NXP Semiconductors N.V.

Hello, and thank you for standing by. Welcome to NXP Third Quarter 2025 Earnings Conference Call. At this time, all participants are on a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session, you will need to press Star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press Star 11 again. I will now like to hand the conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead, sir.

Thank you, Tawanda, and good morning, everyone. Welcome to our third quarter earnings call today. With me on the call today is Rafael Sotomayor, NXP's President and CEO, and Bill Betts, our CFO. Also on the call with us is Kurt Sievers, who will act as a special advisor to Rafael through the end of 2025. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for financial results for the fourth quarter of 2025. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2025 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. Now I'd like to turn the call over to Rafael.

Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the third quarter was solid. Our revenue exceeded guidance by $23 million. We experienced sequential growth driven by broad-based improvements across all regions and end markets. We maintained good profitability and controlled operating expenses, resulting in healthy fall through. Turning to the specifics, NXP delivered third quarter revenue of $3.17 billion, a decline of 2% year-on-year and up 8% sequentially. Non-GAAP operating margin in the third quarter was about 34%, 170 basis points below the same period a year ago, and 10 basis points above the midpoint of our guidance. The lower operating margin versus the same period last year was due to lower revenue and gross profit, partially helped by flat operating expenses. Taken together, we drove non-GAAP earnings per share of $3.11, a penny better than guidance. Distribution inventory was flat at nine weeks, consistent with our guidance, while still below our long-term target of 11 weeks. From a direct sales perspective, we believe our shipments into the Tier 1 automotive supply chain has approached end demand. We estimate that aggregate inventory levels of NXP-specific products at our major Tier 1 partners are below NXP's manufacturing cycle time. We believe this reflects a continual cautious approach in the automotive supply chain due to the uncertain macro environment. Overall, during the quarter, we did not experience any material customer order pull-ins or push-outs. Now, I will turn to our expectations for the fourth quarter. Our outlook reflects the continuous strength of our company-specific road drivers and signs of a steady cyclical recovery in our automotive and industrial markets. We do not yet anticipate direct customer inventory restocking as one might expect off the bottom of a cyclical trough. From a channel perspective, our guidance assumes distribution inventory may fluctuate between 9 and 10 weeks, as we are selectively staging additional products in the channel to be competitive. We are guiding fourth quarter revenue to $3.3 billion, up 6% versus the fourth quarter of 2024, and up 4% sequentially. At the midpoint, we expect the following trends in our business during Q4. Automotive is expected to be up mid single digit versus Q4 2024 and up in the low single digit percent range versus Q3 2025. Industrial and IoT is expected to be up in the mid 20% range year on year and up 10% versus Q3 2025. Mobile is expected to be up in the mid-teens percent range year-on-year and up in the mid-single-digit range on a sequential basis. And finally, communication infrastructure and other is expected to be down in the 20% range versus Q4 2024 and flat versus Q3 2025. In summary, NXP third quarter results and guidance for the fourth quarter reflect a growing confidence and the company-specific road drivers, and that a new up cycle is beginning to materialize. This is based on several signals we track regularly. These include continually growing customer backlog placed with our distribution partners, improved order signals from our direct customers, increased short cycle orders, and a growing number of product shortages leading to customer escalations. At the same time, we do not yet see material customer restocking due to the uncertain macro environment. Now, an update on our pending acquisitions of Kinara and AvivaLinks. We have received all regulatory approvals. We have closed both AvivaLinks and Kinara. We are extremely excited about the long-term benefits these acquisitions will bring to our customer engagements and market position. As we have previously shared, in the short term, these acquisitions will have an immaterial impact to the revenue and financial model of NXP. We do believe the revenue impact will be material in 2028 and beyond. The three recent acquisitions, TT Tech Auto, Kinara, and Aviva Links, will enable NXP's vision to be the leader in intelligent edge systems in the automotive, industrial, and IoT markets. As this is my first earnings call, I would like to assure you that the strategy we laid out during our November 2024 investor day stays firmly in place. This includes our product innovation focus in our financial and capital return model. For the last six months, I've traveled globally, engaging with our customers, suppliers, and development teams. My key takeaway is that NXP's strategy is compelling. We are focused on the most important customers and top leaders. Our highly differentiated product roadmaps position as well to achieve our long-term goals. I will continue to work closely with the cross-functional leaders throughout NXP to accelerate our innovation in time to market efforts. Overall, we remain focused on discipline, investment, and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. And now, I would like to pass the call to Bill for a review of our financial performance.

Thank you, Raphael, and good morning to everyone on today's call. As Raphael has already covered the drivers of the revenue during Q3 and provided the revenue outlook for Q4, I would like to move to the financial highlights. Overall, Q3 financial performance was solid, with revenue, gross profit, and operating profit all above the midpoint of our guidance range, while operating expenses were a touch above the midpoint of our guidance due to slightly higher variable compensation. Taken together, we delivered non-GAAP earnings per share of $3.11, or a penny better than the midpoint of our guidance. Now moving to the details of Q3, total revenue was $3.17 billion, down 2% year-on-year, and $23 million above the midpoint of our guidance range. We generated $1.81 billion in non-GAAP gross profits, and reporting a non-GAAP gross margin of 57%, down 120 basis points year-on-year and in line with the midpoint of our guidance range. Total non-GAAP operating expenses were $738 million, or 23.3% of revenue flat year-on-year. From a total operating profit perspective, non-GAAP operating profit was $1.07 billion, and non-GAAP operating margin was 33.8%, down 170 basis points year on year, and 10 basis points above the midpoint of our guidance range. Non-GAAP interest expense was 91 million, while taxes for ongoing operations were 173 million, or a 17.7% non-GAAP effective tax rate. Non-controlling interest was 15 million, and results from equity accountant investees related to our joint venture manufacturing partnerships was a $2 million loss. Taken together, the below the line items were 6 million unfavorable versus our guidance, primarily due to a slightly higher tax rate driven by improved profitability. Stock-based compensation, which is not included in our non-GAAP earnings, was 118 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $12.24 billion, up $757 million sequentially. We issued three new tranches of debt totaling $1.5 billion with a combined weighted cost of debt of 4.853%. During the quarter, we reduced our net commercial paper outstanding by $735 million. Additionally, we plan to retire two tranches of debt due in March and June of 2026, totaling $1.25 billion with a weighted cost of debt of 4.465%. Our ending cash balance was $3.95 billion, up $784 million sequentially due to the cumulative effect of commercial paper reduction, capital returns, equity and capex investments offset against the new debt and cash generated during the quarter. The resulting net debt was $8.28 billion, with a trailing 12-month adjusted EBITDA of $4.65 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.8 times, and our 12-month adjusted EBITDA interest coverage ratio was 15.9 times. During Q3, we paid $256 million in cash dividends and repurchased 54 million of our shares, representing a 12-month total shareholder return of $2.05 billion, or 106% of non-GAAP free cash flow. After the end of the quarter and through October 24th, we bought an additional 100 million of our shares under a 10b-5-1 program. Now turning to working capital metrics, days of inventory was 161 days, an increase of three days versus the prior quarter, with inventory dollars up modestly due to pre-bills and wafer receipts from our foundry partners. Days receivables were 31 days, down two days sequentially, and days payable were 58 days, down two days sequentially as well. Taken together, our cash conversion cycle was 134 days. Cash flow from operations was 585 million, and net CapEx was 76 million, or about 2% of revenue, resulting in non-GAAP free cash flow of 509 million, or 16% of revenue. During Q3, we paid $225 million towards the capacity access fees related to VSMC, which is included in our cash flow from operations. Additionally, we paid $139 million into VSMC and $15 million into ESMC, our two equity-accounted foundry joint ventures under construction, with the payments reflected in our cash flow from investing activities. Now turning to our expectations for the fourth quarter. As Raphael mentioned, we anticipate Q4 revenue to be 3.3 billion plus or minus 100 million. At the midpoint, this is up about 6% year on year and up 4% sequentially, better than our view 90 days ago. We expect non-GAAP gross margin to be 57.5% plus or minus 50 basis points. operating expenses are expected to be about $757 million plus or minus $10 million, or about 23% of revenue, consistent with our long-term financial model. Taken together, we see non-GAAP operating margin to be 34.6% at the midpoint, bringing NXP back into our long-term financial model. In addition, our guidance includes about two months of operating expenses for the closed Aviva Links, and Canara Acquisitions. Now turning to the below line items. We estimate non-GAAP financial expense to be about $103 million. We expect the non-GAAP tax rate to be 18% of profit before tax. Non-controlling interest expense will be about $14 million. And startup expenses related to our equity account investees will be about $3 million loss. For Q4, We suggest for modeling purposes, you use an average share count of 254.3 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be 118 million. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.28. Turning to the uses of cash, we expect capital expenditures to be around 3% of revenue below our 5% target as we execute our hybrid manufacturing strategy. This includes consolidating our 200 millimeter front end manufacturing factories, investing in our 300 millimeter joint ventures with VSMC and ESMC. These investments will result in margin expansion, supply resilience, and access to a competitive manufacturing cost structure. As shared at our Investor Day, we will continue to substantially invest in VSMC in Singapore during Q4, including a $250 million capacity access fee payment and a $350 million equity investment. When VSMC is fully loaded in 2028, it will drive a 200 basis points improvement in NXP's total gross margins. Additionally, we will make a $45 million equity investment into ESMC in Germany, enabling additional 300-millimeter supply resilience. Lastly, we will pay approximately $500 million for the closed acquisitions of both AvivaLynx and Canera. And furthermore, we have restarted our buybacks at the beginning of September, and we will continue to buy back stock consistent with our capital allocation strategy. And finally, I would like to extend my personal thanks to Kurt as he transitions to a new and exciting chapter of his life. He's been an inspiration to all NXP team members and a personal mentor and value partner to me as a CFO. We will miss his infectious humor, timely counsel, and thoughtful insights. With that, I would like to now turn it back to the operator for questions.

Thank you. Ladies and gentlemen, as a reminder to ask the question, please press Start11 on your telephone, then wait for your name to be announced. To withdraw your question, please press Start11 again. We ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q&A roster. Our first question comes from the line of Ross Seymour with Dutcher Bank. Your line is open.

Hi, guys. Thanks for asking the question, and congrats to both Kurt and Raphael. I guess my first question, a big picture one. Bill, you just mentioned that the guidance for the fourth quarter was better than you expected 90 days ago. But the details Rafael gave, while positive, didn't seem like much had really changed. So what specifically got better over the last 90 days, either by end market, inventory, region, et cetera?

Yeah, let me take that one, Russ. So the way we think about Q4 is we're guiding, Q4 sequentially, you know, 4% up. And so what we said last time, we said we're going to, I mean, we did provide a soft guide of Q4 that we said we're going to be slightly up. So I think what I would say is that things that we expected to go, maybe potentially the risks that we have, they didn't materialize. And the signals the signals with respect to a soft recovery continue to be there, right? And our order book continues to be strong. The end customer backlog, our distribution partners continues to be healthy. And so if you look at the quarter-to-quarter guide, what is driving a slight improvement, I will say, over seasonality, pre-COVID seasonality, is industrial and IoT, where I think we see signs now of slight demand improvement.

Great. I guess on that front, you mentioned about the inventory staying in the 9 to 10 week level, not quite getting to the 11. That's your target. If you go from 9 to 11, any sort of rough dollar amount that that contributes that we should think about? And is there any specific trigger that you're looking at to let that inventory get back to its normal level, whether it be in the fourth quarter, which it doesn't sound like, or say the first half of next year?

yeah russ so i understand that in the past i mean we apply a math uh that it was that we said it's about a one week of inventory equals to 100 million dollars um and i understand the math but what i what i would like to kind of for now i think of i think it's more useful to look at how we're managing the channel strategically and and so kind of shift a little bit of of of how you look at a channel inventory if you look at today given the current environment that we have where visibility is limited, orders come late. The one thing I want to leave you with, it's important to have the right product mix in the channel to be competitive, especially when you think about our competition that has significantly higher inventory in the channel than us. And as you know, we're not a cattle company, so getting the right product mix is really important for us. Now, today, right now, we're being selective. We're staging additional products that we have high conviction of sell-through. And so that one, that's the reason I state that the inventory may fluctuate between nine and tens, because, because what I want to leave you with is in today's environment, weeks of inventory is not static, right? Orders are coming late. Now I will say that your, your, your, your question with respect to when 11 weeks, I will say that after visibility and confidence continues to improve. And I will, I will confirm your, your point. We still see the optimal level moving towards 11 weeks. Um, and. That may or may not happen in Q1 as we see improvements in the business conditions.

Thank you. Thanks, Ross.

Thank you. Will you stand by for our next question? Our next question comes from the line of Francois Bouvenies with UBS. Your line is open.

Thank you very much. My first question is on maybe, you know, your comment, Raphael, you said that You think inventories are low in automotive, for example, and things are getting better, broad-based, but you do not expect to increase inventories in the channel, or even, sorry, not in the channel, but in the direct channel. So I was wondering if we look at Q1, you know, in terms of seasonality, I think you are down high single digit percentage quarter on quarter for Q1. Should I read this comment as, you know, today with your visibility, you are comfortable with seasonality, assuming there is no stockpiling and demand is stabilizing? Is that the right way to look at it? So you're asking about Q1. Yeah, Q1, so, you know, like in a way directionally based on what you just said, you know, like are you comfortable with a seasonal trend?

Yeah, well, let me just kind of, before I get into, I give you a slight answer on that one. I would say that if you look into what we feel good about is the setup into 2026. If you look at how we finished Q4, I think that we are now entering a phase of inventory normalization and auto And we've seen, you know, signals of, I would say, of demand improvement in industrial and IoT. I think we like the setup. I'm not going to guide Q1 for you, Francois, but I think if you're going to model, I think modeling seasonality, and I would say using pre-COVID seasonality, which is high single digits decline, would be reasonable.

Thank you, Raphael. I appreciate the call. Maybe the second question is for Bill. I mean, gross margin is going up in the next quarter. I assume it could be because of mix, but I would be happy to have your view here. But more generally, I mean, your inventory is still fairly high. You know, days a bit higher, dollars a bit higher. So I assume your loading is still, you know, you keep loading quite high. So how should we think about the gross margin direction after this Q4? Are you going to, you know, decrease the loading at the expense of gross margin, or do you think you can manage this level of gross margin or even increase from here? Just the moving parts would be very helpful. Thank you.

Sure, Francois. As you can see, as you mentioned, we are guiding gross margins up approximately 50 basis points into Q4. And this is driven by the higher revenues, first of all, improved operational costs, and also, yes, higher utilizations, which is actually offset with unfavorable product mix. And then, of course, we have the normal plus or minus 50 basis points on what that mix tends to ultimately be in the quarter. For Q1 2026, in the full year of 2026, we are not guiding. However, please consider our normal seasonality that Raphael just talked about in revenues for Q1, along with our annual low single-digit price negotiations that typically impact us in the first quarter. And we always work to offset those throughout the year through cost reductions and operational efficiencies. So for full year 2026, I would say we expect to be in our long-term model of 57% to 63% driven by a function of revenue levels. improved utilizations, cost reductions, offsetting the price gives, and the normal product mix fluctuations in any given quarter. I would say, as stated before, please continue to use that rule of thumb. For every $1 billion of revenue on a full year basis drives approximately 100 basis points improvement to gross margin. For example, I shared in the past, at $15 billion, we should be at 60%. And then remember, as I mentioned in my prepared remarks, beyond 2027, We also see another lift to our gross margins by approximately 200 basis points driven by our hybrid manufacturing strategy. And again, overall, I think we're very pleased with the trajectory of our gross margins and how we manage this. Related to your inventory question, you know, you're right. In Q3, we finished inventory at 161 days. That was up three days. And we're staging inventory to support our growth into Q4. Proactively, we are holding more inventory to support the continued increase of late orders that Raphael talked about, which are coming in below lead times. And of course, the customer escalations have grown quarter over quarter, as Raphael shared in his prepared remarks. And as I mentioned last quarter, we started our pre-builds for the 200 millimeter consolidation plan, which by the end of the year will be worth about six to seven days of our total NXP days of inventory. Also remember, we're holding approximately 14 days of inventory on our balance sheet versus our distribution partners. Again, that assumes nine weeks. And with the positive signals we are seeing and from lessons learned from the past, I'm quite comfortable and pleased with the internal inventory positioning. As we mentioned many times, we have long-lived inventory in die form, preventing obsolescence risk. So if you had me call inventory into Q4, I would say similar levels from a days perspective, plus or minus five days is the best view I can give you at the moment into Q4.

Very clear. Thank you, gentlemen.

Thanks, Francois. Please stand by for our next question. Our next question comes from the line of Joe Moore with Morgan Stanley. Your line is open.

Great. Thank you. I also wanted to touch on automotive customers' kind of view on inventories. And I guess, can you just talk to us a little bit about what those conversations are like? Understanding there's not much overlap between you and Nexperia at this point, I would think stuff like that is a reason to want to hold more inventory and kind of buffer yourself from these geopolitics issues. Just are you seeing any indications that that is happening or will happen?

Yeah, Joe, I mean, that's a great question. And I think the issue with an Xperia really shows that the current level of inventory at the end customer is not sufficient to have any ripple of business continuity. We don't see restocking with our direct customers. Now, I would say, I mean, the good thing, right, if you look at the business dynamics of auto highly related to inventory, the normalization and also already a very nice, already we consider a very nice tailwind. And you would expect the next phase to actually be a restocking of inventory, but we have not seen it happen. And so the conversations are pretty much about how they are being very conservative with respect to how they manage their working capital. So no restocking so far.

Yeah, maybe I'll add on the experience itself, just to add to it, because I think your question, does it impact NXP in any way from a direct standpoint? The answer is no. And as Raphael said, we're still in the early phase and seeing customer escalations and signals improved. The restocking has not happened. nor has price increases have happened, which you typically see during a supply crisis. But those are other signals that we wait to see.

Okay. And is there any impact potentially on automotive production from all of that on the negative side that you could see, you know, if they have shortages of other components that it slows productions?

Joe, we don't anticipate that. I think the products that are associated right now with Nexperia, these are products that could be second source. I think the qualification process could be relatively benign for auto OEMs. But so far, our orders will not indicate any impacts into the production of auto.

Thank you so much.

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

Hi, guys. Thanks for taking my questions. For my first one, I wanted to drill into gross margins a little more. So you are guiding it up sequentially, but it's flat year over year, even on a pretty decent revenue increase. I guess that's mixed, but I'm struggling to see where the mixed issue is. It looks like your industrial mix is higher. Auto looks about the same. What is going on with gross margin? It sounds like utilizations, I'm not even sure. They don't sound like they're lower year over year. Why aren't we getting more gross margin leverage on a year over year basis?

Yeah, Stacey, I think the factor that we see going into Q4, again, what we talked about is from an end segment, our gross margins tend to be much closer to each other to the corporate average. But you can see the common infra is down quite a bit year over year. And then the other one, as you can see, we're having record quarters in our mobile space, which, again, you kind of, you know, slightly below our margin corporate mix. So those two end markets are kind of impacting our mix. From a utilization standpoint, we are in the high 70s or plan to be in the high 70s into Q4 related to it. And so We do have kind of inventory at the high end internally. So, of course, that also has an impact of how we run total our material throughout the line, just not in the front end, but also in the back end and so forth. But really, those are help offsetting that unfavorable mix that we see at the moment.

I guess the inventory fill also helps. The distribution stuff is higher margin as well.

Yeah, there's two sets of it. So remember the distribution and what you'll see is actually our distribution sales will be up quarter over quarter. But let me remind you that a portion of that or a large portion of it is driven by our mobile business where we drive and use the distribution partners in that mobile end market. And so that's what's driving the increase from a quarter over quarter perspective.

Thanks. For my follow-up, I just wanted to level set. So Sounds like there is some diskey fill into Q4. So if I say half a week, I guess is that, do I just like roughly think of that as $50 million of income on the impact into the Q4 guide? And I know you said Q1 you were comfortable with seasonal, but does that incremental channel fill in Q4 influence how we might think about Q1 seasonality? Are you sort of implicitly assuming that you are going to be putting more into the channel in Q1 for a seasonal guide?

okay there was several questions on that one stacy let me let me let me grab that one so so you made a comment again on the on trying to kind of equate where we're going to end up uh in the channel and you quite i mean you you mentioned 50 million dollars um and again i mean i wouldn't see it that way i mean we gave we gave a guidance of 3.3 uh the demand again that means the visibility that we have right now is low, orders are coming late. And so where the weeks of inventory end up in the channel, like I said, it may fluctuate between 9 and 10. It's not going to be more than 10. It may be 9. And so to put a formulaic kind of way of looking at how much revenue is going to come from weeks of inventory staying in the channel, I don't know if I can really kind of go there, given how fluid the demand Again, we're putting products that we have high conviction of sell-through, right? And so I don't see it. We use the channels.

But you must have a scenario that's baked into guidance. But you must have a scenario that's baked into guidance for Q4, right?

Yeah, and the scenario says that it depends. The inventory may fluctuate between nine and ten weeks. The scenario is what material we put in the channel. Okay. All right, guys. Thank you.

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

Hey, guys. Thanks for taking my questions. The industrial and IoT business seems very strong to close the year, kind of particularly versus where expectations were. You guys have been helpful in the past about kind of laying out where you're seeing that strength, whether it's the core industrial side or more on that IoT side. Could you give us a little bit of a feel of what's moving into your Q4?

Yes, Tom, let me just step back, and if you look at our industrial and IoT business, at a high level, 60% is core industrial, 40% is consumer. And even within that, 80% of the revenue flows to distribution. So that just kind of gives you a kind of step on it. Now, what we see in IoT, the end customer backlog through the channel continues to improve, so we see really strong signs of demand improvement. On the consumer side, this is where we continue to benefit from company specific drivers. And this, for instance, I'll give you an example that there's a new category of wearables. These are smart glasses that have high demand. They require high performance, low power processing. And this is an area where our portfolio is strong. So we're seeing some tailwinds on that side. And the core industrial, We're seeing broad-based improvements across regions of products. And for us, if you were to drill into a little bit of the application-specific, it will be driven by, for us, it's driven by energy storage systems and building automation. Now, let me put a caveat here. I don't think we, and it will be the first one to tell you, we don't see ourselves as bellwethers for industrial and IoT. And so what we see, it may be that this is very company-specific.

Helpful. And then a similar question just on the automotive side, because it's useful to kind of see what's moving here is just on the S32 portfolio, like you've seen some really strong growth trends. And like part of the reason, you know, many think that you guys have handled this a lot better is just the growing portion of your business that is levered to processors. So maybe again, what happened in the quarter, maybe the processor, the processor business versus the rest of auto and then into the fourth quarter, any kind of color on if there's a divergence there, how we should be thinking about just the entire auto business with those two pieces. Thank you.

No, I think, Tom, I mean, we were encouraged about the direction that auto is taking, right? I mean, if you were to take just Q3, um, in Q3, we're only 3% below our prior peak. And, uh, and so I think that's, that's encouraging. Um, Now, with respect to what is driving the performance in the business, I mean, it continues to be what we deem, what we term a coin accelerate growth drivers. And these are in the South 45 vehicle, which is the S32 franchise that you mentioned, is radar, is connectivity. And so if you were to ask me what is driving it, that is exactly what it is. I mean, it's the secular shift to South 45 vehicles is driving the performance of auto.

And Tom, if I could add, you know, we'll provide a full year kind of update on where we're at with our accelerated growth drivers on our Q4 call. But directionally, I'd say we feel very good about how the accelerated growth drivers are playing out inter-quarter.

Thank you, guys.

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

Thanks for taking my question and best wishes to both Raphael and Kurt. So, Raphael, let's say, you know, if 26 plays out the way 25 did with China, OEMs and EVs growing, but the rest of the world, you know, not growing or flattish, what does it mean for NXP? So, you know, in an overall flattish situation, auto production environment, what kind of lift can content provide net of any pricing movement? Like can your autos be conceptually within your long-term model for next year?

So Vivek, I think the one thing I want to maybe reframe the way we, the drivers of our business, right? Car production is, is not the driver of our business we're not sorry related i mean if you were to look at uh you know the the production the production has been stable for years i mean it varies one percent here and there but it stays pretty flat at 90 ish million a year constant growth dwarfs star growth and so and and then what you have in auto is the production is quite stable but you have a very complex um you have a very complex supply chain, and that complex supply chain is the one that creates either bubbles in inventory, glut, or vacuums that create shortages. And that, the supply chain is the one that creates the cyclical aspect of our business. If I just say, the way I see it is, we see normalization in inventory. If you already get behind the content growth of autumn, normalization of inventory is something that we see as very, very positive for the direction of auto. I just want to kind of basically reframe the way I think you posed the question a little bit and the way we see it. Content growth and normalization inventory provides for us an optimistic view of our business in auto in 2026.

And for my follow-up, Bill, on gross margins, Is it just volume that takes you from the lower end of the 57 to 63 range right towards the middle of the range? Or are there any new products, any new kind of mixing up of your portfolio that can provide benefits on top of any volume benefits?

Oh, absolutely. As we said in the past, our new product ramps. are accretive to the company, and they go through their normal growing pains, of course, as they ramp and other parts of our products roll off. I mean, Mix is really the one that, you know, what orders we get, what orders we serve. We serve over 10,000 SKUs or products every quarter, and so we have to adjust and either accommodate for it and offset those or vice versa, let them fall through, and that's why gross margin improves as another factor. related to it but really also our hybrid manufacturing strategy as we move more to 300 millimeter and as we're making all these investments that will start to yield benefits beyond 2027 as I talked about but short-term levers again it's I think we're doing a really good job offsetting any price gives that we give through our cost efficiencies and productivity internally on test time reductions and so forth so Those, you know, that's really what we're supposed to go do day in and day out. And I think the team's doing a good job. And you can see this by just our variability in our gross margins through this last cycle. So I think as we become less fixed costs, that will just improve with that variability going forward. As I mentioned today, we're 30% fixed. And my guess is in about a couple of years from now, once we finish our consolidation efforts, so think five years, and so we'll probably be below 20%, which will reduce that variability.

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

Yeah, thanks. Good morning. I wanted to go back to some of what you said with inventory levels, particularly at your direct automotive customers. Where do those inventory levels stand now? And you quantified a bit on what the impact would be as the distribution channel increased inventory. Is there any, I mean, help us with the magnitude of what would happen if those direct auto customers, you know, finally decided that they did indeed need to restock?

So, Chris, what we see right now that we're starting to shift to end demand. And I think that normalization, we can see it in our orders. And we did say, indeed, that we don't see the restock. Now, specific questions of what the levels are, I think we don't have visibility at a granular level per customer per tier one. That would be a complex. But it's very clear to us that it's way below our manufacturing cycles. And that's what I mean by is I think that that is just eventually not a healthy level to be able to manage sustainable business. I can't comment whether this will happen or not in the next few quarters or in even 2026. But that is a potential scenario of restocking. It's indeed a tailwind for our business that is something that will provide benefit for us.

Maybe I could add a little bit, Raphael. You know, Chris, as you know, for about the last eight quarters, we've been under shipping into the tier one supply chain and actual end production. So it's actually been a headwind to us. I'd say over the last two quarters and then our guidance into Q4, we started to see that headwind subside. And so we think the inventory levels of the tier one are where they, the tier one players, believe are normalized for the current environment. They are still very cautious on the macroeconomic outlook. And so as Rafael said, we've not seen that next lever of restocking occurring. But when you go from a headwind of undershipping to at least shipping to end demand, that's the new growth in the short term. Did you have a follow up, Chris?

I do, thanks. I wanted to come to your comment on buybacks that you mentioned in your prepared remarks. Could you give us a little more detail on what the intention is going forward and what we should expect now that you're resuming the buybacks?

Yeah, no change to our capital allocation strategy, Chris. As shared in our prepared remarks, we restarted our buybacks. As I mentioned, we have a lot of cash going out, and so we just wanted to make sure we had all the cash available to continue to return and make all the investments we want to make inside NXP, but also balance that with healthy returns to our owners. And so if you look at the last 12 months, we returned 106% back to our owners, and we're going to continue to go do that. Thank you.

Thank you. Our next question comes from the line of Blaine Curtis with Jefferies. Your line is open.

Hey, guys. Thanks for taking my question. I just want to ask on, you know, the kind of cyclical tailwinds versus seasonality. I mean, I guess if you look at December, it's really just industrial that maybe you could argue is above typical seasonality. And then I think you said just soft guidance for March, normal. I think a lot of people have talked about just the slowing down of the cyclical recovery. I mean, your comments were pretty positive, Rafael. So I'm just kind of curious, you know, if you can just kind of assess, you know, If you're just looking at seasonality, I guess, is the cyclical tailwind slowing? And I guess maybe you can look at the different markets and if you feel differently about them.

Yeah. I think if you look at the Q4 numbers, you clearly stated industrial and IT was above seasonality. already said that automotive was slightly better than seasonality right pre-covid levels um and the drivers are what they have one common driver that is i think is inventory digestion is is it's almost done i think that that is that is one normalization is a big deal um and we're starting to shift to to to true end demand and automotive and we're starting to see some company-specific drivers in industrial IT that are helping us. With respect to whether seasonality is going to change, are we calling it an upcycle? I think we're careful with that because, one, we do have the inventory digestion done as a factor for an upcycle. We do see some specific areas of growth in industrial. And we see an encouraging signs of true demand in industrial and IoT. And so we do see the elements of a soft upcycle. And that's the reason why I would say that, Blaine, that if you were to ask me today, are you more optimistic than you were last quarter? I would say that we are slightly more optimistic than last quarter.

Thanks. And then I wanted to ask you on mobile, I mean, if I have the numbers right, it might be a record. I'm just kind of curious the drivers behind that.

You know, in all of my mobile, we're a specialty player. They're mostly driven by the wallet and a little bit of custom analog that we do for a tier one customer there. I see that the moves of Q2 to Q3 and Q4, and I think you've got to take Q3 and Q4 together. It's purely, in my opinion, just a seasonal move and some strength in some of our customers.

Okay. Thank you.

Thank you. Our next question comes from the line of Joshua Buchalter with TD Cohen. Your line is open.

Hey, guys. Thank you for taking my question, and congrats to both Raphael and Kurt, and good luck. I know it's still early in earnings season, but your comments and outlook on the industrial and IoT segment, you know, were certainly better than your peers who have mainly talked about decelerating trends. You know, we've kind of touched on it a little bit, and I realize you're not going to comment on peers. But, you know, would you say the difference in what you're seeing versus peers is because of inventory management or more product cycle driven? And, you know, what gives you confidence in the sustainability of sort of the up cycle that you're starting to see signs of with orders still coming in late and within lead time. Thank you.

Yeah, Josh, so I can speak of NXP's situation with respect to industrial and IoT. Because for us, industrial and IoT has indeed been one of the more challenging end markets since 2022. And as of Q3, our business is still 20% below our peak. And again, I do remind you that we're not the bellwether for industrial IoT, so the comparisons to other, you could say, peers may not be, I guess, relevant. But I would have to say that we did manage inventory in a different way. We were very disciplined in the way we managed our business in the down cycles. And I think I'm, I want to say that we will be similarly disciplined managing what we see. And I would say it's a sub up cycle. Um, and again, I mean, we are having some, some company specific drivers there. They're driving demand that is true new demand. And we have, uh, exposure to a few, few, few companies, specific, uh, design wins in the core industrial that, that is driving the driving, some of the, some of the, the improvement. But I don't know how you will take that as a bellwether for the industry.

Understood. Helpful caller. Thank you. And I was maybe also hoping that you could provide some color on the China auto market, what you saw there in your quarter and your expectations into 4Q. I believe a good amount of that is actually served by the DISTE. So are our inventory levels there lean as well? Thank you.

Yes, China. I mean, listen, I was in China a few months ago with Kurt, and we did a customer visit to both China, Taiwan, and actually Japan. China specifically. China continues to be strong, continues to be a very dynamic market. Themselves, the auto industry there is very competitive, and they continue to actually push for innovation, push for product. Our, I would say, inventory situation there is also lean. But it's a business that is driven, that is thriving, that is strong. We have good customer traction, so we feel very optimistic about our position in China.

And Josh, if I could just add as a reminder, in the Asia market, specifically in China auto, we service the majority of that through our distribution channel. And it is in the Western markets of North America and Europe where we do it on a direct basis. So our approach to channel management, which I'd say is probably best in class, we take a heavy hand there even in Asia with the channel.

Thank you both.

Thank you. Our next question comes from the line of William Stein with Truist Securities. Your line is open.

Kyle, great. Thanks for taking my questions. First, I'm hoping you can remind us about the strategic purpose of the recent acquisitions. I think TT Tech closed recently, but then you have the two new ones as well. Can you just frame that as it relates to the rest of the autos business, and then I have a follow-up. Thank you.

Yeah. Well, these acquisitions are actually directly aligned with the strategic direction of bringing intelligent systems at the edge of industrial and automotive. If you look at TT Tech is a company that is a software company that is going to help us accelerate our move of the system-defined vehicle in around S32s and around a system approach. And so quite excited to have them. It's a capability that would have been very difficult to obtain organically. And it's a company that brings IP-specific also in functional safety at a system level. VivaLynx is a company that has a really, really, I would say, innovative technology on a certis technology that is a standard. So it's a standard certis. And that is critical to standardize sensors. Think of radar, think of cameras, think of LiDAR, around a core processor, which in this case will be our S32. So we're quite bullish on AvivaLynx. And Kinara brings AI capabilities, especially gen AI capabilities, high performance, low power, that is going to also accelerate our portfolio of intelligence into the edge.

And then as a follow-up, there's been some discussion about the elevated competitive dynamics in the infotainment part of your auto's business. Can you remind us how big that is in your auto's business and maybe update us on that competitive situation? Thank you.

Hey, Will, I'll take that one. So, you know, think about IBI and vehicle infotainment. There's kind of two parts. There's the visualization, what you see on the dashboards, and there's the what you hear, the audio portion. I'd say on IVI Auto, we continue to be a dominant player there. On the visualization, our performance is maybe a little below some of our peers, but I think that's very well known at this time. And I think with that, Tawanda, I think we're going to need to move back to Rafael for closing remarks, if we can.

Well, thank you, everyone, for joining us today and your thoughtful questions. This quarter marks both a leadership transition and a reaffirmation of NXP's consistent strategy focused on profitable growth, disciplined execution, and predictable returns. We are encouraged by the gradually increasing signs of a cyclical recovery across our automotive and industrial and IoT markets, and by the continuous strength of our company-specific road drivers. Our priorities remain clear. Deliver on our commitments, and manage what is in our control and position NXP to continue to grow profitably. I want to express my gratitude to Kurt for his outstanding leadership and for the partnership we have built over many years. In his 30-year career at NXP, he has left a lasting legacy, navigating us through various challenges and positioning NXP as a leader in the markets we serve. I am truly humbled to follow his footsteps. It is a privilege to lead this company and this team. I am excited about what we will achieve together. Thank you.

Ladies and gentlemen, that concludes today's conference call. Thank you for your participation. You may now disconnect.