NXP Semiconductors NV (NXPI) — Q3 2021 Earnings Call Transcript

Thank you, Dexter. And good morning, everyone. Welcome to the NXP Semiconductors Third Quarter 2021 Earnings Call. With me on the call today is Kurt Sievers, NXP's President and CEO, and Bill Betz, our CFO. 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 continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products at our expectations for the financial results for the fourth quarter of 2021. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures which are driven primarily 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 to the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2021 earnings press release, which will be furnished to the SEC on Form 8-K and is available on NXP's website in the Investor Relations section at nxp.com. Before we start the call today, I would like to remind everyone of our upcoming Analyst Day on Thursday, November 11, 2021. We are hosting a hybrid event. We will be in person in New York City, but also simulcasting the event from our website for virtual attendees. After the event concludes, we will post the slides to the Investor Relations website. I would like to turn the call over to Kurt.

Yeah, thanks very much, Jeff. And good morning, everyone. We appreciate you joining our call this morning. I will review our Q3 results and then discuss our guidance for Q4. Overall, our Q3 results were better than the midpoint of our guidance with the mobile end markets stronger than planned as a result of improved supply. At the same time, the trends in the Auto, Industrial IoT, and Communication Infrastructure markets were all in line with our guidance. Taken together, NXP delivered Q3 revenue of $2.86 billion, an increase of 26% year-on-year, and $11 million above the midpoint of our guidance range. These are very good results given the constrained supply position we knew we would face entering the quarter. And we continue to view our channel and on-hand inventory metrics below our long-term targets. We exited quarter three with our distribution channels supply metric at 1.6 months, almost a full month lower than our long-term target. And we expect this to be the situation in quarter four again as well. Our non-GAAP operating margin in quarter three was a strong 33.5%, which is 770 basis points better than the year-ago period, and 50 basis points above the midpoint of our guidance. Operating profit dollars were $19 million better than guidance, driven by higher revenue and lower expense. Now let me turn to the specific trends in our focus ends markets, starting with Automotive. Q3 revenue was $1.46 billion, 51% up versus the year-ago period, and in line with our expectations. In Industrial and IoT, Q3 revenue was $607 million, up 18% versus the year-ago period, and again, in line with our expectations. In Mobile, Q3 revenue was $345 million, up about 2% versus the year-ago period, and above our expectations. Lastly, in communication, infrastructure and other, Q3 revenue was $454 million, about flat versus the year-ago periods. And in line with our expectations. With this, let me move straight to our outlook for quarter four. We expect the midpoint of quarter four revenue to be $3 billion, up 20% versus the fourth quarter of 2020, within a range of up 17% to up 23% year-on-year. From a sequential perspective, this is up 5% at the midpoint versus the prior quarter. And we again anticipate demand outstripping available supply in our quarter four outlook. At the midpoint of this range, we anticipate the following trends in our business. Automotive is expected to be up in the high 20% range year-on-year and up in the mid-single-digit range versus Quarter Three '21. Industrial and IoT is expected to be up in the high 20% range year-on-year and up in the mid-single-digit range versus Quarter Three '21. Mobile is expected to be down in the mid-teens range year-on-year and up in the low single-digit range versus Quarter Three '21. And finally, Communication, Infrastructure, and Other is expected to be up in the high-teens range versus the same period a year ago, and up in the low single-digit range versus Q3 '21. Over the course of the last 2 quarters, investors continue to ask how to reconcile the revenue performance of NXP's Automotive business with that of the global vehicle production numbers as they are reported by IHS. Specifically, NXP's Automotive segment revenue is expected to be up over 40% in 2021. Against this, the auto OEMs continue to struggle to match supply to strong consumer demands with the auto industry likely not able to meaningfully grow unit production versus 2020. Now let me make a few observations which may help you understand these diversions. First, the auto supply chain is very extended and complex, with multiple points of product transformation across the globe. This extended supply chain needs to coordinate the timing and delivery of up to 30,000 products and up to 1,500 different semiconductors, from hundreds of suppliers to build just one single car. During normal periods from the time at which NXP ships finished components to when the final assembly is fitted into a finished car, it takes up to 6 months. And this is on top of the normal semiconductor manufacturing cycle times of 3 to 6 months. At each step of the transformation, thousands of parts move through a complex global network of suppliers. For the process to work efficiently, it is essential that all of the components needed to complete a car are available exactly where and when they are required. Now, we believe the extended auto supply chain significantly depleted on-hand inventory of all types of products, including semiconductors already by the beginning of the second half of 2018 and continuing through 2019 and most of 2020. That depletion was a result of global car production declining 6% in 2019 and another 16% in 2020. While NXP's auto business, despite content increases, declined by 7% into 2019 and by another 9% into 2020. Let me illustrate the impact by using the NXP Distribution Channel as a proxy for overall auto supply demand trends and how we have been directly affected. We consistently monitor and measure all component movements in inventory data at our distribution partners at the end-market level. Throughout 2021 these metrics for Automotive have been at record low levels, with on-hand inventory being about 1 month below our long-term target of 2.5 months, with demand in the intermediate term being consistently greater than our ability to rebuild inventory back to normalized levels. In my personal daily discussions with our customers throughout the auto supply chain, we hear the consistent message that they want significantly more products. And in some cases, Tier 1s are struggling to assemble full kits, and in other cases, the OEMs are choosing to build partially completed cars or hold their production lines altogether. For NXP, lead times for about 75% of our automotive products continue to be above 52 weeks. Against this backdrop, our customers are placing NCNR orders to assure long-term supply. We, in turn, are making long-term supply commitments to our suppliers. In summary, we think the automotive supply-demand equation will continue to be out of balance through 2022. In addition, as a learning all of the current material shortage situation, we believe we cannot broadly achieve the demands for more supplies and inventories in the extended supply chain before 2023. Now, with this currently dysfunctional supply chain as a backdrop, there are very clear and positive trends that have simultaneously increased the demand for auto semiconductors industry-wide as a consequence of content growth. We have seen multiple OEMs prioritize the production of premium vehicles, which require significantly more semiconductor content from NXP and others. And another clear and emerging secular content driver for the auto semiconductor markets, is the fast exploration of fully electric and hybrid electric vehicles, which combined have moved from 8% of global production in 2019 to about 20% of production in 2021. This is very impactful since the average semiconductor content in an xEV is above $900, which is roughly 2 times that of an equivalent ICE vehicle. These trends have resulted in industry-wide content per vehicle increasing at 10% per year, over the last three years. And on top of all of this, NXP is consistently gaining share in our focused growth areas and increasing content. These content gains include 77 gigahertz radar safety systems, multiple electrification system opportunities, beyond just battery management, and new domain and zonal processing, as well as others. Now for NXP, it's of course not just automotive driving our performance. Within the Industrial and IoT markets, we see our ability to provide complete turnkey connected processing solutions, consisting of processes, connectivity, security, and analog, all leading to increased customer traction. These are all just a few examples that underpin our confidence in our company-specific growth. As Jeff mentioned earlier, we plan to go into much greater detail at our Investor Day on November 11th, next week in New York. In summary, we continue to execute very well in a strong demand environment, notwithstanding the industry-wide supply challenges. From a company-specific perspective, NXP is experiencing very positive customer traction with our newest products and solutions. Putting it all together, we are highly confident that the company-specific drivers within our strategic end-markets will continue to build also beyond Q4 into Q1, as well as over the intermediate term through 2022. Now, before we move to the financial details of the quarter, I'd like to make a few remarks in the context of our recent announcement of Bill Betz as our new CFO. I have personally worked with Bill as a business partner and one of Peter Kelly's key finance leaders for over eight years. Bill brings both a strong track record and career in the semiconductor industry, as well as truly intimate knowledge of NXP and consistency to his new role. I personally drove the evaluation, the interview process, and the viewing of a wide number of external candidates, as well as Bill. I concluded Bill is the right person to lead our NXP finance organization, and I'm personally truly excited to work with Bill and drive NXP's profitable growth going forward. At the same time, I would like to highlight the outstanding contribution Peter Kelly has played in the strategic evolution of NXP. Peter first came into the company in an operations role over a decade ago, and then quickly moved into the CFO role to drive the financial discipline our stakeholders have all come to expect. He has been a clear-thinking strategic advisor to myself and a highly valued mentor to many on the NXP management team. Obviously, including both Bill and Jeff. We wish Peter the very best in the next phase of his life, and hope he gets to spend more quality time with his family. And with that, I would now like to pass the call to Bill for a review of our financial performance.

Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q3 and provided our revenue outlook for Q4, I will move to the financial highlights. Overall, our Q3 financial performance was very good. Revenue was above the midpoint of our guidance range. And we drove an improvement in non-GAAP gross profit and non-GAAP operating profit, both of which were at the high end of our guidance range. Now, moving to the details of Q3, total revenue was $2.86 billion up 26% year-on-year and above the midpoint of our guidance range. We generated $1.6 billion in Non-GAAP gross profit and reported a non-GAAP gross margin of 56.5%, up 640 basis points year-on-year and near the high-end of our guidance. Total non-GAAP operating expenses were $657 million, up $107 million year-on-year and up $31 million from Q2. This was $8 million below the midpoint of our guidance, due to lower material and mass spend during the quarter. From a total operating profit perspective, non-GAAP operating profit was $959 million and non-GAAP operating margin was 33.5%, up 770 basis points year-on-year. This was also at the high-end of our guidance range, as a result of better fall-through on higher revenues. Non-GAAP interest expense was $94 million with cash taxes on ongoing operations of $86 million and non-controlling interest was $7 million. Taken together, the below-the-line items were $8 million better than our guidance. Stock-based compensation, which is not included in our non-GAAP earnings, was $81 million. Now, I would like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $9.59 billion, flat on a sequential basis. Our ending cash position was $2.3 billion, down $607 million sequentially due to higher Capex and robust capital returns during the quarter. The resulting net debt was $7.29 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $3.92 billion. A ratio of debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.9 times. Our 12-month adjusted EBITDA interest coverage ratio was 11 times. Our liquidity continues to be excellent and our balance sheet is very strong. During Q3, we repurchased $1.16 billion of our shares and paid $152 million in cash dividends for a total of $1.31 billion of capital return to our owners. Subsequent to the end of Q3, between October and November 1st, we repurchased an additional $300 million of shares, resulting in a total of $4 billion returned to our owners year-to-date. Turning to working capital metrics, days of inventory were 85 days, a decline of three days sequentially. Our DIO continues to be below our long-term target of 95 days. We continue to closely manage our distribution channel with inventory in the channel at 1.6 months, flat sequentially and below our long-term targets. Both metrics reflect the continuation of strong customer delivery rates, in a tight supply environment. We continue to believe it will take multiple quarters before we're able to rebuild on-hand and channel inventories to our long-term targets. Days receivables were 31 days, down four days sequentially. And days payable were 83, a decline of nine days versus the prior quarter. Taking together our cash conversion cycle of 33 days, an increase of two days versus the prior quarter. Cash flow from operations was $924 million and net Capex was $200 million, resulting in non-GAAP free cash flow of $724 million. Turning to our expectations for Q4, as Kurt mentioned, we anticipate Q4 revenue to be $3 billion plus or minus $75 million. At the midpoint, this is up 20% year-on-year and up 5% sequentially. We expect Non-GAAP gross margin to be about 56% to 56.5% plus or minus 50 basis points. Operating expenses are expected to be about $680 million plus or minus about $10 million, consistent with our long-term model. Taken together, we see non-GAAP operating margin to be about 33.8% at the midpoint. We estimate non-GAAP financial expense to be about $94 million and anticipate cash taxes related to ongoing operations to be about $100 million. Non-controlling interest will be about $9 million. For Q4, we suggest for modeling purposes, you use an average share count of 270 million shares, which is down 15 million shares from a year-ago period as a result of the consistent execution of our capital return policy. Finally, I have a few closing comments I'd like to make. First, demand trends continue to be strong across our target end markets, and customer interest in our newest products continues to be very robust. At the same time, we are closely working with our customers and our suppliers to address order requests in a timely manner. Second, our Q4 guidance reflects the clear potential of our business model, both in terms of revenue growth as well as the significant profit fall-through, which will enable us to consistently drive our non-GAAP gross margin above the midpoint of our gross margin targets. Third, our business continues to generate significant free cash flow, and we are committed to our capital return policy and will return all excess free cash flow to our owners, so long as our leverage ratio remains at or below 2x net debt to trailing 12-month adjusted EBITDA. I'd also like to take this opportunity to thank Peter Kelly for a significant contribution to NXP since he joined the company in 2011. Not only did Peter guide NXP from a financial perspective, but he truly helped lead the company and drive the strategy that made NXP what it is today. And on a personal note, I consider Peter a great leader, a mentor, and a friend, and I will always be grateful for his support. And then finally, I'd like to thank all my colleagues across NXP for their outstanding work and dedication. We shouldn't forget that we're all still working under strict pandemic protocols. So, with that, I'd like to turn it back to the operator for questions.

Thank you for the opportunity to ask a question, and congratulations to Bill on becoming CFO. My first question is for Kurt regarding customer behavior. You provided a thorough analysis of the apparent disconnect between the auto revenues in production and the various explanations. I want to know if customer behavior is changing, and if so, does it relate to longer visibility, greater certainty, or improvements in profitability for the auto semi production companies in this sector?

Good morning, Ross. There have indeed been a couple of changes. First, I must emphasize that there has been no reduction in the urgency to obtain more products. Efforts to expedite or escalate orders to speed up their delivery to manufacturing locations remain unchanged. We anticipate this trend to continue. From a broader perspective, it's clear that the entire auto industry has recognized the critical role of semiconductors for their future. This realization is crucial for innovation and for producing complete vehicles. As a result, we've developed closer and more effective relationships with the OEMs, enhancing our understanding of their innovation and supply needs both in the near and mid-term. These developments are leading to significant changes, including an increase in long-term orders, specifically NCNR orders that extend through the next calendar year, primarily from Tier 1 customers. This behavior is driven by similar actions from the OEMs. Additionally, we are gaining better long-term visibility, which is vital for innovation. The close relationship we are building with OEMs allows us to collaborate on future systems, aiding us in creating the right roadmaps.

Thank you for that information. As a follow-up, I want to shift focus to a more immediate question regarding the mobile business. It's positive to see that there was an unexpected upside in the third quarter compared to your initial guidance. However, when I look at both quarters together, it's clear that supply is tight, and you may be managing some allocation. Still, the mobile business appears to be weaker than anticipated seasonally over these two quarters. I had expected it to bounce back in the fourth quarter. Can you discuss what is causing the year-over-year weakness in that sector?

It's clearly a supply issue. As we entered the third quarter, we mentioned a potential sequential decline that we managed to avoid by pulling in some supply, which is why our performance in Mobile exceeded expectations. There were no changes in product sockets; we simply had improved supply capability, and we anticipate a similar situation in the fourth quarter. However, for the entire second half of this year, we are significantly constrained in supply for the mobile market. The situation is gradually improving, which explains our recent performance, but overall, the supply is facing notable challenges. Comparing year-on-year, this presents a tougher scenario for us. In Q3 last year, the ban on Huawei impacted our results, causing a spike in demand from one of our major mobile customers, coinciding with the timing of last year's quarter. This makes the year-on-year comparisons for both Q3 and Q4 require careful consideration due to those specific events. I want to reassure you that we haven't lost any sockets, and everything is proceeding as we planned. We have faced supply constraints, but the larger factors driving our business are the adoption of mobile wallets, attach rates, and the early penetration of critical solutions, all of which align with our earlier targets and plans.

Thank you for taking my question and good luck to both Peter and Bill. Kurt, on the automotive industry, if one had told you that auto production would be flat this year, but your auto sales would have been up 40%, would that have been predictable? And if not, what do you think surprised NXP other than some of the bad shutdown effects? Was it mixed that surprised you? Was it pricing? Was it content? What specifically was the surprise this year to create this big gap between production and sales?

Hi, Vivek. To be completely open, with today's knowledge, we could have predicted some aspects. However, at the time, we didn't have the foresight. What we now refer to as surprises are really the outcomes we experienced. One major factor has been the shift towards premium vehicles, which optimizes profits on the OEM side and was something we didn't foresee. Nobody anticipated this shift, and it significantly affects semiconductor consumption, as premium vehicles can have twice the semiconductor content of mass-market cars. Additionally, the rapid penetration of electric vehicles, driven by a focus on CO2 targets and considerable government subsidies, has further positive implications for semiconductor content. Even if car production remains steady, the semiconductor content is expected to increase substantially. Both of these trends have the potential to double the semiconductor content in cars, surpassing production levels. Another surprising factor has been the complexity of the extended automotive supply chain. There are many stages and companies involved between when we ship a product and when it reaches a vehicle. The depletion of this supply chain since 2019 and 2020 has led to significant dysfunction. We are currently working to replenish the supply chain to return to normalized levels, which is essential for effective operational supply. We underestimated the extent of depletion and the depth of the issues within the supply chain, which makes it challenging to restore functionality at this time.

And for my follow-up, Kurt, just to continue that line of discussion, you mentioned over the last few years that the content Delta, right between units and sales have been, for the industry, about 10 points, so then NXP doing better. If I look at the current IHS production forecast for next year, and I know that they keep on changing all the time, but right now it's about 10%-11% unit growth. Assuming that happens, what is the crystal ball saying in terms of that rough delta for the industry next year? Do you think it'll be that 10 points or will it be closer, right, to the much bigger number we saw this year? Thank you.

Yes, Vivek. First of all, you mentioned another very important aspect, which is our performance in all of this. I described earlier how we think the industry surprised us all. The third element is clearly NXP's specific content gains where we increased our share, which accelerates our growth. Now, how all of this translates to next year and the subsequent years, both from a content growth perspective and NXP's revenue growth perspective, I would just ask you to wait for our Investor Day in New York next week. We will provide the details you are looking for and give guidance for the next few years, including our expectations for the semi-market in automotive and our performance relative to that. So, please be patient until next week.

Good morning, guys. Thanks for letting me ask the questions and congratulations on the solid results. Kurt, I think we all appreciate all the details you gave in your opening comments about the complexity around the auto supply chain. I'm curious. You can spend a couple of minutes just talking about your ability to grow supply from here, both internally, externally, both on the wafer side and on the back end and tests. I'm assuming that the nice sequential jump in autos means that some of the weather events in the first half of the year have reversed themselves. But specifically, as you look over the next several quarters, would you expect your ability to grow supply to be relatively linear or is it going to be chunky? And is there a point in time where your ability to grow supply accelerates in 2022?

Thanks, John. Let me give you a few pieces on this. One is indeed the negative impact from the weather events which we had in early Q2 in Texas is behind us. Both factories which were impacted are running back to levels and we are good. Another element I have to mention here because it has an impact on the industry. You've seen that over summer, there have been quite a few factory shutdowns for back-end test and assembly sites in Malaysia. I want to highlight that we have been in a very disciplined position to organize and manage our own factories in such a way that our shutdowns were very immaterial. So, we had a few days but by and large, we have had very little negative impact from those shutdowns on our revenue. So, when you think about what we shipped in Q3, assume there was hardly any negative impact from COVID factory shutdowns from Southeast Asia and/or specifically Malaysia. Now going forward, we will clearly see improvements on the wafer side. We talked earlier that we are entering into long-term supply commitments with our supply partners. That will start benefiting us next year, but also the years after. Again, this is balanced against the NCNR orders which we are collecting from our customers. The back-end test and assembly, which largely is in-house for NXP. We are forced to put all the CapEx and all the investments in place to make sure that any wafer we get our hands around will also find enough capacity in-house to be tested and assembled into finished products. So, think about the test and assembly increase in capacity as pretty gradual because it is something which we are putting in tune with the wafers coming in. On the wafer side, it is in a way more discreet, but it's not shown because we have obviously several wafer suppliers and they don't improve all at the same time. From that perspective, what comes out into revenue, think about something which is gradual, which doesn't have huge step functions at any specific point in time. However, the result of all of this business is that clearly our supply capabilities, as it has done through this year, they continue to grow also through next year. Finally, I should say this is clearly an overarching comment that is in any way or form specific to automotive business. The supply shortages which we are facing is across all market segments. We discussed earlier briefly about mobile. Anyway, anybody knows about automotive, but we have the same negative impact on our industrial IoT business and partially in the content for our business. All of these improvements build health and will support revenue growth across all of our end market segments.

That's really helpful color Kurt. And then maybe for my follow-on, one for Bill. First, congratulations. Looking forward to working with you in your new role. I'm just curious on the gross margin line. Another really solid gross margin quarter. Given some of the logistic inflationary costs out there, often times it's hard to, within a quarter, to get all of that rate relative to pricing. Was there anything holding back gross margins from a cost side in the quarter? And I guess more importantly, as you look out across these long-term agreements, can you help us understand either how they're being constructed relative to your gross margin goals. I would assume it's much easier to price in this sort of environment. Does that mean we could see some ticks up here in gross margins over the next several quarters?

Yes, thank you for your question. Let me give a bigger picture on the margin and more color about it. So as mentioned on our previous calls, our gross margin had improved drastically versus last year driven by the higher volumes and improved internal utilizations from our factories. For example, if I try to remember, I think Q3 utilizations last year were in the mid-60s and today we are in the high 90s. From a guidance standpoint, as you saw, we were slightly better from a quarter-over-quarter basis by 20 to 30 basis points, related to the improved product mix. Now, as we move forward over the next several quarters, it's going to be really difficult to have that additional fall-through on our internal factories. As basically they're running at full utilization. To address your question on pricing, we are only passing on the increases in our input costs from our suppliers to our customers. And we're not having any of our margins in this process as we value our long-term relationships with our customers, I’d say. And we are really equally sharing the pain together. As you could see in Q4, we are guiding our gross margins to be flat quarter-over-quarter, and any additional margin expansion would come in the short-term will be driven by that continued product mix. More longer-term, it will be really driven by the expansion of our new NPIs. I'd say overall, we're very proud of achieving these levels and we look forward to continue delivering towards that higher end financial state of model around 57% as we go forward.

Hi, guys. Thanks for taking my question. I wanted to follow up on the other pricing question. I know you're not trying to extract more, but to play devil's advocate a little bit, given the shortages out there, why not? You're in a period of time right now where the supply chain is probably tighter than it ever has been and ever will be. And there is demand for your products that's off the chart. You're locking customers in. At this point, why is this not the time even on a selective basis to try to extract more? Especially given it seems like some of your peers actually are going down that path. Why not you guys?

Yeah. Hi Stacy. There is a very clear answer to this, which is we are not in the commodity business. The very vast majority of our portfolio is application-specific. And with that portfolio, we are in very deep, longer-term relationships with our customers. So, what we do is, as Bill said, we pass on the input cost, which is already, in some cases a pretty significant element to digest for our customers. But we want to be transparent and we want to have long-term relationships which are built on trust with our customers. And in that context, we absolutely consider it the right thing to pass on the input costs, but not use it to pad our margins. I would personally say, from being in different markets in the past, in the commodity market, that works differently. But that's not the kind of market environment we are moving in. And I’m very sure that this will pay off positively in the long term relative to the customer relations which we need to continue to build our business. In that context, it is also important to note that the whole environment clearly has a lot of input costs which is going out for our customers. I mean, it’s not just on semiconductors. A lot of other things are also moving. So, it's a tough environment for all the participants where I think consistency, transparency, and trust into the long-term relationships is a big value. And that's something where we do differentiate.

Thank you. I guess for my follow-up, even to follow up on that a little bit, the historical pricing practices, at least at a high level, especially in automotive, was to have long-term price downs that were built into the contracts, and you'd be fighting that every year. I guess, understanding that we're maybe coming off a higher base now, at least on raising price because of the input cost increases, do you foresee like a similar type of long-term pricing behavior that'll be built into the long-term contracts? Are you still going to be fighting a couple of 100 basis points of margin compression every year just off the higher base as part of these long-term contracts? Or is the general pricing structure like long-term of these contracts different than it was in the past?

Yes, Stacy, that is definitely another aspect of this conversation. While I can't go into specific customer or segment trends, the overall situation is indeed a reset, which is both important and positive. By reset, I mean that the new step function we are implementing is here to stay. I previously mentioned how all the industries we serve, not just automotive, recognize the importance of semiconductors and the different value they represent. From this perspective, we are making a significant change that will be permanent. It's difficult to predict how this will impact individual cases and year-on-year pricing, but I don't believe it will regress.

Great. Thanks for taking my questions. First, I think you just spoke about this a moment ago, but can you talk about the magnitude and duration of your purchase commitments to foundry and your customer purchase commitments to NXP?

Well, Bill would fill in maybe with a bit more detail, but I'd say in general, it really varies. We have some of them on the NCNR site which is the customer orders, they would typically easily cover next year. So, now, getting an order which stretches all the way until the end of next year. If you think then on the other side, which is the agreements with our foundry and supply partners, I think we actually published a new number, which if I remember right, is between $4.3 billion and $4.4 billion of agreed and signed supply commitments, which we have entered into with our supplier base. The vast majority of it is obviously in wafers. But mind you, this is not just for 1 year, this stretches out over multiple years to come, 4.4 billion to give you a feel.

That helps. Thank you. And Bill, I want to offer some congratulations on your new role. Of course, you have some pretty big shoes to fill given Peter's very strong performance and the Company's strong performance in the last 10 years or so. I'm hoping you might give us a preview of what you might say next week, at least in terms of your priorities as the new CFO. Thank you.

Yes, thank you for your question. First off, I'm very honored and thankful for the role. I've been in the semi-industry for about 20 years prior to NXP. I've worked for Fairchild, LSI Systems. Really, no change as you have to remember, I've been with NXP for about 8 years supporting the Company's financial strategy alongside with Peter, Kurt, Jeff, and the entire management team. I'd say my style's a bit different than Peter, but principles are the same. Focus on delivering like you mentioned, there's commitments and driving long-term value to our customers and employees and shareholders. Related to Analyst Day, yes, I'll share that next week, related to our long-term financial model. But we really like to save that for next week and not address that in this call.

Thank you. Good morning. First question, I wonder if I could just ask about those long-term agreements that you're signing with your customers now. Can you tell us what sort of commitments have your customers made to you under those agreements? And it sounds like you're using those agreements from your customers to backstop the agreements that you are making with your suppliers. Is that for specific volume commitments over a certain amount of time? And is pricing committed to in those agreements as well, such that you have visibility on both volume and pricing?

I can't go into great detail on this, but the main point aligns with what you mentioned about the customer agreements typically covering volume and price for a specific period, such as until the end of next calendar year. They even specify it by quarter, so it's not just one figure for the entire year. In many instances, it can even be tied to two quarters.

And very helpful. And if I can follow up pricing as well, and clearly, over the past couple of quarters, you've been passing along, as you've said, those price increases you've gotten from suppliers. Can you give us a sense of the magnitude of the pricing benefit you've seen out of this sort of 26% year-on-year increases you've seen in revenue? How substantial has price been in that calculation? And then as you go forward, are you expecting, as you go into next year, there's still going to be a pricing tailwind as the input costs rise?

Well, generally, as we discussed before, we will continue to match the rising input costs with adjusting the prices accordingly. Such that yes, since input costs will continue to go up also next year, they will also continue to have upwards adjustments into next year in general terms. For the rest of your question, I really cannot and don't want to go into greater detail on how much is what piece. It's really just important that the leading concept and philosophy of all of this is that the price increase is just matching the input costs increase, and that's it. But that is something which indeed we have this year and which is going to follow up next year too.

Thank you for taking my question. I want to congratulate Peter and Bill as well. Regarding the audio side, I would like to clarify something. I've heard from other companies that customers are becoming more selective and trying to put kits together. I appreciate the detailed information, Kurt, about the complex supply chain. I'm curious if you are observing the same customer behavior, if you're seeing strength in other areas, or if your specific situation and some secular growth mean you aren't experiencing that selectivity in certain segments. Thank you.

Blayne, I think what you tried to ask me is am I seeing a slowdown, and the clear answer is no. We absolutely don't see a slowdown and you can imagine that especially, the car companies with the pretty significantly negative impact to their car production numbers this year, and the ambition to grow them next year by a significant percentage. They clearly need more semiconductors. And that is not limited to one product or one technology. I think I also made the very open comment earlier that 75% of the product portfolio in our automotive business still has a lead time of above 52 weeks. I think that says it all.

Thank you. Could you provide some insight on the Industrial IoT? Specifically, I'd like to know where your strengths lie and how the supply chain looks for the second half of the year. Is it still as tight as before? Thank you.

Yeah Blayne. It is very tight too. I would say, no different to automotive. Also, by the way, the impact of not shipping enough product is at least as significant as in automotive. It just catches less headlines in newspapers. But if you think about the impact on industrial automation, which is huge machinery, which cannot be built if there was more semiconductor supply or in the smart home. It's equally drastic as it is in automotive, just catching less headlines. Now, our big differentiator, more and more is our capability to offer complete solutions. Complete solutions around the processor. We've had that leadership in a very wide range and portfolio of processing solutions into industrial, but it's now very nicely complemented by connectivity, security, and analog attach, which really differentiates us from our competitors. I would dare to say it's a very unrivaled position and offering here, which by the way, is also going to be very much in the spotlight of our Investor Day next week to give you much more detail on what we have and why we think that makes us grow so much in the time to come. Now from a supply chain or channel perspective, a lot of that business indeed is going through distribution, which because it goes to thousands, literally thousands of small customers. And this is exactly why that solution capability of NXP makes such a big difference. Because many of these companies which we are serving there through distribution don't have the capability themselves to deal with the complexity of these connected edge applications. When and if we can offer them a complete solution, that has a huge advantage for both time-to-market levels or from an R&D perspective for them. That's actually what I think is really a very significant differentiator for us. Now, another element in the equation is we do have a relatively strong exposure to China. If you think about the industrial business, a lot is going through distribution and a lot is going into China. And just to anticipate the question, we do not see a slowdown there in China. But again, mind you, it's also that we continue to be supply constrained. As I said earlier, also in industrial, we could certainly run higher revenues if only we had more supply. Good news is also there that our supply capability, as we discussed earlier, is improving every month so that over time we will hopefully get into a better place.

Yeah. Good morning. Thanks for squeezing me in. I guess first question for you, Kurt, in your prepared remarks, you talked about auto supply demand balance, probably not achieved until 2023. So curious, as you contemplate that, what kind of assumptions are you making in terms of what kind of future inventory management will look like, both at the Tier 1 and OEMs. I imagine there's more of adjusting case as opposed to just in time. So, we would love to hear your thoughts on kind of that evolution that is likely coming ahead for the auto industry.

Yes, C.J. Absolutely. I did indeed say that I don't think there is broadly speaking enough supply next year to already stop building those additional inventories. Because that's exactly what you're asking for. Yes, we clearly see a demand by the OEMs to the Tier 1s and other participants in the extended supply chain, explicitly not to semi companies, but in between, between us and the OEMs, the demand and the requirements to build more inventory. Typically, if you want to size this, a typical ask is somewhere between 3 and 6 months, sometimes longer. And it has a very simple reasoning that's the manufacturing cycle time for semiconductor products. In a very simple way, they say, 'Okay, if this is the additional inventory, then that puts us maybe on the safe side for more flexibility.' Yes, this is something which I don't see the industry has the capability to build next year, but let's aim for '23.

Very helpful. And then I guess my follow-up question, obviously, we've seen positive mix shift on the EV side, which you spoke to earlier. I'm curious, as we're seeing more and more OEMs target full platforms, moving over to EV or hybrid as well. Curious how that has played with your full solution which I would think would fit nicely. I would love to hear your thoughts there.

We appreciate your input, C.J. We've discussed our strong capabilities in battery management solutions, which are benefiting significantly from this rapid market penetration. Next week at the Investor Day, we will highlight more about our initiatives in electrification, as our involvement extends beyond just battery management systems. This is a favorable development for NXP, and it encompasses more than battery management alone. Speaking of battery management, it is indeed benefiting immensely from these trends. As we wrap up the call, I would like to summarize briefly. It’s a challenging time in the market, but I am proud of our solid performance in the third quarter and our positive outlook for the fourth quarter. Furthermore, we’re seeing strong momentum as we head into next year, indicating consistent demand across our markets. We are not seeing any excess inventory, and our supply capabilities are improving to meet future demand. Thank you for joining us today, and I look forward to seeing many of you next week at our more in-depth Investor Day in New York. Thank you.