NXP Semiconductors NV (NXPI) — Q4 2021 Earnings Call Transcript

Thank you, Katherine, and good morning, everyone. Welcome to the NXP Semiconductors fourth 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 specific end markets in which we operate, the sale of new and existing products and our expectations for financial results for the first quarter of 2022. 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 of the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2021 earnings press release, which will be furnished to the SEC on Form 8-K and available on NXP's website in the Investor Relations section at nxp.com. Before we start the call today, I'd like to highlight, NXP will be attending the Morgan Stanley TMT Conference in San Francisco on March 7 and 8. Now, I'd like to turn the call over to Kurt.

Thank you very much, Jeff, and good morning, everyone. We really appreciate you all joining our call today. I will review both our quarter 4 and our full year 2021 performance, and then I will discuss our guidance for quarter 1. Beginning with quarter 4, our revenue was $39 million better than the midpoint of our guidance with most end markets stronger than planned and with the trends in the communication infrastructure markets more in line with our expectations. Taken together, NXP delivered quarter 4 revenue of $3.04 billion, an increase of 21% year-over-year. Non-GAAP operating margin in quarter 4 was a strong 34.9%, 440 basis points better than the year-ago period and about 110 basis points above the midpoint of our guidance. Year-on-year outperformance was largely due to the impact of improved factory utilization and higher revenues. For the full year, revenue was a record $11.06 billion, an increase of 28% year-over-year. And as 2021 progressed, our customers continued to accelerate orders on NXP. We consistently found ourselves in a situation where robust demand outstripped available supply even as production levels both internally and from our supply partners improved across the year. We do anticipate a continuation of strong demand throughout 2022, likely better than we originally contemplated at our recent Investor Day in November. The full year non-GAAP operating margin was a solid 32.9%, a 700 basis point improvement as a result of improved factory loadings, higher revenue and positive leverage on our operating expenses. Now, let me turn to the specific trends in our focus end markets. In Automotive, full year revenue was $5.49 billion, up 44% year-on-year, a reflection of the strong company-specific product drivers we noted at our Investor Day, the step-up in content per vehicle as OEMs prioritized premium vehicles in a limited supply environment and the accelerated transition towards electric vehicles, which have fundamentally higher semiconductor content. For quarter 4, Automotive revenue was $1.55 billion, up 30% versus the year-ago period and slightly better than our guidance. Moving to Industrial and IoT, full year revenue was $2.41 billion, up 31% year-on-year, driven by our solutions offering with a combination of industrial and crossover processes, wireless connectivity and our analog attached products, all driving the year-on-year growth. For quarter 4, Industrial and IoT revenue was $661 million, up 29% versus the year-ago period and better than our guidance. In Mobile, full year revenue was $1.41 billion, up 13% year-on-year. During the year, we experienced continued strong adoption of our secure mobile wallet and early ramps of secure ultra-wideband solutions and a good traction for our mobile-embedded power solutions. These positive trends were modestly offset by a discontinuation of certain custom analog products. For quarter 4, mobile revenue was $374 million, down 9% versus the year-ago period and better than our guidance. Lastly, I will move to Communication Infrastructure and Other. Full year revenue was $1.75 billion, up 3% year-over-year. The year-on-year growth was due to a rebound in demand for secure transit, tagging and access solutions as well as solid demand for RF power products for the cellular base station market, somewhat tempered by the anticipated moderation in demand for network processing solutions. For quarter 4, revenue was $457 million, up 16% year-on-year and in line with our guidance. In review, 2021 was an excellent year for NXP. We experienced significant design win traction across the entire portfolio and especially within the areas of our strategic growth drivers. Our priority has been to assure the health and safety of all our employees. And it is their engagement and performance which has been truly outstanding. We are extremely proud of their adaptability, dedication and hard work in the face of adversity. Now before I turn to our expectations for quarter 1, I'd like to offer you some perspective on the coming year. For those who were able to join us at our recent Investor Day in November, you will remember, we offered a positive view of 2022, expecting revenue growth near the high end of our 8% to 12% long-term growth target. Now as we enter into early 2022, we are more optimistic about the opportunities in front of us, both in the short term as well as over the intermediate horizon. The demand signals from our customers continue to be very strong. Inventories across all end markets appear very lean, and our ability to supply continues to improve. Hence, we anticipate 2022 will be another year of demand/supply imbalance with lead times extending out across almost the entire portfolio and the level and intensity of supply-related escalation conversations with our customers remains elevated. Against this backdrop, we are guiding quarter 1 revenue at $3.1 billion, up about 21% versus the first quarter of 2021, within a range of up 18% to up 24% year-on-year. And from a sequential perspective, this represents growth of about 2% at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the mid-20% range versus quarter 1 '21 and flat versus quarter 4 '21. Industrial and IoT is expected to be up mid-teens year-on-year and flat versus quarter 4 '21. Mobile is expected to be up about 10% year-on-year and up in the low single-digit range versus quarter 4 '21. And finally, Communication Infrastructure and Other is expected to be up in the low 20% range versus the same period a year ago and up in the low double-digit range on a sequential basis. In summary, we do continue to see growing customer demand outstripping our improving supply as the inventory across all end markets remains very lean. Customer engagement levels and design win momentum in our strategic focus areas continue to be very positive. This underpins our continued confidence of robust growth throughout 2022, and we do continue to be very optimistic about the long-term potential of NXP. Now, at this point, I would like to pass the call over to you, 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 Q4 and provided our revenue outlook for Q1, I will move to the financial highlights. Overall, our Q4 financial performance was very good. Revenue was above the midpoint of our guidance range, and both non-GAAP gross profit and non-GAAP operating profit were above the high end of our guidance. I will first provide full year highlights and then move to the Q4 results. Full year revenue for 2021 was $11.06 billion, up 28% year-on-year. We generated $6.21 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 56.1%, up 500 basis points year-on-year as a result of increased internal factory utilization, higher revenue levels and product mix. Total non-GAAP operating expenses were $2.56 billion or 23.2% of the revenue, in line with our long-term model. Total non-GAAP operating profit was $3.64 billion, up 63% year-on-year. This reflects a non-GAAP operating margin of 32.9%, up 700 basis points year-on-year and consistent with our long-term financial model. Non-GAAP interest expense was $365 million. Cash taxes for ongoing operations were $276 million. Non-controlling interest of $35 million. And stock-based compensation, which is not included in our non-GAAP earnings, was $353 million. Full year cash flow highlights include $3.08 billion in cash flow from operations, $766 million in net CapEx investments, resulting in $2.31 billion of non-GAAP free cash flow or a solid 21% of revenue. During 2021, we repurchased 20.6 million shares for a total of $4.02 billion and paid cash dividends of $562 million. In total, we returned $4.58 billion to our owners, which was nearly 200% of the total non-GAAP free cash flow generated during the year. Now moving to the details of Q4. Total revenue was $3.04 billion, up 21% year-on-year and above the midpoint of our guidance range. We generated $1.74 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 57.3%, up 440 basis points year-on-year and above the upper end of our guidance range, driven by improved utilization, higher revenue and product mix. Total non-GAAP operating expenses were $681 million or 22.4%, up $118 million year-on-year and up $24 million from Q3, in line with the midpoint of our guidance and again, consistent with our long-term model. From a total operating profit perspective, non-GAAP operating profit was $1.06 billion. And non-GAAP operating margin was 34.9%, up 440 basis points year-on-year, which is above the high end of our guidance, reflecting solid fall-through and operating leverage on the increased revenue level. Non-GAAP interest expense was $93 million, with cash taxes for ongoing operations of $100 million, and non-controlling interest was $8 million. Stock-based compensation, which is not included in our non-GAAP earnings, was $88 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q4 was $10.57 billion, up $979 million sequentially as we issued $2 billion of new notes at very attractive rates with longer durations and retired early the 2022 $1 billion notes with a rate of 3.875%. Our ending cash position was $2.83 billion, up $527 million sequentially due to the cumulative effect of the previous note debt repayments, capital returns increased CapEx investments and cash generation during Q4. The resulting net debt was $7.74 billion, and we exited the quarter with a trailing month adjusted EBITDA of $4.23 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q4 was 1.8x. And our 12-month adjusted EBITDA interest coverage was 11.6x. Cash flow generation of the business continues to be excellent, and our balance sheet continues to be very strong. During Q4, we paid $150 million in cash dividends and repurchased $750 million of our shares. Subsequent to the end of Q4, between January 1 and January 31, 2022, we repurchased an additional $400 million of our shares via a 10b5-1 program. Additionally, the NXP Board of Directors has authorized an incremental $2 billion in the company's repurchase capacity, bringing total new authorization and remaining authorization to $3.35 billion. Further, the Board has approved a 50% increase in the quarterly cash dividend, bringing the quarterly cash dividend to $0.845 per share. These actions are all aligned with our capital allocation strategy that we continue to execute to. Turning to working capital metrics, days of inventory was 83 days, a decrease of 2 days sequentially, which is below our long-term target. We continue to closely manage our distribution channel with inventory in the channel at 1.5 months, also below our long-term targets. Both metrics reflect the continuation of customer shipments at a robust pace combined with supply challenges we continue to experience. We anticipate the coming year will be very similar to 2021, where customer demand is in excess of available supply. Days receivable were 28 days, down 3% sequentially. And days payable were 87 days, an increase of 4 days versus the prior quarter as we continue to increase orders with our suppliers. Taken together, our cash conversion cycle was 24 days, an improvement of 9 days versus the prior quarter, reflecting strong customer demand, solid receivable collections and positioning for customer deliveries in future periods. Cash flow from operations was $785 million, and net CapEx was $266 million, resulting in a non-GAAP free cash flow of $519 million. Turning now to our expectations in the first quarter. As Kurt mentioned, we anticipate Q1 revenue to be about $3.1 billion, plus or minus about $75 million. At the midpoint, this is up 21% year-on-year and 2% sequentially. We expect non-GAAP gross margin to be about 57.3%, plus or minus 50 basis points. Operating expenses are expected to be about $693 million, plus or minus about $10 million. Taken together, we see non-GAAP operating margin to be about 35% at the midpoint. We estimate non-GAAP financial expense to be about $105 million and anticipate cash tax related to ongoing operations to be about $125 million. Non-controlling interest will be about $9 million. For Q1, we suggest for modeling purposes, you use an average share count of 266 million shares. Finally, I have a few closing comments I'd like to make. First, as a housekeeping reminder, we anticipate our cash tax payments will trend towards 15% in 2022 based on the current U.S. tax legislation and law. As can be seen in our Q1 guidance, we are expecting a slightly lower tax rate in the short term and anticipate it will increase as we progress through the year. Secondly, we are investing to support our more profitable long-term growth. We currently have about $4 billion of long-term material supply obligations as discussed at the Investor Day. Our CapEx investments for 2022 will be above the high end of our long-term CapEx model. These investments are focused on the combination of assured external foundry wafer supply, expansion of our internal back-end capacity and a modest expansion of our internal front-end capabilities. While significant, the investments we are committed to are more than balanced by the robust level of non-cancelable, nonreturnable orders from our customers. In closing, we are very confident in our profitable growth over the intermediate to long term, especially in the key areas of the Accelerate growth drivers as we highlighted during Investor Day. Our gross profit will continue to expand. And we have demonstrated solid control over our operating expenses while consistently investing in those areas which will enable our long-term growth. Together, these results in solid operating profit leverage and robust cash flow generation. And lastly, we have a proven track record of returning all excess free cash flow to our owners via our clear capital return policy. With that, I'd like to turn it back to the operator for questions.

I guess, Kurt, the first question I have is on the full year commentary. At the Analyst Meeting, you talked about, I guess, at the high end of your range before about 12%, and now you're saying better than that. What changed? And do you have the supply necessary to grow sequentially through the year to what seems to be something that in the mid-teens, roughly, that you're guiding to now?

Yes. Hey, good morning, Ross. Thanks for your question. Indeed, the commentary I made is that we have grown optimism that we can grow above the high end of our long-term growth range which was 8% to 12%, so about 12%. So, indeed. Yes, we do have the supply capability. We are gradually building more supply capability through the year. It's a huge amount of different actions, both in our own back-end test and assembly sites, in our internal front-ends. And mind you, that this year, we will be running full out with our internal front-end factories. While last year, we had the winter storm taking capacity away and we had only started to ramp the factories full up during the first and second quarter. So from a year-on-year perspective alone, that does give us more supply. But also with third-party foundry suppliers, and Bill just mentioned our supply commitments and obligations here, we purchase from our prospective obligations here. We are growing our supply capabilities. So yes, the supply capability is here. And while we will not guide the full year, Ross, it was still important I felt to make that comment because the demand situation has continued to be very, very strong. And I say continue to be very strong since our Investor Day in November. And we see the inventories, both our own ones, and I think we talked about the 83 days, we talked about the channel inventory even coming a little bit down. But also at our customers, we think inventories continue to be super lean such that we see the potential of outgrowing the 12% high end of our long-term growth trajectory.

I guess as my follow-up, just sticking on the revenue line, it's been going a little shorter term for the first quarter. Are there any specific dynamics that are keeping automotive and industrial flat sequentially? Is it simply a supply issue? I think that's the first time in, I don't know, 6 quarters that those will have been flat sequentially. So the dichotomy between auto and industrial flat and the relatively smaller segments growing was a little surprising to me. So any color on those dynamics would be helpful.

Yes, it is actually totally supply regulated. I mean we have more than enough demand. It is all a function of supply. And maybe here, it is worthwhile to note that you all might have seen that in the City of Tianjin in China, there was a controlled movement order, which actually meant factory shutdowns. One of our test and assembly back-end sites is Tianjin. So we had a factory shutdown there for between 1 and 2 weeks. Think about maybe a $50 million impact for the first quarter. And that is all sitting on industrial and auto, which is another factor which is actually hampering supply a little bit further than we would have wished into the first quarter. Mobile, on the other side, Ross, you know that the last 2 quarters, we've been really struggling with supply in mobile. I think we talked about this consistently in the call. This starts to get better, which actually helps us to start to do much better in Mobile. So all of the, say, the movements quarter-on-quarter are much more a function of supply capability rather than demand.

I guess first question on gross margins. You're 70 bps away from the high end of your target. And in your prepared remarks, Bill, you talked about expectations for gross margins to continue to expand. So curious how you're thinking about upward bias here in '22? And then moreover, I guess, '23, '24 as new products that carry higher margins come through the model?

Hi, C.J., yes, for the rest of the year, we're not guiding. But our goal was to maintain, I'd say, a gross margin in the 57% range with the pluses and minuses we continue to talk about in any given quarter. Kurt just mentioned about the slight impact with Tianjin, which is impacting our margin a little bit in Q1. But that is offset by the higher revenue and volume that we're experiencing quarter-over-quarter by $60 million. So that kind of keeps it flat there for Q1. As we go forward, again, mix will play an important role as we are supply constrained. And then over the long, long term, as we talked about, is really driven by our new product introductions out further.

Very helpful. And as my follow-up, I guess, Kurt, you talked in your prepared remarks about making real traction with some of the newer products. And I know, in particular, on the S32 domain processor side, there's significant architectural decisions being made today by your potential customers. So curious, any update in terms of the traction there? And I guess how to think about maybe some of these new products? And which we should be focused on in terms of driving real incremental growth into '23, '24?

Yes, C.J., absolutely. At Investor Day, we aimed to provide a deeper understanding of our progress in this area, specifically regarding the S32 platform. This platform consists of a growing range of software-compatible products primarily designed for the car's networking infrastructure. We are undertaking a rapid and significant rearchitecture initiative with all OEM customers. One of the major features will be over-the-air updates, which include essential security measures. This will ensure that the car's performance can be enhanced over its lifetime through software updates without needing hardware changes. The process will utilize over-the-air updates and an efficient network architecture within the vehicle. The chip responsible for enabling these updates is a gateway chip known as S32G, which is one of our flagship products and is being ramped up with leading OEMs over the next few years. This is just one example among many. I'm particularly proud to highlight our announcement from November with Ford Motor Company, where we discussed that their new models, including the F-150 and the Bronco, will utilize this S32G platform for gateway functionality.

I just wanted a clarification first. You identified the material weakness in internal controls in your earnings press release. I was just hoping you could maybe just discuss that issue. How much is any potential impact and how soon can those issues be rectified?

Hey, Vivek, I'll take that question. As shared in our EPR, as part of our annual year-end audit process, we did identify a potential material weakness associated with our general internal IT controls in the areas of user access, change management and documentation. At this moment, we are very comfortable there had been no impact on our current or past financial statements. We are actually very pleased with the fixes the teams are implementing, which just take time. And we feel confident that we'll be able to remediate these internal IT controls in 2022 and ensure the proper monitoring throughout the year. We want to disclose this now for full transparency. And we plan to disclose more about the details in our annual 10-K, per our normal scheduling in the late February.

Great. Very helpful. And for my follow-up, Kurt, if I look at last year, we saw a nearly 40-point delta between auto unit production and your sales. I'm curious, what is the way you think about a more sustainable kind of content delta we should think about between units and sales over time? And what are you doing to ensure the quality of orders and the utilization of your products? So we are not surprised by any excess inventory, right, that might be there at your OEMs or Tier 1s?

Thank you, Vivek. First, I want to emphasize that we are not worried about the difference between our 44% revenue growth and the 2.5% SAR growth from last year. This can be attributed to increases in content relative to changes in premium vehicle mix and the acceleration of electric vehicles. Additionally, much of the inventory within the complex extended supply chain was already depleted in 2020 and earlier in 2019. I also see that we have increased our market share. In fact, I am frequently being urged to supply more products to the automotive sector, which remains relatively low at the moment. To address this, we are enhancing our transparency, not only with our Tier 1 customers but also specifically with OEM customers. We have established many direct relationships with OEMs that provide us with multi-year, model-specific forecasts, allowing us to have a better understanding of realistic content growth. In the short term, we are implementing the NCR order concept, particularly in the automotive sector, which gives us a confirmed and non-cancelable order pattern for the entire calendar year 2022, providing us with more stability than we've had in the past. From a directional standpoint, I believe that content increases will continue to accelerate. In the midterm, two key factors driving this are the growth of electric and hybrid electric vehicles, which require significantly more semiconductor content, and the increasing traction of Level 2 and Level 3 autonomy efforts, both of which are important to us in radar. As a result, we expect to continue outperforming this market, gaining share and experiencing faster market development due to these changes. With the NCR orders and our relationships with OEMs, I believe we are well-positioned to maintain this positive trajectory.

There's been a clear imbalance between supply and demand for the last few quarters. It's triggering very extended lead times in the last year. I don't I've heard an update on that condition during the call or in the press release or presentation. I'm hoping you can update us as to how that's trended in the most recent quarter. I would imagine given the inventory decline that lead times are still quite stretched. Any normalization you anticipate for that through this year?

Yes, Bill, it has not improved. From a supply perspective, if I take a more optimistic view, the demand remains extremely strong. Looking ahead to Q1 and the rest of the year, it's clear that the guidance is entirely dependent on available supply. There is significantly more demand than supply. You've mentioned various metrics that can help us understand the situation better. Our internal inventory has decreased further, and unfortunately, the channel inventory has also dropped to 1.5 months, down from 1.64 that we've maintained for a long time last year. This is against a target of 2.4 to 2.5 months, which is also the level we started from. The change in debt is about $500 million. I don't expect this imbalance to resolve throughout this calendar year. It may improve in some areas, but overall, in the key markets we serve—without commenting on the entire semiconductor industry—I don't foresee a complete resolution of this imbalance until the end of the year.

That really helps. If I may, I want to approach the question about automotive content differently. It's clear that you've provided a strong argument that some of this content represents a more lasting change, such as the new networking architectures. However, it's reasonable to suggest that part of the growth we've experienced over the past year has stemmed from a favorable shift towards higher-end models and trims, which likely translates into increased semi content that is more profitable for the OEM customers. What should investors consider regarding this trend for the upcoming year? Will it continue, or is there a possibility of it reversing as availability increases?

Yes, I completely agree with what you said. Last year definitely saw an increase in content due to the shift towards more premium vehicles. I believe this will eventually find a natural balance. As long as the overall supply of the semiconductor industry into the automotive sector remains limited, manufacturers will continue to produce more profitable premium vehicles. This is quite normal. Once things balance out over time, they will also start making more volume cars. However, I don't see this as a negative because they have the capacity to build and sell more cars regardless. If you look at dealer inventories, not only in the U.S. but also in China, they are at all-time lows and are getting worse. So yes, there will be some changes, but this won't negatively impact our demand because they will simply produce more cars as a result.

Kurt, I wonder if you could spend a couple of minutes just talking about the impact of inflationary pressures on the business right now both on revenue and on OpEx. And I know you've said historically that you're not raising pricing above your increase in cost. But I'm trying to get a sense of how much of a tailwind price is to your view that you'll be above the high end of that 8% to 12% this year. And conversely, what's the impact it's having on OpEx relative to higher prices?

I want to clearly state that we are not using the current situation to inflate our margins. We are committed to the policy of passing on increased input costs and raising prices accordingly. This process began last year and will continue this year, as it reflects the nature of our business, which is application-specific and relies on long-term customer relations. It's not an easy adjustment for us, but it's necessary. While I can't provide guidance for the upcoming quarters, I can assure you that last year's pricing had a minimal impact on our revenue growth, so it's not a significant factor. Bill, would you like to discuss the effects on operating expenses?

Yes, sure. Hi, John. I'd say we continue to do well here and near our 23% long-term model. As you know, Q4 finished at 22.4% of sales, which was better than our guidance of the 22.7%. We just guided Q1 to be about 22.4%. And this is up mainly because of the U.S. benefits for FICA and 401(k) tending to be higher in the U.S. in Q1. But as you think ahead, and this is where you're going, we mentioned during Investor Day, we like to run around 23% with quarters fluctuating a bit. But we do see that we can get additional leverage on the model, especially in the SG&A side. Yes, if you look at CapEx, just a quick recap, in 2020, we spent 4.6%. 2021, we spent 6.9%. And you just saw in Q4, we spent 8.8%. So we think that's going to go up a little bit more for 2021 without giving you the absolute guide, but think maybe another point or so on it related to it.

I wanted to first ask about the mobile strength into Q1. And I get what you said on some of the supply constraints in that business that have been there easing a little bit. But is there anything else there around customer pull-forward or anything like that? What is actually driving that strength? And how do we think about the sustainability of that profile into Q2 and beyond, just given the above-seasonal nature of it into Q1?

Yes, Stacy, there are indeed two main factors: demand and supply. We've faced supply challenges over the last two quarters, particularly in Q3 and Q4 of last year, which significantly impacted us. While not everything has been completely resolved, the situation is improving as we enter Q1. On the demand side, I understand your concerns. However, it's important to note that we are not overly reliant on a single customer or mobile customer in that segment. Considering our diverse customer base, there's a strong argument for continued demand heading into the first quarter. Additionally, I don't view this as merely a temporary spike. This aligns with our strategy to increase the attach rate of the mobile wallet, which is a key component for us, alongside the growing interest in our secure ultra-wideband solutions.

Got it. My follow-up, I wanted to ask about Industrial, particularly in China. What are you seeing there? I mean they have COVID-zero. There were shutdowns as you mentioned on something, some of the data points are not great. Are you seeing any issues particularly around China, especially for the Industrial business?

No, we don't see it at this stage, Stacy. I mean I'm reading the same news. Our main concern is in Tianjin, China, especially regarding our own production, which is currently fully operational. However, that is where we identify the issue from a demand perspective, largely within the industrial markets served through distribution. We do not see any slowdown at all. On the contrary, our channel inventory has continued to decrease, and unfortunately, a significant portion of that is in China. So, we are not worried about demand slowing in the industrial sector in China.

Kurt, I wonder if you could go through a bit about some of the commitments that you've had to make to secure that additional capacity. What is the commitment now to the foundry partners? And how has that changed versus prior cycles? And I'm guessing by your comments that your feeling is that that's backed up by the commitments from your customers to you. And how resilient do you think that will be over time as conditions change? And obviously, this seems like this is something different for the industry.

Yes. Thanks, Chris. Maybe Bill, you want to speak a little bit first about the $4-plus billion purchasing obligations, which we entered into?

Yes, that was in my prepared remarks. At the moment, we have $4 billion. And those are strongly supported by actually greater than our supply commitments, backed by the non-cancelable, nonreturnable orders that we see. So the demand continues to be strong. Our customers are actually coming to us. And unfortunately, we can't serve them all.

Yes. Adding to this, Chris, regarding the NCNR orders, the strength of these contracts is solid. We understand the unpredictability of the market, but we have reliable contracts in place. We feel very positive about this situation. Our customers are looking to place even more orders than we can accommodate. We are in a position where demand exceeds our supply capabilities, and we can't cover all the requests. Customers are interested in extending orders into 2023 and 2024, and we are exploring the best ways to manage this. The demand continues to grow without any signs of softening. Additionally, I want to emphasize that we have seen no order cancellations, push-outs, or delays in our backlog.

Got it. That's very helpful. And for a follow-on question and we will return to pricing. And really kind of 2 questions on pricing. One is, obviously, we've seen foundry price increases announced last year. Do you think that is now behind us? Or with the continuing tight supply situation, is there potential for additional input cost increases as we go through the year? And then with that, I think there's an investor concern that some of these price increases are transitory because of the strong conditions, and obviously, the input costs on you, you're passing along to the customers. So what's your view of the stickiness of these price increases that this is kind of a permanent ratchet up as opposed to something that's transitory just because of the supply conditions?

Yes, Chris, I believe there is always a possibility of further cost increases, so we can't completely dismiss that. Regarding the first part of your question, I feel we have solid visibility and favorable agreements for this year. However, whether this is the absolute end remains uncertain. There could always be unforeseen factors. As for the long-term sustainability, I firmly believe that we are witnessing a reset of the industry. Therefore, I don’t anticipate a regression; neither in input costs nor in our prices for customers. The past four to five quarters of challenging supply conditions have taught the world much about the value of semiconductors across various critical infrastructures and applications. This has led to a heightened appreciation for our industry and the products we offer, which has consequently influenced a restructured pricing model. I don’t expect this trend to reverse.

You mentioned the non-cancelable backlog over the year, which I believe was related to automotive. Can you provide insights on the backlog coverage for your other businesses and how far that extends? In areas like automotive, where it seems to extend a full year, do you anticipate maintaining that one-year visibility as we progress? Are people still planning that far ahead?

So Joe, while I initially mentioned automotive, this trend is not limited to that sector. Our direct customers across the board are keen on the non-cancelable, non-returnable (NCNR) pattern as a strategy to secure supply for the short to medium term. This issue extends beyond automotive, and it’s important to note that the shortages in other industries, such as industrial applications, are just as severe. Automotive might receive more media attention, but the challenges in other segments remain significant. Regarding order visibility, customers are seeking longer horizons. They would prefer NCNRs that extend up to two years. So, to answer your question, they do indeed want to maintain that one-year outlook, and if we are ready, there’s potential for even more requests for longer terms. Overall, this reflects the nature of the automotive and industrial markets, which involve durable products with lengthy life cycles. It's essential for us as an industry to adapt and meet the evolving needs of these markets. I believe we are well on track to achieve our long-term growth target of 8% to 12%. Looking at the short term for this year, we feel increasingly optimistic that we can exceed the upper end of that range for the calendar year 2022. And with that, I would like to thank you all for your attention today and speak to you next. Thank you very much.