NXP Semiconductors NV Q3 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Ross Seymore - Deutsche Bank AG - Analyst : Thanks for letting me ask the question. Kurt, it seems like a lot of things changed during the course of the quarter. You're not alone in highlighting weakness, and I don't think it's NXP specific. But can you just talk a little bit about the specific customer behavior changes you saw because up until now, you seem to have set things up pretty conservatively throughout the year. So the guide down seems to be a little more of a surprise for you guys than the peers just given the setup appeared to be a little more favorable heading into the quarter and guide.

Question: Ross Seymore - Deutsche Bank AG - Analyst : Thanks for that color. And I guess, looking forward, Bill, switching to the gross margin side. I know that you talked about for the quarter. So just -- can you talk a little bit about utilization that's leading to the roughly 0.5 point to 1 point decline in gross margin? And how do we think about the levers for gross margin going forward at the risk of kind of front running, what you're going to talk about on Thursday, what are the plus and minuses to that in a weaker environment where inventory seems to be a little bit more persistently elevated?

Question: Ross Seymore - Deutsche Bank AG - Analyst : Thank you.

Question: Christopher Caso - Wolfe Research LLC - Analyst : Yeah. Thank you. Good morning. I guess the first question is with regard to the channel inventory. And I know that you wanted to increase that somewhat. I guess it is right to interpret that the increase in channel inventory was just a function of the end markets being larger than you thought. And I guess, in the context of your customers taking the inventory down so low, how does that affect your view of where you want your own inventory to be as you go into next year on both a channel basis on an internal basis?

Question: Christopher Caso - Wolfe Research LLC - Analyst : Thank you. I guess as a follow-up, I'll ask a question, which I know is very difficult to answer, but you're going to get it. So I'll be the one to ask it, which is -- do you think that we're pretty close to the bottom now and recognize how difficult that it is given the moving targets and such. But as an example, sort of normal seasonality is down to the first quarter. I don't know if we should think about that differently given what's happened in the second half of this year. And I guess, with what your customers are planning to do with inventory, does that get -- and bring it so low, does that give you some confidence that we're kind of approaching revenue bottom levels here? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 1:00PM, NXPI.OQ - Q3 2024 NXP Semiconductors NV Earnings Call

Question: Christopher Caso - Wolfe Research LLC - Analyst : Got it. Totally fair. Thank you.

Question: Vivek Arya - BofA Securities Inc - Analyst : Thanks for taking my questions. Kurt, what's NXP's relative exposure in the China-based car versus a European premium cars? So if, let's say, your China customers continue to take share, how does that content play out for NXP? And then this China trend, yes, you have mentioned it the peers have mentioned it. How much of that is kind of prebuying before the elections? And does that kind of

Question: Vivek Arya - BofA Securities Inc - Analyst : And for my follow-up, I think you mentioned that Q1, you expect to be seasonal, if I heard correctly, which is down high single digits. But if I were to just take the average of just your automotive business over the last seven years, including the COVID, that is more down like 1%, 2% or so on an average. I understand seasonality could mean different things at different times. But what explains this large difference between what we have seen with NXP over the last six or seven years in Q1, especially in your automotive business versus what I think you are kind of alluding to for Q1 '25.

Question: Vivek Arya - BofA Securities Inc - Analyst : Thank you.

Question: Christopher Muse - Cantor Fitzgerald LP - Analyst : Yeah. Good morning, good afternoon. Thanks for taking my question. I was hoping you could give a little more color on the industrial slowdown that you're seeing. You talked about China strong, and I'm assuming that's a little more. So would love to hear kind of what -- whether North America, Europe, kind of any changes in terms of geo and where you're seeing weakness, whether it's broad isolated to safe factory automation, I would love to hear your thoughts. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 1:00PM, NXPI.OQ - Q3 2024 NXP Semiconductors NV Earnings Call

Question: Christopher Muse - Cantor Fitzgerald LP - Analyst : Thank you so much. I guess as my follow-up, given kind of how you will manage the cycle to date, there's a perception that you're gearing into the next up cycle, maybe less than peers. So I was hoping you could speak to kind of where you think you are overall in terms of your sell-in versus sell-through and demand? And if there's any kind of color around end markets to kind of give confidence that when things do recover, that you do have that gearing cyclically?

Question: Christopher Muse - Cantor Fitzgerald LP - Analyst : Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 1:00PM, NXPI.OQ - Q3 2024 NXP Semiconductors NV Earnings Call

Question: Stacy Rasgon - Bernstein Research - Analyst : Hi, guys. Thanks for taking my questions. My first one just around the auto, like 90 days ago, you were sort of suggesting to us that auto would be stronger into the end of the year because of company-specific wins in radar and other things that were going to be ramping. So part of the incremental was I'm a little confusing, does that stuff does not ramp? Or did it ramp less than you thought? Or is it ramping later than you thought? Or what is it? Because it certainly doesn't seem to be enough to offset the other of the broader weakness that we're seeing? Like what's going on with that?

Question: Stacy Rasgon - Bernstein Research - Analyst : Got it. That's helpful. For my follow-up, I wanted to ask about gross margin. So I understand why they're coming down in Q4, I think. Now in Q1, you just suggested that revenues are probably down high-single digits sequentially. It doesn't sound to me like mix is any better. Is it -- should I be thinking that the 57.5% just given those dynamics in the near term is likely not the trough? Like how should we be thinking about gross margins into Q1 just giving the further revenue shortfall that we're seeing and any other drivers that are leading in the beginning of the year.

Question: Stacy Rasgon - Bernstein Research - Analyst : So where was that? I'd open up my model. Like where were gross margins last time revenues were? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 1:00PM, NXPI.OQ - Q3 2024 NXP Semiconductors NV Earnings Call

Question: Stacy Rasgon - Bernstein Research - Analyst : I'll dig it up myself. But thank you, guys.

Question: Francois Bouvignies - UBS Group AG - Analyst : Thank you very much. My first question was on the pricing as we are at the end of the year where we understand you have some negotiation, especially for your auto customers. And from what you understand, of course, given the challenging environment, the pricing is -- it's like an intense conversation, I should say, from many peers that talked about this. So I was wondering for NXP, how should we think about the pricing strategy, how you think the pricing is going to play out, given this pressure maybe more than usual, especially into next year, that would be very helpful. And I have a follow up after if that's okay.

Question: Francois Bouvignies - UBS Group AG - Analyst : That's very clear. Thank you, Kurt. And maybe a follow-up. It's a bit kind of a medium term, but still it impacts the short term given these challenges on the cycle, you have this China uncertainty with local players probably going after pricing. Even if you have a sticky and strong differentiation, as you described, Kurt, it's fair to assume maybe that the pricing environment and the oversupply that will take a bit longer to feel how NXP tends to play in that role? I mean, the trade-off between market share and gross margin, for example, would you consider like to exit some product as soon as you see something that doesn't play your way or cost saving program as well, given the very long down cycle? Is it something that you consider as well potentially just strategy? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 1:00PM, NXPI.OQ - Q3 2024 NXP Semiconductors NV Earnings Call

Question: Francois Bouvignies - UBS Group AG - Analyst : Thanks for that color. Thank you, Kurt.

Question: Stacy Rasgon - Bernstein Research - Analyst : Hey, guys. Thank you for taking my question. I'm sorry for harping on gross margin, but it's the one that box the most last night and this morning. I guess if we zoom out, I mean, your gross margins have been remarkably stable for like 10, 11 quarters and now are starting to see some leverage with revenue. Like can you, I guess, maybe walk through why now? And it sounds like it's all maybe fixed cost coverage and utilization rates, and there's nothing going on with pricing, but the mix by end market isn't really changing anything within mix of products that we should be aware of? Or any other factors beyond, again, fixed cost coverage and purchase agreements that are really driving the sequential decline in gross margins in both the fourth quarter and I guess, what you're implying for the March quarter, which is another leg down? Thank you. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. NOVEMBER 05, 2024 / 1:00PM, NXPI.OQ - Q3 2024 NXP Semiconductors NV Earnings Call

Question: Toshiya Hari - The Goldman Sachs Group Inc - Analyst : Hi. Good morning. Thank you so much for taking the question. I have two quick ones on automotive. Just wanted to clarify, Kurt, the incremental weakness you're seeing in auto, is that at this point, purely due to weakening end demand? Or are your Tier 1s bringing down their inventory levels as we speak as well. I think last quarter, you gave a range of something like 2 to 12 weeks in terms of how they're managing their inventory. Have you seen any changes to how they think about optimal inventory levels?

Question: Toshiya Hari - The Goldman Sachs Group Inc - Analyst : Yeah. That makes a lot of sense. Thank you. And then as my follow-up, you've seen a mix shift in favor of hybrids at the expense of maybe not at the expense of EVs, but EV adoption has kind of stalled over the past several quarters. I think the industry consensus view is that over the long run, EVs do grow pretty materially. But as you talk to your partners and customers into 25 and maybe early part of '26, do you have a view on how hybrids perform or EVs perform relative to one another? And more importantly, what are the implications from a content perspective for you guys at NXP? Thank you.

Question: Toshiya Hari - The Goldman Sachs Group Inc - Analyst : Appreciate that. Thank you.

Question: William Stein - Truist Securities - Analyst : Great. I'm just going to ask one, if I can. The weaker-than-expected results in industrial and IoT and yet the strength in China, I'm a little bit confused because I always recall this segment to be very China and very China distribution focused. So maybe you can correct my understanding. Is it -- am I correct, but what's outside of China is very, very weak? Or is my recollection of the mix of this in terms of geo and channel maybe stale? Thank you.

Question: William Stein - Truist Securities - Analyst : Thank you.

Question: Christopher Danely - Citigroup Inc - Analyst : Hey, gang. Thanks for squeezing me in. So just two quick ones. So guys, can you just give us a sense of how much of your auto business is China. And then I'm sure you were at the Paris Auto Show as well. It seemed like there were dozens of China sort of EV companies and start-ups. If China gains a bunch of share in the EV market, what's the impact to NXP? Is it good? Is it bad? Is it indifferent? How would that be?

Question: Christopher Danely - Citigroup Inc - Analyst : Great. Thanks, Kurt. I got to figure out a way to get that into my note on Enchilada -- Chinese Enchilada [EV] And then just real quick, a follow-up for Bill. So Bill, your inventory days are basically in the $145 million to $150 million range for this year. Longer term, what's the goal there? Are we going to keep it at $150 million while this weakness passes? And then where are we looking at like longer term there?

Question: Christopher Danely - Citigroup Inc - Analyst : Will do. Thanks, guys.