time, our distribution automotive business, which is 40% of the total automotive revenue, has always been at 1.6 only. So on that side of the house, we haven't had to correct at all. So that's the way how you should think about it, which explains also some of the confusion I'm reading in a lot of reports about the peak to trough behavior of NXP versus others. In comms-infra, in industrial and mobile, we have a 30% peak to trough, more or less. It's just that our trough was already a year ago because of our channel discipline. But it's the same peak to trough as everybody else. It's just in automotive, it's probably more in the 9% to 10%, because I believe we trough in automotive this quarter too, right now. But again, that is intentional, as I just explained.
Stacey Radcon
Bernstein Research
Got it. So is it demands getting worse now, or is it just your inventory behavior taking a harder line on inventories now? Because it does feel like the general trajectory is getting worse over the last quarter and Q4, Q1, Q2.
Kurt Sievers
President and CEO
No, it's really the inventory. I mean, you have to take the offset from the SAR, Stacey. I said earlier that last year, of course, there was a SAR growth of 10%. This year, it is flat. That is a, if you compare like for like, then that makes this year, of course, a less positive environment from a macro perspective. But everything else, which is the company-specific positions we have, which is the content increase, which is offered by the industry per se, enterprising, which is also flat for us this year, is totally in place. So, no, it's just inventory. Got it. Okay.
Stacey Radcon
Bernstein Research
Thank you, guys.
Kurt Sievers
President and CEO
Appreciate it.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Joshua Butch-Alter with TD Cohen. Your line is open.
Joshua Butch-Alter
TD Cohen
Joshua Butch- Hey, guys. Thanks for taking my question, and congrats on the results. For my first one, I think there's a perception out there that there's a line to draw between software-defined vehicles and EVs, and that it's much more difficult to do an SUV architecture on an ICE engine. Maybe you could spend a minute or two talking about what you're seeing from your customers. I mean, is there a big correlation between that digital architecture change versus electric vehicles because of the re-architecting? And what are you seeing on ICE engines for a software-defined vehicle? Thank you.
Joshua
Yeah.
Kurt Sievers
President and CEO
Hi, Joshua. I would say no. Fundamentally, the concept of a software-defined vehicle, which is actually moving a lot of performance parameters from hardware to software and creating much more flexibility, is completely independent of what kind of powertrain it has. Now, the matter of the fact is, however, that all OEMs I know are extremely busy with developing electric powertrain-based new vehicles. And for most of them, it is actually the core of their activity going forward. And that is, of course, the reason why when they think then about STV implementations, it falls together with electric drivetrains, but that is not because there would be a technical reason. I actually know that several SDV implementations where we are leading partner for OEMs, they'll comprehend both ICE and electric drivetrains. So it is the same SDV concept, which splits them on a much lower level into an implementation for a combustion engine car or in an implementation for a battery electric vehicle car. But fundamentally, there is no difference.
Joshua Butch-Alter
TD Cohen
Appreciate the color there. And maybe for Bill, after you just paid down the billion dollars note in March, I think you don't have anything due for over a year now and only $500 million next year. In the past, I guess, NXP has been more aggressive utilizing the balance sheet, and I think your past target was two times levered. Can you maybe talk about how you're thinking about utilizing the balance sheet and capital returns here? Thank you.
Bill Betts
CFO
Yeah, sure. So again, Josh, no change to our capital allocation strategy. If I just look back over the last three years, we returned $8.4 billion, or 107% of our free cash flow. Last trailing 12 months, it's below 100% because we retired that debt that you just mentioned. And so that's about 82%. And in this past quarter, We did 90%. So, you know, I think, you know, we did take the opportunity to deleverage the company. You know, we looked at our gross leverage metric, and it was at 2.1 times. Now it's at 1.9. You know, clearly with the credit rating agencies, the sweet spot's below 1.5. If we look at – we're going to continue actually buying back our shares. We think it's a great use of our cash. We have approximately $1.1 billion left on our board authorization plan of buybacks this year. We continue to pay a healthy level of dividends. So if you look at that as a percentage of cash flow from operations of the last 12 months, about 28%. And as we talked about in the past, we treat it somewhat as fixed. We'll continue to execute and invest in the business. That's the number one priority, right? We're going to stay within our financial model, invest in the business, continue a lot of small tuck-ins of our M&A that we've been actively involved in. So overall, I think we're committed to continue returning excess free cash flow back to you all.
Tawanda
Operator
Thank you. Great. Hey, Tawanda, we'll take one more question here today.
Tawanda
Operator
All right. Please stand by for our final question. Our final question comes from the line of Chris Caso with Wolf Research. Your line is open.
Chris Caso
Wolf Research
Yes, thank you. Good morning. I wonder if you could talk a little bit more about the China for China manufacturing strategy that you've spoken to in the past. I mean, I guess in one point, you know, how that protects the business in China. And then secondly, you know, what margin implication that may have if you change that manufacturing strategy going forward?
Kurt Sievers
President and CEO
Yeah, hi, Chris. That's indeed a very important point. There is a clear ongoing and I'd say increasing requirements from our Chinese customers in automotive and beyond to go for localized manufacturing. We are pursuing this quite forcefully. We have chosen the Nanshing factory of TSMC, which happens to host the 16 FinFET, 16 nanometer technology, which is the core of our microprocessors for automotive. We are working with SMIC, which we have done historically outside of automotive and continue to do so outside of automotive. And we just ended up choosing a third foundry partner, which I'm not going to name here, but a third foundry partner for the analog mixed signal space in order to produce our products in China for China. That is helpful in two ways, Chris. The one is indeed that we can follow that requirement of local manufacturing. And I believe NXP is in a comparatively good position here because several of our peers have their own factories and for them that move to China is really not easy. Secondly, cost. You just mentioned that there is certainly a competitive market in China. And if we want to successfully play against local Chinese competitors, which certainly over time will continue to try and come up, it is good when we can use the same cost base which they use, which is local foundries in China. So, in an ideal case, Chris, and again, let's see how it plays out, you will not see any impact on the margin from doing this, but it keeps us competitive. I mean, the whole point is that we can play against them successfully because we can leverage the same cost competitiveness which they have in the local manufacturing environment. Good. I look at Jeff here.
Chris Caso
Wolf Research
Do you have a follow-up? Yeah, I do. And if I could follow up. also with China from a competitive standpoint regarding what they could actually produce. And you've addressed it from a manufacturing standpoint, putting you on an equal cost base with them. What do you think about the capabilities of some of these local players? Obviously, there's an imperative in China to try to bring as much content locally as possible. Do you see the competitive threat rising in terms of the capabilities of some of the local players that could be a factor going forward?
Kurt Sievers
President and CEO
Look, Chris, in principle, and that's an overriding statement, we are always paranoid about competition. Because I've learned in my career in this industry, you better be paranoid at all times because it keeps you hot to run successfully against competition. Factually, in that particular case, We see two areas where China is very, very busy from a local competition perspective. One is power discreet, especially for automotive, and that ranges all the way from IGBTs, MOSFETs, to silicon carbide. We just observed that. For us, it doesn't matter, since you know that this is not part of our portfolio. But that's something where it appears they actually make quite good progress. Secondly, lower-end microcontrollers. There is a number of companies and they together have a couple of hundred million of dollar business already that's outside of automotive. We think with the fast move and requirements for higher processing performance and a lot more software in automotive, this is a long way for them. Again, we are paranoid, but I think it's just another set of competitors which we are facing like in other places in the world. So we are not fearful of this anytime soon. In the analog space, I could imagine, again, we haven't really seen much, but I could also imagine that they get into the lower end catalog analog at some point. I mean, if I was China, I would try and do this. So overall, clearly a trend. So I completely agree with you that this is something which they want to do. We don't see it really moving in our space at this time. And certainly with the localization of our manufacturing, we kind of want to counter that, at least from a competitive cost base and from a compliance perspective. Good. With that, we are a little bit over time. I want to conclude the call with summarizing and just making the remark again. This is a tough cycle. We have over many quarters operated a soft landing strategy in order to keep the P&L earnings and profitability in reasonable shape. With some cautious optimism, we are seeing now that the second half is turning around. It's hard to say what the slope of that is going to be, but given our low inventory position going into this, we are cautiously optimistic that we can land the year in this plus minus zero kind of fashion, which we discussed during the call. In the meantime, we keep every possible control on anything we can do about gross margin and OPEX, as well as CapEx. With that, I would like to conclude the call and thank all of you.
Tawanda
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect. Thank you. you Thank you. Hello, and thank you for standing by. Welcome to NXP's first quarter 2024 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 the question during this 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. I would now like to turn the call over to Jeff Palmer, Senior VP of Investor Relations. You may begin.
Jeff Palmer
Senior VP of Investor Relations
Thank you, Tawanda. Good morning, everyone. Welcome to NXP Semiconductor's first 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 macroeconomic 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 second quarter of 2024. NSP 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 NSP's underlying core operating performance. Pursuant to Regulation G, NSP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2024 earnings press release, which will be furnished to the SEC on Form 8K and available on NSP's website in the investor relations section. Now I'd like to turn the call over to Kurt.
Kurt Sievers
President and CEO
Thank you, Jeff, and good morning, everyone. We appreciate you joining our call this morning. Beginning with quarter one, revenue trends in all our focus end markets were in line with the midpoint of our guidance. NXP delivered quarter one revenue of 3.13 billion, essentially flat year on year. Non-GAAP operating margin in quarter one was 34.5%, 30 basis points below the year-ago period, and 60 basis points above the midpoint of our guidance. Year-on-year performance was a result of consistent gross profit generation offset by slightly higher operating expenses as we continue to invest in our future business. From a channel perspective, we held distribution inventory at a tight 1.6-month level consistent with our guidance and well below our long term target of two and a half months of inventory in the channel. Now let me turn to the specific trends in our focus and markets. In automotive, revenue was 1.80 billion, down 1% versus the year ago period and in line with our guidance. We continue to manage an orderly process of inventory digestion with our major direct automotive tier one customers. In industrial and IoT, revenue was 574 million, up 14% versus the year-ago period, and in line with our guidance. Our performance compares favorably versus the year-ago period when the business had dropped. Since 1Q23, we have seen a steady sequential improvement in the industrial and IoT demand trends, so not yet back to the long-term levels which we would expect. In mobile, revenue was 349 million, up 34% versus the year-ago period, where, again, the business had dropped already back in 1Q23. And lastly, in communication, infrastructure, and other, revenue was 399 million, down 25% year-on-year, and in line with our guidance. Let me turn to our expectations for the second quarter 2024. We are guiding quarter two revenue to 3.125 billion, down 5% versus the second quarter of 2023, and flat sequentially. In the automotive end market, revenue trends during the first half of 2024 reflect a continued inventory digestion process at our direct tier one automotive customers compounded by a soft automotive macro environment. In the industrial and IoT end market, we had already trust in 1Q23. We see improving demand in China, in part thanks to our lean channel position, as well as thanks to incrementally healthier end demand. This is expected to be partially offset by soft end demand in Europe and the Americas. In the mobile end market, we continue to witness the expected modest cyclical recovery. And finally, within the communications infrastructure and other end markets, our resumption of sequential growth is primarily driven by secure RFID tagging. Taken together at the midpoint, we anticipate the following trends in our business during the second quarter. Automotive is expected to be down in the high single-digit percent range versus quarter 223 and down in the mid single-digit percent range versus quarter 124. Industrial IoT is expected to be up in the high single-digit percent range for both year-on-year and versus quarter 124. Mobile is expected to be up in the low 20% range year-on-year and about flat versus Q124. And finally, communication infrastructure and other is expected to be down in the mid 20% range year on year and up in the high single digit percent range versus quarter one, 24. So in summary, we are beginning to see incrementally improving demand signals for the second half of 24 across all end markets. Hence, during quarter two, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting quarter two. And if demand momentum continues, we will stage additional channel inventory during the second half, however, in a very controlled and targeted manner. So it is unlikely that we grow channel inventory back to our long-term target of two and a half months within this calendar year. And taken all together, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline, just consistent with our views from a quarter ago. Overall, we continue to manage what is in our control, enabling NXP to drive solid profitability and earnings in a challenging demand environment. Our first quarter resides, our guidance for the second quarter, and our early views into the second half of the year underpin a cautious optimism that NSP is successfully navigating through this industry-wide cyclical downturn. And now before turning the call over to Bill, while we are very focused on managing the soft landing through the cycle, I would like to take a minute to highlight a couple of important innovation announcements which we made during the first quarter. This includes our S32 CoreRide platform for next-generation software-defined vehicles. It represents the industry's first platform to combine high-performance automotive processing, vehicle networking, and system power management, along with integrated software to address the complexity the scalability, and the cost efficiency required for the software-defined vehicle. And as part of that announcement, we also introduced our 5-nanometer S32N processor, a milestone in the expansion of our S32 processing family. Additionally, we introduced industry's first 28-nanometer RF CMOS single-chip automotive radar, which enables next-generation automotive ADAS systems This new product further expands our market leading franchise and it enables next generation highly performance coherent radar systems in a very cost effective manner. Lastly, NXP and Honeywell, who is a leader in building automation systems, signed the memorandum of understanding. This collaboration aims to help make buildings operate more intelligently by integrating NXP's neural network enabled industrial grade applications processes into Honeywell's building management systems. That agreement is another great example of how NXP will participate and potentially lead in the revolution of AI processing at the edge in industrial applications. And now I would like to pass the call over to you, Bill, for a review of our financial performance.
Bill Betts
CFO
Bill? Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q1 and provided our revenue outlook for Q2, I will move to the financial highlights. Overall, the Q1 financial performance was good. Revenue was in line with the midpoint of our guidance range with non-GAAP gross margin slightly above the midpoint of our guidance, while inventory in the distribution channel continues to remain below our long-term target. Turning to Q1 results, total revenue was $3.13 billion, flat year-on-year, in line with the midpoint of our guidance range. We generated $1.82 billion in non-GAAP gross profit, and reported a non-GAAP gross margin of 58.2% flat year-on-year, though 20 basis points above the midpoint of our guidance range. The incremental margin was due to an increase in the estimated useful lives of our internal front-end manufacturing equipment from five to 10 years. This was about 30 basis points favorable to the results which was not in our guidance. Total non-GAAP operating expenses were $736 million, or 23.5 percent of revenue, up $8 million year-on-year and down $55 million from Q4. This was $19 million below the midpoint of our guidance range, primarily due to a combination of reduced variable compensation and proactive expense control. From a total operating profit perspective, non-GAAP operating profit was $1.08 billion, and non-GAAP operating margin was 34.5%, down 30 basis points year on year, and 60 basis points above the midpoint of our guidance range. Non-GAAP interest expense was $64 million, with taxes for ongoing operations of $171 million, or a 16.8% non-GAAP effective tax rate. Non-controlling interest was $5 million, and stock-based compensation, which is not included in our non-GAAP earnings, was $115 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $10.18 billion, down $997 million as we repaid the 4.875% bond that was due on March 1, 2024. Our ending cash balance, including short-term deposits, was $3.31 billion, down $963 million sequentially due to the commuted effect of debt repayment capital returns, CapEx investments, and cash generation during Q1. The resulting net debt was $6.9 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.4 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 22.8 times. During Q1, we paid $261 million in cash dividends, and we repurchased $303 million of our shares. Subsequent to the end of Q1 and through Friday, April 26, we repurchased an additional $97 million of shares under an established 10b-5-1 program. Turning to working capital metrics, days of inventory was 144 days, an increase of 12 days sequentially, while distribution channel inventory was 1.6 months, or about seven weeks. As we have highlighted throughout the previous year, given the uncertain demand environment, we continue to make the intentional choice to limit inventory in the channel while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed. Days receivables were 26 days, up two days sequentially, and days payable were 65 days, a decrease of seven days versus the prior quarter. Taken together, our cash conversion cycle was 105 days, an increase of 21 days versus the prior quarter. Cash flow from operations was $851 million, and net CapEx was $224 million, or approximately 7% of revenue, resulting in non-GAAP free cash flow of $627 million, or about 20% of revenue. Turning now to our expectations for the second quarter. As Curt mentioned, we anticipate Q2 revenue to be $3.125 billion, plus or minus about 100 million. At the midpoint, this is down 5% year-on-year and flat sequentially. We expect non-GAAP gross margin to be about 58.5% plus or minus 50 basis points, which includes approximately 60 basis points associated with the change of our useful life estimate for our internal front-end manufacturing equipment. As Kurt noted in his prepared remarks, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting Q2. Operating expenses are expected to be about $765 million plus or minus about 10 million. The sequential increase is primarily driven by our annual merit increases and the 15 million license fees paid to impinge as part of our legal settlement. Taken together, we see non-GAAP operating margin to be 34% at the midpoint. We estimate non-GAAP financial expense to be 63 million, with the non-GAAP tax rate to be 16.8% of profit before tax. Non-controlling interest and other will be about $5 million. For Q2, we suggest for modeling purposes, you use an average share count of 258.5 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $115 million. For capital expenditures, we expect to be around 6%. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.20. In closing, looking through the remainder of 2024, I'd like to highlight a few focus areas for NXP. First, from a performance standpoint, We will continue to navigate a soft landing through a challenging and cyclical demand environment with a cautious optimism for a second-half improvement in our business. Second, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model. Specifically, we expect our gross margin will continue to perform at or above the high end of the long-term model while maintaining internal FAB utilization levels in the low 70s for the remainder of the year. Third, there is no change to our capital allocation policy where we have returned $2.4 billion over the last 12 months. Furthermore, we will continue to be active in the market repurchasing NXP shares. And lastly, we are excited to host an Investor Day on November 7th in Boston. The specific details will be available soon on the NXP Investor Relations homepage. We look forward to you joining us. I'd like to now turn it back to the operator for questions.
Tawanda
Operator
Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 11 on your telephone and then wait to hear your name announced. To withdraw your question, please press star 11 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.
Vivek Arya
Bank of America Securities
Thanks for taking my question. For the first one, Kurt, I think you gave a very clear explanation you know, kind of a cautious optimism around automotive in the second half of the year. My question is kind of a more, you know, medium to longer term question. You know, in the past, you gave a 9% to 14% growth target for your automotive business. And since then, a lot of things have changed, right? With the slowdown in EVs and inflation and all those other things. What is the right way to think about NXP's long-term automotive growth prospect? Is it a simple formula that connects... production growth to your sales growth targets?
Kurt Sievers
President and CEO
Good morning, Vivek. First of all, let me augment what you said. The cautious optimism which I expressed for the second half is not limited to automotive. It is important to note that cautious optimism for second half growth over first half is actually across the company. It's very broad-based. It's across distribution and direct. and it is across all of our segments. Now, coming back to your original question, longer-term automotive growth, yes, we had a guide of 9 to 14 percent from 21 to 24. Now we are in 24. It's actually good to see that automotive is probably that one segment which is going to hit the target this year of the 9 to 14. We will, as Bill said at the end of his prepared remarks, we will host an investor day in November where we will come out with the new growth targets for the next three years for all of our segments, including automotive. Now, so I will not be able to give you a number today for the next three years for automotive, but directionally, Vivek, I would say the algorithm isn't that much different from the history because we see the content drivers very much in place and you know that we are as NXP very well benefiting both from ADAS as well as from the electrification trends and mainly on the mid to longer term basis from a trend to software defined vehicles where our industry-leading franchise in processing is certainly going to win. So that continues, which means in the end the SAR as an underlying mechanism probably becomes less relevant. And I would also tell you that we think pricing will be certainly to start with sustainable from where we come from. You know that we have as NXP increased prices over the past three years. We said it will be neutral this year. And as I said earlier, for the coming years, maybe we go back to a very small, low single-digit ASP erosion per year. I mean, that is to be discussed in the coming years. But nothing out of the normal, I would say, and especially not surprising coming back to where it was pre-COVID. I mean, that's really important for that algorithm. So please bear with us, Vivek, for the November investor day and become with exact numbers But I just wanted to signal to you, you should not expect massive changes here.
Vivek Arya
Bank of America Securities
Got it. And then, Kurt, kind of a more near-term or sort of just calendar 24 question on your automotive business. So last year, your auto sales grew about 9% about in line with auto production, right? So despite better pricing, i.e. you're somewhat undershipped. What is the assumption for the entirety of calendar 24? Because you're auto sales seem to be declining sequentially in Q2. So is the assumption that they pick back up and they do better than production in the backup? Just what is kind of the puts and takes for how you are thinking about automotive for the entire year?
Kurt Sievers
President and CEO
Yeah, look, indeed, you had it quite right for last year. The 9% growth of automotive revenues of NXP was actually in a very strong SAR year. I think the SAR last year was something in the order of almost 10% growth year-on-year, so spectacularly high. And indeed, NXP did increase price from a corporate total company perspective by 8%. So yes, we totally undershipped already last year, which was part of that soft landing strategy which we are pursuing. So we think we have already started to correct the automotive revenue and inventory situation in the direct customers since mid of last year and in the distribution channel already way back because we never went above 1.6. Now, when you think about this year, Vivek, it is indeed the macro is a little different. The latest S&P numbers would suggest a 0% SAR for this year. And a bit of a moderation in the EV penetration. I say that very carefully, Vivek, because I think the headlines we all see about EV slowdown are more dramatic than what it really is. S&P is still talking about 20-plus percent unit growth of ex-EVs, so hybrids, and full EVs for this year, which is still a very strong growth. What really drives our revenue number, however, this year is the inventory digestion with the direct customers. Clearly in Q1 and now with the guide which we just gave for the second quarter, we are digesting inventory with our direct automotive tier one customers. If this is exactly done by the end of Q2 or if it takes a little bit into Q3, very hard to say. However, we have any indication that the second half in automotive this year is going to grow solidly above the first half of this year. And that is actually driven both by company-specific enablers. So we have radar platforms which are strongly ramping in the second half. But of course, it is also driven then by the normalization of the inventory digestion, which means we would move in the second half from undershipping end demand to meeting end demand again. I will not give you the full year growth number. We don't guide the full year by segment. Actually, we only guide the next quarter. But when I said the whole company is modestly up or down for the full year and automotive is more than 50% of the company, then you can guess that automotive is probably not that far from the same number.
Tawanda
Operator
Thank you. Thank you. Please stand by for our next question. Our next question comes from the line of Ross Seymour with Detri Bank. Your line is open.
Ross Seymour
Detri Bank
Hi, guys. Thanks for asking the question. Could I want to get into a little bit of the increased comfort that apparently you're feeling with the desire to start refilling the channel? I know you did a little bit of it in the first quarter, but the second quarter, it seems like your optimism has increased a little bit sequentially, even despite the automotive side being guided down. And, you know, I know you went through each of the segments. But if you step back at a higher level, what's giving you the confidence? What's improved to give you the confidence to fill the channel?
Kurt Sievers
President and CEO
Yeah. Hi, Ross. So first of all, Q1, honestly, the 1.6, and you are right, we came from 1.5 in Q4. It's just been hovering around 1.5 and 1.6. It's very hard to keep this strictly to one number. I'd say Q1 wasn't really intentional. It's just, if you look back over the past, I don't know, 12 quarters, we've always been jumping up and down between 1.5 and 1.6. Quarter two, yes, this is intentional. So we want to try to get it to 1.7 for the exit of quarter two. And indeed, it is based on growing still cautious optimism for the second half. Now, what is giving us that optimism? It is really a mix between cyclical considerations and very company-specific considerations. I think in the question of Vivek a minute ago, I mentioned in automotive we have company-specific platforms which are ramping in the second part, where we sit almost every day with our customers and discuss the organization of that ramp. So we just know that's going to happen. Secondly, and Bill mentioned that in his prepared remarks, we have the settlement with Impinj for the RFID tagging business. And the fact that the two market leading franchises or companies in that market space, NXP and Impinj, have settled here was a positive catalyst, I would say, to the market development for RFID tagging. So we see a positive development there. which is then also playing into the second half over first half in our communication infrastructure and other business. And then thirdly, and that's more on the cyclical side, We clearly see that the automotive tier one inventories will normalize. So then we just go back to shipping to run rates. So there's nothing spectacular happening. The demand is there already today, but we are still digesting inventory. And in the second half, so we don't expect that there is more car production or more EVs or anything. It is simply that we ship to end demand. But the same holds even more true for industrial IoT. where we come from an extremely lean channel position, that industrial IoT business is largely exposed to China. You might also have seen that the PMI in China is actually developing quite nicely. So we do see both in the core industrial as well as in this consumer IoT business, which is in that segment, we see sequential improvement. And that is the main reason actually that we are staging the channel. Because we absolutely want to be sure we have a competitive position on the shelves of our distribution partners entering into the third and fourth quarter.
Ross Seymour
Detri Bank
Thanks for those details. I guess since you mentioned the NPN side, Bill, you're doing a great job on the OPEX. You came in below your guide in the first quarter. The second quarter you included, you said, a $15 million payment for that. Can you just give us an idea of, one, is that impinged payment a one-time deal, and so it goes away after this quarter? And then, more importantly, what are your thoughts on the OPEX side of things? If the optimism on the revenue side is increasing, should we expect the OPEX to increase with variable comp or any of those sorts of drivers?
Bill Betts
CFO
Sure. Good day, Ross. Let me break those two apart. So, the agreement that we have with impinged is an annual cross-license, which will impact us on a go-forward basis about $15 million in the second quarter, and it rose slightly, but that could stop any time in the future once we have the workarounds complete. And again, don't know exactly that exact timing, but that's something that we're pursuing internally. Related to our OpEx, clearly you can see we're somewhat out of model in Q2, but that's really driven by our annual merit increases. So we have a combination of both those impacts occurring in Q2, the 15 plus the annual merit increases. But what's offsetting some of that impact is also our proactiveness on our expense controls, and you saw that in Q1 as well, and some lower variable compensation. So as we think about the second half, and I think this is where you're going, you know, where are we headed with OpEx? And what we're going to try to do is make sure we get back into that model, as you know, around that 23% as we think about the second half.
OpEx
Thank you.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from a line of CJ Muse with Canterbury Sterile. Your line is open.
CJ Muse
Canterbury Sterile
Yeah, good morning. Thank you for taking the question. I guess first question on gross margins. If I take into account the change in the depreciation on equipment, you're essentially pro forma guiding gross margins flat. And I guess I would have thought maybe you would have had a little bit of a kiss from the channel refill as you take it one more month. And so I guess if you can kind of comment what might be an offset there. And then, you know, considering your vision for utilization rates to stay kind of where they are through the remainder of the year, how should we be thinking about the trajectory for gross margins into the second half?
Bill Betts
CFO
yeah hey how are you um yes you're right so obviously if you adjust for the accounting basically uh we're kind of flattish guiding to flat um and again but it's within our plus or minus 50 basis points i'm not really that good for three million dollars or ten basis points but again there's all sorts of flips and takes in that uh and you know part of the reason for the useful life i would say accounting change You know, as you know, every year we have to go look at this from accounting and relate to this specific topic. There was a number of factors considered, which includes the NXP product lifecycle, age of tools, and the market analysis. And this is something that we just had to go do, and we did it. We think it's the right thing to do, and we're calling it out. So it's very clear. And to be honest with you, we expect now to run at or above our long-term model. versus our previous commentary where we said near or at the gross margin. And what levers we have, some of the tailwinds, as we mentioned before on our previous calls, CJ, is clearly our utilizations are running in the low 70s. So that eventually will go back up and becomes a tailwind. We've talked about higher revenues fall through over that 30% fixed cost. Again, that should help We discussed about replenishing the distribution channel. That's where you were applying with your question, just that dot one, you know, we should get something. But you're right, over time, when we bring that back up to target, that should be a lever for us to carry that higher margin. We're also, we talked about expanding customer reach within the mass market. That just takes time. And now, you know, internally, the team's focused on productivity improvements, cost reductions. And over the longer time horizon, we explain this many, many times, it's really our new product introduction layering on top of our business.
spk15
So continue to move that.
Bill Betts
CFO
So, you know, we have an analyst day or investor day coming up on November 7th. We'll break that out in more detail and update that model. But hopefully you guys can see that even through this downturn, we're managing margins quite well. And 58 or 58.5 with the account adjustment, that's not our end destination.
CJ Muse
Canterbury Sterile
Excellent. And then a question for Kurt. You know, as you look back to the COVID period and kind of the initiation of NCNR programs, you know, it sounds like that was really done at the most senior levels, you know, with you and focused on volume, not price. I'm curious, just as you look forward, how did that kind of help nurture your customer relationships and what potential benefits, you know, might you see ahead as we progress in a world where NCNRs are no longer part of the business? Thank you.
Kurt Sievers
President and CEO
Yeah, a couple of considerations here, CJ. The one is just to remind everybody, our NCNR programs have ended with the calendar year 23. So since January 1st, there is nothing anymore under any NCNR program. However, I would very strongly say, and I point it out because I know that some industry peers have had very different opinion on this, the way how we had our program was actually good. I would do it again. It did help because in our particular case, it did put us closer together and we learned much earlier about over inventory built because there was an agreement underneath which forced the customer to the table to tell us that things would be running too high if we don't jointly try to correct. And that is the reason why we undershipped already all of last year in automotive. And I think I started to speak about this in the Q1 earnings call already last year, that there was a first signs of building inventory with tier one automotive customers. Again, we wouldn't have seen that, we wouldn't have learned about that without NCNR. Now, from a more strategic perspective, CJ, I think this is all about how does this industry learn from the supply crisis to to not run into the trap again to try and apply just-in-time concepts with semiconductor products which have a three to four months manufacturing cycle time. And I would say I have mixed emotions about this, CJ. On the one hand, I'd say the automotive OEM customers and some of the industrial OEM customers are very thoughtful and we have entered into long-term agreements, into programs where we know how to deal with inventory in a very specific way about those products which are most critical. So I'd say there is good learning in place and that's clearly a step forward beyond MC&Rs. With some of our direct customers, however, we clearly see that now under the pressure of working capital requirements, they tend to become very tactical when it comes to reducing inventories again, from my perspective, too far down. So I would go that far that we see inventory targets of some of our direct customers, not all, but some, which I believe are starting to pose a risk when I think about the next uptick. And what I mean with the risk is that we get again into supply trouble because the short reaction time which would be required then to ship again much more suddenly It's going to be very hard. And that is compounded by the fact that that supply chain is a very deep one. So it's not just one partner which we ship to and then it goes to the car company, but it's typically two or three or four stages and they all reduce inventory. And at some point they all will want to increase inventory again. And that is what drives the cycle. So I'd say on the OEM side, good learnings in the post-NCNR time, CJ. With the direct customers, it is a more mixed picture, unfortunately. Very helpful. Thank you.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line, of course, Dangley with Citi. Your line is open.
Dangley
Citi
Hey, thanks, guys. Kurt, just, I guess, a longer-term question on the automotive end markets. What are your thoughts on the relative growth rates of hybrids versus EVs? And then also, it seems like BYD is doing a little bit better than Tesla this year. Do you expect those two trends to continue? And then what are the impacts, if any, to NXP? Or does it not matter?
Kurt Sievers
President and CEO
These are interesting questions, Chris, which we also think about very hard. Let me try and dissect it. The one is, and I think I said this in my prepared remarks earlier, the XEV, so if you combine hybrids and battery electric vehicles, continues to grow pretty well. But that is carried by China. And the reason why many media headlines suggest it is not going well is that Europe and the US are actually quite small in XEVs. To be more specific, If you take the total XEVs worldwide, only 12% of those are in the US and 24% are in Europe, while China holds 44%. And BYD indeed is a big part of that. And that China 44%, Chris, is growing this year, according to S&P, by 27% in volume. So what I try to say with that is the XEV in total certainly keeps growing nicely. Now, if you go into the split between BEVs and hybrid, so full electric and hybrid electric, then I'd say it isn't that difficult. The battery electric vehicles are still only 15%, but they grow by 25%. Hybrids are 24%, but grow with 17%. So the one has a smaller base and grows faster. The other one has a bigger base and grows a bit slower. I think on the long run, Chris, and that's more from a technical perspective, BEVs will win the race. I think this hybrid thing is an intermediate period. I do believe on the long run it will all tilt to BEVs once battery and electronic technology gives enough range. I mean, then the whole concept of a hybrid is actually not meaningful anymore. Now, for NXP, it doesn't matter that much as it does to some of our peers. Because only very little of our product portfolio has a strict exposure to BEV only. It is actually only the high voltage battery management solutions. Everything else also plays in hybrid. So that's very different to people who have silicon carbide, for example, which only goes in the one and not in the other. So therefore, Chris, I don't know exactly how that plays out over the short term. But it's also not relevant very much to our revenue. On the long term, I'm sure it is going to tilt back all to BEVs again. Tesla against BYD, I don't want to call that, Chris. I would just say the Chinese, and there is much more than BYD, are extremely competitive and aggressive. I'm very glad that we have a great exposure to them because I do believe that a large part of the global electric growth will continue to come from China. Now, how Tesla plays with that or in that, I don't know. But certainly, China is going to be the majority in the end. And again, that's BYD+.
Dangley
Citi
Great. Thanks. And then just a quick follow-up for Bill. Bill, you said your utilization rates are going to remain kind of flattish in the second half of the year. What would be the catalyst?
Bill Betts
CFO
uh to take them higher would it be some sort of inventory days level or you know an even better demand outlook or some combo of both can you share what would be a catalyst for higher utilization rates um you're correct it's a combo of both as you can imagine right now we're at the high end of our model when we look what's in the channel what do we have on hand uh so and then we're trying to balance that stage and appropriate for that second half growth so it's you know balancing out quarter from quarter But we want to make sure we continue to do the right thing here and keep inventory in check. And some of that inventory of the 144 days is coming from the fact related to the revenue drop off from Q4. And so revenue COGS is probably impacting that drop by about 14 days. And then we actually decreased our inventory dollars in the quarter by about two days or 32 million dollars. So we're trying to balance all this, all the moving pieces. And I expect that we're going to focus on getting inventory maybe a little bit tighter in the second half. But if growth is higher than our current expectations, clearly we'll be able to run our factories that increase the utilization there.
OpEx
Great. Thanks, guys.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open.
Gary Mobley
Wells Fargo Securities
Hi, guys. Thanks for taking my question. Kurt, you seem to be implying that the second half revenue is about 12% higher than the first half, or in dollar terms, about $750 million higher. Correct me if I'm wrong, but I would imagine the majority of that delta is inventory restocked direct in through distribution, but maybe you can give us a sense of the magnitude of the impact from improving and demand or seasonality there?
Kurt Sievers
President and CEO
Yeah, hi, Gary. First of all, no, that's not what I said. What I said is that the second quarter is guided at 3,125, so you can calculate the first half revenue. And then I said that the full year is somewhere between modestly down to modestly up. And very importantly, I want to stress that that growth in the second half over the first half is is not just coming from the channel. We clearly see, and we have the data points from all the patterns, et cetera, that also the direct business is going to grow in the second half over the first half. And I gave two examples, I think, with Ross earlier. One is automotive platforms, which are ramping. That is totally independent of the cycle. And there is no product on the inventory because it's a new product, which just comes in at the customer. And it is RFID tagging. which is also with direct customers in parts, where it has nothing to do with the cycle, but it is the, say, the relief of the industry after the settlement between NXP and Impinj for that market. Very importantly, I also want to say that it is highly unlikely, Gary, that in order to do this, we would go to two and a half months of channel inventory. So what I said is, For the two, we take it to 1.7. So that's one digit up. We are at 1.6, and we want to exit Q2 at 1.7. And if then the demand continues to go the way we preview this, we will slightly increase further in Q3 and Q4. I must admit, I cannot see a scenario that we would get to 2.4 or 2.5 with that. So the modestly up or down for the full year, does not depend on taking the channels two and a half months. So I'm sorry if that was not clear earlier. So I'm glad you did ask, Gary. But that's really not the background to it.
Gary Mobley
Wells Fargo Securities
OK. Just a quick follow up for Bill. You did a good job of highlighting the increased depreciation schedule from five years to 10 years on internal front end equipment. What does that do for the long term capital intensity for the overall company?
Bill Betts
CFO
No change. Well, our current view is our CapEx is to spend 6% to 8%. Again, this is really accounting change that we just dealt with it and moved on. Thank you.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Stacey Radcon with Bernstein Research. The line is open.
Stacey Radcon
Bernstein Research
Hi, guys. Thanks for taking my questions. For the first one, I also wanted to sort of revisit the second aphorism. So it does seem clear if the full year is flat, plus or minus, you're up decent double digits, half over half. Does that start in Q3? Like, is Q3 above seasonal to get us there? Like, how would you, I guess, sitting where we are right now, how would you sort of characterize likely Q3 seasonality versus what you've seen historically?
Kurt Sievers
President and CEO
Hi, Stacey. We really can't go there. I mean, I'm already leaning out of the window here with giving kind of a directional full-year guidance, which we thought is useful given the dramatic cycle we are all going through, but now calling it into Q3 and Q4 separately. I'm sorry, we don't provide that. So it is for the full year. And honestly, it's also hard to say, Stacey, because you know that inventory digestion is not an Excel sheet. I mean, this is a number of customers. Each of them has their own dynamic, has moving targets. So things could be settled earlier, could be settled a little later. And calling that exact by the quarter end is virtually impossible.
Stacey Radcon
Bernstein Research
Okay. So, I mean, so maybe to take that point and maybe step out a little more, So on autos, last year you've already sort of indicated that you undershipped last year. You had strong pricing and yet you actually underperformed the market last year. So if you actually started undershipping last year, why are you still in an inventory correction now? So this is like six quarters?
Kurt Sievers
President and CEO
Because we wanted to spread this out, Stacey, that was the whole idea. I think last quarter we discussed about our understanding of that so-called soft landing strategy for NXP. Our whole target was to actually have not a sharp peak to drop in automotive because that would be a bad impact on our factories and Bill would come back with heavy underloading and negative margin impacts. So the idea was to spread this over a longer period of time, which is why we started early, but didn't want to overdo it in any given quarter. So say we started in Q3 last year for the direct side of automotive, and obviously it goes at least until the end of the second quarter of this year. So that would be a full year of correction on the direct side, maybe a little bit spreading into the third quarter. Mind you that at the same time, our distribution automotive business, which is 40% of the total automotive revenue, has always been at 1.6 only. So on that side of the house, we haven't had to correct at all. So that's the way how you should think about it, which explains also some of the confusion I'm reading in a lot of reports about the peak to trough behavior of NXP versus others. In comms-infra, in industrial and mobile, we had a 30% peak to trough, more or less. It's just that our trough was already a year ago because of our channel discipline. But it's the same peak to trough as everybody else. It's just in automotive, it's probably more in the 9% to 10%, because I believe we trough in automotive this quarter too, right now. But again, that is intentional, as I just explained.
Stacey Radcon
Bernstein Research
Got it. So is it demands getting worse now, or is it just your inventory behavior taking a harder line on inventories now? Because it does feel like the general trajectory is getting worse over the last quarter and Q4, Q1, Q2.
Kurt Sievers
President and CEO
No, it's really the inventory. I mean, you have to take the offset from the SAR, Stacey. I said earlier that last year, of course, there was a SAR growth of 10%. This year, it is flat. That is a, if you compare like for like, then that makes this year, of course, a less positive environment from a macro perspective. But everything else, which is the company-specific positions we have, which is the content increase, which is offered by the industry per se, and the pricing, which is also flat for us this year, is totally in place. So, no, it's just inventory. Got it.
Stacey Radcon
Bernstein Research
Okay. Thank you, guys. Appreciate it.
Tawanda
Operator
Thank you. Please stand by for our next question. Our next question comes from the line of Joshua Butch-Alter with TD Cohen. Your line is open.
Joshua Butch-Alter
TD Cohen
Joshua Butch- Hey, guys. Thanks for taking my question, and congrats on the results. For my first one, I think there's a perception out there that there's a line to draw between software-defined vehicles and EVs, and that it's much more difficult to do an SUV architecture on an ICE engine. Maybe you could spend a minute or two talking about what you're seeing from your customers. I mean, is there a big correlation between that digital architecture change versus electric vehicles because they're re-architecting? And what are you seeing on ICE engines for a software-defined vehicle? Thank you.
Kurt Sievers
President and CEO
Yeah. Hi, Joshua. I would say no. Fundamentally, the concept of a software-defined vehicle, which is actually moving a lot of performance parameters from hardware to software and creating much more flexibility, is completely independent of what kind of powertrain it has. Now, the matter of the fact is, however, that all OEMs I know are extremely busy with developing electric powertrain-based new vehicles. And for most of them, it is actually the core of their activity going forward. And that is, of course, the reason why when they think then about STV implementations, it falls together with electric drivetrains, but that is not because there would be a technical reason. I actually know that several STV implementations where we are leading partner for OEMs, they'll comprehend both ICE and electric drivetrains. So it is the same STV concept, which splits them on a much lower level into an implementation for a combustion engine car or in an implementation for a battery electric vehicle car. But fundamentally, there is no difference.
Joshua Butch-Alter
TD Cohen
Appreciate the color there. And maybe for Bill, after you just paid down the billion dollars note in March, I think you don't have anything due for over a year now and only $500 million next year. In the past, I guess, NXP has been more aggressive utilizing the balance sheet, and I think your past target was two times levered. Can you maybe talk about how you're thinking about utilizing the balance sheet and capital returns here? Thank you.
Bill Betts
CFO
Yeah, sure. So again, Josh, no change to our capital allocation strategy. If I just look back over the last three years, we returned $8.4 billion, or 107% of our free cash flow. Last trailing 12 months, it's below 100% because we retired that debt that you just mentioned. And so that's about 82%. And in this past quarter, We did 90%. So, you know, I think, you know, we did take the opportunity to deleverage the company. You know, we looked at our gross leverage metric, and it was at 2.1 times. Now it's at 1.9. You know, clearly with the credit rating agencies, the sweet spot's below 1.5. If we look at – we're going to continue actually buying back our shares. We think it's a great use of our cash. We have approximately $1.1 billion left on our board authorization plan of buybacks this year. We continue to pay a healthy level of dividends. So if you look at that as a percentage of cash flow from operations of the last 12 months, about 28%. And as we talked about in the past, we treat it somewhat as fixed. We'll continue to execute and invest in the business. That's the number one priority, right? We're going to stay within our financial model, invest in the business, continue a lot of small tuck-ins of our M&A that we've been actively involved in. So overall, I think we're committed to continue returning excess free cash flow back to you all.
Tawanda
Operator
Thank you. Great. Hey, Tawanda, we'll take one more question here today.
Tawanda
Operator
All right. Please stand by for our final question. Our final question comes from the line of Chris Caso with Wolf Research. Your line is open.
Chris Caso
Wolf Research
Yes, thank you. Good morning. I wonder if you could talk a little bit more about the China for China manufacturing strategy that you've spoken to in the past. I mean, I guess in one point, you know, how that protects the business in China. And then secondly, you know, what margin implication that may have if you change that manufacturing strategy going forward?
Kurt Sievers
President and CEO
Yeah, hi, Chris. That's indeed a very important point. There is a clear ongoing and I'd say increasing requirement from our Chinese customers in automotive and beyond to go for localized manufacturing. We are pursuing this quite forcefully. We have chosen the Nanshing factory of TSMC, which happens to host the 16 FinFET, 16 nanometer technology, which is the core of our microprocessors for automotive. We are working with SMIC, which we have done historically outside of automotive and continue to do so outside of automotive. And we just ended up choosing a third foundry partner, which I'm not going to name here, but a third foundry partner for the analog mixed signal space in order to produce our products in China for China. That is helpful in two ways, Chris. The one is indeed that we can follow that requirement of local manufacturing. And I believe NXP is in a comparatively good position here because several of our peers have their own factories. And for them, that move to China is really not easy. Secondly, cost. You just mentioned that there is certainly a competitive market in China. And if we want to successfully play against local Chinese competitors, which certainly over time will continue to try and come up, it is good when we can use the same cost base which they use, which is local foundries in China. So, in an ideal case, Chris, and again, let's see how it plays out, you will not see any impact on the margin from doing this, but it keeps us competitive. I mean, the whole point is that we can play against them successfully because we can leverage the same cost competitiveness which they have in the local manufacturing environment.
Chris Caso
Wolf Research
Good. I look at Jeff here. Do you have a follow-up? Yeah, I do. And if I could follow up, also with China from a competitive standpoint regarding what they could actually produce. And you've addressed it from a manufacturing standpoint, putting you on an equal cost base with them. What do you think about the capabilities of some of these local players? Obviously, there's an imperative in China to try to bring as much content locally as possible. Do you see the competitive threat rising in terms of the capabilities of some of the local players that could be a factor going forward?
Kurt Sievers
President and CEO
Look, Chris, in principle, and that's an overriding statement, we are always paranoid about competition. Because I've learned in my career in this industry, you better be paranoid at all times because it keeps you hot to run successfully against competition. Factually, in that particular case, We see two areas where China is very, very busy from a local competition perspective. One is power discreet, especially for automotive, and that ranges all the way from IGBTs, MOSFETs, to silicon carbide. We just observed that. For us, it doesn't matter, since you know that this is not part of our portfolio. But that's something where it appears they actually make quite good progress. Secondly, lower-end microcontrollers. There is a number of companies and they together have a couple of hundred million of dollar business already. That's outside of automotive. We think with the fast move and requirements for higher processing performance and a lot more software in automotive. This is a long way for them. Again, we are paranoid, but I think it's just another set of competitors which we are facing like in other places in the world. So we are not fearful of this any time soon. In the analog space, I could imagine, again, we haven't really seen much, but I could also imagine that they get into the lower end catalog analog at some point. I mean, if I was China, I would try and do this. So overall, clearly a trend. So I completely agree with you that this is something which they want to do. We don't see it really moving in our space at this time. And certainly with the localization of our manufacturing, we kind of want to counter that, at least from a competitive cost base and from a compliance perspective. Good. With that, we are a little bit over time. I want to conclude the call with summarizing and just making the remark again. This is a tough cycle. We have over many quarters operated a soft landing strategy in order to keep the P&L earnings and profitability in reasonable shape. With some cautious optimism, we are seeing now that the second half is turning around. It's hard to say what the slope of that is going to be, but given our low inventory position going into this, We are cautiously optimistic that we can land the year in this plus minus zero kind of fashion, which we discussed during the call. In the meantime, we keep every possible control on anything we can do about gross margin and OPEX, as well as CapEx. With that, I would like to conclude the call and thank all of you.
Tawanda
Operator
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
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