NXP Semiconductors reports $3.17 billion Q3 revenue, exceeding guidance, with optimistic Q4 outlook driven by automotive and industrial market improvements.

OPERATOR - (00:00:31)

Hello and thank you for standing by. Welcome to NXP third quarter 2025 earnings conference call. At this time all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask the question during the session you will need to press star 1-1 on your telephone. You would then hear an automated message advising. Your hand is raised to withdraw your question. Please press star 1-1 again. I would now like to hand the conference over to Jeff Palmer, Senior Vice President Investor Relations. Please go ahead sir.

Jeff Palmer - Senior Vice President Investor Relations - (00:01:06)

Thank you Tawanda and good morning everyone. Welcome to our third quarter earnings call today. With me on the call today is Rafael Sotomayor, NXP's President and CEO and Bill Betts, our CFO. Also on the call with us is Curt Sievers who will act as a special advisor to Rafael through the end of 2025. 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 financial results for the fourth quarter of 2025. NXP undertakes no obligation to revise or update publicly any forward looking statements. For a full disclosure of forward looking statements, please refer to our press release. Additionally, we will refer to certain non GAAP financial measures which are driven 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 third quarter 2025 earnings press release which will be furnished to the SEC on Form 8K and is available on NXP's website in the Investor Relations section. Now I'd like to turn the call over to Rafael.

Rafael Sotomayor - President and CEO - (00:02:41)

Thank you Jeff and good morning. We appreciate you joining our call today. Our overall performance during the third quarter was solid. Our revenue exceeded guidance by 23 million. We experienced sequentialial growth driven by broad based improvements across all regions and end market. We maintained good profitability and controlled operating expenses resulting in healthy fall through. Turning to the specifics, NXP delivered third quarter revenue of $3.17 billion, a decline of 2% year on year and up 8% sequentialially non GAAP operating margin in the third quarter was about 34%, 170 basis points below the same period a year ago and 10 basis points above the midpoint of our guidance. The lower operating margin versus the same period last year was due to lower revenue and gross profit, partially helped by flat operating expenses. Taken together we drove non GAAP earnings per shared or $3.11 a penny better than guidance. Distribution inventory was flat at nine weeks consistent with our guidance while still below our long term target of 11 weeks. From a direct sales perspective, we believe our shipments into the tier 1 automotive supply chain has approach demand. We estimate that aggregate inventory levels of NXP specific products at our major tier one partners are below NXP's manufacturing cycle time. We believe this reflects a continued cautious approach in the automotive supply chain due to the uncertain macro environment. Overall during the quarter we did not experience any material customer order pull ins or push outs. Now I will turn to our expectations for the fourth quarter. Our outlook reflects the continued strength of our company specific growth drivers and signs of a steady cyclical recovery in our automotive and industrial markets. We do not yet anticipate direct customer inventory restocking as one might expect off the bottom of a cyclical trough. From a channel perspective, our guidance assumes distribution inventory may fluctuate between nine and 10 weeks as we are selectively staging additional products in the channel to be competitive. We are guiding fourth quarter revenue to 3.3 billion, up 6% versus the fourth quarter of 2024 and up 4% sequentialially. At the midpoint we expect the following trends in our business during Q4 Automotive is expected to be up mid single digits versus Q4 2024 and up in the low single digit percent range versus Q3 2025. Industrial and IoT is expected to be up in the mid 20% range year on year and up 10% versus Q3 2025. Mobile is expected to be up in the Mid teens percent range year on year and up in the mid single digit range on a sequential and finally communication infrastructure and other is expected to be down in the 20% range versus Q4 2024 and flat versus Q3 2025. In summary, NXP third quarter results and guidance for the fourth quarter reflect a growing confidence in the company specific growth drivers and that a new upcycle is beginning to materialize. This is based on several signals we track regularly. These include continually growing customer backlog placed with our distribution partners, improved order signals from our direct customers, increased short cycle orders and a growing number of product shortages leading to customer escalations. At the same time, we do not yet see material customer restocking due to the uncertain macro environment. Now an update on our pending acquisitions of Kinara and Aviva Lynx. We have received all regulatory approvals. We have closed both Aviva Lynx and Kinara. We are extremely excited about the long term benefits these acquisitions will bring to our customer engagements and market position. As we have previously sharedd, in the short term, these acquisitions will have an immaterial impact on the revenue and financial model of nxp. We do believe the revenue impact will be material in 2028 and beyond. The three recent acquisitions, TT Tech Auto, Kinara and Aviva Lynx, will enable NXP's vision to be the leader in intelligent edge systems in the automotive, industrial and IoT markets. As this is my first earnings call, I would like to assure you that the strategy we laid out during our November 2024 Investor Day stays firmly in place. This includes our product innovation focus in our financial and capital return model. For the last six months I've traveled globally engaging with our customers, suppliers and development teams. My key takeaway is that NXP strategy is compelling. We are focused on the most important customers and thought leaders. Our highly differentiated product roadmaps position us well to achieve our long term goals. I will continue to work closely with the cross functional leaders throughout NXP to accelerate our innovation in time to market efforts. Overall, we remain focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. And now I would like to pass the call to Bill for a review of our financial performance.

Bill Betts - Chief Financial Officer - (00:08:42)

Thank you Rafael and good morning to everyone on today's call as Rafael has already covered the drivers of the revenue during Q3 and provide the revenue outlook for Q4. I would like to move to the financial highlights. Overall Q3 financial performance was solid with revenue, gross profit and operating profit all above the midpoint of our guidance range, while operating expenses were a touch above the midpoint of our guidance due to slightly higher variable compensation. Taken together, we delivered non GAAP earnings per share of $3.11 or a penny better than the midpoint of our guidance. Now moving to the details of Q3. total revenue was $3.17 billion down 2% year on year and $23 million above the midpoint of our guidance range. We generated $1.81 billion in non GAAP gross profit and reported a non GAAP Gross margin of 57% down 120 basis points year on year and in line with the midpoint of our guidance range. Total non GAAP operating expenses were $738 million or 23.3% of revenue for flat year on year. From a total operating profit perspective, non GAAP operating profit was $1.07 billion and non GAAP operating margin was 33.8% down 170 basis points year on year and 10 basis points above the midpoint of our guidance range. Non GAAP interest expense was 91 million while taxes for ongoing operations were 173 million or a 17.7% non GAAP effective tax rate. Non controlling interest was 15 million and results from equity accounted investees related to our joint venture manufacturing partnerships was a $2 million loss. Taken together, the below the line items were 6 million unfavorable versus our guidance primarily due to a slightly higher tax rate driven by improved profitability. Stock based compensation which is not included in our non GAAP earnings was 118 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was 12.24 billion up 757 million. Sequentially we issued three new tranches of debt totaling 1.5 billion with a combined weighted cost of debt of 4.853%. During the quarter we reduced our net commercial paper outstanding by 735 million. Additionally, we plan to retire two tranches of debt due in March and June of 2026 totaling 1.25 billion with a weighted cost of debt of 4.465%. Our ending cash balance was 3.95 billion up 784 million sequentially due to the cumulative effect of commercial paper reduction. Capital returns, equity and capex investments offset against the new debt and cash generated during the quarter. Resulting net debt was 8.28 billion with a trailing twelve month adjusted EBITDA of 4.65 billion. Our ratio of net debt to trailing twelve month adjusted EBITDA at the end of Q3 was 1.8 times and our twelve month adjusted EBITDA interest coverage ratio was 15.9 times. During Q3 we paid 256 million in cash dividends and repurchased 54 million of our shares representing a twelve month total shareholder return of 2.05 billion or 106% of non GAAP free cash flow. After the end of the quarter and through October 24th we bought an additional 100 million of our shares under a 10B5.1 program. Now turning to working capital metrics, days of inventory was 161 days, an increase of 3 days versus the prior quarter with inventory dollars up modestly due to pre builds and wafer receipts from our foundry partners. Days receivables were 31 days down 2 days sequentially and days payable were 58 days down 2 days sequentially as well. Taken together our cash conversion cycle was 134 days. Cash flow from operations was 585 million and net capex was 76 million or about 2% of revenue resulting in non GAAP free cash flow of 509 million or 16% of revenue. During Q3 we paid 225 million towards the capacity access fees related to VSMC which is included in our cash flow from operations. Additionally, we paid 139 million into VSMC and 15 million into ESMC, our two equity accounted foundry joint ventures under construction with the payments reflected in our cash flow from investing activities. Now turning to our expectations for the fourth quarter, as Rafael mentioned, we anticipate Q4 revenue to be 3.3 billion plus or minus 100 million at the midpoint. This is up about 6% year on year and up 4% sequentially better than our view 90 days ago. We expect non GAAP gross margin to be 57.5% plus or minus 50 basis points. Operating expenses are expected to be about 757 million plus or minus 10 million or about 23% of revenue consistent with our long term financial model. Taken together we see non GAAP operating margin to be 34.6% at the midpoint, bringing NXP back into our long term financial model. In addition, our guidance includes about two months of operating expenses for the closed Aviva Links and Canera acquisitions. Now turning to the below line items, we estimate non GAAP financial expenses to be about 103 million. We expect the non GAAP tax rate to be 18% of profit before tax, non controlling interest expense will be about 14 million and startup expenses related to our equity account investees will be about $3 million loss. For Q4 we suggest for modeling purposes you use an average share count of 254.3 million shares. We expect stock based compensation which is not included in our non GAAP guidance to be 118 million. Taken together at the midpoint, this implies a non GAAP earnings per share of $3.28. Turning to the uses of cash, we expect capital expenditures to be around 3% of revenue below our 5% target as we execute our hybrid manufacturing strategy. This includes consolidating our 200-millimeter front-end manufacturing factories investing in our 300 millimeter joint ventures with BSMC and ESMC. These investments will result in margin expansion, supply resilience and access to a competitive manufacturing cost structure. As share at our investor day, we will continue to substantially invest in VSMC in Singapore during Q4, including a 250 million capacity access fee payment and a 350 million equity investment. When VSMC is fully loaded in 2028, it will drive a 200 basis points improvement in NXP's total gross margin. Additionally, we will make a 45 million equity investment into ESMC in Germany, enabling additional 300 millimeter supply resilience. Lastly, we will pay approximately 500 million for the closed acquisitions of both Aviva Lynx and Chimera. And furthermore, we have restarted our buybacks at the beginning of September and we will continue to buy back stock consistent with our capital allocation strategy. And finally, I would like to extend my personal thanks to Kurt as he transitions to a new and exciting chapter of his life. He's been an inspiration to all NXP team members and a personal mentor and value partner to me. As a cfo, we will miss his infectious humor, timely counsel and thoughtful insights. With that, I would like to now turn it back to the operator for questions.

OPERATOR - (00:18:16)

Thank you, ladies and gentlemen. As a reminder to ask the question, please press star 1-1 on your telephone, then wait for your name to be announced. To withdraw your question, please press Start one one. Again, we ask that you limit yourself to one question and one follow-up. Please stand by while we compile the Q and A roster. Our first question comes from the line of Ross Seymour with Ditra Bank. Your line is open.

Ross Seymour - Analyst - (00:18:43)

Hi guys. Thanks for asking the question and congrats to both Kurt and Rafael. I guess my first question a big-picture question. Bill, you just mentioned that the guidance for the fourth quarter was better than you expected 90 days ago. But the details Rafael gave, while positive. Didn'T seem like much had really changed. So what specifically got better over the last 90 days either by end market, inventory region, etc.

Rafael Sotomayor - President and CEO - (00:19:07)

Yeah, let me, let me take that one, Ross. So the way we think about Q4 is we're guiding Q4 sequentially, you know,, 4% up. And so what we said last time, we said we're going to we did provide a soft guide of Q4 that we said we're going to be slightly up. So I think what I would say is that things that we expected to go, maybe potentially the risk that we have, they didn't materialize. And the signals, the signals with respect to a soft recovery continue to be there. Right. And our order book continues to be strong. The end customer backlog, our distribution partners continues to be healthy. And so if you look at the quarter to quarter guide, what is driving a slight improvement, I would say over seasonality? Pre Covid seasonality is industrial and Iot where I think we see signs now of slight demand improvement.

Ross Seymour - Analyst - (00:20:20)

Good. I guess on that front you mentioned. About the inventory staying in the nine to ten week level, not quite getting to the eleven. That's your target. If you go from nine to eleven, any sort of rough dollar amount that. That contributes that we should think about. And is there any specific trigger that. You'Re looking at to let that inventory get back to its normal level, whether it's in the fourth quarter, which it doesn't sound like, or say the First half of next year.

Rafael Sotomayor - President and CEO - (00:20:47)

Yeah, Ross. So I understand in the past, I mean we apply math that it was that we said it's about one week of inventory equals to $100 million. And I understand the math. But what I would like you kind of for now think of I think, it’s more useful to look at how we're managing the channel strategically and so kind of shift a little bit of how you look at a channel inventory. If you look at today, given the current environment that we have where visibility is limited, orders come late. The one thing I want to leave you with, it's important to have the right product mix in the channel to be competitive. Especially when you think about our competition, which has significantly higher inventory in the channel than us. And so. And as you know, we're not a catalog company. So getting the right product mix is really important for us now right now we're being selective. We staging additional product that we have high conviction of sell through. And so that one, that's the reason I state that the inventory may fluctuate between 9 and 10 is because. Because what I want to leave you with is in the current environment, the weeks of inventory is not static

Ross Seymour - Analyst - (00:21:57)

Right.

Rafael Sotomayor - President and CEO - (00:21:57)

Orders are coming late. Now I'd say that your question with respect to when 11 weeks. I'd say that as our visibility and confidence continues to improve and I will confirm your point, we still see the optimal level moving towards 11 weeks. And that might or might not happen in Q1 depending on improvements in the business conditions.

Ross Seymour - Analyst - (00:22:24)

Thank you.

Rafael Sotomayor - President and CEO - (00:22:25)

Thanks Ross.

OPERATOR - (00:22:27)

Thank you. Please stand by for our next question. Our next question comes from the line of Francois Bouvennese with ubs. Your line is open.

Francois Bouvennese - Analyst - (00:22:38)

Thank you very much. My first question is on Maybe,. You know, your comment, Rafael, you said that you think inventories are, I mean, low in automotive, for example, and things are getting better broad based. But you do not expect to increase inventories in the channel, I mean, or even, sorry, not in the channel, but in the direct channel. So I was wondering if we look at Q1, you know, in terms of seasonality. I think you are down high single digit percentage, quarter on quarter for Q1. Should I read this comment? As you know, today with your visibility, you are comfortable with seasonality. Assuming there is no stockpiling and, And demand is stabilizing. Is that the right way to look at it? So you're asking about Q1. Yeah, Q1. So you know, like in a way directionally, based on what you just said, you know, like, are you comfortable with a seasonal trend?

Rafael Sotomayor - President and CEO - (00:23:40)

Yeah. Well, let me. Let me just kind of, before I get into. I give you a slight answer on that one. I'd say that if you look into what we feel good about is the setup into 2026, if you look at how we finished Q4, I think, that we now entering a phase of inventory normalization in auto and we've seen signals of, I'd say of demand improvement in industrial and iot. I think, we like the setup. Not going to guide Q1 for you, Francois, but I think, if you're going to model, I think, modeling seasonality and I'd say using pre COVID seasonality, which is high single digits decline would be reasonable.

Francois Bouvennese - Analyst - (00:24:31)

Thank you, Rafael. I appreciate the color. Maybe the second question is for Bill. Gross margin is going up in the next quarter. I assume it could be because of mix, but I'd be happy to have your view here. But more generally, I mean your inventory is still fairly high; days a bit higher, dollars a bit higher. So you assume your loading is still, you know, you maintain high loading. So how should we think about the gross margin direction after this Q4? Are you going to, you know, decrease the loading at the expense of gross margin? Or do you think you can manage this level of gross margin or even increase from here? Just the moving parts would be very helpful, thank you.

Bill Betts - Chief Financial Officer - (00:25:14)

Sure. Francois. As you can see, as you. Mentioned, we are guiding gross margins are up approximately 50 basis points into Q4. And this is driven by the higher revenues, Francois,, improved operational costs and, yes, higher utilizations, which is actually offset with unfavorable product mix. And then of course we have the normal plus or minus 50 basis points on what that mix tends to ultimately be in the quarter for Q1, 20, 26 and the full year of 2026. We are not guiding. However, please consider our normal seasonality that Rafael just talked about in revenues for Q1 along with our annual low single digit price negotiations that typically impact us in the first quarter. And we always work to offset those throughout the year through cost reductions and operational efficiencies. So for full year 2026 I would say we expect to be in our long term model of 57 to 63% driven by a function of revenue levels; improved utilizations, cost reductions, offsetting the price gives and the normal product mix fluctuations in any given quarter. I would say as stated before, please, continue to use that rule of thumb. For every 1 billion of revenue on a full year basis drives approximately 100 basis points improvement to gross margin. For example, I shared in the past at $15 billion we should be at 60%. Also, remember, as I mentioned in my prepared remarks, beyond 2027 we also see another lift to our gross margins by approximately 200 basis points driven by our hybrid manufacturing strategy. And again, overall, I think we're very pleased with the trajectory of our gross margins and how we manage this. Related to your inventory question, you know, you're right. In Q3 we finished inventory at 161 days. That was up three days. And we're staging inventory to support our growth into Q4 proactively. We are holding more inventory to support the continued increase of late orders that Rafael talked about which are coming in below lead times. And of course the customer escalations have grown quarter over quarter as Rafael shared. In his prepared remarks. As I mentioned last quarter we started our pre builds for the 200 millimeter consolidation plans which by the end of the year will be worth about six to seven days of our total NXP days of inventory. Also remember, we're holding approximately 14 days of inventory on our balance sheet versus our distribution partners. Again, that assumes nine weeks. And with the positive signals we are seeing and from lessons learned from the past, I am quite comfortable and pleased with the internal inventory positioning. As we mentioned many times, we have long lived inventory in dye form, preventing obsolescence risk. So you know, if you have me call inventory into Q4, I would say similar levels from a day's perspective, plus or minus five days is the best view I can give you at the moment into Q4.

Francois Bouvennese - Analyst - (00:28:26)

Very clear. Thank you gentlemen.

Rafael Sotomayor - President and CEO - (00:28:29)

Thanks Francois.

OPERATOR - (00:28:31)

Please stand by for our next question. Our next question comes from the line of Joe Moore with Morgan Stanley. Your line is open.

Joe Moore - Analyst - (00:28:41)

Great, thank you. I also wanted to touch on Automotive customers kind of view on inventories. And I guess can you just talk to us a little bit about what those conversations are like, understanding that there's not much overlap between you and nextperia at this point. I would think things like that are. A reason to want to hold more inventory and kind of buffer yourself from these geopolitical issues.

Rafael Sotomayor - President and CEO - (00:29:04)

Just are you seeing any indications that that is happening or will happen? Yeah, Joe, I mean that's a great question. And I think it really, I think the issue with Nexperia really shows. Really. Shows that the current level of inventory at the end customer is not sufficient to have any ripple effect on business continuity. We don't see it restocking with our direct customers. And now I would say, I mean the good thing, right. If you look at the business dynamics of auto highly related to inventory, the normalization and also a very nice. Already we consider a very nice tailwind. And you would expect the next phase to actually be restocking of inventory. But we have not seen it happen. And so the conversations are pretty much about how they are being very conservative with respect to how they manage their working capital. So no restocking so far.

Bill Betts - Chief Financial Officer - (00:30:13)

Yeah, maybe I'll add Nexperia itself, just to add to it because I think your question, does it impact NXP in any way? From a direct standpoint, the answer is no, and as Rafael said, we're still in the early phase and seeing customer escalations. The signals improve. The restocking has not happened, nor has price increases that happen, which you typically see during a supply crisis. But those are other signals that we wait to see.

Joe Moore - Analyst - (00:30:44)

Okay, and is there any impact potentially on automotive production from all of that on the negative side that you could see, you know, if they have shortages of other components, that it slows productions? Joe, we don't anticipate that. I think the products that are associated right now with Nexperia, these are products that could could be second source. I think the qualification process could be relatively benign for OEMs. But so far our orders will not indicate any impacts into the production of auto. Thank you so much.

OPERATOR - (00:31:20)

Thank you. Our next question comes from the line of Stacy Rasggon with Bernstein Research. Your line is open.

Stacy Rasggon - (00:31:29)

Hi guys. Thanks for taking my questions. My first one, I wanted to drill into gross margins a little more. So you are guiding it up sequentially, but it's flat year over year, even on a pretty decent revenue increase. I guess that's mixed, but I'm struggling to see where the mix issue is. It looks like your industrial Mix is higher. Automotive looks about the same. What is going on with gross margin? It sounds like utilizations. I'm not even sure. They don't sound like they are lower year over year. Like why are we getting more gross margin leverage on on a year over year basis?

Bill Betts - Chief Financial Officer - (00:32:01)

Yes, Stacy, I think the factor that we see going into Q4 again what we talked about is from an end segment, our gross margins tend to be much closer to each other to the corporate average. But you can see the industrial, not the industrial, the communication infrastructure is down quite a bit year over year. And then the other one is you can see we're having record quarters in our mobile space which again you kind of, you know, slightly below our margin corporate mix. So those two end markets are kind of impacting our mix from a utilization standpoint. We are in the high 70s or plan to be in the high 70s into Q4 related to it. And so we do have kind of inventory at the high end internally. So of course that also has an impact of how we run total our material throughout the line. Just not in the front end but also in the back end and so forth. But really those are help offsetting that unfavorable mix that we see currently.

Stacy Rasggon - (00:33:07)

I guess the inventory fill, also helps. The distribution products is higher margin as well.

Bill Betts - Chief Financial Officer - (00:33:14)

Yeah, there's two sets of it. So remember the distribution, and what you'll see is actually our distribution sales will be up quarter over quarter. But let me remind you that a portion of that or a large portion of it is driven by our mobile business where we drive and use the distribution partners in that mobile end-market. And so that's what's driving the increase from a quarter over quarter perspective.

Stacy Rasggon - (00:33:39)

Thanks for my follow-up. I just wanted to level set. So it sounds like there is some diti fill into Q4. So if I say half a week, I guess, do I just roughly think of that as $50 million of income on the impact on the Q4 guidance? I know you said Q1, you were comfortable with seasonal, but does that incremental Channel Fill in Q4 influence how we might think about Q1 seasonality? Are you sort of implicitly assuming that. You will be putting more to be putting more.

Rafael Sotomayor - President and CEO - (00:34:07)

Into the channel in Q1 for a seasonal guide? Okay, there were several questions on that one. Stacy, let me grab that one. So you made a comment again on the, on trying to kind of equate where we're going to end up in the channel and you equate I mean you mentioned $50 million and again I mean, I wouldn't see it that way. I mean, we gave a guidance of 3.3. The demand, again, the visibility that we have right now is low. Orders are coming late. And so where the weeks of inventory end up in the channel, like I said, it may fluctuate between 9 and 10. It's not going to be more than 10, it may be 9. And so to put a formulaic kind of way of looking at how much revenue is going to come from weeks of inventory staying in the channel, I don't know if I can really kind of go there, given how fluid the demand is. Again, we're putting products that we have high conviction of sell through.

Stacy Rasggon - (00:35:15)

Right. And so I don't see it. We usually have a scenario that's baked into guidance. But you must have a scenario that's baked into guidance for Q4, right? Yeah.

Rafael Sotomayor - President and CEO - (00:35:28)

And the scenario says that depends. The inventory may fluctuate between nine and 10 weeks. The scenario is based on what material we put in the channel. Okay. All right, guys, thank you.

OPERATOR - (00:35:42)

Thank you. Our next question comes from the line of Tom o' Malley with Barclays. Your line is open.

Tom o' Malley - (00:35:50)

Hey guys, thanks for taking my questions. The industrial and IoT business seems very strong to close the year, kind of particularly versus where expectations were. You have been helpful in the past about kind of laying out where you're seeing that strength, whether it's the core industrial side or more on that Iot side. Could you give us a little bit of a feel of what's moving into your Q4?

Rafael Sotomayor - President and CEO - (00:36:13)

Yes, Tom, let me just step back. And if you look at our industrial and IoT business at a high level, 60% is core industrial, 40% is consumer. And even within that, 80% of the revenue flows to distribution. So it just kind of gives you kind of step by step. Now what we see in IoT, the end customer backlog through the channel continues to improve. So we see really strong signs of demand improvement. On the consumer side, this is where we continue to benefit from company specific drivers. And this, for instance, I'll give you an example that there's a new category of wearables. These are smart glasses that have high demand, they require high performance, low power processing. And this is an area where our portfolio is strong. So we're seeing some tailwinds on that side. In the core industrial, we're seeing broad based improvements across regions and products. And for us; if you were to drill into a little bit of the application specific, it will be driven by, for us, is driven by energy storage systems and building automation. Now let me put a caveat here. I don't think we, and we'll be the first one to tell you, we don't see ourselves as bad weathers for industrial and IoT. And so what we see it may be that this is very company specific.

Tom o' Malley - (00:37:38)

Helpful. And then a similar question just on the automotive side because it's useful to kind of see what's moving here is just on the S32 portfolio you've seen some really strong growth trends. And part of the reason many think that you guys have handled this a lot better is just the growing portion of your business that is levered to processors. So maybe again what happened in the quarter, maybe the processor business versus the rest of auto and then into the fourth quarter any kind of color on if there's a divergence there; how we should be thinking about just the entire automotive business with those two pieces. Thank you.

Rafael Sotomayor - President and CEO - (00:38:11)

No, I think Tom, I mean we were encouraged about the direction that auto is taking, right? I mean if you were to take just Q3 in Q3 we were only 3% below our prior peak. And so I think that's encouraging. Now with respect to what is driving the performance in the business, I mean it continues to be what we deem what we term coined accelerated growth drivers. And these are in the software defined vehicle which is S32 franchise that you mentioned are radar, is connectivity. And so if you were to ask me what is driving that is exactly what is driving is the secular shift to software defined vehicles is driving the performance of auto.

Bill Betts - Chief Financial Officer - (00:39:04)

And Tom, if I could add, we'll provide a full year kind of update on where we're at with our accelerated growth drivers during our Q4 call. But directionally I'd say we feel very good about how the accelerated growth drivers are playing out inter-quarter. Thank you guys.

OPERATOR - (00:39:24)

Our next question comes from the line of Vivek Arya with Bank of America securities. Your line is open.

Vivek Arya - Analyst - (00:39:33)

Thanks for taking my question and best wishes to both Rafael and Kurt. So Rafael, let's say if 26 plays out the way 25 did with China OEMs and EVs growing but the rest of the world not growing or flattish, what does it mean for NXP? So you know, in an overall flattish auto production environment, what kind of lift can content provide net of any pricing movement like can your autos be conceptually within your long term model for next year? So Vivek, I think the one, the one one thing I want to, I want to maybe, maybe reframe the way we the drivers of Our business, right. Car production is not the driver of our business. We're not SAAR related. I mean if you were to look at, you know, the production has been stable for years. I mean it varies 1% here and there, but they stay pretty flat at 90ish million year content growth dwarfs SAAR growth. And so and then what you have in auto is the production is quite stable but you have a very complex, you have a very complex supply chain. And that complex supply chain is the one that creates either bubbles in inventory glut or vacuums that create shortages. And that the, the supply chain is the one that creates the cyclical aspect of our business. If I just sell it, the way I see it is we see normalization inventory. If you already get behind the content growth of auto, normalization of inventory is something that we see as very, very positive for the direction of auto. And I just want to kind of basically reframe the way, the way I think you posed the question a little bit. And the way we see it, content growth and normalization of inventory provides for us an optimistic view of our business in Auto in 2026. And for my follow up bill on gross margins, is it just volume that takes you from the lower end of the 57 to 63 range right towards the middle of the range? Or are there any new products, any new kind of mixing up of your portfolio that can provide benefits on top of any volume benefit?

Bill Betts - Chief Financial Officer - (00:42:07)

Oh, absolutely. As we said in the past, our new product ramps are positive to the company and they go through their normal growing pains of course as they ramp and other parts of our products roll off. I mean product mix is really the one that, you know, what orders we get, what orders we serve. We serve over 10,000 SKUs or products every quarter. And so we have to adjust and either accommodate for it and offset those or vice versa, let them fall through. And that's why gross margin improves as another factor related to it. But really also our hybrid manufacturing strategy as we move more to 300 millimeter and as we're making all these investments that will start to Yield benefits beyond 2027 As I talked about. But short term levers, again, I think we're doing a really good job offsetting any price gives that we give through our cost efficiencies and productivity internally on test time reductions and so forth. So those, you know, that's really what we're supposed to go do day in and day out. And I think the team's doing a good job. And you can see this by just our variability and our gross margins throughout this last cycle. So I think as we become less fixed costs, that will just improve with that variability going forward. As I mentioned today we're 30% fixed and my guess is in about a couple years from now, once we finish our consolidation efforts. So think five years and so we'll probably below 20% which will reduce that variability.

OPERATOR - (00:43:47)

Thank you. Our next question comes from the line of Chris Caso with Wolf Research. Your line is open.

Chris Caso - (00:43:57)

Yes, thanks. Good morning. I wanted to go back to some of what you said with inventory levels, particularly at your direct automotive customers. Where do those inventory levels stand now? And you quantified a bit on what the impact would be as the distribution channel increased inventory. Is there any, I mean, help us with the magnitude of what would happen if those direct auto customers, you know, finally decided that they did indeed need to restock. Chris.

Rafael Sotomayor - President and CEO - (00:44:38)

What we see right now that we are starting to shift to end demand. And I think that normalization and we can see it in orders and we did say indeed that we don't see the restocking. Now a specific question is of what the levels are. I think we don't have visibility at a granular per customer per Tier one. That will be a complex. But it’s clear to us that is way below our manufacturing cycle. And that's what I mean by is I think that that is just eventually not a healthy level to be able to manage sustainable business. I can't comment whether this will happen or not in the next few quarters or in even 2026. But that is a potential scenario of restocking is indeed a tailwind for our business. That is something that will provide benefit for us.

Bill Betts - Chief Financial Officer - (00:45:39)

Maybe I could add a little bit, Rafael, Chris, as you know, for about the last eight quarters we've been under shipping into the Tier 1 supply chain and actual end production. So it's actually been a headwind to us, I'd say over the last two quarters and then our guidance into Q4, we started to see that headwind subside. And so we think the inventory levels at the Tier one are where the Tier one players believe are normalized for the current environment. They are still very cautious on the macroeconomic outlook. And so as Rafael said, we've not seen that next lever of restocking occurring. But when you go from a headwind of under shipping to at least shipping to end demand, that's the new growth in the short term. Did you have a follow up, Chris?

Chris Caso - (00:46:26)

I do. Thanks. I wanted to come to your comment on buybacks that you mentioned in your prepared remarks. Could you give us a little more. Detail on what the intention is going forward and what we should expect now.

Bill Betts - Chief Financial Officer - (00:46:40)

That you're resuming the buybacks?

Chris Caso - (00:46:42)

Yeah, no change to our capital allocation strategy. Chris, as shared in our prepared remarks, we restarted our. There are buybacks, as I mentioned. We have a lot of cash going out and so we just wanted to make sure we had all the cash to continue to return and make all the investments we want to make inside nxp, but also balance that with healthy returns to our owners. And so if you look at the last 12 months, we returned 106% back to our owners and we're going to continue to go do that.

OPERATOR - (00:47:12)

Thank you.

Blaine Curtis - (00:47:15)

Thank you. Our next question comes from the line of Blaine Curtis with Jeffries. Your line is open. Hey guys, thanks for taking my question. I just want to ask on the. Kind of cyclical tailwinds versus seasonality. I mean, I guess if you look at December, it's really just industrial that. Maybe you could argue is above typical seasonality. And then I think you said just soft guidance for March normal. I think a lot of people have talked about just the slowing down of cyclical recovery. I mean, your comments were pretty positive, Rafael, so I'm just kind of curious if. You can just kind of assess. If you're just looking at seasonality, I guess is the seasonal cyclical tailwind slowing And I guess maybe you can look at. The different markets and if you feel differently about them. Yeah.

Rafael Sotomayor - President and CEO - (00:48:04)

I think if you look at the Q4 numbers, it's clear you stated industrial and IoT was above seasonality. I would even say that automotive was slightly better than seasonality. Right. Pre Covid levels. And the drivers are what they have one common driver that is I think is inventory digestion is almost done. I think that is one normalization is a big deal. And we started to shift to true end demand in automotive and we're starting to see some company specific drivers in industrial IT that are helping us with respect to whether seasonality is going to change. We call it an upcycle. I think we're careful with that because one, we do have the inventory digestion done as a factor for an upcycle. We do see some specific areas of growth in industrial and we see an encouraging sign. So true demand in industrial and IoT. And so we do see the elements of a soft upcycle. And that's the reason why I would say that. Blaine Daddy, if you were to ask me today are you more optimistic than you were last quarter, I would say that we are slightly more optimistic than last quarter.

Blaine Curtis - (00:49:32)

Thanks. And then I wanted to ask you on mobile, I mean, if I have a numbers right, it might be a record. I'm just kind of curious the drivers behind that.

Rafael Sotomayor - President and CEO - (00:49:42)

Blaine, you know, in Automotive Mobile, we're a specialty player there, mostly driven by the wallet and some custom analog that we do for a Tier 1 customer there. I see that the movements from Q2 to Q3 and Q4 and I think you got to take Q3 and Q4 together, it's purely in my opinion it's just a seasonable move and some strength in some of our customers.

Blaine Curtis - (00:50:09)

Okay, thank you.

OPERATOR - (00:50:12)

Thank you. Our next question comes from the line of Joshua Buchalter with PD Cohen. Your line is open.

Joshua Buchalter - (00:50:20)

Hey guys, thank you for taking my. Question and congrats to both Rafael and Kurt and good luck. I know it's still early in earnings season, but your comments and outlook for the industrial IoT segment were certainly better than your peers, who have mainly talked about decelerating trends. You know, we've kind of touched on it a little bit and I realize you're not going to comment on peers, but you know, would you say the difference in what you're seeing versus peers is because of inventory management or more product cycle driven and you know, what gives you confidence in the sustainability of sort of the upcycle that you're starting to see signs of with orders still coming in late and with the lead time. Thank you.

Rafael Sotomayor - President and CEO - (00:51:01)

Yeah, Josh, so I can speak of NXP situation with respect to industrial and IoT because for us, industrial IoT has indeed been one of the more challenging end markets since 2022 and as of Q3, our business still 20% below our peak. Right. And again, I do remind you that we're not the bellwether for industrial IoT so the comparisons to other, you could say peers may not be, I guess relevant. But I would have to say that we did manage inventory in a different way. We were very disciplined in the way we manage our business in the down cycle. And I think I would say that we will be similarly disciplined managing what we see. And I would say it's a soft upcycle, And again, I mean we are having some company specific drivers there that are driving demand. That is true new demand. And we have exposure to few company specific design wins in the core industrial that are driving some of the improvement. But I don't know how you will take that as a bellwether for the industry. Understood.

Joshua Buchalter - (00:52:26)

Helpful caller, thank you. And I was maybe also hoping that

Rafael Sotomayor - President and CEO - (00:52:29)

You could provide some color on the China auto market. What you saw there inter quarter and your expectations into 4Q. I believe a good amount of that is actually served by the Disney. So our inventory levels there lean as well. Thank you. Yes. China. I mean listen, I was in China a few months ago with Kurt and we did a customer visit to both China, China, Taiwan and actually Japan. China specifically China continues to be strong, continues to be a very dynamic market themselves. The auto industry there is very competitive and they continue to actually push for innovation, push for product. Our I would say inventory situation there is also. Lean.

Bill Betts - Chief Financial Officer - (00:53:18)

Is also. But it's a business that is driven, that is driving, is strong. We have good customer traction. So we feel very optimistic about our position in China. And Josh, if I could add as a reminder, in the Asia market, specifically in China auto, we service the majority of that through our distribution channel and it is in the western markets in North America and Europe where we do it on a direct basis. So our approach to channel management, which I'd say is is probably best in class, we take a heavy hand there even in Asia with the channel,

Joshua Buchalter - (00:53:54)

Thank you both.

OPERATOR - (00:53:57)

Thank you. Our next question comes from the line of William Stein with Truist Securities. Your line is open.

William Stein - (00:54:05)

Thanks for taking my questions. First, I'm hoping you can remind us about the strategic purpose of the recent acquisitions. I think TT Tech closed recently; but then you have the two new ones as well. Can you just frame that as it relates to the rest of the autos business? And then I have a follow-up. Thank you.

Rafael Sotomayor - President and CEO - (00:54:25)

Yeah, William, these acquisitions are actually directly aligned with the strategic direction of bringing intelligent systems at the edge of industrial and automotive. If you look at TT Tech, it is a company that is. Is a software company that is going to help us accelerate our move of the system defined vehicle and around S32s and around a system approach and so quite excited to have them. It's a capability that would have been very difficult to obtain organically. And it's a company that brings IP specific also in functional safety at a system level. Aviva Links is a company that has a really, really I would say innovative technology on a Serdes technology that is a standard. So it's a standard serdes and that is critical to standardize sensors. Think of radar, think of cameras, think of lidar around a core processor which in this case will be our S32. So we're quite, quite bullish on Aviva Links. And Kinara brings AI capabilities, especially gen AI capabilities. High performance, low power. That is going to Also accelerate our portfolio of intelligence into the edge.

William Stein - (00:55:59)

And then follow up. There's been some discussion about elevated competitive dynamics in the infotainment part, of your autos business. Can you remind us how big that is in your autos business and maybe update us on that competitive situation? Thank you.

Bill Betts - Chief Financial Officer - (00:56:18)

Hey, Will, I'll take that one. So, you know, think about IVI and vehicle infotainment. There's kind of two parts. There's the visualization, what you see on the dashboards, and there's the what you hear, the audio portion. I'd say on IVI Auto, we can continue to be a dominant player there. On the visualization, our performance is maybe a little below some of our peers, but I think that's very well known at this time. And I think with that, Tawanda, I think we're going to need to move back to Rafael for closing remarks, if we can.

Rafael Sotomayor - President and CEO - (00:56:54)

Well, thank you everyone for joining us today and your thoughtful questions. This quarter marks both a leadership transition and a reaffirmation of NXP Semiconductors' consistent strategy focused on profitable growth, disciplined execution and predictable returns. We are encouraged by the gradually increasing signs of a cyclical recovery across our automotive and industrial and IoT markets and by the continued strength of our company specific growth drivers. Our priorities remain clear, deliver on our commitments and manage what is in our control and position. NXP to continue to grow profitably. I express my gratitude to Kurt for his outstanding leadership and for the partnership we have built over many years. In his 30 year career at NXP, he has left a lasting legacy, navigating us through various challenges and positioning NXP as a leader in the markets we serve. I am truly humbled to follow his footsteps. It is a privilege to lead this company and this team. I am excited about what we will achieve together.

OPERATOR - (00:58:00)

Thank you, ladies and gentlemen. That concludes today's conference call. Thank you for your participation. You may now disconnect.