The operator introduces the NXP's first quarter 2024 earnings conference call and turns it over to Jeff Palmer, Senior VP of Investor Relations. Jeff thanks everyone for joining and introduces Kurt Sievers, President and CEO of NXP, and Bill Betz, CFO. The call will include forward-looking statements and non-GAAP financial measures, with reconciliations provided in the first quarter 2024 earnings press release. Kurt thanks everyone for joining and mentions that revenue trends in all focused end markets were in line with guidance.

In the first quarter of 2024, NXP reported flat revenue of $3.13 billion, with a non-GAAP operating margin of 34.5%. The year-on-year performance was mainly due to consistent gross profit generation, offset by higher operating expenses. Automotive revenue was down 1%, in line with guidance, as the company manages inventory digestion with major customers. Industrial & IoT revenue increased by 14%, while Mobile revenue increased by 34% compared to the year ago period. Communication Infrastructure & Other revenue was down 25%. For the second quarter of 2024, the company expects a 5% decrease in revenue compared to the same period in 2023, with continued inventory digestion in the automotive market and a soft macro environment. The Industrial & IoT market has already reached its trough in the first quarter of 2023.

In the second quarter, the company expects to see improving demand in China and a modest cyclical recovery in the Mobile end market. However, there may be soft demand in Europe and the Americas. Automotive is expected to decline and Industrial & IoT to see growth. Mobile is expected to see a slight increase in revenue, while Communication Infrastructure and Other may see a decline. The company plans to increase channel inventory to support competitiveness in the second half of the year, but it is unlikely to reach their long-term target. Overall, the company expects a modest annual revenue growth or decline for 2024.

NXP is successfully managing the current demand environment and driving solid profitability and earnings. They are cautiously optimistic about navigating through the cyclical downturn. The company also made important innovation announcements, including the S32 core platform for software-defined vehicles and a 5-nanometer processor. They also introduced a 28-nanometer single-chip automotive radar and signed a collaboration agreement with Honeywell to integrate AI processing into building management systems. These developments showcase NXP's leadership in the industry and their potential in the AI processing revolution for industrial applications.

In the paragraph, Bill Betz discusses the financial performance of the company in the first quarter of the year. He notes that revenue was in line with expectations and non-GAAP gross margin was slightly above expectations. Operating expenses were lower than expected due to reduced variable compensation and expense controls. Overall, non-GAAP operating profit and margin were slightly down from the previous year but above expectations. Interest expense, taxes, and noncontrolling interest were also discussed, along with changes in cash and debt.

In the first quarter, our total debt decreased by $997 million due to repayment of bonds, resulting in a net debt of $6.9 billion. Our cash balance also decreased by $963 million due to various investments and cash generation. We paid dividends of $261 million and repurchased $303 million of shares during the quarter. Our days of inventory increased by 12 days, while distribution channel inventory was 1.6 months. Days receivables increased by 2 days, while days payable decreased by 7 days. Our cash conversion cycle increased by 21 days. Cash flow from operations was $851 million and non-GAAP free cash flow was $627 million. For the second quarter, we expect revenue of $3.125 billion, down 5% from the previous year and flat sequentially.

NXP expects non-GAAP gross margin to be around 58.5% with a slight increase in inventory to support competitiveness. Operating expenses will increase due to annual merit increases and legal settlement fees. Non-GAAP operating margin is expected to be 34%. Non-GAAP financial expense is estimated to be $63 million with a tax rate of 16.8%. Stock-based compensation is expected to be $115 million. Capital expenditures will be around 6%. NXP expects to have a non-GAAP earnings per share of $3.20. They will continue to navigate a challenging demand environment and stay within their long-term financial model. They expect gross margin to remain strong and maintain internal fab utilization levels in the low 70s for the remainder of the year.

The company has not changed its capital allocation policy and will continue to repurchase shares. An Investor Day is planned for November 7th. The CEO expressed cautious optimism for growth in the second half of the year, which is broad-based across the company. The long-term Automotive growth target of 9% to 14% from 2021 to 2024 remains in place.

The Automotive segment is expected to meet its growth target this year. An Investor Day will be held in November to announce new targets for the next three years. The company anticipates a similar growth trend as in the past due to content drivers and a shift towards software-defined vehicles. Pricing is expected to be sustainable and there will be no significant changes in the algorithm. In 2024, the company's auto sales grew 9% in line with auto production, despite better pricing resulting in undershipping.

The assumption for the entirety of calendar 2024 is that auto sales will pick back up and do better than production in the second half of the year. Last year, NXP undershipped due to a soft lending strategy, but they have already started to correct the situation. The macro this year is different, with a projected zero percent SAAR and a moderation in EV penetration, but S&P still predicts strong growth in xEVs. The main driver of NXP's revenue this year is inventory digestion with direct customers, which is expected to be completed by the end of Q2 or possibly into Q3. The second half of the year is expected to see solid growth in Automotive.

Kurt Sievers, CEO of NXP Semiconductors, discusses the company's increased confidence in refilling the channel in the second quarter. He notes that the company's RADAR platforms and normalization of inventory digestion will drive growth in the second half. While he does not provide specific guidance for the full year, he hints that Automotive, which makes up more than 50% of the company, will likely see similar growth. In the first quarter, the company's channel fill was unintentional, but in the second quarter, it is intentional and they aim to reach 1.7 for the exit of the quarter.

The company is cautiously optimistic about the second half of the year, citing specific company-specific platforms ramping up in the automotive industry, a positive settlement with Impinj for RFID tagging business, and the normalization of Automotive Tier 1 inventories. They also mention a positive development in the Industrial IoT sector, which is largely exposed to China and benefiting from the country's improving PMI.

The company has seen improvement in both their core industrial and consumer IoT business, and they are focusing on maintaining a competitive position in the market. The $15 million payment to Impinj is a one-time deal, and the company's OpEx may increase in the future due to annual merit increases, but they are also proactively controlling expenses. The company is optimistic about their revenue and is looking towards the second half of the year.

The speaker is discussing the company's gross margins and how they are expected to remain flat in the second half of the year. The speaker also mentions a change in accounting related to the NXP product life cycle and expects to run at or above their long-term model. The speaker also mentions previous commentary about running near or at gross margin levels and some tailwinds.

The company's utilization rates are currently below 70%, but are expected to increase and become a tailwind in the future. Revenues are expected to increase due to higher fall through and replenishing the distribution channel. The company is also focused on expanding its customer reach and improving productivity and cost reductions. The company's margins have been managed well during the downturn and an upcoming Investor Day will provide more details on future plans. The company's NCNR programs have ended as of January 1, 2023, but have helped nurture customer relationships.

The speaker believes that the NCNR program was successful in bringing the company and its customers closer together and helping them identify potential inventory issues early on. However, there are mixed emotions about the long-term effectiveness of the program, as some customers are becoming too tactical in reducing their inventories, which could pose a risk in the future. The speaker also discusses the industry's need to learn from the recent supply crisis and apply just-in-time concepts more effectively.

The speaker discusses the potential risks of a sudden increase in demand for automotive parts and the complex supply chain involved. They also touch on the growth of hybrids and electric vehicles, with China being the main driver of this market. BYD is highlighted as a major player in this market, and their growth is expected to continue. The US and Europe currently have a smaller share of the xEV market, but China's growth in this area is projected to be 27% this year.

In paragraph 18, the speaker discusses the split between battery electric vehicles (BEV) and hybrid electric vehicles. BEVs currently make up 15% of the market but are growing at a faster rate than hybrids, which make up 24% of the market. The speaker believes that in the long run, BEVs will win the race due to advancements in battery and electronics technology. However, for NXP, the exposure to BEVs is minimal compared to other companies. The speaker also mentions the competitiveness of Chinese companies, such as BYD, in the electric vehicle market. In a follow-up question, Bill discusses the utilization rates for the second half of the year and mentions that they are expected to remain flat. There is no specific catalyst mentioned for an increase in utilization rates.

The speaker clarifies that the second half revenue is not necessarily 12% higher than the first half, as previously interpreted. They also mention that the second quarter is guided at 3.125 and the first half revenue can be calculated from this.

The speaker discussed the company's growth for the full year, stating that it would be modestly down to modestly up. They emphasized that this growth is not just coming from the channel, but also from direct business, citing examples such as Automotive platforms and RFID tagging. They also clarified that the company will not increase channel inventory to reach this growth, and that their capital intensity remains unchanged despite a recent accounting change.

The speaker is unable to provide specific guidance for Q3 and Q4 due to the unpredictable nature of inventory digestion. They also mention that they intentionally undershipped last year and are currently in an inventory correction phase.

NXP's goal was to avoid a sharp decline in their Automotive business, so they started making corrections in Q3 last year and expect it to continue until at least the end of Q2 this year. Their distribution Automotive business has not needed any corrections. This explains the confusion in reports about NXP's peak to trough behavior compared to others. In other segments, their peak to trough is similar to others, but in Automotive it is around 9-10%. This is intentional and not due to worsening demand, but rather their inventory behavior. The SAAR growth last year was 10%, but this year it is flat.

The speaker responds to a question about the relationship between software-defined vehicles and electric vehicles. They clarify that the concept of a software-defined vehicle is independent of the type of powertrain, but many OEMs are currently focused on developing electric vehicles, which may lead to a correlation between the two. However, this is not due to a technical reason.

The speaker discusses the company's STD implementations and how they are the same for both combustion engine and battery electric vehicles. They also mention their capital allocation strategy, which includes returning a high percentage of their free cash flow to shareholders through buybacks and dividends. The company has recently deleveraged but plans to continue actively buying back shares and investing in the business.

NXP is committed to staying within their financial model and investing in their business while also returning excess cash flow to shareholders. They plan to continue acquiring smaller companies and have a "China for China" manufacturing strategy in place to meet the increasing demand from Chinese customers for localized production. This strategy also helps with cost competitiveness in the Chinese market.

The speaker discusses the importance of having a similar cost base to local Chinese competitors in order to successfully compete against them. They mention that there is a focus in China on bringing as much content locally as possible and that this could potentially pose a threat in terms of their capabilities, particularly in power discretes and lower-end microcontrollers. However, the company remains vigilant and always considers competition a priority.

The speaker discusses the competition from other companies in the automotive industry and the potential for Chinese companies to enter the market. They express cautious optimism about the second half of the year and their strategy to maintain profitability. They also mention their focus on controlling expenses and investments. The call concludes with a thanks to participants.

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