NXP Semiconductors N.V.

and thank you for standing by. Welcome to the NXP first quarter 2025 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference call is being recorded. I would now like to hand the conference over to your first speaker today, Jeff Palmer, Senior Vice President of Investor Relations. Please go ahead.

Thank you, Tonya. Good morning, everyone. Welcome to NSP Semiconductor's first quarter earnings call. With me on the call today is Kurt Seavers, NSP's President and CEO, and Bill Betts, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties, 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 marks in which we operate, the sale of new and existing products, and our expectations for the financial results for the second quarter of 2025. NSP undertakes no obligation to revise or update publicly any forward-looking statements. For 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, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our first quarter 2025 earnings press release, which will be furnished to the SEC on Form 8K and available on NXP's website in the investor relations section.

Now I'd like to pass the call to Kurt. Thank you, Jeff, and good morning, everyone. We appreciate you joining our call today. I will review our quarter one performance and then discuss our guidance for quarter two. Beginning with quarter one, our revenue was 10 million better than the midpoint of our guidance. The revenue trends in the mobile and communication infrastructure markets were slightly above expectations, while performance in the automotive and industrial and IoT markets were slightly below our expectations. Taken together, NXP delivered Q1 revenue of 2.84 billion, a decrease of 9% year-on-year. Non-GAAP operating margin in quarter one was 31.9%, 260 basis points below the year-ago period, and about 40 basis points above the midpoint of our guidance. Year-on-year performance was a result of the lower revenue related gross profit fall-through, partially offset by lower operating expenses. From a channel perspective, distribution inventory was in line with our guidance at 9 weeks, below our long-term target of 11 weeks. From a direct sales perspective, we continue to support Western Tier 1 Auto customers with their ongoing digestion of on-hand inventory against the backdrop of a cloudy automotive demand environment. Now let me turn to our expectations for the second quarter. We are operating in a very uncertain environment influenced by tariffs with volatile direct and indirect effects. As of today, the direct impact of the current tariffs is immaterial to our financial However, the indirect impact of current tariffs related to future end demand and supply chain remains unknown. As of now, we are not seeing any abnormal customer order pull-ins or push-outs, which could be associated with the tariffs.

And other than the potential indirect impacts of tariffs, we are seeing some positive trends.

These trends include improving distribution customer backlog levels, as well as stabilized order signals from our direct customers. Additionally, we are experiencing an increase in short cycle orders, as well as some spot product shortages leading to customer escalations. Taken together, these trends have historically been indicative of the early innings of improving cycle dynamics. Therefore, our guidance reflects these improving cycle trends and the immaterial direct tariff impact, but we have not incorporated any judgment of indirect impact from tariffs. Given the uncertain macro environment, we are only providing guidance for the second quarter. We are guiding Q2 revenue to $2.9 billion, down 7% versus the second quarter of 2024, and up 2% sequentially. At the midpoint, we expect the following trends in our business during quarter two. Automotive is expected to be flat versus quarter two 2024, and up in the low single digit percent range versus quarter one 2025. Industrial and IoT is expected to be down in the mid teens percent range year on year, and up in the mid-single-digit percent range versus quarter 1, 2025. Mobile is expected to be down in the mid-single-digit percent range on both the year-on-year and the sequential basis. And finally, communication infrastructure and other is expected to be down in the high 20% range versus quarter 2, 2024, flat versus quarter 1, 2025. Our outlook assumes that we will continue to undership end demand in automotive, and we expect channel inventory to be flattish at nine weeks against our long-term target of 11 weeks. Before turning to your questions, I would like to review a strategic acquisition which we announced in the first quarter. On February 10, we announced the intention to acquire Kinara for $307 million, an industry leader in high-performance, energy-efficient, and programmable neural processes. This acquisition provides a scalable platform for AI-powered edge-based systems, combining NXP's broad portfolio of processing, connectivity, security, and advanced analog solutions with Kinara's AI NPU hardware and software. We believe there is an inflection point in the industrial and IoT markets, which is creating demand for intelligent edge AI compute solutions. Customers need high performance, secure low-power processing, which takes place locally at the edge. This eliminates the requirement to connect to the cloud for the execution of AI models in order to meet the critical latency, security, and real-time edge requirements. Kinara already has meaningful customer engagements within the factory automation, building and energy management, health care, and smart home end markets. We expect the regulatory approval should be complete by the end of second quarter. The transaction will not have a material impact on the financial model shared at our investor day in November. We expect Kinara to be accretive to our current financial model by 2028, and it will accelerate our overall position in the industrial and IoT markets. In summary, XP's first quarter results and guidance for the second quarter I'm the pin of Porsche's optimism that NXP continues to effectively navigate to a challenging set of market conditions. We are operating in a very uncertain environment influenced by tariffs with volatile direct and indirect effects. Considering these external factors, we are redoubling our efforts to manage what is in our direct control, enabling NXP to drive solid profitability and earnings. Now, finally, on a more personal note, after deep reflection, I have decided to retire from NXP at the end of 2025. My past 30 proud years with NXP, including seven years as president and five years as CEO, have been hugely fulfilling. I am incredibly thankful for the invaluable privilege to work with so many amazing people, and having the opportunity to co-create NXP's future and drive technological leadership for a better world. For three decades, I've passionately prioritized and dedicated my energy to NXP and all of our stakeholders. Now the time has come to start planning for a shift and focus on my personal journey. I am looking forward to entering the next chapter of my life in good health, taking more time for family, friends, and personal passions. And I would like to congratulate Raphael on his promotion to president of NXP. I look much forward to the next six months of transition period before Raphael assumes the chief executive officer role for NXP in October. Work very closely together with all of you in the upcoming period. Building on more than 10 years of experience in NXP, Rafael will be an excellent leader to execute on NXP's strategy to bring intelligent systems to the edge in the automotive and industrial IoT end markets. 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 Q1, and provided our revenue outlook for Q2, I will move to the financial highlights. Overall, our Q1 financial performance was good. Revenue was slightly above the midpoint of our guidance range, while gross profit was in line, and operating expenses were below the midpoint of our guidance. Taken together, we delivered non-GAAP earnings per share of $2.64, or $0.05 better than the midpoint record. We continued to manage sales into the distribution channel, consistent with our guidance of nine weeks. Now moving to the details of Q1. Total revenue was $2.84 billion, down 9% year-on-year, slightly above the midpoint of our guidance range. We generated $1.59 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 56.1%, down 210 basis points a year-on-year and 20 basis points below the midpoint of our guidance range due to product and channel mix. Total non-gas operating expenses, $686 million, or 24.2% of revenue, down $50 million year on year, and $14 million below the midpoint of our guidance. From a total operating profit perspective, Non-GAAP operating profit was $904 million, and non-GAAP operating margin was 31.9%, down 260 basis points year-on-year and 40 basis points above the midpoint of our guidance. Non-GAAP interest expense was $80 million, while taxes for ongoing operations were $143 million, or a 17.4% non-GAAP effective tax rate. Non-controlling interest was $7 million, and results from equity account investees associated with our joint venture manufacturing partnerships was $1 million. Taken together, Below the line items were $3 million unfavorable, which is our guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $127 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $11.73 billion, up $871 million sequentially. due to a combination of a second tranche of the European Investment Bank Loan and the initial results of our new commercial paper program. Our ending cash balance was $3.99 billion, up $696 million sequentially due to the cumulative effect of additional liquidity, capital returns, half-ex investments, and cash generation during the quarter. The resulting net debt was $7.74 billion and we exited the quarter with a trailing 12-month adjusted EBITDA of $4.89 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.6 times and our 12-month adjusted EBITDA interest coverage ratio was 19.2 times. During Q1, we repurchased $303 million of our shares and paid $258 million in cash dividends. After the end of the quarter and through April 25th, we bought an additional $90 million of our shares under an established 10-B-5-1 program. Turning to working capital metrics, Days of inventory was 169 days, an increase of 18 days sequentially, and slavish on a dollar basis. Days receivable were 34 days, up four days sequentially, and days payable were 62 days, down three days sequentially. Taken together, our cash conversion cycle was 141 days. Cash flow from operations was $565 million, and net capex was $138 million, or 5% of revenue, resulting in non-GAAP free cash flow of $427 million, or 15% of revenue. During Q1, we paid a $125 million capacity access fee related to VSMC, which is included in our cash flow from operations. Additionally, we paid $16 million into ESMC, our equity accounting foundry joint venture under construction in Germany, and a $20 million into the SMC, our equity accountant foundry joint venture under construction in Singapore, both of which are included in our cash flow from investing. Now turning to our expectations for the second quarter. As Curt mentioned, we anticipate Q2 revenue to be $2.9 billion plus or minus about $100 million. At the midpoint, this is down about 7% year-on-year and up about 2% sequentially. We expect non-GAAP gross margin to be 56.3% plus or minus 50 basis points. Operating expenses are expected to be about $710 million, plus or minus about $10 million. The sequential increase is driven by the normal annual merit increases and the previously disclosed annual license payment modestly offset by our ongoing restructuring to make room for the three pending acquisitions. Taken together, we see non-GAAP operating margin to be 31.8% at the midpoint. Please note our second quarter guidance does not incorporate the three pending acquisitions. We estimate non-GAAP financial expense to be about $88 million. We expect the non-GAAP tax rate to be 17.4% of profit before tax. non-controlling interest will be about $9 million, and results from equity account investees, about $2 million. For Q2, we suggest for marketing purposes, you use an average share count of 255 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $115 million. Taken together at the midpoint, this implies a non-GAAP earnings per share of $2.66. Furthermore, we continue to operate our internal FABs in the low 70% range, and we expect our days of inventory to be flattish into Q2. Turning to uses of cash, We expect capital expenditures to be around 4% of rent. We will pay a $35 million capacity access fee to DSMC. Additionally, we will make a $16 million equity investment into ESMC and a $50 million equity investment into DSMC, our two equity-accounted founding joint ventures under construction. Pending the regulatory approval of the three acquisitions, it will result in a cash payment of $1.1 billion, and we will redeem the $500 million tranche of debt due in May from our current cash balance of $4 billion. After closing these acquisitions, our ongoing restructuring actions are intended to enable NXP to get into its stated long-term operating expense model of 23% in the second half of 2025. In closing, I would like to highlight a few focus areas for NXP. First, as Kurt mentioned in his prepared remarks, Our outlook does not consider unknown indirect and market demand impacts because of global tariffs, while the direct impact of the current tariffs are immaterial to our financial guidance. Second, with the upcoming CEO transition, there is no change to our long-term financial model and capital allocation strategy. And lastly, we are operating in a very uncertain environment influenced by global tariffs. Considering these external factors on the end markets we operate, we are redoubling our efforts to manage what is in our direct control, enabling NXP to drive solid profitability and earnings while executing our growth strategy. With that, I would like to now turn it back to the operator for your questions.

Certainly. As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1-1 again. Please limit yourself to one question and one follow-up. Please stand by while we compile our Q&A roster. Our first question will be coming from Christopher Muse of Cantor Fitzgerald. Your line is open, Christopher.

Yeah, well, good morning, good afternoon. Thank you for taking the question. And, Kurt, you will clearly be very missed. Thank you for everything that you've done over the last five years, and obviously before that as president. I guess maybe first question, you know, you highlighted in your prepared remarks the Canara acquisition, but you've also made acquisitions with Aviva and TT Tech. And I guess my question is this. As you think about competition from China in the MCU world. How much of these acquisitions are defensive in terms of a world where MCU discrete purchases probably decrease and focus on software is more important or conversely more offensive in terms of true differentiation both in the auto and in the industrial side of things where you look to really separate yourselves?

Many thanks, and good morning, CJ. Yeah, indeed, we have had three acquisitions now, Kinara, Aviva, and TT Tech Auto. Kinara is the AI Edge compute, which I just discussed briefly on the call. Aviva is about asynchronous connectivity in the car between displays and cameras, and for very high data rates in one direction versus not in the other, so clearly beating what Ethernet can do. And TTTEC Auto is indeed a very strong software complement to our CoreRite platform. And to answer your question in brief, this is clearly an offensive addition, complement to our product strategy as we have it today to make us more differentiated with our compute portfolio. I was a little bit hesitating, T.J., because it's not just the compute portfolio, because especially the Aviva and TTTEC Auto is the whole offering with our CoreRite platform for the software-defined vehicle. Clearly, this will come to good play in China, but I have to emphasize, T.J., not only in China. I mean, this is a global offering, but it will certainly also further help our China for China strategy.

Very helpful. Then as a quick follow-up, Could you give us a kind of level set where we are in the auto correction you talked about? Under shipping and demand I guess when you now expect excess inventory to be digested and how are you thinking? From my geographic perspective, I think you know three months ago you talked about China strong America's kind of slowly recovering in Europe week is that kind of consistent with where we are again today.

Thanks so much Yeah Actually, quarter two guidance is a bit of a turning point above and beyond the comments I made in my prepared remarks about better backlog with distribution customers, about stabilization of the order patterns from direct customers, some early innings of escalations because of supply shortages with very short-term orders. But the turning point of order in the second quarter is actually, in my view, that second quarter we are flat year on year. And that's the first time after five quarters. So we look now back to five quarters of year on year declines in automotive. And this second quarter of calendar 2025 is the first time that we are flat. It is indeed, CJ, a combination of a stabilizing order pattern from the direct customers with somewhat slower digestion of above inventory in the western tier ones. I say somewhat slower because some of them are done, and we still have a few left which are still absorbing over inventory. So this is still under shipping to their end demand. At the same time, we see a pretty nice pickup in order pace. especially from Asia for the second quarter automotive. And Asia here is a combination of China and Japan. Admittedly, that also has seasonal components. China automotive is always seasonally weak in Q1 and then picks up the pace in Q2, and that's exactly what we see. And in Japan, there is another element which makes Q2 always stronger than Q1, which has to do with the price adjustment. I talked about global pricing in the last earnings call, and I hope I made a clear comment that most of the Western customers resettle pricing for the full year by January 1st. For Japan, that is by April 1st. And natural customer behavior is that they hesitate to buy before they have the new price. So Japan was waiting, and that's why we see now an uptick in Japan into the second quarter. Since it will be one of the next questions for sure, I say it up front, with having all the price negotiations with the large customers now settled for the year, I can reconfirm and with confidence what I said last earnings, which is we will have for this year a low single-digit price erosion for the whole company for the year. So no change to what we said last year. It's just that now the confidence is fully in place since we also closed and operate and execute in Japan. Thanks so much.

Thank you. One moment for our next question. Our next question will be coming from Ross Seymour of Deutsche Bank. Ross, your line is open.

Hi, guys. Thanks for having me ask a couple questions, and I want to echo what CJ said. Thank you so much for all your help over the years, and congrats and best of luck in retirement. So I guess my first question is, I know you talked about the direct and indirect not really having an impact on the tariff front, but can you just talk a little bit about how NXP is viewed by the customers and by the various governments. You know, I know where you're technically headquartered, but are you a U.S. company to China? Are you a China for China play? Does the U.S. consider you a European company? Just trying to talk through the manufacturing footprints you have and the flexibility that might provide.

Yeah, thanks, Ross, and good morning. Let me first reiterate indeed what i said about direct and indirect impact the direct impact of the current tariffs we consider immaterial to our financial guidance so there is a tiny little bit but it is immaterial therefore consider zero what i did say about the indirect impact is that it is completely confusing because things are changing by the day i think today is another reiteration planned for the 25 auto So that keeps changing and we don't see a consistent pattern, but I would also clearly say we have been very busy talking to all of our customers across the world, asking them what they plan to do, what they have possibly done. And there is neither pull in or push out effects at this point in time. And we also don't, we didn't really foresee anything for the second quarter from an indirect perspective. So that's why the comment in my prepared remarks The second part of your question is indeed yielding something we essentially see as an opportunity. Especially in China, Ross, we are seen, and of course we position ourselves that way, as a European company. Very clearly as a European company with a lot of our manufacturing operations given our hybrid manufacturing strategy outside of the US. So that makes us, I'd say, a pretty much appreciated partner. for the industry and our customers in China. Now tariffs have been exempted and coming and going over the last couple of weeks, but clearly we've seen an opportunity with our China for China strategy from these tariffs because our manufacturing structure and our hybrid manufacturing network, which I think I've discussed over the past couple of quarters already, which is very much emphasizing and strongly building a local manufacturing network is a positive in this. So it's not just how we are seen, Ross, but it's also factually such that I think more than a third of our China for China business today is already manufactured in China. So we already have made a lot of progress in leveraging this advantage. Now, you also asked how are we seen in the U.S.? ? Well, of course, in the U.S., we are seen as a U.S. company, which means we are complying with anything that is being asked from us. But I think that the part which gives us potentially a boost and we try to leverage is that the Chinese are seeing us as European. And we have already spent, I'd say, two years of changing our supply network to be a better partner from a China for China manufacturing perspective.

Thanks for that. I guess for my follow-up, I just want to pivot over to the industrial side of things. You gave a lot of color about the order patterns, et cetera, and automotive channel versus direct, et cetera. We've heard from other companies that they're seeing some of the green shoots, and I know those are dangerous words these days, but nonetheless, in the industrial business, I just wondered what you're seeing on that side of things, both direct or geographically, and then, of course, via the channel.

Yeah, as a precursor to this, I'm a little bit humble when it comes to looking at NXP as a bellwether for the industrial sector. I mean, we are comparably small, so I'm a little bit careful in taking my commentary now as a strong direction for the whole industry. What we are seeing is that actually in Q1, from a performance perspective, actual performance, but also for the guidance of the second quarter, which is up with single digit, it is more or less by the consumer IoT part than the core industrial part. The ratio is still about the same as we discussed earlier, Ross, which is that 60-40 between core industrial and consumer IoT. But directionally, both in Q1, but also now into Q2, it is the consumer IoT part which is stronger on a relative basis. However, I do believe, Ross, that also has to do with company-specific design wins. We just have a number of really strong design wins. And again, they are specifically in China, which are now playing out nicely in the first half of this year. So I don't know we can take this as a proxy for the industry.

It's probably pretty specific to NXP.

Thank you. Our next question will be coming from Chris Caso of Wolf Research. Your line is open, Chris.

Yes, thank you. Good morning. I wonder if you could expand a little bit on some of the comments you made on your China for China strategy and I guess how far that progresses And, you know, I guess ultimately, you know, within China, you know, how much of your China revenue do you expect to be able to supply domestically and under which time? And then maybe you could speak a little bit to the U.S., obviously, because, you know, that's something we're awaiting the regulations. And, you know, how much of the U.S. you'd be able to satisfy from the U.S. FAB?

Yeah. So, good morning, Chris. First of all, the China for China strategy has two legs. One is the manufacturing leg, which I will expand on in a second. The other one, I think structurally or strategically even more important, is the road mapping and product generation dedicated for Chinese customers with the consideration of them as lead customers, given that they are really setting the pace now in the automotive and industrial sector when it comes to innovation. And I might have talked last fall about the fact that I even changed the management team of NXP to the extent that I have a leader now directly reporting to me who runs the China business to make sure we have full visibility on the highest level in the company on the specific product needs. So the product roadmapping is a very important strategic element. Now, back to your question on the manufacturing side, we have currently about... By the way, everything I say now is wafer manufacturing. There is different considerations when you think about back-end test and assembly versus front-end wafer manufacturing. I speak now about wafer manufacturing, where we have about 30% capability at the moment to supply, or not only capability, it's actually what we do to supply for our China for China business. So from the revenues, which we currently ship China for China, 30% are actually sourced in China, and of course, we work hard to expand this. Now, don't assume that the rest is in the US. You know that we have 60% of our overall evaders coming from boundaries, which are typically not in the US. So we have a much higher number, which is non-US sourced, which is then from Europe and other places in Asia. serving China, so it's a much higher number than the 30% which is already in China. But again, we want to work this as high as possible as soon as possible to have maximum independence here relative to possible tariffs to that end. I would actually say, Chris, the tariffs, of course, are now adding uncertainty and complexity, but the China for China strategy, which I can speak about here, is not something we now suddenly did because of the tariffs. We've had that actually in place for probably more than two years, given the revenue opportunity, which we see for our core markets, automotive and industrial in China, where we just see that the industry in China is leading the tech now from a global perspective, which is why we've been leaning into this already for a long time.

Thank you. As a follow-up, a question for Bill, and I think you made a comment that you would get to your 30, I'm sorry, your 23% expenses percentage revenue target in the second half of the year after accounting for the acquisitions. Could you go into a little more detail on that and what assumptions you're making to get to those numbers?

Yeah, sure. So on operating expenses, right, we're not guiding the second half. You can see in Q1 we were favorable against our guidance. So that means we're ahead of the plan of the restructuring activities. And we're going to continue that into Q2 and Q3 because it's time phase. Think about, you know, at the end of June 30th, we will have probably 1,250 extra employees joining us. for a full quarter effect starting in Q3 and Q4. And you're right in my prepared remarks. Basically, what we're doing is continue making space for those acquisitions so that we can absorb and hit our model at 23%. Obviously, we're not guiding the second half, but we have scenarios on what revenue we think we want to go do and different levers to go pull against that. But we feel pretty confident we'll land sometime in 2020, the second half of 2025, at the model. Got it. Thank you.

Tonya, we'll take the next caller.

Thank you. And our next question will be coming from François Bouvenies of UBS. Your line is open, François.

Thank you very much. And again, Kurt, thank you very much for your help. And you will be missed. Sad to see you leaving, but well-deserved, I have to say, as well. The two questions I had is on, firstly, on, you said, Kurt, that you don't see much pull-in so far and, you know, not much impact there in terms of all the behavior and obviously you manage very well during COVID the inventories in the channel. So my question is, if you were seeing some pull-in at some point, would you allow your customer to increase their inventories or would you control it the way you did during COVID? I mean, how do you want to play this dynamic here given, I mean, your... Customers, maybe they would like to increase the buffer and inventories maybe above some level that you would like to see.

Yeah, thanks and good afternoon, Francois. And by the way, I'm still around for a full half year. So this is not a good time to work. On the pull-ins. So yes, I first of all reconfirm through Q1 and through quarter-to-date Q2, we have not seen pull-ins. I say that very explicitly. We checked it very carefully, customer by customer, because we wanted to be sure that this is clean of that. If it was to happen, I think the underlying policy, Francois, continues to be we don't want this. We don't like this. Now, there could be specific reasons and specific cases with specific customers where They can explain to us why it makes sense, and we might want to do it. But I would say, especially on the distribution side, which is more than 50% of NXP, I think I said in my prepared remarks, we want to stay flat to the nine weeks inventory into the second quarter. There again, we wouldn't want to allow it. And I also said, and I don't know if CJ or Ross asked earlier, we are still busy with some tier one automotive customers to digest inventory. And for that same reason, we don't have a hell of a lot of appetite to consider pull-ins. So I'd say with possible exceptions always in the range of the moment, we don't want that. We would not want to support it.

Great. Thank you, Kurt. Maybe my follow-up would be for Bill on the gross margin side. I mean, your inventory days are relatively high when you look at the history. You said you will. You think it will be flat. And then when I look at the gross margin, you are around 56, low 56 in H1. I looked at the consensus. It has more than 57% gross margin in the second half of the year. So how should we think about the gross margin here? Because it seems tricky to get a big improvement of gross margin here. with inventories having to come down on your balance sheet, maybe not in Q2, but in Q3, Q4. So can you help us or reassure us on the gross margin side trajectory in the second half of the year? Can it go up despite inventories coming down on your balance sheet? And maybe you can remind us the mixed effect.

Sure, absolutely. Very fair question. So let me just repeat, in Q1, we had a slight miss driven by our product and channel mix. And if we hold everything equally in going into Q2, we're just saying, okay, right now our order book's pretty full. We actually see the mix, and it says similar mix as Q1, and we're getting the follow-through on the higher revenues over fixed costs, and that's why we guided the 56.3. Now, without providing guidance for the second half of 2025, The best way to think about our gross margin is a function of revenue levels before any of our company-specific drivers to influence it. So, for example, at a 13 billion revenue annual number level, we will feel very confident at 58%, plus or minus. 12 billion, 57. 11 billion, 56. Again, that's that plus or minus 50 basis points. And we've demonstrated those levels in the past. Now, from an upside perspective, we obviously have these additional levers to drive gross margin much higher. And they include increasing of our internal utilization. Again, that's at 70%. And it's staying at 70% because our inventory, as you said, is at the higher end. The consolidation of our 200-millimeter factories, we will be talking more about that in the second half. We're increasing our industrial and IoT go-to-market through our channel, so we want to focus on addressing that mass market. We also have And by the way, our company-specific Accelerate growth trackers are tracking to our growth plans versus investor day. I know we're only one quarter in, but everything is good there. We have the normal operational efficiency of our projects to offset just these annual pricing, low single digit that we occur, so those two offset each other. And a bit longer term, which we've shared all of last year, we will leverage our DSMC 300 millimeter joint venture with Vanguard which is tracking slightly ahead of schedule, so we feel pretty good about that. So overall, stepping back with the revenue numbers I just gave you, we feel very confident to deliver our long-term gross margin range of 57 to 63. It really is where revenue comes from and the influence at the starting point, and then you have these levers. On inventory, again, you're right, 169 days. is probably the upper bounds in my liking, for sure, related to it. Now, you have to think, you know, we managed Q4 going into Q1. We had to manage the absolute dollars because it was the variable orders with our suppliers, and we kept utilizations internally. So going into Q2 and also Q3, Again, 169 because we have a backlog that we see actually is okay so far for Q3, and so we have to make sure we take that into account to make sure we build the proper product. But as you all know, with the uncertainty around the macro effects related to global tariffs, and more importantly, the number of potential disruptions from a supply chain perspective that could occur and we're starting to read about, We believe holding a bit more inventory is important from the lessons learned from the past. But again, I agree with you. The 169 is the upper balance, and we're going to probably adjust this once we learn a little bit more about second half and the confidence of second half revenue.

Very clear. Thank you for your answers.

One moment for our next question, which is coming from Stacey Raskin of Bernstein's Research. Your line is open, Stacey. Okay.

Hi, guys. Thanks for taking my question. Bill, first a question for you. So I know you said you weren't guiding the second half. That being said, the OpEx targets, I mean, you're running $710 million a quarter in OpEx. 23% of that would be like $3.1 billion at some point in the second half. You got close to $50 million a quarter in OpEx coming in Q3. So I mean, $750 a quarter would be like $3.3 billion at some point in the second half. I mean, are these the kinds of revenue targets? into the second that you have in mind when you give those OpEx targets? Like, how do we think about that in the context of everything else?

Well, let me remind you about the Q2 OpEx number. There is a one-time payment from a reoccurring license that occurs each year. That's about $16 million to one of our peers, and I've had that in my prepared remarks. I also mentioned that we continue to restructure the company to make space for these new acquisitions, which I have not disclosed the size from an operating expense standpoint. related to it. So we feel pretty confident under the different types of revenue scenarios that we can model because we have other levers to make sure. Remember what I said and what our whole message is, we are redoubling our efforts on the areas that we can control. And as you know, Stacy, The two things that we like to control is our spend, because that we can do, as well as to some extent the inventory time based on what we're building and not building and taking and placing bets with those orders with the unknown macro environment. Hopefully that helps provide additional color effects.

That is helpful. And I guess for my follow-up, I guess I'm going to try it. So I know, again, you said you didn't want to give color on the backup, but I mean, any just even soft commentary? on how you guys are seeing Q3 right now? Like, I mean, what's typical seasonality in Q3? Is there any reason to expect you could be above or below that typical seasonality? I'm just, I'm sympathetic to the idea that nobody knows what the hell's going on at all right now, but any color you can give us at all, even a little bit farther out, would be helpful if you're so inclined.

Yeah, good morning, Stacey. This is Kurt. Look, last year we did this. And you know that we were wrong. We called a cycle which didn't happen. And one of the learnings from that was that we would not want to repeat this. Now this year, the situation is even more complex because as I said in my prepared remarks, on the one hand, we do see now what has been always good early innings of the cycle recovery. I mean, that's very positive what we see there. At the same time, we have this pretty material uncertainty of the indirect impacts from the third, which we just cannot figure out what they would possibly mean for the second half. Therefore, we wanted to draw here a clear line, not even for a soft cut for the second half. We just can't. It would be really irresponsible to do it. So we stick to quarter two.

I mean, how do you even tell the difference between like a cycle recovery or green shoots and pull forwards and short-term orders and things like that? Wouldn't they look the same?

Oh, we can clearly see that because as I gave you a couple of elements, one of them was that the backlog of our distribution and customers, which we see by product, is starting to grow after a long, long period of absolutely no growth or even decline. And that is different customers, new customers, new products. That is totally different to a pull-in. Absolutely no pull-in. I also talked about a nicely stabilized order pattern from our direct customers, which has been in decline for a long, long, long period and has now stabilized across the board, which is not a pull-in because it's far too even to be a pull-in. So we think we can clearly differentiate between those. Because, as I said earlier to I think Francois, we want to avoid to entertain pull-ins and increase inventories again. So, Stacey, that's for us a pretty focal point. So, therefore, no, let's stick to the second quarter and see how that plays out with the uncertainty which is provided to us from the tariff landscape to our customers. You know, Stacey, what we do is we speak to our customers, and that's where that uncertainty comes from. I mean, it's not us inventing it, but we have no better source than speaking to our customers, big and small, across the different segments, and they have no idea what the second half should look like. So how should we make it up?

Well, I get it. That's helpful. Thank you so much. I appreciate it.

And one moment for our next question. Our next question will be coming from Vivek Arya of Bank of America Securities. Your line is open.

Thanks for taking my question. Kurt, I just wanted to go back to these, you know, the green shoots that were discussed because when I look at your Q1 results, auto and industrial sales, industrial IoT sales are actually modestly below expectations. I think the upside came from mobile and the comm segment. And Q2, you're largely guiding to, you know, kind of seasonal trends. So if there are green shoots, is it fair to say they have not yet shown up in this first half and they could show up in the second half? I'm just trying to, you know, get a sense for where are these green shoots, you know, showing up, if any.

Well, Vivek, you don't know what we thought it was earlier because you practiced already if you want to do a soft dive for Q2. where, I don't know, I think I said it's maybe flat or very, very slightly up. No, but I think there was something very relevant in your question, which is in Q1, indeed, auto and industrial and IoT were a touch light against guidance, while the other two segments were a touch richer. That has a reason, and it is actually Japan and China. So it is the seasonal weakness of China automotive, which was a little bit stronger than what we had anticipated. Again, we know that that was to happen. So it was forecasted, but not to the full extent it came. And in Japan, I think I talked about this earlier, it is the price change, which is leading customers to finally, and mind you, that for several years, we have either increased prices or kept them flat. Now, it was the first time that we offered a low single-digit price decline for customers also in Japan. So they were eagerly waiting and held actually back to purchase until they could enjoy the quarter two prices. So it's a bit of a... kind of specific. And for quarter two, we see things coming up. What you don't see, Vivek, is, of course, what underneath is still at work from an inventory digestion perspective with the tier one automotive customers, which is kind of fogging some of the nice uptake which we are seeing. But again, you didn't hear me calling the cycle, Vivek. I said we see now trends which are or have been in the past, and I would say also now, indicative of early innings of a cycle recovery. But it's certainly not at the stage that we would say with belted business, everything is jumping up. That alone would not be given, simply given the uncertainty which our customers face from Paris.

Got it. And for my follow-up, the last, I think, forecast that we saw from IHS or S&P was for light vehicle production to be down, I think, kind of low single digit. So let's assume that that is the case, right? Including all the effects of tariffs and whatnot. So if that is the industry backdrop, what does that tell us about what NXP's automotive business could do this year, given all your company-specific growth drivers? Thank you.

Well, let me confirm, Vivek, that indeed S&P... just published their latest forecast for the year, which says the SAR is going to be down by almost 2% this year, which compares to a flatline last quarter. So it has degraded, which maybe or maybe not is a consequence of the tariff fears. It could be. But the matter of the fact is, indeed, it is now a 2% decline in the forecast versus a flatline before. As we said earlier, we are not guiding the year and we are also not guiding the year for automotive feedback. However, the much bigger role continues to play the content increases. All of the growth drivers, which we had laid out at the last investor day in November, think about SDVs, think about radar, think about electrification, are nicely at work. So we are on track on those. And I think it is those content increases which should continue to make us very optimistic about automotive, not that much the SAR.

So does that suggest they can offset the SAR decline, or are we not willing to say that yet?

Hey, Rebecca, I'll take that. I really think we're going to hold off giving any real color on where the second half could be revenue-wise. And you also have to remember, Our revenue does not synchronize the global production quarter to quarter. There's always a six-month or so lag between when we recognize revenue and when a car comes out of the factory somewhere in the world as counted in sum. But we really do want to respectfully not address revenue targets or potentials in the second half.

Understood. Thank you.

Good luck. Tony, this will probably be our last panelist question, if you would.

Certainly. And our last question will come from Mark Lipicist of Evercore ISI. Mark, your line is open.

Great. Thanks for taking my question. And, Kurt, congrats on your retirement. Really appreciate all your great insights and help over the years. And wish you luck. The question, Kurt, is for you. Every two to three years, there's like a new theory on inventory stocking that gets proposed. you know before COVID it was just in time and then it you know and then during COVID became just in case and now it's just in time and you know I think our own checks are consistent with your own that some of the tier ones are well below normal for their inventory stocking on semis at least and my question is about like what would you you know what do you what would you expect on a restocking cycle are you of the view that that something has foundationally changed like you and your semiconductor peers keep inventories well above normal and your your lead times you know lower than they were they had been historically or and and then downstream your your supply chain feels comfortable with the idea of just keeping things very low and then you don't really benefit from a restocking cycle or are you of the view that that really nothing has changed and this is all driven by lead time so when lead time stretch everybody's just going to restock again i i fear mark i have a bit of a frustrating answer it's it's more the letter than the first um

I'd say more than because there are notable exceptions to this. I don't think that semiconductor companies in general will hold more inventory because it would be just the wrong inventory. That always creates a mixed issue. What has got better in several cases is the communication and the alignment between customers and us on understanding the future, on understanding where could be bottlenecks and, of course, given the whole geopolitical turmoil, there is also a more sophisticated, diversified supply chain in place now across the world, which eventually has going forward. But fundamentally, Mark, I fear as an industry in total, intellectually, we've all learned a lot practically not much of that is actually happening as we speak. The working capital pressure across the supply chain is just too high to allow that to happen. With that, I guess, Jeff, that was the last question. Mark, do you have a follow-up?

Oh, yeah, sure. No, that's all I had. It was as simple as that. Thanks so much, Kurt. Appreciate it. Thanks, Jeff. Thank you.

Thanks very much, Mark. And let me go to make just a couple of closing comments. We have now a very interesting crosshair situation between what I would call a significant macro uncertainty offered by the tariffs, with the current tariffs more the indirect impact of them rather than the direct, which is immaterial for us. standing against the clear early innings of cycle recovery. Mind you that, for example, automotive turns to a flat year-on-year already now in the second quarter. So those two are competing forces which are not easy to forecast into the rest of the year. With that, we continue to, I hope, show pretty strong resilience through the draft cycle. at the same time offer excellent exposure to the secular growth drivers, especially in the automotive and industrial sectors. So when we zoom out from this, we see us nicely on track to doubling our EPS by 2030 plus, as we had laid out in our investor day last year in November. Of course, a lot of turmoil short term, but seeing the cycle coming back now, of course, overshadowed by that uncertainty in the macro from Terex, But fundamentally, seeing the cycle coming back, we consider as a pretty nice positive. Thanks for your attention today and see you soon. Thank you.

And ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.