The operator introduces the NXP 2Q '24 Earnings Conference Call and reminds participants that the call may be recorded. Jeff Palmer, Senior Vice President of Investor Relations, welcomes everyone and introduces Kurt Sievers, President and CEO, and Bill Betz, CFO. The call will include forward-looking statements and non-GAAP financial measures, and NXP undertakes no obligation to update these statements. Reconciliations of non-GAAP measures will be provided in the second quarter 2024 earnings press release.

NXP delivered a strong quarter two performance, with revenue in line with guidance and a non-GAAP operating margin above the midpoint of guidance. Automotive revenue was down 7% due to inventory digestion, while industrial and IoT revenue was up 7% driven by demand in China and Asia Pacific. Distribution inventory remains below the long-term target. The company is preparing for the 2024 Investor Day in November and encourages pre-registration.

In the second quarter of 2024, the company's revenue in mobile increased by 21%, while revenue in communication infrastructure and other decreased by 23%. For the third quarter of 2024, the company expects a 5% decrease in revenue compared to the same period in 2023, but a 4% increase from the second quarter of 2024. The automotive end market is expected to resume sequential growth, but the inventory digestion process at some customers will continue into the second half of the year. The industrial IoT market is showing improvement in demand in China, but weakness persists in Europe and the Americas. Mobile end markets are expected to follow normal seasonality, and growth in secure RFID tagging will offset weakness in other parts of the communications infrastructure market. Overall, automotive is expected to decrease slightly compared to the third quarter of 2023, but increase compared to the second quarter of 2024.

NXP is expecting growth in Industrial IoT and mobile segments, but a decline in communication infrastructure and other areas. They will continue to stage inventory in the channel to support competitiveness and prepare for anticipated growth in the second half of the year. The second half is expected to grow over the first half, but there may be a modest annual revenue decline in 2024 due to inventory digestion at auto Tier 1 customers and weakness in industrial markets. NXP has also formed a manufacturing joint venture with Vanguard International Semiconductor as a long-term strategic investment.

NXP's investment in a new joint venture with TSMC, called VisionPower Semiconductor Manufacturing Company (VSMC), will allow them to execute their long-term growth plans and have access to competitive costs and supply control. The new fab in Singapore will support the production of a variety of products for different markets and has the potential for expansion. TSMC's involvement and Vanguard's expertise make this a promising partnership. NXP will invest $2.8 billion over the next few years, which will enable them to generate an additional $4 billion in annual revenue.

In the joint venture, the company plans to consolidate their factories to improve cost competitiveness. The financial performance for Q2 was good, with revenue, gross margin, operating expenses, and inventory meeting guidance. Total revenue was down 5% year-on-year, with non-GAAP gross margin increasing by 20 basis points. Operating expenses were down $11 million, and non-GAAP operating profit was $1.07 billion. Non-GAAP earnings per share was $3.20.

The company's total debt at the end of Q2 was $10.18 billion, with a cash balance of $3.26 billion. They returned $570 million to shareholders and repurchased $69 million of shares after Q2. Days of inventory and distribution channel inventory increased, resulting in a cash conversion cycle of 111 days. Cash flow from operations was $761 million, and non-GAAP free cash flow was $577 million. For Q3, the company expects revenue of $3.25 billion, with a non-GAAP gross margin of 58.5%. They will continue to stage inventory in the channel to support future growth.

The paragraph provides guidance for Q3, including estimates for operating expenses, non-GAAP operating margin, non-GAAP financial expense, non-GAAP tax rate, and non-controlling interest. The joint venture with Vanguard and the VSMC will cost $7.8 billion, with NXP investing $2.8 billion for a 40% equity stake and additional capacity access, and Vanguard investing $3.1 billion for a 60% equity stake and additional capacity access. Other sources will provide remaining funding. The joint venture will not be consolidated into NXP's financial statements but will be reflected under equity accounting investees in the non-GAAP income statement. It is expected to provide a 200 basis point gross margin expansion when fully operational in 2029.

The ninth paragraph of the article discusses the gross profit benefit and highlights three areas of focus for the remainder of 2024. These include maintaining their capital allocation policy, staying within their long-term financial model, and resuming sequential growth in the second half of the year. The speaker also addresses the question of how they plan to achieve sequential growth in Q4 and clarifies that it is not due to channel inventory refill, but rather a combination of factors such as strong performance in certain end markets and careful management of channel inventory.

Kurt explains that they will carefully manage growth in the coming quarters and will not reach their target of 2.5 months in the channel. The growth in the second half is mainly due to a re-acceleration of automotive, which has two legs: company-specific drivers and less need for digestion of over-inventory at Tier 1 customers. The RFID secure tagging and industrial IoT will also contribute to growth. Vivek asks if the process of building up inventory post-COVID is now behind us and if OEMs and Tier 1s will maintain those levels.

The speaker is discussing the current state of the automotive industry and how it has changed in the past 90 days. They mention that the latest forecast for SAAR has dropped and that inventory levels are still a concern. The speaker believes that the main factor affecting the industry is the inventory digestion of Tier 1 automotive customers, which is taking longer than expected due to varying inventory targets. This has led to a slight decrease in growth for the company in the third quarter.

The speaker discusses the difficulty in predicting where inventory will land and the target average of inventory end numbers for Tier 1s due to changes in their thinking about the future. They mention the possibility of increased call-offs from OEMs leading to a quick increase in inventory. The automotive growth has improved and the tide is changing, but there is still work to be done in the third quarter. The next question asks about the inventory in different product segments, but the speaker explains that it is customer-specific and there is no overall pattern.

The company has Tier 1 customers who have finished inventory digestion and are driving growth in the third quarter. The targets for inventory levels vary between two and 12 weeks, making it difficult to answer questions about over inventory. The company's accelerated growth drivers, such as electrification and BMS chips, will continue to grow in the second half of the year. Utilization rates will stay low for the rest of the year and will not be fully utilized until 2025. The company has a higher inventory on its balance sheet and will navigate through it.

In the industrial and IoT segment, there has been a decline in demand in the US and Europe, but growth is expected in China. This is mainly due to a macro-driven demand issue and not over-inventory. The consumer IoT sector in China is driving growth in the industrial sector.

Ross Seymore asks a question about capital allocation and changes for Bill, who responds by saying there is no change and they will continue buying back stock, maintaining dividends, and doing small M&A deals. He also mentions that the cash flow for ESMC and VSMC will show up at different times on the cash flow statement, with the majority of the $2.8 billion investment in VSMC being spread out over five years. There is also a 10% equity position in ESMC and a portion of the investment will come from working capital operations to guarantee supply for customers.

Kurt Sievers, the CEO of NXP Semiconductors, discussed the company's plans for the second half of the year. He mentioned that one of the drivers for improvement will be company-specific growth in the automotive sector. This growth will be supported by the company's ramps with two Tier 1 automotive companies for their radar technology, which will serve global OEM platforms. Sievers also noted that the company is moving closer to shipping to end demand and that inventory digestion is no longer a major concern.

The company is seeing an increase in production of design wins from three years ago, and they are optimistic that these numbers will come in as expected. The design wins are for radar platforms for global OEMs and include various components. In terms of pricing, there has been no change and it is expected to remain flat. The gross margin in Q2 was slightly better due to favorable product mix, but in Q3 it is expected to be offset by slightly unfavorable product mix.

The speaker reminds the audience that the company ships over 10,000 different parts every quarter and managing the mix is challenging. They have a plus or minus 50 basis points on their gross margin. However, there are multiple factors that will improve their gross margins in the medium and long term, such as internal utilizations, revenue improvement, productivity, and focus on long tail customers. They also expect to improve their 2029 margins by over 200 basis points through strategic investments in a joint venture. The speaker hints that their current gross margin of 58% is not their final destination. A question is then asked about their auto commentary.

The speaker is confused about the state of the auto market and the company's expectations for growth. The speaker asks for clarification on how the company's auto expectations have changed in the last 90 days. The speaker also asks about the increase in channel inventory and whether the company still plans to reach their target of 2.5 months in the future. The speaker is told that the company's expectations for the second half of the year are similar to what they were 90 days ago, but with two changing factors: the inventory digestion is worse than expected, but some company-specific factors are going better. The company still plans to reach their target of 2.5 months in the future.

The speaker discusses the company's long-term target of 2.5 and how they came to that number. They also mention that they do not expect to reach that target by the end of the year due to the poor macro environment in the Americas and Europe. The company wants to operate responsibly and will not push products into the market too aggressively. The speaker also mentions that the channel refill strategy is not specific to any particular segment or region, but rather focuses on high runner products.

Thomas O'Malley asks a question about the company's RFID business, which represents about 50% of the mix. Kurt Sievers clarifies that RFID is not actually 50% of the business, but part of the 50% segment that also includes secure cards. RFID continues to grow, but is offset by declines in other areas such as Legacy Digital Networking and the RF power business. These declines are expected to continue into the back half of the year.

The company's comps infra segment at the end of last year included 50% secure cards, 30% legacy digital networking, and 20% RF power. The only growing part is RFID. The company expects low single digit total revenue decline in the fourth quarter, with potential growth coming from industrial and IOT. However, the company cannot provide specific breakdowns for each segment's performance in the fourth quarter due to uncertainties in inventory targets and macro factors. The trend in automotive is positive, with the company leaving behind a trough in that sector.

Kurt Sievers, CEO of NXP, discusses the company's position as the number one auto processor worldwide and their strong presence in China. He also mentions their strategy of focusing on high-performance processors in the Chinese market to differentiate from local competition. The company is pushing for higher performance processors, specifically those with 16 nanometer technology, to maintain their lead in the automotive industry.

In this paragraph, the speaker discusses their company's strong position in the market and their focus on local manufacturing in China. They mention their use of a Taiwanese foundry for their 16 nanometer processors and their plans to transfer this manufacturing capability to China. They also mention that these processors are a key part of their accelerated growth drivers and will contribute to their overall revenue. The speaker concludes by hinting that they will exceed their target for this aspect of their business at their upcoming Analyst Day event.

The company has exceeded its growth targets in the automotive processing sector, with China showing the strongest performance due to the success of electric vehicles. The company expects inventory days to start coming down in Q4, with Q3 likely to be similar to Q2 due to the time it takes to move products into finished goods.

The company is expecting growth in Q3 and Q4, with a peak in Q4 and a return to normalcy in 2025. They have successfully navigated the down cycle and are now seeing growth in both automotive and industrial IoT. However, there are factors such as inventory digestion and slower channel refill that have resulted in a lower-than-expected annual decline. The company remains optimistic and will continue to operate responsibly.

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