NXP Semiconductors N.V. (NASDAQ:NXPI) Q1 2024 Earnings Call Transcript

NXP Semiconductors N.V. (NASDAQ:NXPI) Q1 2024 Earnings Call Transcript April 30, 2024

NXP Semiconductors N.V. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Hello, and thank you for standing by. Welcome to NXP’s First Quarter 2024 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over to Jeff Palmer, Senior VP of Investor Relations. You may begin.

Jeff Palmer: Thank you, Tawanda, and good morning, everyone. Welcome to NXP Semiconductor’s first quarter earnings call. With me on the call today is Kurt Sievers, NXP’s President and CEO; and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today’s call will include forward-looking statements that involve risks and uncertainties that could cause NXP’s results to differ materially from management’s current expectations. These risks and uncertainties include, but are not limited to, statements regarding the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products and our expectations for our financial results for the second quarter of 2024.

NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we 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 first quarter 2024 earnings press release, which will be furnished to the SEC on Form 8-K and available on NXP’s website in the Investor Relations section. Now I’d like to turn the call over to Kurt.

Kurt Sievers: Thank you, Jeff, and good morning, everyone. We appreciate you joining our call this morning. Beginning with quarter one, revenue trends in all our focused end markets were in line with the midpoint of our guidance. NXP delivered quarter one revenue of $3.13 billion, essentially flat year-on-year. Non-GAAP operating margin in quarter one was 34.5%, 30 basis points below the year ago period and 60 basis points above the midpoint of our guidance. Year-on-year performance was a result of consistent gross profit generation, offset by slightly higher operating expenses as we continue to invest in our future business. From a channel perspective, we helped distribution inventory at a tight 1.6 months level, consistent with our guidance and well below our long-term target of 2.5 months of inventory EBITDA.

Now let me turn to the specific trends in our focus end markets. In automotive, revenue was $1.80 billion, down 1% versus the year ago period and in line with our guidance. We continue to manage an orderly process of inventory digestion with our major direct automotive Tier 1 customers. In Industrial & IoT, revenue was $574 million, up 14% versus the year ago period and in line with our guidance. Our performance compares favorably versus the year ago period when the business had dropped. Since 1Q 2023, we have seen a steady sequential improvement in the industrial and IoT demand trends, so not yet back to the long-term levels, which we would expect. In Mobile, revenue was $349 million, up 34% versus the year ago period, where again, the business had troughed already back in 1Q 2023.

And lastly, in Communication Infrastructure & Other revenue was $399 million, down 25% year-on-year and in line with our guidance. And now let me turn to our expectations for the second quarter 2024. We are guiding quarter two revenue to $3.125 billion, down 5% versus the second quarter of 2023 and flat sequentially. In the Automotive end market, revenue trends during the first half of 2024 reflect a continued inventory digestion process at our direct Tier 1 automotive customers compounded by a soft automotive macro environment. In the Industrial & IoT end markets, we had already troughed in 1Q 2023. We see improving demand in China, in part, thanks to our lean channel position as well as thanks to incrementally healthier end demand. This is expected to be partially offset by soft end demand in Europe and the Americas.

In the Mobile end market, we continue to witness the expected modest cyclical recovery. And finally, within the Communications Infrastructure &Other end markets, our resumption of sequential growth is primarily driven by secure RFID tagging. Taken together at the midpoint, we anticipate the following trends in our business during the second quarter. Automotive is expected to be down in the high-single-digit percent range versus quarter two 2023 and down in the mid-single-digit percent range versus quarter one, 2024. Industrial & IoT is expected to be up in the high-single-digit percent range for both year-on-year and versus quarter one 2024. Mobile is expected to be up in the low 20% range year-on-year and about flat versus Q1 2024. And finally, Communication Infrastructure and Other is expected to be down in the mid-20% range year-on-year and up in the high-single-digit percent range versus quarter one, 2024.

So in summary, we are beginning to see incrementally improving demand signals for the second half of 2024 across all end markets. Hence, during quarter two, we will begin to state slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting quarter two, and if demand momentum continues, we will stage additional channel inventory during the second half, however, in a very controlled and targeted manner. So it is unlikely that we grow channel inventory back to our long-term target of 2.5 months within this calendar year. And taken all together, the potential outcome for 2024 should be in the range of a modest annual revenue growth or decline, just consistent with our views from a quarter ago.

Overall, we continue to manage what is in our control, enabling NXP to drive solid profitability and earnings in a challenging demand environment. Our first quarter results, our guidance for the second quarter and our early views into the second half of the year underpin a cautious optimism that NXP is successfully navigating through this industry-wide cyclical downturn. And now before turning the call over to Bill, and while we are very focused on managing the soft landing through the cycle, I would like to take a minute to highlight a couple of important innovation announcements, which we made during the first quarter. This includes our S32 core right platform for next-generation software-defined vehicles. It represents the industry’s first platform to combine High-Performance Automotive Processing, Vehicle Networking and System Power Management, along with integrated software to address the Complexity, The Scalability and the cost efficiency required for the software-defined vehicle.

And as part of that announcement, we also introduced our 5-nanometer S32M processor, a milestone in the expansion of our S32 processing summary. Additionally, we introduced industry’s first 28-nanometer RFCMOS single-chip automotive radar, which enables next-generation automotive ADAS systems. This new product further expands our market-leading franchise and it enables next-generation highly performing coherent radar systems in a very cost-effective manner. Lastly, NXP and Honeywell, who is a leader in building automation systems, signed a memorandum of understanding. This collaboration aims to help make them operate more intelligently by integrating NXP’s neural network enabled industrial grade applications processes into Honeywell’s building management systems.

That agreement is another great example of how NXP will participate and potentially lead in the revolution of AI processing at the edge in industrial applications. And now I would like to pass the call over to you, Bill for a review of our financial performance. Bill?

Bill Betz: Thank you, Kurt, and good morning to everyone on today’s call. As Kurt has already covered the drivers of the revenue during Q1, and provided our revenue outlook for Q2. I will move to the financial highlights. Overall, the Q1 financial performance was good. Revenue was in line with the midpoint of our guidance range, with non-GAAP gross margin slightly above the midpoint of our guidance, while inventory in the distribution channel continues to remain below our long-term target. Turning to Q1 results. Total revenue was $3.13 billion, flat year-on-year, in line with the midpoint of our guidance range. We generated $1.82 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.2%, flat year-on-year, though 20 basis points above the midpoint of our guidance range.

The incremental margin was due to an increase in the estimated useful lives of our internal front-end manufacturing equipment, from five to 10 years. This was about 30 basis points favorable to the results, which was not in our guidance. Total non-GAAP operating expenses were $736 million, or 23.5% of revenue, up $8 million year-on-year and down $55 million from Q4. This was $19 million below the midpoint of our guidance range, primarily due to a combination of reduced variable compensation and proactive expense controls. From a total operating profit perspective, non-GAAP operating profit was $1.08 billion, and non-GAAP operating margin was 34.5%, down 30 basis points year-on-year and 60 basis points above the midpoint of our guidance range.

Non-GAAP interest expense was $64 million, with taxes for ongoing operations of $171 million or a 16.8% non-GAAP effective tax rate. Noncontrolling interest was $5 million and stock-based compensation, which is not included in our non-GAAP earnings, was $115 million. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $10.18 billion, down $997 million, as we repaid the 4.875% in bonds that was due on March 1, 2024. Our ending cash balance, including short-term deposits was $3.31 billion, down $963 million sequentially due to the cumulative effect of debt repayment, capital returns, CapEx investments and cash generation during Q1. The resulting net debt was $6.9 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.4 billion.

Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.3 times, and our 12-month adjusted EBITDA interest coverage ratio was 22.8 times. During Q1, we paid $261 million in cash dividends, and we repurchased $303 million of our shares. Subsequent to the end of Q1, and through Friday, April 26, we repurchased an additional $97 million of shares under an established 10b5-1 program. Turning to working capital metrics. Days of inventory was 144 days, an increase of 12 days sequentially, while distribution channel inventory was 1.6 months or about 7 weeks. As we have highlighted throughout the previous year, given the uncertain demand environment, we continue to make the intentional choice to limit inventory in the channel, while keeping inventory on our balance sheet to enable greater flexibility to redirect product as needed.

Days receivables were in 6 days, up 2 days sequentially and days payable were 65 days, a decrease of 7 days versus the prior quarter. Taken together, our cash conversion cycle was 105 days, an increase of 21 days versus the prior quarter. Cash flow from operations was $851 million, and net CapEx was $224 million or approximately 7% of revenue, resulting in non-GAAP free cash flow of $627 million or about 20% of revenue. Turning now to our expectations for the second quarter. As Kurt mentioned, we anticipate Q2 revenue to be $3.125 billion, plus or minus about $100 million. At the midpoint, this is down 5% year-on-year and flat sequentially. We expect non-GAAP gross margin to be about 58.5% plus or minus 50 basis points, which includes approximately 60 basis points associated with the change of our useful life estimates for our internal front-end manufacturing equipment.

As Kurt noted in his prepared remarks, we will begin to stage slightly higher inventory in the channel to support our competitiveness for the anticipated second half growth. Therefore, our guidance assumes approximately 1.7 months of distribution channel inventory exiting Q2. Operating expenses are expected to be about $765 million, plus or minus about $10 million. The sequential increase is primarily driven by our annual merit increases and the $15 million license fee paid to Impinj as part of our legal settlement. Taken together, we see non-GAAP operating margin to be 34% at the midpoint. We estimate non-GAAP financial expense to be $63 million, with a non-GAAP tax rate to be 16.8% of profit before tax. Non-controlling interest and other will be about $5 million.

For Q2, we suggest for modeling purposes, you use an average share count of 258.5 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance to be $115 million. For capital expenditures, we expect to be around 6%. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.20. In closing, looking through the remainder of 2024, I’d like to highlight a few focus areas for NXP. First, from a performance standpoint, we will continue to navigate a soft landing through a challenging and cyclical demand environment with a cautious optimism for a second half improvement in our business. Second, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model.

Specifically, we expect our gross margin will continue to perform at or above the high end of the long-term model while maintaining internal fab utilization levels in the low 70s for the remainder of the year. Third, there is no change to our capital allocation policy, where we have returned $2.4 billion over the last 12 months. Furthermore, we will continue to be active in the market repurchasing NXP shares. And lastly, we are excited to host an Investor Day on November 7 in Boston. The specific details will be available soon on the NXP Investor Relations homepage. We look forward to you joining us. I’d like to now turn it back to the operator for questions.

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Q&A Session

Operator: Thank you. [Operator Instructions] Our first question comes from the line of Vivek Arya with Bank of America Securities. Your line is open.

Vivek Arya: Thanks for taking my question. For the first one, Kurt, I think you gave a very clear explanation of kind of the cautious optimism around Automotive in the second half of the year. My question is kind of a more medium- to longer-term question. In the past, you gave a 9% to 14% growth target for your Automotive business. And since then, a lot of strike the slowdown in EVs and inflation and all those other things. What is the right way to think about NXP’s long-term Automotive growth prospect? Is it a simple formula that connects production growth to your sales growth targets?

Kurt Sievers: Yes. Hi, good morning, Vivek. So first of all, let me augment what you said, the cautious optimism, which I expressed for the second half is not limited to Automotive. It is important to note that, that cautious optimism for second half growth over first half is actually across the company. It’s very broad-based. It’s across distribution and direct and it is across all of our segments. Now coming back to your original question, longer-term Automotive growth. Yes, we had a guide of 9% to 14% from 2021 to 2024. Now we are in 2024. It’s actually good to see that Automotive is probably the one segment which is going to hit the target this year of the 9% to 14% and he will, as Bill said at the end of his prepared remarks, we will host an Investor Day in November where we will come out with the new growth targets for the next three years for all of our segments, including Automotive.

Now so I will not be able to give you a number today for the next three years for Automotive, but directionally, Vivek, I would say, the algorithm isn’t that much different from the history because we see the content drivers very much in place. And you know that NXP very well benefiting both from ADAS as well as from the electrification trends and mainly on the mid- to longer-term basis from a trend to software-defined vehicles where our industry-leading franchise in processing is certainly going to win. So that continues, which means in the end, the SAAR as an underlying mechanism probably becomes less relevant. And I would also tell you that we think pricing will be certainly to start with sustainable from where we come from. You know that we have this NXP increased prices over the past three years.

We said it will be neutral this year. And as I said earlier, for the coming years, maybe we go back to a very small, low single-digit ASP erosion per year. I mean, that is to be discussed in the coming years. But nothing out of the normal, I would say, and especially not pricing coming back to where it was pre-COVID. I mean that’s really important for that algorithm. So please bear with us, Vivek, for the November Investor Day and we come with exact numbers. But I just wanted to signal to you, you should not expect massive changes here.

Vivek Arya: Got it. And then, Kurt, kind of a more near-term or sort of just calendar 2024 question on your Automotive business. So last year, your auto sales grew about 9%, about in line with auto production, right? So despite better pricing, i.e., you somewhat undershipped. What is the assumption for the entirety of calendar 2024 because your auto sales seem to be declining sequentially in Q2. So is the assumption that they pick back up and they do better than production in the back up? Just what is kind of the puts and takes for how you’re thinking about Automotive for the entire year?

Kurt Sievers: Yes. Look, indeed, you had it quite right for last year. The 9% growth of Automotive revenues was actually in a very strong SAAR year. I think the SAAR last year was something in the order of almost 10% growth year-on-year, so spectacularly high. And indeed, NXP did increase price from a corporate total company perspective by 8%. So yes, we totally undershipped already last year, which was part of the soft lending strategy, which we are pursuing. So we think we have already started to correct the Automotive revenue and the inventory situation in the direct customers since mid of last year and in the distribution channel already way back because we number went above 1.6. Now when you think about this year, Vivek, it is indeed – the macro is a little different.

The latest S&P numbers would suggest a zero percent SAAR for this year and a bit of a moderation in the EV penetration. I say that very carefully, Vivek because I think the headlines we all see about EV slowdown are more dramatic than what it really is. S&P is still talking about 20-plus percent unit growth of xEV, so hybrids and full EVs for this year, which is still a very strong growth. What really drives our revenue number, however, this year is the inventory digestion with the direct customers. Clearly, in Q1, and now with the guide, which we just gave for the second quarter, we are digesting inventory with our direct automotive Tier 1 customers. If this is exactly done by the end of Q2 or if it takes a little bit into Q3, very hard to say.

However, we have any indication that the second half in Automotive this year is going to grow solidly above the first half of this year. And that is actually driven both by company-specific enablers. So we have RADAR platforms, which are strongly ramping in the second half. But of course, it is also driven then by the normalization of that inventory digestion which means we would move in the second half from under shipping end demand to meeting end demand again. I will not give you the full year growth number. Vivek, we don’t guide the full year by segment. Actually, we only guide the next quarter. But when I said the whole company is modestly up or down for the full year and Automotive is more than 50% of the company, then you can guess that Automotive is probably not that far from the same number.

Vivek Arya: Thank you.

Operator: Thank you. Please standby for our next question. Our next question comes from the line of Ross Seymore with Deutsche Bank. Your line is open.

Ross Seymore: Hi, guys. Thanks for answering my question. Could I want to get into a little bit of the increased comfort that apparently you’re feeling with the desire to start refilling the channel? I know you did a little bit of it in the first quarter, but the second quarter, it seems like your optimism has increased a little bit sequentially, even despite the Automotive side being guided down. And I know you went through each of the segments specifically. But if you step back at a higher level, what’s giving you the confidence? What’s improved to give you the confidence to fill the channel?

Kurt Sievers: Yes. Hi, Ross. So first of all, Q1, honestly, the 1.6, and you are right, we came from 1.5 in Q4. It’s just been hovering around 1.5 and 1.6. It’s very hard to keep this strictly to one number. So I’d say Q1 wasn’t really intentional. It’s just – if you look back over the past, I don’t know, 12 quarters, we’ve always been jumping up and down between 1.5 and 1.6. Quarter two, yes. This is intentional. So we want to try to get it to 1.7 for the exit of quarter two. And indeed, it is based on growing still cautious optimism for the second half. Now, what is giving us that optimism? It is really a mix between cyclical considerations and very company-specific considerations. I think in the question of Vivek a minute ago, I mentioned in Automotive, we have company-specific platforms, which are ramping in the second half where we sit almost every day with our customers and discuss the organization of that ramp.

So we just know that’s going to happen. Secondly, and Bill mentioned that in his prepared remarks, we have the settlement with Impinj for the RFID taking business and the fact that the two market-leading franchises or companies in that market space, NXP and Impinj have settled here was a positive catalyst, I would say, to the market development for RFID tagging. So we see a positive development there, which is then also playing into the second half over first half in our Communication Infrastructure & Other businesses. And then thirdly, and that’s more on the cyclical side. We clearly see that the Automotive Tier 1 inventories will normalize. So then we just go back to shipping to run rates. So there’s nothing spectacular happening. The demand is there already today but we are still digesting inventory.

And in the second half, so we don’t expect that there is more car production or more EVs or anything. It is simply that we ship to demand. But the same holds even more true for Industrial IoT where we come from an extremely lean travel position. That Industrial IoT business is largely exposed to China. You might also have seen that the PMI in China is actually developing quite nicely. So we do see both in the core industrial as well as in this consumer IoT business, which is in that segment, we see sequential improvement, and that is the main reason actually that we are staging the channel, because we absolutely want to be sure we have a competitive position on the shelves of our distribution partners entering into the third and fourth quarter.

Ross Seymore: Thanks for the details. I guess since you mentioned the Impinj side, Bill, you’re doing a great job on the OpEx. You remember what your guide in the first quarter. The second quarter, you included, you said, a $15 million payment for that. Can you just give us an idea of, one, is that Impinj payments a one-time deal, and so it goes away after this quarter? And then more importantly, what are your thoughts on the OpEx side of things? If the optimism on the revenue side is increasing, should we expect the OpEx to increase with variable comp or any of those sorts of drivers?

Bill Betz: Sure. Let me break those two apart. So the agreement that we have with Impinj is the annual cross license, which will impact us on a go-forward basis, about $15 million in the second quarter and it rose slightly, but that could stop any time in the future once we have the work around complete. And again, I don’t know exactly the exact timing, but that’s something that we’re pursuing internally. Related to our OpEx, clearly, you can see we’re somewhat out of model in Q2, but that’s really driven by our annual merit increases. So we have a combination of both those impacts occurring in Q2, the 15 plus of the annual merit increases. But what’s offsetting some of that impact is also our proactiveness on our expense controls and you saw that in Q1 as well and some lower variable compensation.

So as we think about the second half. And I think this is where you’re going, is where are – we headed with OpEx. And what we’re going to try to do is make sure we get back into that model, as you know, around that 23% as we think about the second half.

Ross Seymore: Thank you.

Operator: [Operator Instructions] Our next question comes from the line of C.J. Muse with Cantor Fitzgerald. Your line is open.

C.J. Muse: Yes. Good morning. Thank you for taking the question. I guess first question on gross margins. If I take into account the change in the depreciation on equipment, you’re essentially pro forma guiding gross margins flat. And I guess, I would have thought maybe, you would have had a little bit of a kit from the channel refill, as you take it one more month. And so I guess if you can kind of comment what might be an offset there. And then considering your vision for utilization rates to stay kind of where they are through the remainder of the year, how should we be thinking about the trajectory for gross margins into the second half?

Bill Betz: Yes. Hi. How are you? Yes. You are right. So obviously, if you adjust for the accounting, basically, we’re kind of flattish guiding to flat and again, it’s within our plus or minus 50 basis points, I’m not really that good for $3 million or 10 basis points. But again, there’s all sorts of puts and takes in that and part of the reason for the useful life, I would say, accounting change, as you know, every year, we have to go look at this from accounting and related to this specific topic, there was a number of factors considered, which includes the NXP product life cycle, age of tools and the market analysis. And this is something that we just how to go do and we did it. We think it’s the right thing to do, and we’re calling it out, so it’s very clear.

And to be honest with you, we expect now to run at or above our long-term model, versus our previous commentary where we said near or at the gross margin levers we have, some of the tailwinds, as we mentioned before in our previous calls, C.J. is clearly, our utilizations are running below the 70%. So that eventually will go back up and becomes a tailwind. We talked about higher revenues fall through over that 30% fixed cost. Again, that should help. We discussed about replenishing the distribution channel, that’s where you were flying with your question, just that one, you should get something. But you’re right, over time, when we bring that back up to target that should be a lever for us to carry the higher margin. We’re also – we talked about expanding customer reach within the mass market.

That just takes time. And now internally, the team is focused on productivity improvements, cost reductions, and over the longer time horizon, we explained this many, many times, it’s really our new product introductions layering on top of our business. So continue to move that. So we have an Analyst Day or Investor Day coming up on November 7th. We’ll break that out in more details and update that model. But hopefully, you guys can see that even through the downturn, we’re managing margins quite well and 58% or 58.5% with the accounting adjustment, that’s not our end destination.

C.J. Muse: Excellent and then, a question for, Kurt, as you look back to, the COVID period and kind of the initiation NCNR programs, it sounds like that has really been at the most senior levels with you and focused on volume, not price. I’m curious, just as you look forward, how did that kind of help nurture your customer relationships? And what potential benefits might you see ahead as we progress into a world where NCNRs are no longer part of the business? Thank you.

Kurt Sievers: Yes. A couple of considerations here, C.J. The one is just to remind everybody our NCNR programs have ended with the calendar year 2023. So since January 1, there is nothing anymore under any NCNR program. However, I would very strongly say, and I pointed out because I know that some industry peers had very different opinion on this. The way we had our program was actually good. I would do it again. It did help because, in our particular case, it did put us closer together and we learned much earlier about over inventory built because there was an agreement underneath, which forced the customer to the table to tell us that things would be running too high if we don’t jointly try to correct and that is the reason why we undershipped already all of last year in automotive.

And I think I started to speak about this in the Q1 earnings call already last year that there was first signs of building inventory with Tier 1 automotive customers. Again, that would not – we wouldn’t have seen that. We wouldn’t have learned about it without NCNR. Now from a more strategic perspective, C.J., I think this is all about how does this industry learn from the supply crisis to not run into the trap again to try and apply just-in-time concepts with semiconductor products, which have a three to four months manufacturing cycle time. And I would say I have mixed emotions about this, C.J. On the one hand, I’d say the automotive OEM customers and some of the industrial OEM customers are very thoughtful, and we have entered into long-term agreements into programs where we know how to deal with inventory in order – in a very specific way about those products, which are most critical.

So I’d say there is good learning in place, and that’s clearly a step forward beyond NCNR. With some of our direct customers, however, we clearly see that now under the pressure of working capital requirements, they tend to become very tactical when it comes to reducing inventories again. From my perspective, too far down. So I would go that far that we see inventory targets of some of our direct customers at all, but some which I believe are starting to pose a risk when I think about the next uptick. And what I mean with the risk is that we get again into supply trouble because the short reaction time, which would be required then to ship again much more suddenly it’s going to be very hard and that is compounded by the fact that, that supply chain is a very deep one.

So it’s not just one partner which we ship to and then it goes to the car company, but it’s typically two, three or four stages, and they all reduce inventory. And at some point, they all will want to increase inventory again. And that is OEM side, good learnings in the post NCNR time C.J. with the direct customers, it is a more mixed picture, unfortunately.

C.J. Muse: Very helpful. Thank you.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Chris Danely with Citi. Your line is open.

Chris Danely: Hi. Thanks, guys. Kurt, just, I guess, a longer-term question on the automotive market. What are your thoughts on the relative growth rates of hybrids versus EVs? And then also, it seems like BYD has been a little bit better than Tesla this year. Do you expect those two trends to continue? And then what are the impacts, if any, to NXP? Or does it not matter?

Kurt Sievers: All right. These are interesting questions, Chris, which we also think about very hard. Let me try and dissect it. The one is – and I think I said this in my prepared remarks earlier, the xEV, so if you combine hybrids and battery electric vehicles, continues to grow pretty well. And – but that is carried by China. And the reason why many media headlines suggest it is not going well is that Europe and the U.S. are actually quite small in xEVs. To be more specific, if you take the total xEVs worldwide, only 12% of those are in the U.S. and 24 are in Europe while China holds 44% and BYD indeed is a big part of that. And that China 44%, Chris, is growing this year according to S&P by 27% in volume. So what I tried to say was that is the xEV in total, certainly keeps growing nicely.

Now if you go into the split between BEV and hybrid, so fully electric and hybrid electric, then I’d say it isn’t that difficult. The battery electric vehicles are still only 15%, but they grow by 25%. Hybrids are 24% but grow with 17%. So the one has a smaller base and grows faster. The other one has a bigger base and growth a bit slower. I think on the long run, Chris, and that’s more from a technical perspective, BEVs will win the race. I think this hybrid thing is an intermediate period. I do believe on the long run, it will all tilt to BEVs, once battery and electronics technology gives a tough range. I mean then the whole concept of a hybrid is actually not meaningful anymore. Now for NXP, it doesn’t matter that much as it does to some of our peers, because only very little of our product portfolio has a strict exposure to BEV only.

It is actually only the high-voltage battery management solutions. Everything else also plays in hybrid. So that’s very different to people who have silicon carbide, for example, which only goes into one and not in the other. So therefore, Chris, I don’t know exactly how that plays also over the short-term. But it’s also not relevant very much to our revenue. On the long-term, I’m sure it is going to tail back all to be BEVs again. Tesla against BYD, I don’t want to call it, Chris. I would just say that Chinese and there is much more than BYD are extremely competitive and aggressive. I’m very glad that we have a great exposure to them, because I do believe that a large part of the global electric growth will continue to come from China. Now, how Tesla plays with that or in that, I don’t know.

But certainly, China is going to be the majority in the end, and that’s – again, that’s BYD plus.

Chris Danely: Great. Thanks. And then just a quick follow-up for Bill, Bill, you said your utilization rates are going to remain kind of flattish in the second half of the year. What would be the catalyst to take them higher? Would it be some sort of inventory days level or even better demand outlook or some combo of both? Can you share what would be a catalyst for higher utilization rates?

Bill Betz: You’re correct. It’s the combo of both. As you can imagine, right now, we’re at the high-end of our model when we look what’s in the channel? What do we have on hand. And then we’re trying to balance that, stage it appropriately for that second half growth. So it’s balancing at quarter-for-quarter, but we want to make sure we continue to do the right thing here and keep inventory in check. And some of that inventory of the 144 days is coming from the fact related to the revenue drop-off from Q4 and so revenue cost is probably impacting that drop by about 14 days. And then we actually decreased their inventory dollars in the quarter by about two days or $32 million. So we’re trying to balance all of this, all the moving pieces.

And I expect that we’re going to focus on getting inventory maybe a little bit tighter in the second half, but if growth is higher than our current expectations, clearly, we’ll be able to run our factories that increase the utilization there.

Chris Danely: Great. Thanks, guys.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Gary Mobley with Wells Fargo Securities. Your line is open.

Gary Mobley: Hi, guys. Thanks for taking my question. Kurt, you seem to be implying that the second half revenue is about 12% higher than the first half or in dollar terms, about $750 million higher, correct me if I’m wrong, but I would imagine the majority of that delta is inventory restock direct in through distribution. But maybe you can give us a sense of the magnitude of the impact from improving end demand or seasonality there?

Kurt Sievers: Yes. Hi, Gary. First of all, no, that’s not what I said. What I said is that the second quarter is guided at 3.125 so you can calculate the first half revenue. And then I said that the full year is somewhere between modestly down to modestly up. And very importantly, I want to stress that, that growth in the second half over the first half is not just coming from the channel. We clearly see – and we have the data points from order patterns, et cetera, that also the direct business is going to grow in the second half over the first half. And I gave two examples, I think with Ross earlier. One is Automotive platforms, which are ramping, that is totally independent of the cycle and there is no product on the inventory because it’s a new product, which just comes in at the customer.

And it is RFID tagging, which is also with direct customers in parts there – it has nothing to do with the cycle, but it is the, say, the relief of the industry after the settlement between NXP and Impinj for that market. Very importantly, I also want to say that it is highly unlikely, Gary, that in order to do this, we would go to 2.5 months of channel inventory. So what I said is in quarter two, we take it to 1.7. So that’s one digit up. We are at 1.6, and we want to exit Q2 at 1.7. And if then the demand continues to go the way we preview this, will slightly increase further in Q3 and Q4. I must admit I cannot see a scenario that we would get to 2.4 or 2.5 with that. So the modestly up or down for the full year, does not depend on taking the trends to 2.5 months.

So I’m sorry if that was not clear earlier, so I’m glad you did ask, Gary, but that’s really not the background to it.

Gary Mobley: Okay. Just a quick follow-up for Bill. You did a good job of highlighting the increased depreciation schedule for five years to 10 years on internal front-end equipment. What does that do for the long-term capital intensity for the overall company?

Bill Betz: No change. Our current view is our CapEx is to spend 6% to 8%. Again, this is really accounting change that we just dealt with it and moved on.

Gary Mobley: Thank you.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Stacy Rasgon with Bernstein Research. Your line is open.

Stacy Rasgon: Hi, guys. Thanks for taking my questions. For the first one, I also wanted to sort of revisit the second half ramp. So it does seem clear if the full year is flat, plus or minus, you’re up decent double-digits half over half. Does that start in Q3? Like is Q3 above seasonal to get there, like how would you – I guess, sitting where we are right now, how would you sort of characterize likely Q3 seasonality versus what you’ve seen historically?

Kurt Sievers: Hi, Stacy, we really can’t go there. I mean I’m already leaning out of the window here with giving kind of a directional full year guidance, which we thought is useful given the dramatic cycle we are all going through. But now calling it into Q3 and Q4 separately, I’m sorry, we don’t provide that. So it is for the full year. And honestly, it’s also hard to say, Stacy, because you know that inventory digestion is not an actual sheet. I mean this is a number of customers. Each of them has their own dynamic, has moving targets. So things could be settled earlier could be set a little later and calling that exact by the quarter end is virtually impossible.

Stacy Rasgon: Okay. So I mean – so maybe to take that point and maybe step out a little more – so on autos, last year, you’ve already sort of indicated that you undershipped last year, you had strong pricing and you didn’t – you actually underperformed the market last year. So you actually started under shipping last year, why are you still in an inventory correction now? Like – this is like six quarters.

Kurt Sievers: Because we wanted to spread this out, Stacy, that was the whole idea. I think last quarter, we discussed about our understanding of that so-called soft landing strategy for NXP. Our whole target was to actually have not a sharp peak to trough in Automotive because there would be a bad impact on our factories and Bill would come back with heavy underloading and negative margin impact, so the idea was to spread this over a longer period of time, which is why we started early but didn’t want to overdo it in any given quarter. So say we started in Q3 last year for the direct side of Automotive. And obviously, it goes at least until the end of the second quarter of this year. So that would be a full year of correction on the direct side, maybe a little bit spreading into the third quarter.

Mind you that at the same time, our distribution Automotive business, which is 40% of the total Automotive revenue has always been at 1.6% only. So on that side of the house, we haven’t had to correct at all. So that’s the way how you should think about it, which explains also some of the confusion I’m reading in a lot of reports about the peak to trough behavior of NXP versus others. In [Comms Infra], in Industrial and Mobile, we have a 30% peak to trough more or less. It’s just that our trough was already a year ago because of our channel discipline. But it’s the same peak to trough as everybody else. It’s just in Automotive, it’s probably more in the 9% to 10% and because I believe we troughed in Automotive this quarter two right now. But again, that is intentional, as I just explained.

Stacy Rasgon: Got it. So is it demand getting worse now? Or is it just your inventory behavior or taking a harder line on inventories because it does feel like the general trajectory is getting worse over the last quarter and Q4, Q1, Q2.

Stacy Rasgon: No, it’s really the inventory. We don’t see – I mean, you have to take the offset from the SAAR, Stacy. I said earlier that last year, of course, there was a SAAR growth of 10%, this year, it is flat. That is – if you compare like-for-like, then that makes this year, of course, a less positive environment from a macro perspective. But everything else, which is the company specific positions we have, which is the content increase, which is offered by the industry per se, and the pricing, which is also flat for us this year is totally in place. So no, it’s just inventory.

Stacy Rasgon: Got it. Okay. Thank you, guys. Appreciate it.

Operator: Thank you. Please stand by for our next question. Our next question comes from the line of Joshua Buchalter with TD Cowen. Your line is open.

Joshua Buchalter: Hi, guys. Thanks for taking my question and contrast on results. For my first one, I think there’s a perception out there that there’s a line draw to draw between software-defined vehicles and EVs. And then, it’s much more difficult to do in SPV architecture on an ICE engine. Maybe you could spend a minute or two talking about what you’re seeing from your customers? I mean, is there a big correlation between that digital architecture change versus electric vehicles because they’re re-architecting and what are you seeing on ICE engines for a software-defined vehicle? Thank you.