The NXP Third Quarter 2023 Earnings Conference Call is about to begin, with the operator introducing the speakers and providing instructions for the call. The call will include forward-looking statements and non-GAAP financial measures, and participants can access the call recording later. The speakers will discuss NXP's financial results and expectations for the future, with a focus on specific end markets and the sale of new products. They will also provide reconciliations of non-GAAP measures to GAAP measures.

In the third quarter, NXP's revenue was $3.43 billion, slightly above the midpoint of their guidance. Their Mobile, Industrial & IoT, and Automotive end markets performed as expected, while Communication Infrastructure & Other was slightly below expectations. The distribution channel inventory decreased to 1.5 months, below their target of 2.5 months. Non-GAAP operating margin was 35%, slightly below their guidance due to unexpected legal expenses. Automotive revenue was up 5%, Industrial & IoT was down 15%, Mobile was down 8%, and Communication Infrastructure & Other was up 8%, all in line with or above expectations.

In the third quarter, there was improvement in most regions, with China showing solid improvement. The shift to rates in China is still down compared to last year. The distribution business had improved sell-through, while the direct business declined due to inventory management. For the fourth quarter of 2023, revenue is expected to be $3.4 billion, representing a 3% increase from the previous year. Automotive and Industrial & IoT are expected to see growth, while Mobile and Communication Infrastructure & Other are expected to decline. The full year 2023 revenue is expected to be flat compared to 2022. For 2024, there are expected to be various challenges and changes in the operating environment.

The macro environment remains weak, with subdued demand in China and geopolitical challenges. However, lead times have normalized and a more neutral pricing environment is expected. The company has actively engaged with customers to reduce on-hand inventory and has effectively managed its distribution channel. NXP expects a balanced customer inventory position by 2024 and plans to replenish the channel. In 2024, the company anticipates growth in the automotive and core industrial markets, as well as an improving environment in consumer IoT and mobile. However, demand in the communication infrastructure and other sectors is expected to remain weak.

The company is expecting a soft landing for the business and a return to year-on-year revenue growth in 2024. The first quarter is expected to have a decrease in revenue due to seasonal patterns. The financial performance in Q3 was good, with revenue and non-GAAP gross profit above the midpoint of guidance. Total revenue was $3.4 billion, non-GAAP gross profit was $2.01 billion, and non-GAAP gross margin was 58.5%. Total non-GAAP operating expenses were $803 million, resulting in a non-GAAP operating profit of $1.2 billion and a non-GAAP operating margin of 35%. This was slightly below the midpoint of the guidance range due to a potential legal liability.

In the third quarter, the non-GAAP interest expense and income tax provision were both favorable, resulting in a non-GAAP earnings per share of $3.70. The company's total debt remained flat, while the cash position increased due to capital returns and improved working capital metrics. The net debt to trailing 12 month adjusted EBITDA ratio was 1.3 times, and the company returned $568 million to shareholders through share repurchases and dividends. Working capital metrics also improved, with days of inventory and distribution channel inventory decreasing.

In the fourth quarter, the company will continue to tightly control channel inventory levels and utilize their balance sheet strength to hold product for quick turnaround. Days receivable and payable have decreased, resulting in a cash conversion cycle of 99 days. Cash flow from operations was $988 million and non-GAAP free cash flow was $788 million, representing a 20% margin. The company expects Q4 revenue to be $3.4 billion, up 3% year-on-year and down 1% from Q3. Non-GAAP gross margin is expected to be flat at 58.5%, with slightly higher input costs being mitigated through productivity and passing costs to customers. Operating expenses are expected to be $785 million, resulting in a non-GAAP operating margin of 35.4% at the midpoint.

The company expects non-GAAP financial expenses, taxes, and non-controlling interest to be a certain amount for Q4. They suggest using specific numbers for modeling purposes and expect a non-GAAP earnings per share of $3.65. For 2024, they plan to increase channel inventory and manage the business within certain parameters. They also expect to hold more cash on the balance sheet for flexibility.

The company plans to retire a large debt tranche and continue to repurchase shares. The operator then opens up the call for questions, and the first question is about the linearity of demand. The CEO explains that the channel has fluctuated between 1.5 and 1.6 and that they are trying to keep it lean. They have decided to move it back to 1.6 and have intentionally kept it at this level for over 1.5 years due to weak demand.

The company expects the environment to become more stable in the future and plans to start refilling their channel next year. They will not go above their long-term target of 2.4 or 2.5 level. The gross margin has been kept at the high end of the range due to internal utilization and distribution mix, and the company plans to maintain this in the fourth quarter.

The company is focused on increasing gross margin over the long-term through various levers such as higher revenues, productivity gains, and expanding into new markets. They expect to continue growing through 2024, driven by content increase rather than SAAR. The latest SAAR update for this year is almost 8% higher than 2022.

The speaker discusses the current state of the automotive market and NXP's revenue growth. They mention that the forecast for next year is only 1% higher and that NXP intentionally under-shipped demand to avoid excess inventory. They believe that they will be through this inventory digestion by the second half of next year and expect year-on-year growth throughout the year. This pattern applies to the entire company, not just the automotive sector. The speaker is confident in their management of this "soft landing."

Kurt Sievers explains that the company has proactively managed the inventory issue and will resume year-on-year growth in the first quarter of next year. Vivek Arya asks about the normal seasonal pattern for the Automotive business in Q1 and overall sales in 2024. Kurt Sievers declines to provide specific numbers but reiterates the company's commitment to the 8% to 12% CAGR growth corridor and hitting the targets outlined in the investor day presentation.

Kurt Sievers, the CEO of NXP Semiconductors, discussed the company's revenue outlook for the next year. He mentioned that they will be in the 8% to 12% revenue growth corridor, but it depends on factors like the return of China and the timing of it. He also clarified that their outlook includes both hybrid and fully electric vehicles, and that this category is important for them because it requires more semiconductors.

The company believes that the production of xEVs will continue to grow sharply, with a forecasted 33% of total car production this year and 41% next year. The main volume and driving force in this market is China. The company also sees potential for growth in other electronic systems, such as ADAS and ultra-wideband, which are being adopted faster in xEVs. The company does not anticipate a slowdown in the penetration of electric vehicles.

In a recent interview, Kurt Sievers discussed the current state of the handset and auto industries and how they relate to NXP's ultra-wideband technology. He mentioned that there is still a lack of dynamic in the Android space, but they are seeing sequential growth in mobile and expect to benefit from any increased activity. In the auto industry, NXP is ahead of their goals for ultra-wideband production, with seven platforms currently in production and 18 out of 20 new platforms awarded to NXP. The momentum for ultra-wideband in the auto industry is strong. When asked about channel inventory, Sievers confirmed that the amount to be shipped is still $500 million and that NXP would still see year-over-year growth in 2024 even if they did not fill up the channel next year.

The company has reached 1.5 and the $500 million is immaterial. They do not need the $500 million to grow next year and it cannot be used as a guide. The company has entered into a soft lending navigation, which has led to better performance compared to their competitors. They have shipped less over the past year and have undergrown their competitors in terms of growth and order rates. This is due to shipping less inventory.

The company's management strategy for the current cycle involves intentionally managing a softer decline in order to benefit gross margin trajectory. This is in contrast to the strategies of other competitors, who have experienced a sharp drop in Industrial IoT. The company has already seen its trough in China and has been gradually improving since the first quarter. While there is no big rebound expected in China, there is cautious optimism due to the company's earlier management of the trough.

The speaker, Kurt Sievers, responds to a question about competition from domestic Chinese players in the automotive market. He emphasizes the company's focus on remaining competitive in all markets and notes that they have not yet seen significant competition from local companies in the automotive space. He also mentions that they do not currently compete in the low-end microcontroller space and are not affected by Chinese investment in silicon carbide.

The speaker believes that there will be more competition in the analog signal market in China, which may also affect the automotive industry. He mentions that the company has faced local competitors before and will continue to monitor the situation. The company has multiyear purchase commitments in place to support future growth and address the current supply shortage. However, lead times have normalized, but the situation is not completely resolved.

The company is facing technology shortages in some nodes, leading to complications. They are in discussions with customers to ensure long-term forecast and avoid a similar situation to the second half of 2020. Long-term agreements are important for future revenue growth. The Auto segment outlook for 2022 is expected to have lower production growth, neutral pricing, and potential digestion in 2023. The company cannot provide guidance for 2024, but expects the mix of penetration to xEV vehicles to drive further content.

The speaker agrees with the idea of more neutral pricing and believes it is a fair assumption. They also mention that their company-specific growth drivers are in place and the only remaining factor is the cycle of inventory digestion and normal end demand. They state that they are intentionally undershipping demands and this will continue for a few more quarters. They believe that by the middle of next year, this will be behind them and revenue growth rates in automotive will go back to being closer to real end demand. They caution against looking at annual revenue growth in automotive against SAAR, as there are many other factors at play, especially the inventory cycle. When asked about the mix of their auto business, the speaker clarifies that they have not given a specific metric but do see a continued strong content increase of 5-8%, independent of SAAR. They expect this to continue next year, but it is affected by the inventory cycle.

Toshiya Hari asks Kurt Sievers about the pricing environment for 2024, noting that there has been a slight change in expectations from previous discussions. Sievers confirms that there has been a slight increase in input costs, but the company's productivity efforts have helped keep pricing relatively neutral. This is an improvement from previous years, where pricing increased by 2% in 2021 and 14% in 2022. Sievers clarifies that this trend will continue in 2024 and assures investors that there will be no confusion about a possible return to previous pricing levels.

The company clarifies that their pricing will not revert back to pre-COVID levels, but will remain neutral in the coming year. They expect a decline in comps and other business in Q4 due to weak base station demand and the decline of pent-up demand in secure cards. They do not expect a significant improvement in this segment in the next year.

The main theme of this quarter is the inventory cycle, which has affected messaging from peers and the growth drivers in the Automotive and Industrial IoT industries. The company has managed inventory levels and worked with direct customers to undership demand, leading to a soft landing and a return to growth in the future. Business is expected to return to a more normal pricing environment and year-over-year growth is predicted for the next year. The call concludes with thanks from the company.

This summary was generated with AI and may contain some inaccuracies.