NXP Semiconductors N.V.

Ladies and gentlemen, thank you for standing by. Welcome to NXP fourth 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 would need to press star 11 on your telephone. You will then hear an automated message of five and your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to turn your conference over to Jeff Palmer, Senior Vice President, Investor Relations. Please go ahead.

Thank you, Michelle, and good morning, everyone. Welcome to NXP Semiconductor's earning call today. With me on the call today is Rafael Sotomayor, NXP's President and CEO, and Bill Betts, our CFO. The call today is being recorded and will be available for replay from our corporate website. The call will include forward-looking statements that involve risks and uncertainties that could cause NSP's results to differ materially from management's current expectations. These risks and uncertainties include but are not limited to statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the first quarter of 2026. NSP 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 NSP's underlying core operating performance. Pursuant to Regulation G, NSP has provided reconciliations of the non-GAAP financial measures to those directly comparable gap measures and our fourth quarter 2025 earnings press release, which will be furnished to the SEC on a form 8K and available from NSP's website in the Investor Relations section. Now I'd like to pass the call to Rafael.

Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the fourth quarter was solid, with all end markets performing either in line or better than expected. All regions were up on a year-on-year basis. Turning to the specifics, NXP delivered fourth quarter revenue of $3.34 billion, an increase of 7% year-on-year, and up 5% sequentially. This was $35 million better than the main point of our guidance. Non-GAAP operating margin in the fourth quarter was about 35%, 40 basis points above the same period a year ago. and in line with the midpoint of our guidance. Taken together, we drove non-GAAP earnings per share of $3.35, 7 cents better than guidance. Distribution inventory was 10 weeks, consistent with our guidance. We remained disciplined on channel health, prioritizing sell-through of high-demand products rather than broad-based restocking. Now, I would like to reflect on our performance in 2025. The year was a tale of two halves, with the first half of the year exhibiting weaker demand trends, while in the second half of the year, demand began to accelerate in support of our long-term revenue growth model. Looking at the specifics, automotive revenue was $7.1 billion flat year-on-year due to slower inventory digestion at direct customers in the first half of 2025. With the inventory suggested behind us, the second half performance aligns with our 8 to 12 long-term growth outlook, reflecting the underlying strength of our auto portfolio. A few examples which underpin our optimism include our efforts in software-defined vehicles where we have seen strong global adoption of NXP products. These include design win rates for S32M family of 5-nanometer vehicle compute processors, the newly introduced S32K family of 60-nanometer sonar processors, and continued adoption of automotive Ethernet products. These efforts are now material and global in nature, with most auto OEMs undertaking SDV platform initiatives. Additionally, the early conversations with customers on the recently acquired technologies from TT Tech Auto and AvivaLynx are accelerating interest in NXP's SDV portfolios. The potential revenue contributions from this engagement should materialize beyond 2027. This multi-year SDV platform deepens customer commitment and support makes improvement over time. Turning to the industrial and IoT end market, revenue was $2.3 billion flat year-on-year. The second half growth was materially above our 8% to 12% long-term growth outlook across both core industrial and consumer and IoT. Supporting our ambition to lead an intelligent systems at the edge, we continue to see strong customer engagement in the emerging market for physical AI. By combining the industry leading IMX family of industrial application processors with the recently acquired Kinara MPU, we can deliver complete and scalable AI platforms that accelerate deployment at the edge. A few examples of applications include medical imaging systems camera-based workplace safety system in the industrial market, logistic automation systems, and robotics. Customer interest has been exceptionally strong, and these engagements reinforce our vision of physical AI and the power of the NXP platform. These opportunities expand our addressable market, support sustainable growth, and validate the unique competitive nature of our complete system portfolio. Looking at our mobile business, revenue in 2025 was solid at $1.6 billion, up 6% year on year. We saw stronger demand and content gains in the premium mobile market. Overall, NXP remains a specialty supplier in the mobile market with a unique and defensible franchise center on secure mobile transactions. Finally, The revenue in the communications infrastructure market was $1.3 billion, down 24% year-on-year. As we have said in the past, we anticipate flat growth over the longer term as the digital networking and RF power business decelerate, which will be offset by growth in our Secure Card business, which includes our U-code RFID tagging solutions. Now, I will turn to our expectations for the first quarter. our forecast for the first quarter is better than we anticipated 90 days ago. We expect all regions and all their markets to be up year on year. We're guiding first quarter revenue to $3.15 billion, up 11% versus the year-ago period, and seasonally down 6% sequentially. Compared to 90 days ago, the improvements reflect steady inventory normalization and auto tier 1s, broadening order strength across both core industry and consumer at IoT, and program ramps in the premium mobile market consistent with seasonal patterns. Our guide does not assume broad-based restocking. At the midpoint, we expect the following trends in our business during Q1. Automotive is expected to be up in the mid single digit versus Q1 2025 and down in the mid single digit percent range versus Q4 2025. I would like to highlight that our first quarter revenue guidance only includes about $25 million or one month of revenue contribution from the MEMS sensor business. Industrial and IoT is expected to be up in the low 20% range year on year and down in the mid single digit range versus Q4 2025. Mobile is expected to be up in the mid 10% range year on year and down in the 20% range on a sequential basis. And finally, communication infrastructure and other is expected to be up in the mid 10% range versus Q1 2025 and up 10% versus Q4 2025. In summary, Our first quarter outlook reflects early validation of the company-specific growth drivers we've been investing in, and we expect these trends to continue throughout 2026. We believe the NXP-specific secular drivers for our business are now outweighing the broader industry cyclical headwinds which we have experienced over the last few years. Overall, we expect product mix and disciplined cost execution to continue to support a gross and operating margin framework. We're focused on discipline investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. Our capital allocation framework is unchanged. Invest for growth, pursue targeted M&A to strengthen the portfolio, and return excess cash through dividends and buybacks within our long-term model. And now, I would like to pass the call to Bill for a review of financial performance.

Thank you, Raphael, and good morning to everyone on today's call. As Raphael has already covered the drivers of the revenue, I will move to the financial highlights. Overall, our results reflect the strength of our strategic priorities in our end markets, our disciplined investment in manufacturing and product leadership, and our consistent commitment to generating long-term shareholder value. Q4 was solid. with strong execution and results above the midpoint of guidance. Revenue, gross profit, and operating profit were all backed into our long-term financial model. We delivered non-GAAP earnings per share of $3.35, or 7 cents better than the midpoint of guidance. Non-GAAP gross profit was $1.91 billion, with a 57.4% non-GAAP gross margin, a slight miss versus guidance, driven by stronger than expected mobile revenue. Non-GAAP operating expenses were $756 million, or 22.7% of revenue. The primary increase, sequentially, is driven by our two new acquisitions, where we continue to make space for our strategic investments offset by restructuring actions. Non-GAAP operating profit was $1.15 billion and non-GAAP operating margin was 34.6% of 80 basis points sequentially. Below the line, non-GAAP interest expense was $99 million and taxes were $190 million. Non-controlling interest was a $13 million expense and results from equity account to invest fees was a $1 million loss. Taken together, the below the line items were $4 million better than our guidance. While stock-based compensation, which is not in our non-GAAP earnings, was $100 million, $18 million lower than guidance, driven by the retirement of several executives. Turning to changes in cash, debt, and capital returns, Our balance sheet remains strong, giving us the flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q4 with a $12.2 billion in total debt and $3.3 billion in cash, reflecting uses of cash for capital returns, acquisitions, joint venture investments, and CapEx, offset by cash generation during the quarter. Net debt was $8.96 billion and net debt to adjusted EBITDA was 1.9 times with adjusted EBITDA interest coverage ratio of 14.7 times. In Q4, we returned $338 million through buybacks and $254 million in dividends. Over the last 10 years, we have returned over $23 billion to our shareholders. for 95% of free cash flow and reduced our diluted share count by 27%. After Q4, we repurchased another $36 million under our 10B-5-1 program, and on January 5th, we redeemed the $500 million March 2026 notes with our cash on hand. Now turning to working capital metrics, days of inventory was 154 days, which included seven days of pre-bill. Receivables were 29 days, payables were 60 days. Taken together, our cash conversion cycle was 123 days. As revenue growth accelerates, we expect working capital efficiency, particularly days of inventory, including pre-bills, to meaningfully improve throughout the year. From a cash usage perspective, We continue to advance our long-term manufacturing strategy, including contributions to both BSMC and ESMC. This will lead to a long-term supply resiliency and strong gross margin expansion. Cash flow from operations was $891 million and net capex was $98 million, resulting in non-GAAP free cash flow of $793 million or 24% of revenue. We invested $195 million in long-term capacity access fees, made a $282 million equity payment to VSMC, and a $44 million equity payment to ESMC. Taken together, we are about 50% through the investment cycle for both VSMC and ESMC, having invested about $1.7 billion of the $3.4 billion planned investments. We expect the majority of remaining investments will occur in 2026. Now, turning to our expectations for Q1, we expect revenue of $3.15 billion, plus or minus $100 million, up 11% year on year, and down 6% sequentially, which is better than our view 90 days ago. We expect non-GAAP gross margin of 57% plus or minus 50 basis points. Operating expenses are expected to be $765 million plus or minus $10 million, reflecting normal seasonal increases at the start of the year. We are committed to our long-term operating expense model of 23% of revenue, though there are seasonal variations. With the first half of the year normally higher than the second half, resulting in non-GAAP operating margin of 32.7% at the midpoint. Below the line, we expect non-GAAP financial expense to be about 92 million, and our non-GAAP tax rate to be 18%. Non-controlling interest expense will be 11 million, with our joint venture startup losses of about 3 million. Stock-based compensation should be about 108 million, which is not included in our non-GAAP guidance. This implies Q1 non-GAAP earnings per share of $2.97 at the midpoint. Turning to the uses of cash in Q1, we expect capital expenditures to be approximately 3% of revenue, our capacity access fee payment of 190 million, and an equity investment into VSMC of 210 million. Before turning to your questions, I have a few housekeeping items to highlight. After thoughtful consideration, we have decided that our RF power business no longer aligns with our long-term strategic direction. Consequently, we will stop new product development and have taken an approximately $90 million restructuring charge, which is reflected in our fourth quarter gap results. We will redirect and focus our R&D resources to accelerate and enhance our strategic priorities toward software-defined vehicles and physical AI. Yesterday, after the market closed, STMicroelectronics announced the closure of NXP's MEMS sensor business acquisition. This is a positive transaction for both parties. NXP received $900 million in gross proceeds, with another $50 million to be received upon completion of certain closing conditions. We will recognize a one-time gain of approximately $630 million from the sale of the business, which is reflected in our first quarter's GAAP guidance. Next, we have made the decision to shift our geographic revenue reporting to headquarter-based regions, as opposed to a shift-to basis. We believe reporting headquarter-based region better reflects how we manage the business internally and where customer engagement and design win awards occur. The 2025 change can be found in the Post-it IR presentation. And finally, based on the positive trends, including current order rates and business signals we track, We are confident NXP will operate within its long-term financial model for the full year of 2026. In closing, we are well positioned to benefit from the powerful secular trends in our focus and markets. We are confident about the strategic priorities and investments we are making across our entire portfolio and manufacturing footprint. With a strong balance sheet and a disciplined capital return philosophy, we are exceptionally well-positioned to drive long-term value for our shareholders. Now I would like to turn it back to the operator for your questions.

Please press star 11 on your telephone and wait for your name to be announced. And to withdraw your question, please press star 11 again. And we do ask that you please limit

to one question and one follow-up and the first question will come from tom o'malley with barclays your line is open hey guys thanks for taking my question i wanted to ask about the the channel restock so it looks like you guys went from nine to ten weeks um in your guidance you're saying no additional restock kind of baked in could you talk about where you are with the channel today what you saw in the last quarter, and is it the decision to just not go to 11 weeks overall, or is it just we're going to wait a little bit until we take it to the 11 weeks that we talked about previously? Thank you.

Thank you, Tom. Let me take that one.

It's Rafael. Clearly, I mean, I would say that our channel strategy has shifted from, you know, what before we considered type control to ensure that we stage the right product to satisfy demand. We are moving to our long-term target of 11 weeks. And the reason we're doing that is because it is a reflection of an improving demand environment for us. We finished Q4 with about 10 weeks. We will move into our long-term plan and long-term target of 11 weeks into 2026. And that's how we are going to manage our business in a steady state.

Gotcha. And then as a follow-up, just on the comms business, so You're deciding to move away from RF, but you had already kind of moved away from digital networking. You're guiding that business up 10. Could you maybe walk through the moving pieces? Obviously, with digital networking coming down, you needed to see some really, you know, some strength from maybe the SIS business. Just walk through what's contributing to that Q1 strength. Thank you.

Yeah, we did guide CNI about 10% sequentially in Q1. And if you remember, CNI includes three distinct businesses, Secure Cards, Digital Networks, and R Power. And all of these three businesses can move differently quarter to quarter. And CNI, I think right now, is benefiting from the fact that, one, there is normalization in the digital networking business, but there's growth coming from the Secure Card. And that strength really will benefit CNI throughout 2026.

Thank you. And the next question will come from Matthew Prisco with Kanner. Your line's open.

Hey, guys. Thanks for taking the questions. I guess starting with the statistical side, can you maybe offer some more color on customer ordering trends over the past few months and maybe what type of linearity you saw through the quarter and into 1Q?

Matt, are you asking about kind of the trends that we track internally? Is that what you're asking? We couldn't quite hear your questions. We apologize.

Oh, yes, that's exactly it. The trends that you track internally when you look at just customer ordering trends over those past few months and then linearity through the quarter and into 1Q.

Yeah, linearity we don't disclose, but I think Bill will take some of the other metrics we track.

Yeah, no, no. Obviously, over the quarter and the last 90 days ago, all our internal signals that we talked about in the past have improved. So think about our backlogs. Our distributions backlog, our customer escalations have increased. The short-term orders continue to increase as well, and we try to service as much as possible related to that. So across the board, we haven't seen anything like this in quite a while, and so we feel very confident about being in a long-term business model for 2026.

And maybe I'll just add one thing, Bill, If you kind of step back, Matt, and look at kind of the trends in the second half of 25, they've truly started to accelerate. And we're close to our growth rates that we presented on our analyst day. We believe that will continue as we progress through 26. So we're feeling pretty optimistic that we are off the trough of the business. Did you have a follow-up?

Yes, please. I guess on the auto side, We'd love if you could offer some detail on the demand dynamics within your core auto business versus your accelerated growth drivers. And have you seen any impact to date from component price increases potentially pressuring unit demand there?

Thanks. Yeah, so I think there are a few questions there on auto.

If you look at what happens, if you look at auto and the reason why we remain quite optimistic in auto, in Q4, our business return to growth year on year and the guide that we provided continues you know year on year the q1 guide gives you growth as well in year on year and so and what we see is that this is remains unchanged with respect to content games um you asked me about pricing second question with some pricing vpas for most part are are done right with uh in in the pricing that that that that is already reflected in our q1 guide And we are modeling low single-digit price declines, and that's what we see not only in auto but across the business.

Thank you. And our next question will come from Ross Seymour with Deutsche Bank. Your line is open.

Hi, guys. Thanks for asking the question. Just sticking on the auto side of things, it's been pretty much flat for a couple, two, three years in a row. And I know there's been a bunch of puts and takes on inventory and demand, et cetera. But I really wanted to dive into what you've seen over that period of time in your accelerated growth drivers. Is anything changing your thesis there? Are you more optimistic, less optimistic? Any sort of clarifications there, especially as we move forward? Hopefully the headwinds are done. And so I just wanted to judge the growth rate from those drivers going forward. Thank you.

Yeah, thanks, Ross.

So I think with what I said on the prepared remarks, right, auto and our business in general in 2025 was the story of two halves. And the first half was all about inventory digestion. And it really masked the true dynamics of our business. For the full year, the auto accelerated drivers were slightly below model. Remember model we said that we were going to grow 8% to 12%, but they were still growing in a year where auto was flat. And they were about 10%, and it was all led by our SDV efforts, our radar, and our productivity. What you see right now in auto is that auto is shifting our auto exposure is shifting to more and more structural and less cyclical and it's written by you know tying our roadmap towards circular trends are really transforming the architectures of horror so we feel quite optimistic we the answer to the question on the core drivers there's the whole story that thesis is completely intact and we feel stronger than ever that our our roadmap is really addressing the needs of the markets

Okay, thanks for that. And I guess you've had the MEMS divestiture and now the exit of the RF side of things. Can you aggregate how much of a headwind those exits are going to be for this year? And I obviously know where the RF sits, but is the MEMS headwind in the auto side? Just want to kind of make sure to level set on that.

Sure. The way to think about, oh, this is Bill Ross. Good morning. Good morning. The way to think about the sensors divestment, it runs around $300 million per year, and Raphael shared we recognized $25 million in the first quarter, and I think you guys can do the math of the impact that has from a year-over-year compare in our auto and market. Related to the RF business, the RF business is probably going to track similar to what DN did. If you recall, our digital networking business, when we walked away from it, I don't know, eight years ago, it lives quite long. And so what we're actually doing is stop investing next generation products. So that will probably stay with us for at least the next two years is what we're projecting at the current rate. And I think, Jeff, if we had to break out 2025 as a percentage of comms infra pieces, I think I don't have that on my fingertips, so we usually share that, but maybe you can share how the three businesses fared in 2025 to get the size of it.

Sure. Well, so the secure cards business was just over 50%, and both the digital network and RF power businesses were each about 25%. Thank you. Thanks, Ross.

Thank you. And our next question will come from Joe Moore with Morgan Stanley. Your line's open. Thank you.

Great, thank you. In the auto business, there's been a number of sort of these supply disruptions. We had an Xperia a few months ago causing issues. DDR4 now is causing some shortages. You know, is that impacting you guys in any way? Are you seeing either weaker demand because they're bottlenecked by those things, or is there any desire for tier ones to start building inventory to react to any of those things?

Yeah, I'm going to take that, Joe. So the... The next period is not a conversation, it's not been a non-issue for NXP. The discussions on memory, the chatter on memory is not just in autos, it's across markets. We have not seen memory impact the orders of our customers, but clearly it's a conversation that our customers discuss with us as an area of concern for the second half of the year. but nothing has been reflected in our orders.

Great, thank you for that. And then in your auto business, any difference by region? I guess there's been some concern about China demand, just anything you're seeing regionally in your auto business?

No, we don't see anything particular to comment on. I think the auto business, we believe it's going to be It's going to be within model for 2026 for us. It's strong that the accelerated road drivers are executing. So we expect our thesis to continue towards 2026.

Great. Thank you.

Thank you. And our next question will come from Joshua Bucklter with TZ Co. And your line's open.

Hey, guys. Thank you for taking my questions. I APOLOGIZE FOR A BIT OF A NITPICKY SEMANTIC ONE, BUT IT'S ONE I'VE GOTTEN A COUPLE TIMES. SO IN YOUR PREPARED REMARKS YOU SAID FOR 2026 YOU EXPECT TO OPERATE WITHIN YOUR TARGET MODEL THIS YEAR. I THINK YOU'RE GIVEN WHERE WE ENDED 2025 TO HIT YOUR 6 TO 10% LONG-TERM CAGR, 26 AND 2027 WOULD HAVE TO BE HIGHER THAN THAT. ARE YOU GUYS suggesting that this year is within the six to ten percent or are you saying that you know you should track towards the six to ten percent over a three-year period in 26 and 27?

I think Josh what we're saying is the long-term model is intact. I think it's not to be nitpicky but I think you know how to do math and you can probably do the chainsaw on that but we feel very strongly that after the inventory digestion the first half of 25 things are starting to reaccelerate. So we'll leave it there. Did you have a follow-up?

Yeah. You may provide some more puts and takes on gross margin for the first quarter in particular. How are you thinking about utilization rates as we sort of enter a better cyclical period? I know there were some die bank builds that boosted utilization rates at the end of the year. It was done. How should we think about utilization rates from here? Thank you.

Yeah, let me take that one. So I would say gross margins are performing to our expectations into Q1. And this is primarily driven by our annual low single-digit price concessions that Raphael shared. And that is offset only partially from our normal operational efficiencies that we regain back throughout the year. Again, I think for modeling purposes, the best way to think about our gross margins, use that rule of thumb I provided in the past for every $1 billion of revenue. We're entitled to approximately 100 basis points expansion gain to our gross margin on a full year basis. And of course, that's the plus or minus normal mix changes that we share on a quarterly basis. Now, as shared in the past, we will continue to work on mixing up our portfolio through our new product introductions. Also, we're focused on our go-to-market for that long tail, which tends to be a richer mix. also have the ability to improve our internal front-end utilizations. The front-end utilizations in Q4 were in the high 70s and in Q1 they will remain in the high 70s. Obviously, if we get any inflationary costs that we can't offset internally, we will protect our gross margins and pass those on to our customers. And as you know, we always do the normal blocking tackling on improving our yields and test time reductions. Now, longer term, we're quite excited on our hybrid manufacturing strategy, especially when VSMC is fully loaded in 2028. It is on track and beyond. We expect our gross margins to be lifted by another 200 basis points at the company level. So I would say, in general, we are very committed to improving our gross margins over the long term. Related to inventory question, again, our pre-builds were $7 million. To think of seven days, sorry, at the end of the 2025, as you all know, our consolidation efforts and our manufacturing footprint are underway. I would expect the pre-builds by the end of 2026 be about 15 to 20 days related to that. But including those pre-bills, we also expect to take our net inventory days down throughout the year as we continue to focus on what's in our control and do the right thing operationally. To give you some more color on where we plan to take internal inventory.

I appreciate all the detail there, Bill. Thank you.

Thank you. And our next question will come from Vivek Arya with Bank of America Securities. Your line's open.

Thanks for taking my question. On the industrial and IoT segment, Rafael, I was hoping you could help segment how much of that is industrial, how much of that is IoT. And, you know, off of easier compares, the growth rate is very high at the start of the year. But should we expect that this segment will also be in model for 2026? Just how are you looking at the, you know, potential growth scenarios for industrial and IoT this year?

Yeah, thank you, Vivek.

So, yeah, very strong growth that we've seen right now in industrial, right? And the growth, you saw the investors begin recovering in Q3 and continue into Q4. I think Q4 was 20% year-on-year. The growth is fairly broad-based, and it's not a single segment that is driving the growth. Just to give you an answer on the question specifically, we have about 60% of our business there is core industrial, 40% is in the consumer side. But the growth is broad-based. But we saw, I mean, if I would give you, we have some notable traction on fuel sockets in healthcare. And smart glasses, we've seen strength in factory automation and energy storage. And so very, very strong design wins, very differentiated product that we have in industrial and IoT. And that strength of closing 2025 continues in 2026. I mean, you see the Q1 guide was also growing year on year 20%. And we feel very good about 2026 for industrial and IoT.

All right. And for my follow-up, I would be remiss not to ask the seasonality question as we look at Q2 and Q3. And I ask that just because of, you know, all the kind of the exits and things that you're considering this year. So based on, you know, historical patterns and normalizing for all your business diversities, what would you consider normal seasonal trends in Q2, Q3? And are there any other things this year that we should take into account as we model your quarterly cadence this year. Thank you.

Vivek, we're not going to give you guidance beyond Q1.

But one of the things that you should take away, things have gotten better since 90 days ago. And Bill referred to the order patterns that we have. Visibility into Q1 improved as well. We have the conversations with our customers that we're having. It gives us optimism for the second half of the year. So we like the momentum. We like the strength that we closed in 2025. I mean, Q4, the growth was broad-based. And we like the momentum we entered in 2026 because that momentum is also carrying also broad-based. And the way you should think about it, both in auto and industrial, the strength is increasingly structural rather than purely cyclical. And we feel good about the trajectory we're carrying here towards the second half of the year. Thank you.

Thank you. And our next question is going to come from Joe Quattrochi with Wells Fargo. Your line's open.

Yeah, thanks for taking the question. You talked about the acquisitions accelerating interest in your software-defined vehicle portfolio. I'm wondering if you could just kind of expand upon that or just, you know, what are the particulars that customers are excited about?

Yes. So there are the three acquisitions there that we discussed. On the other side, TT Tech Auto has been really an injection of horsepower to accelerate our software-defined vehicle story. One of the deliverables that we have that are very important for us and for some of our customers is a deliverable of software-defined architecture that would be delivering a system around Sonos towards the end of the year. And so TT Tech Auto and the injection of the TT Tech Auto has really accelerated our path into delivering a Sonos architecture and Sonos systems by the end of the year. They also come in with a middleware, and now we're a different middleware called MotionWise. And that engagement right now is, I think, we're taking, I think the interest of our customers is quite high now that they're moving to SDVs. On the industrial and IoT, in my previous remarks, we talked about the the interest level that our customers are not showing for physical AI and the capabilities that we have in our NXP platform. And I just want to double down on that. The interest in the combination of the Kinara NPL and the IMX family of products that we have is really, really strong. And the level of the conversations right now that we're having with our customers has changed significantly. The traction that we get has changed significantly. So we're excited right now in that engagement, and I think that it's going to result in strong design wins in 2026.

Thanks for that. And as a follow-up, on the automotive side, is there any color you can share just geographically on the demand you're seeing, you know, in the fourth quarter and then kind of what's embedded in 1Q?

Yeah, on the auto side, I mean, so I think this is an important question to just give you our perspective. And let's look at the data closely in auto. The inventory correction, what we said, is largely behind us. Q4, we returned year-on-year growth. Q4 auto finished within 1% of its prior peak in 2023. And we're guiding automotive to grow in Q1 year-over-year. And our guide in Q1 only includes one month of the sensor business. So the sequential decline, I think it would have been very close to normal seasonality. Regionally, not a whole lot of differences. Usually in Q1, you have a normal seasonality because now the weight that China has in the market. But fundamentally, our pieces haven't changed. The shift to SDVs, the advanced data, these are multi-year platform transitions. And they're going to drive content growth. And this is where we at NXP are very strong in portfolio.

Thank you.

Thank you. And our next question will come from Chris Casso with Wolf Research. Your line's open.

Yes, thank you. Good morning. If I could follow up on auto again, and specifically the areas of accelerated growth drivers. You know, what you said last year is that those accelerated growth drivers were a bit below plan, and it sounds like the message is that is now likely to improve as you go into this year. What's the reason for that? You know, what was the reason you believe it was below plan last year? And I guess the question is because going forward, it doesn't sound like you're assuming that SAR improves. So what's driving the change that get those accelerated growth drivers back in contract?

So 2025, Chris, I mean, if you remember, first half of the year was a tough year with a lot of inventory digestion. That period put a pause in some of the accelerated road drivers because, for instance, some of the business like radar got caught up into inventory digestion. Electrification got caught up into inventory digestion. It slowed down the ramp of new models that basically address some of the Slightly less growth, I would say, in the SDV piece. But we saw that second half accelerate. Once the inventory digestion, all our thesis became true. The accelerated growth drivers started to grow. By the way, the accelerated growth still grew in 2025. It just didn't grow at target because of the challenges that we have in the first half of the year. And now that thesis continues in 2026. We see our accelerated growth drivers now. being within model and or even better. And so we see that traction being in 2020 SACS taking hold.

Thank you. As a follow-up, if I could follow up on operating margin expectations and what you said for the year returning to the long-term model, you know, assume that that involves operating margins as well. You know, I guess you've given some indication with regard to gross margins, but what does that mean for OPEX and operating leverage as you go forward through the year?

Yeah, sure. As I mentioned in my prepared remarks related to OPEX, you know, typically as an expense as a percentage of revenue for the first half are typically higher than the second half driven by our seasonal revenue profile. The timing effect of our U.S. benefits at the start of the new year, that's why you see our guide up in Q1. Q2, I'll remind you, we have our Q2 annual merits and promotions. And then we also have, at the moment, that one-time IP license impact in Q2 that we previously shared that occurs every year. So we're typically out of model in the first half, but then we expect to go below that 23% model in the second half, leading to a full year of about 23% or below. Obviously, we'll always have leverage on the SG&A side of the house, but the investments that are required for SPVs and physical AI and where we want to take the company, we want to keep that at that 16% level, I would say, to make sure that we can capture that growth, that long-term growth that we're after. So for your modeling purposes, I gave you the gross margin. We gave you the revenue. Here's the op-ex. I think you can get to the answer. Thank you. That's helpful.

Thank you. And our next question will come from Gary Mobley with Loop Capital. Your line's open.

Hey, guys. Thanks for taking my question. I know I'm going to make Jeff cringe here, but I did want to ask a follow-up question with respect to your statement on long-term operating model. When you laid out in November 2024 that long-term operating model, you know, the base off which you were guiding from was 2024, obviously. And so, you know, that would indicate, you know, $15.8 billion in revenue in fiscal year 27 based on that 6% to 10% revenue growth rate minus the sales of them since their business and whatever other adjustments since then. So for the fiscal year 26 commentary about being on target, is that with respect to 6% to 10% growth or that 2027 destination for revenue?

This model has to be laid out at the analyst stage. I think, Gary, we both agree with you on the end point where we want to get to. We both know what we have to do to get there. We're going to leave it to you and the analyst community to figure out how that march is. We feel very good that after coming out of the first half of 25 inventory digestion, we can accelerate through the next two years. I think that's the best we can do.

I appreciate what you gave there, Jeff. As a follow-up, I wanted to ask about the impact on the expense side from the sales and then sensor business. We know the revenue impacted $300 million, but what's the impact to gross margin in OPEX?

Yeah, this is Bill. I mean, think about with the sales, about 100 people. On gross margin, as we said, I think, or shared in the past, it was Below our corporate margins, so, I mean, not much. Maybe 10, 20 basis points improvement related to that 1D model, but it's, you know, those are the colors I can give you on it.

And remember, Gary, that we did go through some corporate restructuring along with this to make room for the new headcount from Aviva, Lynx, TT Tech, and Canara. So I'd still like to say we made room for the additional headcounts.

Yeah, and also remind you, the other reason for divesting this business is we did see headwinds. As we know, the current acquirer, the buyer, actually manufactures the front end, and so we saw this as a great opportunity to prevent headwinds to our gross margin in the future as well. Appreciate it, guys. Thank you.

Thank you. And our next question will come from Jim Schneider with Goldman Sachs. Your line's open.

Good morning. Thanks for taking my question. Relative to everything you said about this year's cadence and being within model and obviously kind of the inventory situation out there, is there any reason to believe that if you exclude the divestitures that automotive and industrial IoT have, would not be operating sort of at the upper end of your long-term target model for the year.

Hey, Jim, it's Jeff again. We're not going to guide 2026. Let me be very clear about that. We've given you guys as much as we're willing to do, but we're not guiding for 2026.

Okay, fair enough. And then maybe... Just on the capital allocation side of things at this point, I mean, you've made a decent amount of investments in the FAB relationships, et cetera. I mean, do you think that you're going to get into a place where you could or you see your way clear to sort of increasing the buyback component of that at some point this year?

Yeah, I mean, our capital allocation – policy strategy has not changed one bit. We are very comfortable buying back the stock as long as we're below our net leverage ratio of two times. And I think in Q4, we were at 1.9 times. So there's lots of opportunity with our investments in the long term of the business, along with buybacks. And I hope into the future as we expand, we also increase our dividend as the company performs better. So, again, we are doing multiple things. We're very flexible, and we've demonstrated that, and we're committed to returning 100% of our excess free cash flow back to our owners.

Thank you.

Thank you. And our next question comes from Taurus Sandberg with C4. Your line's open.

Yes, thank you. Rafael, could you talk a little bit more about changing the way you report on geography, what some of the main reasons are behind that? I mean, I assume it's because, you know, things are changing so much as far as, you know, where your customers are taking design wins. But, yeah, if you could elaborate on that, that would be really great.

Yeah, let me start with that one. The question of why do it now – There's no way of reporting really reflects how we manage the company internally, how we direct our resources, how we direct our sales organization. I mean, think about the way we report today. A major handset maker will receive products in Asia, in the U.S., but in reality, most of the decisions are being in one place and would be here in the US. And so, and that gives you an example there that kind of gives you the ability to really think about how we internally were organizing our sales force and our marketing is to go after the sign ones and address customers. So this is how we manage internally and I think it's better to reflect our business that way.

Yeah, that's very helpful. And as a follow up for you Bill, Billy, I think you mentioned you'll get your $3.4 billion capacity expansion investment in 2026. Just curious, between VSMC and ESMC, what's the split going to be when the year is complete?

Oh, yeah. I would say majority of the investments, you know, VSMC is ahead of schedule, just purely timing, right? I think it's expected to start ramping in 27 and then be in full load in 2028. And so majority of our investments will be out in 2026. Now, maybe a little bit into Q1 2027. I don't know. We'll see on the timing of that on the equity side, but I think majority will be out in 26. ESMC, since that ramp occurs later, think about some payments going out this year, but then there's still a string of payments that go out from 27 to 29, which is much smaller in the aggregate. But majority of most of the payments, hopefully, we will be done at the end of 2026. Very helpful. Thank you.

Thank you. And our next question will come from Vijay Rakesh with Mizuho. Your line's open.

Yeah, hi, Rafa and Bill. Just a quick question on the auto side. Just wondering, as you look at the software-defined vehicles, And you mentioned a structural pickup there in autos. How are you looking at that auto segment revenue growth versus LVP? Should it grow like high single digit above LVP, or how should we look at it?

Yeah. Hi, Vijay. It's Jeff. I think for next year, the way our algorithm works is we assumed over a multi-year period that SAR would grow in the low single digits. The long-term math for auto was 9% to 12% – 8% to 12%, excuse me. And so if you were to say flattish SAR, you kind of back that out of that total rate and, you know, take you down, but we still see content per vehicle as the real accelerator of automotive growth. Got it. And just maybe just kind of give you the one piece that we have, you know, we use S and P as our kind of Bible for, for SAR. And they're looking at 26 that, Oh, just a little, almost 93 million, 92.6 million cars. in 26, which is kind of flat-ish year on year from 25. But when you kind of peel that back, you still see good acceleration of EVs and good market share gains of the Chinese OEMs. So you can kind of use that with the CPD content.

Got it. And then as you look at 2025, I think you guys mentioned autos were $7 billion, $7.1 billion-ish. And I think you put out a long-term, I think 2027, $9.5 billion. I know there's been a lot of puts and takes with acquisitions and diversities, but just wondering how you're looking at that $9.5 billion by 27 number.

Yeah, the only change that we would make to the model is in 24, to be honest, you probably have to back out the $300 million in sale of sensors off that baseline in 24 and then apply the 8% to 12% growth rate off of that.

Got it. Thank you.

Thank you. And our next question will come from William Stein with Truist Securities. Your line's open.

Great. Thanks for taking my questions. First, I'd like to ask another one on automotive. A couple of other suppliers have discussed this EV incentive expiry in China as damaging their Q1 outlook somewhat. And I wonder if you're seeing that dynamic as well and that and your guidance is certainly net of any of those effects, but can you discuss whether that's influencing your outlook either in Q1 or for the rest of the year? And then I have a follow up, thank you.

No, we don't see, we don't have the same perspective. As a matter of fact, one of the changes, well, that we see in China, a couple of changes, you mentioned incentives, which tells the incentive towards more of a high end of the vehicles. The other change that China has made is that they increase certain regulations to improve the quality and resilience of the vehicles. And I think both attempts is to reduce the involution in the market. I think we see both of those initiatives to be good for us. The resilience or quality requirements they're putting in place right now I think is really going to be a tailwind for us. And the sign wins for 2026. So we see some of the changes actually are good for us for NXP and our auto business as well.

Great. Thank you. And as a follow-up, there's a rapid growth area in semis, we all know, not just endpoint semis. physical AI, but data center AI. And I think historically you haven't talked about any exposure there, but my best guess is that you have something in that market. Can you discuss any ongoing development or any exposure to that market? Thank you.

Yes, well, so today our data center revenue sits within the industrial segment, and our exposure is Indeed, you mentioned through processors to support the data center infrastructure. I think there will be things like power supplies, net cars, cooling systems. But we also have our high-performance products there for control functions and things that they need, probably security like PQC. We don't break this revenue out separately, but it is growing nicely, and it will contribute to industrial momentum in 2026.

Thank you.

Thank you. I would now like to turn the call back over to Rafael for closing remarks.

Thank you, everyone, for joining us today and your thoughtful questions. This quarter reaffirms the continuity of our strategy and the durability of our model focused on profitable growth, disciplined execution, and predictable returns. With clear visibility into our company's specific growth drivers, We're confident in our ability to compound value through 2026 and beyond. Thank you.

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