NXP Semiconductors N.V.

Hello, everyone. This is Jeff Palmer from NXP. Thank you and welcome to the NXP Semiconductor's third 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 invoke 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 the financial results for the fourth quarter of 2024. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we'll refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2024 earnings press release. which will be furnished to the SEC on Form 8K and available on NXP's website in the investor relations section at nxp.com. Now I'd like to turn the call over to Kurt.

Thank you, Jeff, and good morning, everyone. We appreciate you joining our call this morning. Beginning with quarter three, NXP delivered quarterly revenue of $3.25 billion, in line with our overall guidance of down 5% year-on-year, and up 4% sequentially. While we experienced some strength against our expectations in the communication infrastructure, mobile, and automotive end markets, we were confronted with increasing macro-related weakness in the industrial and IoT markets. At the total company level, sequential growth was led by China. Non-GAAP operating margin in quarter three was 35.5%, 50 basis points above the year-ago period and 40 basis points above the midpoint of our guidance. Year-on-year operating profit performance was due to a combination of lower revenue and cross-profit, partially offset by favorable operating expenses. Now let me turn to the specific trends in our focus and markets. In automotive, revenue was 1.83 billion, down 3% versus the year-ago period, and in line with our guidance range. The inventory digestion at our main Tier 1 customers continues to occur, with further pressure coming from slowing European and North American car OEM end demand. At the same time, we experienced healthy growth in the China and Asia-Pacific automotive end markets. Turning to industrial and IoT, revenue was 563 million, down 7% versus the year-ago period, and below our guidance range. During the quarter, we experienced weaker-than-expected trends globally. In mobile, revenue was 407 million, up 8% versus the year-ago period, and at the high end of our guidance range in what is normally a seasonally strong period. In communication infrastructure and other, revenue was 451 million, down 19% year on year, and above the high end of our guidance as several RFID programs ramped stronger than originally anticipated. From a channel perspective, distribution inventory was 1.9 months up from the 1.7 months in quarter two, following our attempts to stage dedicated mass market product in the channel. While at the same time, sell-through to distribution service customers in the European and American markets was somewhat slower. Now let me turn to our expectations for quarter four, 2024. We are guiding quarter four revenue to 3.1 billion, down about 9% versus the fourth quarter of 2023, and down about 5% sequentially. Relative to our earlier expectations, we are taking a more conservative stance for quarter four. Hence, we will also aim to hold channel inventory approximately flat sequentially at 1.9 months or about eight weeks. This is because we began to see increasing weakness in the industrial and IoT market already during quarter three, as well as an unexpected contraction in manufacturing PMI below 50 across all regions except China. Furthermore, we find ourselves exposed to a broad slowdown of European and North American automotive OEM outlooks for 2024, only partially compensated by the aforementioned strength in China automotive. This leads to more stringent inventory reductions at our tier one customers below the natural end demand. So at the midpoint, we anticipate the following trends in our business during quarter four. Automotive is anticipated to be down in the high single-digit percent range versus quarter 3.23, excuse me, versus quarter 4.23, and down in the mid-single-digit percent range versus quarter 3.24. Industrial and IoT is expected to be down by 20% versus quarter 4.23 and down in the mid-single-digit percent range sequentially. Mobile is expected to be down in the low single-digit percent range, both versus quarter 4.23 and sequentially. And finally, communication infrastructure and other is expected to be down in the mid single-digit percent range, both versus quarter 4.23 and sequentially. In summary, our guidance for the fourth quarter reflects broader macro weakness in Europe and North America, only partially compensated by strength in China. The cyclical rebound, which we had anticipated for the second half of 24, has not materialized. The soft and uncertain demand environment appears to be causing the tier one customers to take a very cautious stance on their inventory positions. These trends are consistent with the multiple profit warnings issued by major Western automotive OEMs, as well as the contracting global manufacturing PMI trends, which are weighing on demand in the industrial and IoT markets. The net impact to NXP are lower than expected order trends from our direct customers and distribution partners. Notwithstanding this more challenging short-term demand environment, We are very confident we have deployed a long-term winning strategy, focusing our investments to succeed in the fastest growing secular end markets of automotive and industrial IoT. In the short term, we will maniacally focus on managing what is in our control while making the right decisions for the long-term health of the business. This will enable NXP to drive resilient profitability and earnings, even in an uncertain demand environment. And now I would like to pass the call to Bill for a review of our financial performance. Bill.

Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q3 and provided our revenue outlook for Q4, I will move to the financial highlights. Overall, our Q3 financial performance was good. Revenue was in line. Non-GAAP gross margin was near the low end of our guidance, more than offset by favorable operating expenses, resulting in better operating profit. Turning to Q3 specifics, total revenue was $3.25 billion, down 5% year-on-year. We generated $1.89 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.2%, down 30 basis points year-on-year and 30 basis points below the midpoint of our guidance range due to product mix. Total non-GAAP operating expenses were $738 million, or 22.7% of revenue, down $65 million year-on-year, although this was $22 million below the midpoint of our guidance due to lower variable compensation, project spend, and payroll. From a total operating profit perspective, non-GAAP operating profit was $1.15 billion, and non-GAAP operating margin was 35.5%, up 50 basis points year-on-year, and 40 basis points above the midpoint of our guidance. Non-GAAP interest expenses was $70 million, with taxes for ongoing operations of $182 million, or a 16.8% non-GAAP effective tax rate. Non-controlling interest was $11 million, and stock-based compensation, which is not included in our non-GAAP earnings, was $115 million. Taken together, we delivered non-GAAP earnings per share of $3.45, slightly ahead of our midpoint guidance of $3.42. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $10.18 billion, with our cash balance of $3.15 billion, down $111 million sequentially due to the cumulative effect of capital returns, internal CapEx, investments in previously announced equity-accounted foundry joint ventures, and cash generation during the quarter. The resulting net debt was 7.03 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of 5.24 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was at 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 22.9 times. During Q3, we paid $259 million in cash dividends and repurchased $305 million of our shares. Taken together, we return $564 million to our shareholders, representing 95% of non-GAAP free cash flow. In addition, on August 29th, the NXB Board of Directors authorized an increase of our existing capacity to purchase an additional $2 billion of buybacks, with a total balance of $2.64 billion at the end of Q3. Furthermore, since the end of Q3 and through Friday, November 1st, we repurchased an additional $117 million of our shares under an established 10B5-1 program. Turning to working capital metrics, days of inventory was 149 days, an increase of one day sequentially, while distribution channel inventory was 1.9 months or approximately eight weeks. Days receivable were 30 days, up three days sequentially, and days payable were 60 days, a decrease of four days versus the prior quarter. Taken together, our cash conversion cycle was 119 days, an increase of eight days versus the prior quarter. Cash flow from operations was $779 million, and net capex was $186 million, or 6% of revenue, resulting in non-GAAP free cash flow of $593 million, or 18% of revenue. Turning to our expectations for the fourth quarter, as Curt mentioned, we anticipate Q4 revenue to be 3.1 billion plus or minus about 100 million. At the midpoint, this is down 9% year-on-year and down 5% sequentially. We expect non-GAAP gross margin to be about 57.5% plus or minus 50 basis points. Furthermore, our guidance assumes flat channel inventory at about eight weeks exiting Q4. This reflects our continued discipline of proactively managing our distribution channel, especially during uncertain demand environments. Operating expenses are expected to be $725 million, plus or minus $10 million, taken together we see non-GAAP operating margin to be 34.1% at the midpoint. We estimate non-GAAP financial expenses to be 77 million, with the non-GAAP tax rate to be 16.8% of profit before tax at the midpoint. Non-controlling interest and other will be 9 million. Our guidance assumes a 2 million loss from our equity-accounted foundry joint ventures We suggest for modeling purposes you use an average share count of 257 million shares taken together at the midpoint. This implies a non-GAAP earnings per share of $3.13. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be 118 million. Turning to uses of cash. We expect capital expenditures to be around 5% of revenue. We also will make a $400 million capacity access fee and a $120 million equity investment into BSMC, as well as a $52 million equity investment into ESMC, which are our two equity account at Foundry Joint Ventures, which are under construction. In closing, I would like to highlight three items. First, we will continue to return all excess cash to our owners through buybacks and dividends. We expect our Q4 capital returns to be above $700 million. Second, despite the macro headwinds, NXP will continue to navigate and operate within its long-term financial model. And lastly, we look forward to you joining our 2024 Investor Day on Thursday, November 7th at 8.30 a.m., where we will provide an update to our long-term strategic plan and financial model. I would like to now turn it back to the operator for your questions.