NXP Semiconductors N.V.

Good day and thank you for standing by. Welcome to the NXP fourth 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 a question during the session, you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1-1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Daniel, and good morning, everyone. Welcome to NXP Semiconductor's fourth 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 a specific end market in which we operate, the sale of new and existing products, and our expectations for financial results for the first quarter of 2025. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For full disclosure for forward-looking statements, please refer to our press notes. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2024 earnings press release, which will be furnished to the SEC on Form 8K and is available on NXP's website in the investor relations section at nxp.com. Now I'd like to turn the call over to Perry.

Thank you, Jeff, and good morning, everyone. We really appreciate you joining our call today. I will review both our quarter four and our full year 2024 performance, and then I will discuss our guidance for quarter one. Beginning with quarter four, our revenue was 11 million better than the midpoint of our guidance. The revenue trends in our end markets were slightly above in automotive, inline and mobile, slightly below in industrial and IoT, while communication infrastructure and other missed our expectations. So taken together, NXP delivered quarter four revenue of 3.11 billion, a decrease of 9% year-on-year. The non-GAAP operating margin in quarter four was 34.2%, 140 basis points below the year-ago period, and about 10 basis points above the midpoint of our guidance. Year-on-year performance was the result of the lower revenue and the related gross profit fall-through partially offset by lower operating expenses. From a general perspective, we kept distribution inventory flat at eight weeks, below our long-term target of 11 weeks. From a direct sales perspective, we supported Western Tier 1 automotive customers with their continued digestion of on-hand inventory in a cloudy auto demand environment. For the full calendar year 2024, Revenue was 12.61 billion, a decrease of 5% year-on-year. Full-year non-GAAP operating margin was 34.6%, a 50 basis point compression versus the year-ago period, due to lower revenue and the related gross profit fall-through, partially offset by lower operating expenses. While the second half of 2024 did not play out as we had originally expected, we rigorously focused on what is under our own control to minimize the impact on our financial performance. And now let me turn to the specific full year 2024 trends in our focus and markets. In automotive, full year revenue was 7.15 billion, down 4% year on year, primarily a reflection of declining automotive production in Europe and Japan, exacerbated by inventory digestion at Western Tier 1 customers in an uncertain automotive demand environment. Against this backdrop, we experienced company-specific growth in our accelerated growth drivers, S32 for the software-defined vehicle, automotive connectivity, radar, and electrification. For quarter four, automotive revenue was $1.79 billion, down 6% versus the year-ago period, and near the high end of our guidance. Turning to industrial and IoT, full year revenue was 2.27 billion, down 3% year on year, a reflection of ongoing weakness in end demand and tight control of distribution channel inventories. For quarter four, industrial and IoT revenue was 516 million, down 22% versus the year-ago period, and slightly below our guidance. In mobile, full-year revenue was $1.49 billion, up 13% year-on-year, thanks to easy compares in the first half of 2023. For Q4, mobile revenue was $396 million, down about 2% versus the year-ago period, and in line with our guidance. In communication infrastructure and other, full-year revenue was 1.69 billion, down 20% year-on-year. The year-on-year decline was due to lower sales across the entire portfolio. For quarter four, revenue was 409 million, down 10% year-on-year, and below our guidance. Now I will turn to our expectations for quarter one, 2025. We are guiding quarter one revenue to $2.825 billion, down 10% versus the first quarter of 2024 and down 9% sequentially. From a sequential perspective, this is consistent with our original outlook for quarter one to be seasonally down in the high single digit range. At the midpoint, we expect the following trends in our business during quarter one. Automotive is expected to be down in the mid-single-digit percent range versus both quarter one 2024 and quarter four 2024. Industrial and IoT is expected to be down in the low double-digit percent range year-on-year and about flexed versus quarter four 2024. Mobile is expected to be down in the high single-digit range year-on-year and down in the high teams percent range versus quarter four 2024. Finally, communication infrastructure and other is expected to be down in the mid 20% range versus quarter one 2024 and down in the upper 20% range versus quarter four 2024. Zooming out, as we enter 2025, we continue to see weakness in Europe. The Americas appear to be bouncing off the bottom and China has implemented several incentive programs. All of this correlates with the reported manufacturing PMI being around 50, with China and the US slightly above, and Europe and Japan below. Against this backdrop, we continue to have poor forward visibility and we are experiencing relatively high-turns business, reflective of our short order lead times. On the customer front, we have completed the majority of our annual price negotiations for calendar year 2025, and we continue to be confident in low single-digit price erosion year over year, consistent with our prior commentary. When it comes to inventory in the market, our quarter one guidance contemplates decreasing inventory dollars in both the direct and the distribution channels, reflecting undershipment against true end demand. We expect distribution channel inventory to be eight to nine weeks below our long-term target of 11 weeks. Now, before turning to your questions, I would like to review two strategic acquisitions which we announced over the last 90 days. Both are vital building blocks to accelerate and expand NXP's CoreRight vision for next-generation software-defined vehicle platforms. Our CoreRight platform comprises a complete suite of secure hardware and software solutions, including processes, connectivity, functional safety and power management, as we had laid out in our investor day in November. So first, in mid-December, we announced our intention to acquire Aviva Links for $243 million. Aviva is a five-year-old Silicon Valley startup whose founders have a proven track record in the multi-gigabit Ethernet market. The company is focused on multi-gigabit automotive connectivity technology based on the ASA MLE standard, which is ideally suited for asymmetric point-to-point connectivity of ADAS sensors and IVI display applications. Asymmetrical ASA links are cost and performance optimized for one-way data traffic typical for ADAS and IVI applications, whereas Ethernet is optimized for two-way data traffic going in both directions at the same speed. This addition is fully complementary with NXP's market-leading positions in automotive networking processes, gateways, and broad in-vehicle networking solutions. Aviva is an innovation leader in open standards-based asymmetrical ASA service with the first to market best-in-class 16-nanometer quad-port, 16-gigabit-per-second uplink product. The company is pre-revenue and has received design awards from OEMs and Tier 1 customers, aiming to replace proprietary solutions. We expect Aviva to enhance and complement our broad automotive networking business beginning in 2027. With this, we are capturing a growing application area we had not taken part in by a standards-based solution. This acquisition reinforces our company-specific automotive connectivity accelerated growth driver. And secondly, in early January, we announced our intention to acquire TT Tech Auto for 625 million, a division of TT Tech, a privately held software company based in Austria. TT Tech Auto has extensive knowledge and expertise in the automotive market, especially in the domain of vehicle safety and real-time integration. Its software product called MotionWise is focused on safety and deterministic real-time performance, key attributes of the software-defined vehicle. MotionWise bridges the silicon hardware layer to the operating system layer, enabling deterministic and safe management of the application software layer. MotionWise is already deployed in over 4 million vehicles, with a pipeline of awarded projects which will enable another 7 million vehicles. The combination of NXP SquareRite NTT Tech Autos Motionwise will reduce our customers' integration efforts, enabling software reuse and delivering optimal system performance. The combined expertise of NXP and NTT Tech Auto will allow to drive faster time to market and lower cost solution in direct collaboration with automotive OEMs. Taken together, these acquisitions enhance our long-term competitive position in the automotive end market. We expect the regulatory approvals should be complete by the end of quarter 325. These transactions are consistent with our long-term strategic efforts and will begin to contribute revenue within the brief period after close. However, they will not have a material impact on the financial model we recently shared at our investor day in November. By 2028 and beyond, these assets will be accretive to our current financial model and will help bootstrap and accelerate our capabilities in specific functional areas. I am very excited about how they will help NXP to offer complete system-level solutions for tomorrow's automotive markets. We do look forward to welcoming the talented teams to NXP. And with that, I would like to pass the call over to you, Bill, for a review of our financial performance.

Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q4 and provided our revenue outlook for Q1, I will move to the financial highlights. Overall, our Q4 financial performance was good. Revenue and non-GAAP gross profit were both modestly above the midpoint of our guidance range, while operating expenses were in line with the midpoint of our guidance. Taken together, we delivered non-GAAP earnings per share of $3.18 or 5 cents better than the midpoint of our guidance. Furthermore, we continued to tightly manage sales into the distribution channel with weeks of inventory in the channel flat sequentially at eight weeks. I will first provide full year highlights and then move to the Q4 results. Full year revenue for 2024 was $12.61 billion, down 5% year-on-year, due to a weak macro in the Western markets, while China continued to be resilient. We generated $7.33 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.1%, down 40 basis points year-on-year. Total non-GAAP operating expenses were $2.96 billion, or 23.5% of revenue, slightly above our long-term operating expense model as we continue to invest in our strategy supporting long-term profitable growth. Total non-GAAP operating profit was $4.37 billion, down 6% year-on-year. This reflects a non-GAAP operating margin of 34.6%, down 50 basis points year-on-year, and in line with their long-term financial model. Non-GAAP interest expense was $275 million. Taxes related to ongoing operations were $686 million, or a 16.8% non-GAAP effective tax rate. Non-controlling interest was $32 million. And the results from equity account investees associated with our joint venture manufacturing partnerships was zero. Stock-based compensation, which is not included in our non-GAAP earnings, was $461 million. Turning to full-year cash flow performance. we generated 2.78 billion in cash flow from operations and invested 693 million in net capex, or about 5.5% of revenue. Taken together, this resulted in 2.09 billion of non-GAAP free cash flow, or about 17% of revenue. During 2024, we repurchased 5.73 million shares for $1.37 billion and paid cash dividends of 1.04 billion, or 37% of cash flow from operations. In total, we returned $2.41 billion to our owners, which was 115% of the total non-GAAP-free cash flow generated during the year. Now moving to the details of Q4. Total revenue was 3.11 billion, down 9% year-on-year, modestly above the midpoint of our guidance range. We generated 1.79 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 57.5%, down 120 basis points year-on-year and in line with the midpoint of our guidance range. Total non-GAAP operating expenses were $725 million, or 23.3% of revenue, down $66 million year-on-year, and in line with the midpoint of our guidance range. From a total operating profit perspective, non-GAAP operating profit was $1.06 billion, and non-GAAP operating margin was 34.2%, down 140 basis points year-on-year and above the midpoint of our guidance range. Non-GAAP interest expense was $74 million, while taxes for ongoing operations were $164 million, or a 16.5% non-GAAP effective tax rate. Non-controlling interest was $10 million, and results from equity account Investees associated with our joint venture manufacturing partnerships was zero, although $2 million better than our expectations. Stock-based compensation, which is not included in our non-GAAP earnings, was $117 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q4 was $10.85 billion. up 672 million sequentially due to the attractively priced loan from the European Investment Bank. Our ending cash balance was 3.29 billion, up 144 million sequentially due to the cumulative effect of additional liquidity, capital returns, CapEx investments, and cash generation during Q4. The resulting net debt was 7.56 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of 5.06 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q4 was 1.5 times, and our 12-month adjusted EBITDA interest coverage was 21.3 times. During Q4, we paid $258 million in cash dividends and repurchased 455 million of our shares. After the end of the quarter and through January 31st, we bought an additional 101 million of our shares under an established 10B-51 program. Turning to working capital metrics. Days of inventory was 151 days, an increase of two days sequentially, while we maintained distribution channel inventory at eight weeks. As we have highlighted throughout the previous year, given the uncertain demand environment, we continue to make the intentional choice to control the increase of channel inventory. Days receivables were 30 days flat sequentially, and days payable were 65 days, an increase of five days versus the prior quarter due to improving our payment terms with suppliers. Taken together, our cash conversion cycle was 116 days, an improvement of three days versus the prior quarter. Cash flow from operations was 391 million, and net capex was 99 million, or 3% of revenue resulting in non-GAAP free cash flow of $292 million, or 9% of revenue. During Q4, we paid a $275 million capacity access fee related to BSFC, which is included in our cash flow from operations. Additionally, we paid $50 million into our the ESMC Equity Accountant Foundry joint venture under construction in Germany, which is included in our cash flow from investing. Turning now to our expectations for the first quarter. As Kurt mentioned, we anticipate Q1 revenue to be 2.825 billion plus or minus about 100 million. At the midpoint, this is down about 10% year on year, and down about 9% sequentially. We expect non-GAAP gross margin to be about 56.3% plus or minus 50 basis points driven by the return of our annual price concessions and lower revenue fall through over our fixed costs. Operating expenses are expected to be about 700 million plus or minus about $10 million The sequential decline is driven by restructuring the business and lower variable compensation. Taken together, we see non-GAAP operating margin to be 31.5% at the midpoint. We estimate non-GAAP financial expense to be about $80 million. We expect the non-GAAP tax rate to be 17.5% of profit before tax. Non-controlling interest will be about $5 million, and results from equity account investees to be about $1 million. For Q1, we suggest for modeling purposes, you use an average share count of 256 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $128 million. Taken together at the midpoint, this implies a non-GAAP earnings per share of $2.59. Turning to uses of cash, we expect capital expenditures to be around 5% of revenue. We also will make a 125 million capacity access fee into VSMC, which was originally planned for Q4. Additionally, we will make a $32 million equity investment into ESMC and a $76 million equity investment into VSMC, our two equity-accounted foundry joint ventures under construction. For full-year 2025 modeling purposes, consistent with comments from our recent investor day, We expect operating expenses to stay with our long-term model of 23% for the year. We will see a step-up of operating expenses due to the annualized merits, the $15 million annual license fee, along with variable compensation movements pending actual performance. We suggest using a non-GAAP tax rate of 17.5% plus or minus 50 basis points. For stock-based compensation, we suggest using 475 million. For non-controlling interest, we suggest modeling 30 million plus or minus a few million. And for equity-accounted investees, we suggest modeling 10 million loss plus or minus a few million depending out on the bill progress for both ESMC and the ESMC joint venture from our front end facilities. For capital expenditures, we expect to stay within the long term model of 5% or less. In closing, I would like to highlight a few focus areas for NX2. As you can see, we have taken some restructuring charges in Q4 as we are creating space for our recent acquisitions to prevent dilution and to ensure we stay within our long-term operating expense model. Second, our internal front-end utilizations will remain in the low 70% range, consistent with our hybrid manufacturing strategy We are now also concretely planning the consolidation of our internal 200 millimeter factories. And lastly, as visibility remains very cloudy, we will rigorously focus on managing what is in our control to navigate a soft landing while executing our growth strategy. And of course, there is no change to our capital allocation strategy. With that, I would like to turn it back to the operator for your questions.

As a reminder, to ask a question, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. In the interest of time, we ask that you please lend yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from CJ Muse with Cantor Fitzgerald. Your line is open.

Yeah, good morning, good afternoon. Thank you for taking the question. I guess high level, you know, all eyes are on the rate of recovery off of a likely Q1 bottom for you guys as well as the industry. So we'd be curious, you know, if you think we're set up for normal seasonal trends into Q2 and beyond. And if you could kind of parse through that, you know, where you're seeing relative strength and perhaps where you see relative weakness or where you see concerns where perhaps trends won't be as strong as seasonal.

Thanks, CJ, and good morning. Let me start with reiterating what I said in my prepared remarks. The visibility we have is really, really poor. Given the low order late times, there is a lot of turns business and customers place their orders very late. So we have in total a pretty limited visibility. now coming more specifically back to your question yeah so q1 um with the nine percent sequential decline it's i'd say it's on the on the lower bound of seasonal as we had some as we had anticipated anticipated and kind of soft guided in the in the previous quarter there in in i would qualify this actually as kind of okay in automotive and industrial um kind of okay meaning that the year-on-year decline in automotive is the same as we had it in quarter four. So that's like a mid-single-digit year-on-year decline. And in industrial IoT, we actually are flat from Q4 into Q1. Where it really comes down is in the comms-infra segment. where we have an accelerated pace of the earlier discussed end-of-life situation with some of the former digital networking or former pre-scale digital networking products. That's the one which really falls short in line with what we said over last year, that this part of that segment is really becoming weak. Now, I heard your question. You were asking for quarter two. With the little visibility we have, we really can't call quarter two Now, I understand you need something for the model, CJ. If anything, probably a flat to slightly up is what I would use for modeling purposes. But that isn't really based on a hell of a lot of forward visibility, which we have at this stage. But I guess flat to slightly up is the best proxy at this stage.

Very helpful. And then maybe a question for you, Bill. On gross margins, you know, you know, given where we are in the cycle 56.3, it's spectacular. We'd love to hear kind of how you see a recovery playing out from utilization rates, from mix, from bringing in, you know, higher margin distribution. We'd love to kind of how you see things evolve.

CJ, absolutely. As you can see, the gross margins did decline as we anticipated by about 120 basis points. And the attributes, again, we are now returning to our normal annual price negotiations. And as Kurt alluded to, down to low to mid single digit range. So when you do the quick math, you can understand that effect. And then as we hinted toward in Q4 guidance, we would lose some of the fall through over a fixed cost, which actually happened. But on the bright side, which is more of a tailwind, we're able actually to partially offset some of those headwinds through the improved mix in Q1. And also, we are getting lower supplier and operating costs, which are tying throughout the year to offset that total pricing effect that occurred in the first quarter. So the cost adjustments come throughout the year. Overall, I would say at these revenue levels, and as I mentioned, we're running front-end internal utilizations in the low 70s. I feel pretty confident that we will remain at these gross margin levels, plus or minus the normal 50 basis points driven by mix. I'd say once we return to revenue growth, we will then move back into our long-term gross margin range of 57 to 63.

Thank you. Our next question comes from Thomas O'Malley with Barclays. Your line is open.

Hey, guys. Thanks for taking my question. I wanted to focus in on the regional trends. It sounds very similar, what you're kind of talking about, at least on the auto side with some inventory at the North American guys. with potentially some better environments elsewhere. Could you just maybe talk about the inventory situation at the North American customers versus three months ago? Do you feel like that's coming to a bottom here with some inflection from this point forward, or are you still kind of working that down? Any additional color there would be helpful.

Yeah, thanks, Tom. I hear two parts in your question. One is the regional one and the other one, the inventories. On the regional side, in quarter four, clearly Asia, led by China, was on the brighter side of things, with Europe and the US being very weak, and that very weakness was certainly driven both by inventory digestion, as you're hinting to, and a weak end demand. That was pretty much as we had anticipated. So I'd say quarter four, there was nothing really changing through the quarter versus our anticipation. And going into quarter one overall, I'd say we do see some early strength in Asia for industrial IoT. You saw that we sequentially guided that flap. Also for auto, Asia is robust. So it's kind of the same situation like 90 days ago from a regional split perspective with a strong Asia and a relatively weak or especially weak Europe and maybe the US getting a little better. Now on the inventory side. So the answer, first of all, Tom, is yes. We continue to digest on-hand inventory at our direct tier one customers. That process continues and it is both for the US as well as for the European tier one customers. How much it is and how long that still lasts, I can't really tell you. And I would also not put Q1 into comparison to Q4 in terms of it's less or more. No, we have individual plans there with each single customer and we got to see how that plays out. But that is clearly still weighing on our revenue performance, especially in automotive, keeping it at a sub-end demand level. At the same time, and for completeness, I have to say that also the discipline of the general inventory holds. You saw that we kept it flat at eight weeks in the fourth quarter. uh for q1 i i had in my prepared remarks something like eight to nine weeks it's a it's a bit hard to say to pin it down exactly but say eight to nine weeks so um and in total by the way a reduction in dollars in the inventory so the the important piece is we continue to do this tom um inventories both at distributors as well as direct customers go down from a dollar perspective So at some point, that must come to an end because the rate of undershipment against end demand in a flat SAR environment, that must come to an end. I gave up to try and call when exactly, but if you do the math, it cannot take that long anymore.

Super helpful. And then just as a follow-up, I think you gave a lot of really good pieces there. So The DISTI inventory is low. You talked about low 70s range in terms of internal utilization. Like clearly visibility going into this year is really difficult for you guys right now, but can you just maybe walk through for us on the line, you know, when do you start to make decisions about internal utilization? Like is it a two or three-quarter out scenario where, hey, things aren't getting better, we're going to reduce a bit? It seems like things are at a healthy level right now from the utilization perspective, but when do you make that call and maybe what levers do you look at when you think about potentially reducing that if demand isn't coming back?

Yeah, let me take this one. Obviously, we're focused on what we control. At the same time, you know, our internal inventory from a dollar perspective is up quarter over quarter. We expect those dollars going into a Q2, as Kurt alluded to, on flat to slightly up. From a dollar perspective is to stay flattish. So that's what we're balancing, the dollars and the utilization from an internal standpoint. as well as we have to adjust our foundry and subcon orders with current revenue levels. So, again, we're balancing all this. I would say, you know, if the second half comes up and, you know, we're planned and ready for that, that's probably when that will take effect, when we would increase our utilizations. But, again, we're going to be very cautious, as Kurt alluded to. We kind of got this wrong last year, so we're just going to take it one quarter at a time.

Thank you. Our next question comes from Ross Seymour with Deutsche Bank. Your line is open.

Thanks for having me ask a question. Kurt, the auto, or excuse me, the industrial IoT segment being flat sequentially, you alluded a little bit to Asia acting a bit better, but I think that flatness is a welcome surprise to people. Can you dive a little bit deeper into what's going on there and keeping that business flat?

Yeah, Ross. As I said, the The relative strength, I don't want to use the word strength yet, but the relative strength from a sequential perspective indeed comes from Asia and within Asia, clearly from China. And you know that we have a relatively high exposure in that segment to China. I think we are helped by our low channel inventory in that case, because we don't have to reduce that further. So any possible light at the end of the tunnel in terms of end demand directly comes to us because we don't have to work down inventory in the channel. That's how I would characterize it. But, Ross, I also don't want to go that far to talk about green shoots or anything. I mean, it looks a little better indeed in Asia, but too early to follow the trend.

Thanks for that. And then I guess as my follow-up, switching over to the comms, business and other you've mentioned about kind of an accelerated end of life process. Is that now behind us? And so the business in a little under 300 million, I guess in the first quarter for your guide is now going to act along with whatever demand does, or is there more room that that has to be taken down?

Yeah, let, let me try to process. So, um, when exiting last year, calendar 24, Think about the comms-infra segment with roughly the following split. So 50% was in the secure card area, which includes also RFID, 20% in the radio power for the mobile base station networks, and 30% in this digital networking business. So that's about the size we talk about here. And that end-of-living still continues for us. It goes into Q1, but I would expect it further continues beyond Q1.

Thank you. Our next question comes from Vivek Arya with Bank of America Securities. Your line is open.

Thanks for taking my question. Kurt, on the first one, maybe a little deeper into the automotive segment, there's a lot of talk of tariffs, et cetera, this year. Have you seen any change yet in customer behavior, pull-in, push-out, mix of EVs? et cetera, just how are you reflecting this kind of evolving landscape in your thinking for 2025?

Yeah, so first of all, to be clear, given all the uncertainty and the many moving parts, it is not reflected in anything we told you today. I just want to be very clear. There is so many unknowns that we could only get it wrong. So it's just not reflected, Vivek. Most of it from what we are hearing about today will be indirect impact on NXP. Let me give you the example of Canada and Mexico. That's not something where we would be impacted because we don't ship from Canada or Mexico into the US. So for us, that's not relevant. The China one clearly touches us eventually because we have some production in China. As you know, we have this backend facility in Tianjin. And there is also some shipments from there to the US. We looked through this, Vivek, and it would be completely immaterial to us. So that's the only one where I can get my hands firmly around because we know what it is. And that has absolutely immaterial impact on us. Why that is, we can discuss it another time. There's a complex consideration behind it. So, therefore, the straight answer is, Vivek, beyond that, nothing is contemplated in what we said today.

And maybe one for Bill, just kind of a hypothetical, you know, if I sort of take what was said about Q2, and I completely understand visibility is limited, but if I assume some semblance of normal seasonality in the back half, I kind of get it conceptually, you know, sales down, you know, high single-digit or so this year. So, I'm not asking you to endorse that, but let's say that was the situation, what would be the right way to mathematically think about gross margins and this year? Thank you.

Yeah, similar to last quarter, the best metric, I think, for modeling purposes without knowing all the different movements and visibility, I would just go back to whatever you put in your model for those type of revenues, look at from a historical standpoint. That's all I can provide, to be honest with you, because, as you know, there's many moving parts. But that's, I would say, a fair representation for modeling purposes.

Thank you. Our next question comes from Stacy Raskin with Bernstein Research. Your line is open.

Hi, guys. Thanks for taking my questions. I wanted to go back to gross margins. You said gross margins would probably stay here give or take until revenue started to grow, you suggested Q2 would be maybe flash or up a bit. So I assume Q2 gross margins in that environment don't really go up very much. Hopefully, revenue grows in the second half. But before, you had suggested that margins for the full year would land still within your range of 57 to 63. Given you're going to be in the 56s in the first half, do you think you can still get into the range for the full year? And if you do, is it like very close to the low end? Because I'm having a hard time getting it much more than that without a lot of growth in the second half.

Yes, Stacey. First off, related to the gross margins, you're right for Q2. I said at similar levels, plus or minus the 50 basis points. We never guided the full year and say we would stay within the financial model for gross margins.

At the end, we'll say you did. You said that.

Correct. We have said that. And a lot will depend on the second half related to return of growth. So as I mentioned earlier to another question, I said if the second half grows above the first half, we will then get back into model of the 57% to 63%. But a lot depends on the recovery of the second half.

So you don't know if you'll be there for the full year now?

I'm not guiding that at this point in time with the low visibility we have.

Okay. And I guess on that point of visibility, you said you have a lot of turns. What is your percentage of orders that are coming from turns right now? And like, how does that differ across the different segments?

We don't disclose that. All I can tell you is the trend has picked up over the last three quarters and they're getting larger and larger.

Thank you. Our next question comes from Toshiya Hari with Goldman Sachs. Your line is open.

Hi, good morning. Thanks so much for taking the question. My first one is on the automotive business. Just from a business planning perspective, and again, I realize you've got little visibility and a lot of moving parts here, but from a planning perspective, what kind of global SAR or global unit production are you expecting for the year? And more importantly, Kurt, you talked about the secular drivers that you guys have been speaking to, the S32, you know, connectivity, radar, et cetera. What rate of outperformance or content growth should we or can we expect in calendar 25 versus 24?

Yeah, hi, Toshio. So, yeah, the first part, indeed, is pretty simple. We just quote S&P here. We think about around about 89 million units in car production this year. which would be a very slight flat minus. So just a little bit down. There, it's probably important to understand that in that China is more flat plus versus Europe and the US flat minus. So that's the two directions within that. And as Vivek alluded to, I mean, let's see what the terrorists will do to all of this. We can't say, but we model with the flaps to slightly down car production for the year. The outperformance of the company's specific growth drivers. What I suggest to do to Shia is you use the percentage growth rates, which we guided in our analyst and investor day back in November, offset by what you see the overall business underperforming currently, which is the undershipment, which we have to do on inventory digestion. But the delta between What the core business does and what the accelerated growth drivers do, that does hold. There is no difference because they all have about the same inventory levels. So statistically, looking at the total, it doesn't make sense to model any difference in inventory, which means they all suffer from the same offset. So it's the same delta. That's probably the best you can assume. And they... They run well. I mean, let me say that they also, all three of them, did grow last year from an absolute perspective year on year, while the total auto business last year was down. Those pieces, which are quite sizable, as you know, were up, and we clearly see this continuing this year.

That's helpful. Thank you. And then as my follow-up, you mentioned for the year you're expecting blended pricing to be down. in the low single digits. I'm curious what your expectations are in terms of foundry costs or wafer costs in 25 versus 24, and then somewhat related to that, Bill, you talked about potentially consolidating 8-inch facilities. If you can expand on that and kind of speak to timing and magnitude in terms of potential gross margin tailwind in future years, that would be helpful. Thank you.

Let me take the first half of your question. So, yes, I reconfirmed the low single-digit price erosion, which we see this year, this calendar year. By the way, coming from a flat line last year. I'm not sure we said this before, but I can now confirm that last year, as we had anticipated, we were neutral on pricing. This year, no single-digit down. It's now with high confidence that we can say that. And the input cost you were asking for has also started to develop more favorably, which means it helps us offset from a gross profit perspective the headwind which we are seeing from that low single-digit price erosion. The only thing is it's a bit of a timing element, and Bill spoke about this earlier, because a large part of the pricing hits us already in Q1, while the cost erosion, the input cost erosion, is through the full year. So we need through the year to offset that. But that has become a more favorable environment, which helps us offset the ASP erosion. And Bill, maybe you'll speak about the consolidation of traps.

Yes, absolutely. Obviously, this is something we shared during Investor Day. I just hinted that we're basically planning an almost complete When this occurs, it will occur sometime in 2025, and there will be a natural tailwind associated with the utilization as we start bridging some of the bill plan for the transfers of those products. That would probably be, my guess, more of an impact in the second half of the year when we decide to announce this. And again, at this point in time, I can just share you, yeah, that's roughly, basically, I would So there is a tailwind when we do and start that process, but we haven't yet.

Thank you. Our next question comes from Chris Casso with Wolf Research. Your line is open.

Yes, thank you. Good morning. The first question is, again, on some of the digital networking products that are going end of life. I want to make sure that we're calibrated on this correctly. But I think what you said is that was about 30% of the common infrastructure segment. Should we expect that a large part of that goes away over the next few quarters? I guess I'm trying to quantify, you know, how much of the business is affected by end of life and sort of the timing that you expect for that to finally work its way down.

Yeah, so first of all, yes, I reconfirm you understood me correctly. It's about 30%. exiting last year of the of the total revenue of the segments which we which we discuss about here and by the way just as an aside i mean the the rf power business in there is also pretty lumpy it's not like it's not like everything else is golden and that's the only that's the only concern but that's the one we speak about uh and yes it will continue through the next couple of quarters um to further decline given the end-of-life actions on several of these products. That doesn't mean it goes totally away, but think about the continued decline through the next couple of quarters of that 30% piece. Now, at the same time, the secure card business is okay. In there, we have RFID. You know that RFID is a growth business for NXP. So there are many moving pieces in this comms infra segment, which is why for the next three years, we guided it to be just flat. I just wanted to be sure today to call out that that 30% portion really sees a quite material decline through this year. Understood.

Follow-up question is on China. And obviously, you know, it's very strong now, you know, given some of the share shifts that are happening in the industry. I guess in the interest of no good deed goes unpunished, we do get a lot of questions about the sustainability of that strength and owing to the fact that there are a lot of OEMs in China trying to gain share. Could you talk about your view of the sustainability of what's happening in China now and the steps you're taking to make sure that the customers aren't building inventory, we're not overshipping to that region?

Yeah. That's a number of questions. Let me try and pass them. One is indeed last year, China as a region for NXP did grow by 4% year over year. So if you take the China portion of the NXP revenue, calendar 24 over 23, that was 4% up. And that made it a 36% portion of the total NXP revenue. um so while the company was down five percent china was actually up four percent last year uh we have zero indication and i have said very clear we have zero indication that there was any um inventory build or pull-in or anything like this in there we just see it really correlated and a good part of it is obviously automotive to the increased content and the relatively good um production trends and global market share trends of Chinese OEMs. So there is no pull ahead or inventory build. It was just natural growth, which structurally we think will continue, which clearly goes at the expense of the Western OEMs. I mean, as I said earlier, the SAR this year, the global car production is about to flattish. So there is a share shift from the West to China built in. And furthermore, Chris, in China, the electric vehicle penetration is really fast paced. So through the second half of last year, it was 50%. So 50% of the cars sold last year, second half of last year, were in some form electric, hybrid or fully electric in China. So very high penetration already and continuing, which, of course, delivers us over average content growth from a semiconductor perspective. We are dealing with that, I would say, aggressively to the extent that we want to be the right partner there to not have the risk of losing share. I just changed my organization. I have a business leader now for China who reports directly to me to make sure that we do what we've spoken about before, which is dedicated solutions for Chinese OEMs. Because if you think about software-defined vehicle and electrification, it is now that in many aspects China is leading. So we leverage them as lead customers and turn more of our R&D attention to that side of the world to stay competitive. Secondly, we have our manufacturing strategy, China for China, because a big requirement there is that we do local manufacturing, which we are delivering through our back-end facility, which I mentioned earlier in Tianjin, and three elements of front-end manufacturing being TSMC in Nanjing, SMIC, and HH Grades, as we announced in our investor day in November. Chris, I think this trend continues. We do everything to stay and be very competitive locally, really with substantial changes in how we operate, because we think this continues to be a significant growth vector for NXP.

Thank you. And our final question comes from Joshua Buckhalter with TD Cowen. Your line is open.

Hey, guys. Thanks for squeezing me in and taking my question. Very much appreciate that you gave us the rough outlook for the second quarter, given the low visibility environment. I guess, as you sit here today, do you expect to still be undershipping in that second quarter? Is there a way to quantify that amount? And I assume within that flat to up number, that still includes the channel staying in sort of the eight to nine week range. Thank you.

Yeah, thanks. Judge, this is a good trial to further have us guide the second quarter, which we did not intend to do. Yet, it's just mathematics. If we are flat or slightly up, we still undership. We very clearly think we have a much higher natural demand and run rates than that. So if it is flat to slightly up, only in quotes, then it continues to be undershipment. which I would think is in holding discipline on the channel. Yes, the eight to nine weeks is it. And secondly, it would then be probably further digestion of on-hand inventory at especially automotive tier one customers. Again, all of this is not a guide, Josh, but if you put it that way, if it is flat to slightly up, then that would be indeed the consequence.

Got it. I appreciate the call there. And I'll give this cycle a break for a moment. I wanted to ask about the TT Tech acquisition. You know, you're moving further into the software space and acquiring middleware assets. Can you maybe speak to, I guess, one, how that changes your conversations with your OEM customers and the potential pull for your broader set of hardware solutions? And also, is there any element with this acquisition in particular where you're competing a little bit more so with your customers? Thank you.

Yeah, Josh, thanks for that really, I think, important question because that's a key strategic move which we announced there. I would say that very clearly it does enable the conversation and engagement with automotive OEMs. So when you ask what does it do, it enables it. The software-defined vehicle definition and architecture creation is in the hands of the OEMs. no single tier one can ever do that it has to be top down for the whole vehicle so it is owned by the oems and in order to make nxp the leading partner for them to to architect those those new backbones of the car we needed more software that became abundantly clear over the past couple of quarters And this is where TT Tech Auto fills ideally in. So it gives us the possibility to have that conversation and to co-design those STD architectures with OEMs. I wouldn't call it competition with our direct customers, but we are moving up the value stick. I mean, that is a matter of fact, Josh. So in that sense, from what Jens Hinrichsen, my leader for the automotive business, talked about in our investor day in November. TT Tech is a very important building block to make that vision a reality, which is co-architecting those platforms with OEMs.

Thank you. This concludes the question and answer session. I would now like to turn it back to Kurt Sievers for closing remarks.

Yeah, thanks, operator. Yeah, thanks for paying attention to today's call. We continue to be in a very cloudy environment where you saw our hesitation and cautiousness to call the bottom or to speak about the rest of the year. We take, however, a very rigorous focus on cost and gross margin management, which is under our control to continue consistently on that strategy of soft landing to be ready and best prepared for the upcycle when and if it comes. With that, I thank you for your attention. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.