NXP Semiconductors NV (NXPI) — Q1 2022 Earnings Call Transcript

Thank you, Katherine, and good morning, everyone. Welcome to NXP Semiconductor's First Quarter 2022 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 second 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 first quarter 2022 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. I'd now like to turn the call over to Kurt.

Thank you, Jeff, and good morning, everyone. We appreciate you joining our call today, and I can tell you, after two years, finally, I do very much look forward to a series of in-person investor meetings through the rest of this week. Now let me begin with a review of our quarter one performance. Our revenue was $36 million better than the midpoint of our guidance with automotive, industrial, IoT and mobile at or above our guidance. So trends in the communication infrastructure markets were just slightly below our expectations due to supply issues. Taken together, NXP delivered quarter one revenue of $3.14 billion, an increase of 22% year-on-year. Non-GAAP operating margin in quarter one was a strong 35.7%, 480 basis points better than the year-ago period and about 70 basis points above the midpoint of our guidance. Our results reflect strong execution with good operating leverage and profit fall-through on higher revenue, improved gross profit and modestly lower operating expenses. Now let me turn to the specific trends in our focus end markets. In automotive, revenue was $1.56 billion, up 27% year-on-year, in line with our guidance. In industrial and IoT, revenue was $682 million, up 19% year-on-year better than our guidance. In mobile, revenue was $401 million, up 16% year-on-year better than our guidance. Lastly, Communication Infrastructure and Other was $496 million, up 18% year-on-year just modestly below guidance as a result of ongoing supply changes. Overall, the demand in our strategic end markets continues to be robust, putting our customers' requirements in excess of our improved supply capability. And in that context, let me provide some data points of what we see in our daily engagements with our customers. In the distribution channel, which services about half of our total revenue, inventory remains significantly below our long-term targets. During quarter one, the months of supply in the channel was 1.5 months, which is about a month below our long-term target. It is now the sixth consecutive quarter of an exceedingly tight supply situation in the channel. Internal inventory days continue to be below our long-term target of 95 days. In quarter one, days inventory outstanding increased by six days with all of the increase in support of our growth outlook for the second quarter. Lead times across the board continue to be extended, with more than 80% of all of our products being quoted at 52 weeks or greater. Essentially, we are supply constrained for all of 2022. The level of inbound supply-related customer escalations continues to be elevated across all focused end markets and regions. Lastly, let me zoom in on the trends we see in the automotive market. In the U.S., new car inventory at dealers is substantially below historic levels at 27 days versus the historic metric of 64 days. The pace of xEV vehicle penetration globally continues to rapidly accelerate hitting 19% of global production in 2021 and is expected to hit 23% penetration in 2022 and moving to 30% next year in 2023. With xEVs having roughly double the semiconductor content, this represents another strong secular tailwind to semiconductor content growth. The Ukraine war has disrupted predominantly European Tier 1 suppliers and OEMs with shortages of wiring harnesses. In China, the COVID-related shutdowns are creating yet another level of significant supply uncertainty. The extended auto supply chain continues to be very lean, with reported days of inventory at the Tier 1s and at the auto OEMs out of sync with each other. Based on our very frequent and detailed customer conversations across the supply chain, the Tier 1s and OEMs continue to be challenged by kitting issues to complete module and vehicle assemblies. These kitting issues are not due to one semiconductor supplier or shortage of just one common golden screw device. Against all of this dynamic backdrop, our first quarter was a very good beginning to what we view will be a positive year for NXP. In the face of loaded customer escalations and elevated lead times, we are proactively and relentlessly working with our customers to redirect material to assure that customers have what they need, where they need it and when they need it. Customers have begun to much better appreciate and embrace the strategic value of semiconductors in their long-term success, both from an innovation as well as a supply perspective. As a result of our adaptability, the level of engagements with strategic customers is resulting in unprecedented levels of customer intimacy. Our engagements are unlocking new and significant long-term customer arrangements and cooperation that is closer than ever, which will enhance our relative market share over the longer term. Now let me turn to our expectations for quarter two. We are guiding revenue at $3.28 billion, up about 26% versus the second quarter of 2022 within a range of up 22% to up 30% year-on-year. From a sequential perspective, this represents growth of about 4% at the midpoint compared to the prior quarter. At the midpoint, we anticipate the following trends in our business: Automotive is expected to be up in the low 30% range versus quarter two 2021 and in the high-single digits range versus quarter one 2022. Industrial and IoT is expected to be up in the low 20% range year-on-year and up in the low single digits range versus quarter one, 2022. Mobile is expected to be up in the low double-digit range year-on-year and down in the low single-digit range versus quarter one 2022. Finally, Communication Infrastructure and Other is expected to be up about 20% versus the same period a year ago and flat on a sequential basis. Our guidance incorporates several items to be aware of. First, the year-on-year comparison of our auto business in the second quarter benefits from a manageable comparison versus quarter two 2021, when we were impacted by the effects of the winter storms on our wafer manufacturing facilities in Texas. Second, our Tianjin back-end facility in China is fully running at maximum capacity. Remember, we lost about one to two weeks of output during the early part of quarter one. Lastly, our guidance does contemplate several tens of millions of dollars of potential supply and logistical disruptions due to the lockdowns occurring in China related to COVID outbreaks. Before I pass the call to Bill, I would like to provide an update on our ESG journey, something our management team and I are personally committed to. On April 1, we published our annual corporate sustainability report, which included the achievement of several goals. On a year-over-year basis, we have reduced our normalized carbon footprint by 11% and have increased the use of renewable electricity in our facilities to 31% of our total consumption. Additionally, we have realized an 11% normalized decrease in our water consumption and a 76% increase in our recycling efforts. These are all solid and positive steps, but I believe we can and should do more. Looking forward, we have committed to achieve carbon neutrality by 2035. We have formally committed to the science-based targets initiative, and we are transitioning toward 100% renewable energy sources in our facilities. This will be a significant task for our organization; we are committed to providing regular updates documenting our progress. From a global employee perspective, we grew by 8% during 2021, despite a difficult talent market and women now represent 37% of our total employee population. To keep the organization focused on the sustainability journey, I am proud to announce that Jennifer Wuamett, our General Counsel, has been named NXP's Chief Sustainability Officer, and she will oversee our sustainability program. Finally, to demonstrate that we, as an organization, are all responsible to improve the impact we have on our environment, the NXP Board has approved that a portion of our employee annual incentive compensation will be tied to achieving progress towards long-term sustainability goals. In summary, the robust growth we have anticipated for 2022 is materializing in spite of all supply challenges. We do continue to see strong customer demand, especially our company-specific accelerated growth drivers. Overall, demand continues to outstrip increased supply and inventory across all end markets remains very lean. With that, 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 Q1 and provided our revenue outlook for Q2. I'll move to the financial highlights. Overall, our Q1 financial performance was very good. Revenue was $36 million above the midpoint of our guidance range and both non-GAAP gross profit and non-GAAP operating profit were near the high end of our guidance. Now moving to the details of Q1. Total revenue was $3.14 billion, up 22% year-on-year and 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 57.6%, which is up 340 basis points year-on-year and both above the midpoint of our guidance range, driven by improved utilization, higher revenue and positive product mix. Total non-GAAP operating expenses were $688 million or 21.9% of sales, up $88 million year-on-year and up $7 million from Q4, which was below our midpoint of guidance and the lower long-term model. From a total operating profit perspective, non-GAAP operating profit was $1.12 billion and non-GAAP operating margin was 35.7%, up 400 basis points year-on-year and both at the high end of our guidance range, reflecting solid fall-through and operating leverage on the increased revenue levels. Non-GAAP interest expense was $103 million with cash taxes for ongoing operations of $122 million and non-controlling interest was $9 million. Furthermore, our stock-based compensation, which is not included in our non-GAAP earnings, was $89 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q1 was $10.57 billion, flat sequentially. Our ending cash position was $2.68 billion, down $147 million sequentially due to capital returns and increased CapEx investments during Q1. The resulting net debt was $7.89 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $4.58 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q1 was 1.7x, and our 12-month adjusted EBITDA interest coverage was 12x. Turning to working capital metrics. Days of inventory was 89 days, an increase of six days sequentially. The increase in inventory was all in raw materials and work in process to support revenue growth and 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 1.5 months, well below our long-term target. We anticipate the coming year will be very similar to 2021 where customer demand is in excess of incrementally improving supply. Days receivable were 27 days, down one day sequentially. Days payable were 93 days, an increase of six days versus the prior quarter as we continue to increase orders with our suppliers. Taken together, our cash conversion cycle was 23 days, an improvement of one day versus the prior quarter, reflecting strong customer demand, solid receivable collections and positioning for customer deliveries for future periods. Our working capital management and balance sheet metrics continue to be very strong. Cash flow from operations was $856 million and net CapEx was $279 million, resulting in non-GAAP free cash flow of $577 million. During Q1, we paid $149 million in cash dividends and repurchased $552 million of our shares. Overall, we returned 121% of our non-GAAP free cash flow back to the owners of the company, consistent with our capital allocation strategy. Again, the cash flow generation of this business continues to be excellent. Turning now to our expectations for the second quarter. As Kurt mentioned, we anticipate Q2 revenue to be about $3.28 billion plus or minus about $100 million. At the midpoint, this is up 26% year-on-year and up about 4% sequentially. We expect non-GAAP gross margin to be about 57.6% plus or minus 50 basis points. Operating expenses are expected to be about $720 million, plus or minus about $10 million, which is up about 5% sequentially, driven primarily by our annual merit increases. Taken together, we see our non-GAAP operating margin to be 35.7% at the midpoint. We estimate non-GAAP financial expense to be about $103 million and anticipate cash tax related to ongoing operations to be about $154 million or about a 14.5% effective cash tax rate, consistent with what we communicated during Analyst Day of 15%. Non-controlling interest will be about $13 million. For Q2, we suggest for modeling purposes, we use an average share count of 265 million shares. Finally, I have a few closing comments I'd like to make. As Kurt mentioned in his prepared remarks, we have attempted to de-risk our Q2 outlook given the uncertain macroeconomic environment and the potential impact on our supply chain. Despite these potential risks, customer demand for NXP products remains very strong in the markets we serve. From a revenue standpoint, we expect our second half revenue to be greater than our first half on an absolute basis as we continue to work on improving supply. From a modeling perspective, think of a gradual quarterly improvement sequentially through the remainder of 2022. But this improvement is still well short of the demand signals we are seeing and constantly monitoring from our customers. Overall, we believe supply will remain constrained and challenging throughout 2022. Lastly, barring any significant supply disruption, we believe our gross margin should trend in a fairly tight range consistent with our performance in the first half of the year. We continue to see the business as generating strong cash flow, and we will continue to execute to our well-communicated capital allocation strategy consistent with past periods. With that, thank you, and we can now turn it over to the operator for questions.

Good morning everybody. Thank you for taking my questions. I noticed in the 10-Q filing that your purchase commitments were down about 10% from the fiscal year 2021 end. Was that the high watermark for fiscal year 2021 end? Or should we think about NXP perhaps reloading on the purchase commitments?

Yes, hi, Gary. So indeed, it came down somewhat, which is simply a consequence of selling that part of it. So it's just the regular revenue. Going forward, I would not exclude that we might again enter into longer-term obligations with our suppliers. Since the context and the environment of the, say, supply-demand situation has not fundamentally changed, which means we are effectively sold out for the rest of this year. Certainly in certain technologies and capacity buckets, we also see that demand will continue to outstrip available supply further into the future, so also going into next year. With that, yes, I would not exclude that we also enter additional and separate supply commitments to the ones which are in place already.

Thank you for that, Kurt. Bill, you previously mentioned that supply chain increases negatively impacted gross margin in fiscal year 2021, but you expected price increases to positively affect gross margin in fiscal year 2022. Is that still accurate, and could you provide an estimate of that positive impact?

Sure, what we've mentioned related to pricing from our customers is that we're only passing on the higher input costs and inflationary costs that we're seeing on to our customers related to it. If I look internally, we do about 43% in-house on our front-end manufacturing side, and we are running in the high 90s compared to a year-ago when we were in probably the mid-80s. So we're maxed out internally from a utilization standpoint, expect our margins to be, as I indicated in my prepared remarks, to be at these levels, plus or minus the 50 basis points we talk about mix in any given quarter. Our number one priority is really servicing our customers as lines are down, escalations are occurring, and we're doing everything possible firsthand for our customers.

Got it, thank you guys.

Thank you for taking my question. Kurt, I had a question about just the quality of the demand signals that you're getting from your automotive customers. I believe you mentioned that days of inventory at Tier 1 and OEMs is out of sync because of kitting issues. I was hoping you could expand on that. And how does that impact your visibility and confidence in shipping to the automotive end market and give you the confidence you are shipping in line with demand. Because when I look at auto semiconductor sales and auto unit production, there is this kind of consistent, almost 40-point delta which was there last year, and it's probably there in Q1 also. So just what is giving you the confidence that you're shipping in line with demand, right, and that you're not over shipping just given the state of flux among your Tier 1s and OEMs.

Yes, good morning, Vivek. Indeed, I mean that question, we also watch that very carefully. I can tell you from continued very personal experience. I spend a good time of my work week in escalation calls, especially with automotive and industrial customers. It is actually to the point now on this kitting that we are here and there redirecting product because it is falling so short in places that we actually go back to other customers and ask if not, they have a few parts, which they only may need a week later and then we use that week to redirect the part to somebody else. We are extremely close to the pulse of the production of our customers and our customers' customers. This is a triangular supply relationship with the Tier 1s and the OEMs, which is why I have a very high confidence that we are not at all over shipping but actually barely meeting the demand. I would actually say Vivek the reduction we have now seen from IHS in the forecast for the SAAR for this year, I think it came down from something like 8% to 9% in the last quarter to now a forecast of only 4.5%, so almost halved. A good part of that is due to semiconductors again. So all of these modulations you see there in terms of possible demand is actually above what we can service anyway. That’s why we still fight day in, day out to try to fill holes and actually meet production demand. From a bigger contextual perspective because you mentioned again this striking delta between SAAR and the semi shipments into automotive, it comes back to the same points we had mentioned earlier, which is a massive and accelerated content increase, thanks to the penetration of xEVs. I have to mention also premium vehicles. What we did now is we looked at the combination of premium ICE vehicles plus xEVs. If you put that in one basket because it has similar levels of semiconductor content, you actually find it's about 30% of the global car production already. Along that is double from the levels we had in 2017 or 2018 pre this whole turmoil. So our content increase continues to be an accelerating very strong factor. There is certainly a portion of pricing. There are the NXP-specific share gains, which continue to be very much in check, I would say, with our planning. Finally, there is this inventory situation across the extended supply chain to actually keep it functional. I can only say it continues to be dysfunctional; the overall inventory level across the extended automotive supply chain is still too low, which means the whole thing is totally dysfunctional.

Got it. And for my follow-up, Kurt, many investors are worried about some kind of demand slowdown, right, you've been talking about recession at some point over the next one or two years. How do you think about your trough gross margins if that were to happen? You have a very interesting hybrid model. So what steps would you take, let's say, semiconductor sales were to go down 5% or 10% hypothetically next year? What steps would you take? And then how should we think about the bottom in your gross margins? Thank you.

Well, Vivek, I would say, in principle, we don't guide here next year. In the end, what counts is the model which we have given you in our Investor Day back in November of last year. I think I can give you a few bits and pieces to this question. Clearly, our gross margin benefits from utilization of our internal facilities at the moment. We are running full out. Secondly, and Bill just replied to a different question. We are compensating our input cost increases with price increases to our customers. I absolutely do not believe that pricing will go backwards going forward. I think the environment is simply such that we move now to a higher level of pricing, and this is to stay. So that doesn't mean that there are not ASP erosion again going forward but from that higher level. So don't worry about that impact on the gross margin. I think pricing is a step function, which has been or is being achieved, and then we operate from the new level through the next years.

But the bottom of your range, the 55% to 58%, is that the right way to think about trough gross margins?

Well, we've given the model and we have the absolute intention to stick to our model, yes.

Hi guys, thanks for taking a question. I want to ask one short-term one and then a follow-up will be a longer-term one. Kurt, in the shorter term, I just wondered, you talked about derisking due to a lot of the macro events. We've seen different companies say basically it's not having any impact. Others take a big haircut with little precision. Just wondered where you fall in that spectrum, kind of any more details on what you're seeing on China? And maybe is it a bigger or smaller cut than what you experienced in the first quarter?

In the first quarter, we quantified the impact at about $50 million due to the one to two-week shutdown of our Tianjin facility near Beijing. For the second half of the year, we anticipate a couple of tens of millions in impact, which is incorporated into our guidance. I want to emphasize that this is exclusively a supply-related issue. Unlike some peers discussing demand challenges, we are focusing on managing risks from a supply perspective, particularly due to logistics issues in the Greater Shanghai area and various suppliers in that region affecting our operations, such as epoxy and substrate suppliers. This impact is factored into our guidance. From a demand standpoint, it's a different situation. More than half of our customers in the Shanghai area are fully operational again, running at 100% capacity, while another third is partially operational and improving quickly. During their shutdowns, customers stocked up on products in anticipation of a quick return. We've actually been under shipping to them for the past 1.5 years, which is why demand has not been negatively affected. Thus, the derisking I mentioned is based solely on supply considerations and the couple of tens of millions in impact comes from our supply situation in the Shanghai area.

That's very helpful. Thank you for that. And I guess a longer-term question. This kind of goes back to what if the world isn't as good at some point in the future. Earlier in your narrative, Kurt, you talked about the closer relationship with your customers, more intimate relationship, value add, et cetera. I was wondering, does that change your inventory strategy? In the last couple of downturns, you guys were very aggressive to cut your utilization. I know you don't have standard products that are very application-specific, et cetera. But to the extent your customers are giving you more visibility, you have that more intimate relationship, is your willingness to go above the 95 days in a downturn and not cut utilization your willingness for the channel to hold more inventory? Is that at all different from prior cycles or do you think that you will run it with just as abrupt if changes with your factory utilization as you have in the past?

Yes, we've been looking into this very carefully because indeed we have certainly lots of discussions with our customers about longer-term supply assurance programs, et cetera. The solution to this is not to increase our internal inventory. So I have a clear-cut answer, Ross, no, the 95 days stand. I'm actually glad when we get there again because you see we are still below that. But no, we don't have an intention to change that because we kind of remodeled how we went into this crisis and what we find out is that even if we had more inventory, it wouldn't really have made a significant difference to the whole situation at all. However, we are, of course, working with customers on all sorts of different models, their inventory at our customers in the chain, maybe distribution partners in cases is part of an overall package to have better supply assurance going forward. One big element that you said it yourself is actually the transparency and knowledge about the ultimate end customer demand. I think in the past, we and I would dare to say the whole industry, we have too much relied on demand signals of our direct customers, not fully understanding and not having full transparency to the end customers. This in the relationship concept, which I mentioned, has significantly changed over the last 1.5 to two years. So that gives me some confidence that we are in a better position to handle this going forward. Again, internal inventory is not going to be the one which is going to be changed.

Thank you.

Hi, guys. Thanks for taking my questions. So my first one, you talked about revenues kind of ramping incrementally sequentially into the second half as supply improves. Are there any end markets where you think supply is getting better or worse? Are you prioritizing any particular end market in the second half? Like how should we be thinking about that trend spread across your end markets, just given the supply trends and demand trend you're seeing?

Hi, Stacy, we are consistently facing a supply shortage across all of our four revenue segments. If I had to highlight it, I would say that industrial and automotive are currently experiencing the most significant gaps between supply and growing demand. This situation appears to be a long-term challenge for us. When discussing the gradual increase in revenue throughout the year, I would say that it largely hinges on the availability of supply. The demand patterns in those four markets are not as significant a factor as how we are aligning with the demand signals from a supply perspective as the year progresses. This situation results from various factors, including internal supply ramp-up and external foundry supply increase. It's also inconsistent across quarters, making it challenging to project revenue growth by segment based solely on demand, as all of our supply still responds to the demand signal overall.

Thank you, thank you. So my follow-up, I want to revisit the China COVID situation, and I heard what you said in a prior question. But at the same time, like you're calling for maybe 1% or less overall impact to next quarter from China. Your competitor obviously was calling for 10%. I know you talked about maybe differences in what you're seeing in terms of demand versus supply. But I think both of you have more than 50% of your revenues going into China. How can that be that one of them is seeing demand issues, but think their demand issues were also logistics related? Why do you think you're not seeing anything along those lines and they are? Is it just the nature, you have a channel so there is a bigger buffer in China? Or what are some of the differences you think are going on that actually could be driving you to not see an impact along the lines of like some of the others in the industry just given the amount of your revenue that's actually going into that region?

Stacy, obviously, I really cannot speculate and don't want to speculate about the specific strategies and situations of one or more of our peers. I just cannot. However, I can assure you that we put a lot of rigor and a lot of attention into assessing this particular question because it's been obviously very important for us to understand how to sit safely and confidently guide for this quarter in this turbulent environment. Given that this is very near term, it really has to do with the order patterns we have on the books and with this particular customer situations we talk to. This isn't much about strategic consideration, Stacy. It's really about what are we still getting out the next eight weeks of this quarter. The bottom line of the analysis is, it is not about demand. It is all about the supply disturbances from this situation. I feel we took a very balanced risk-balanced approach to figure that in. But again, I can't hold it against competitors because I really don't know what their exact chapters and other policies are.

Thank you. Would you have the supply to ship the extra if there was no impact?

Yes, the issue lies with supply, Stacy. If the COVID-related shutdowns in the Shanghai area had not occurred, we would have provided a higher guidance. That’s the main point I was trying to convey. The purpose of derisking is due to supply challenges stemming from China. This affects us by a significant amount. If the zero COVID policy in China were not affecting Shanghai right now, and potentially Beijing later this quarter, we would indeed have a higher guidance.

Yes, good morning. Thank you for taking the question. I guess first question, I was hoping you could discuss plans for CapEx. I know you're 100% sticking with the hybrid model. But your CapEx intensity is now up to, I think, 8.9% in the quarter. Curious if that's sustainable through '22? And how should we think about beyond 2022?

Sure, C.J. This is Bill. As mentioned during last quarter and our Investor Analyst Day, our long-term model is 6% to 8%. However, we do expect 2022 will be a bit higher around that 10% and then come back within the range in 2023 and beyond. Just to look back again in 2020, we spent about 4.5%, 4.6%; at '21 6.9%. As you can see here right, in Q1, we spent about 8.9%.

Very helpful. As a follow-up question, mobility was particularly strong in the first quarter. You mentioned strength in China, secure mobile wallets, and early adoption of UWB. I'm curious how we should consider these factors as we move into the second half of 2022. Is UWB the main incremental driver, or is it just the overall handset units? Thank you.

The mobile market appears to be somewhat inconsistent globally. Nevertheless, we are committed to our content growth strategy. Ultimately, the focus is on mobile wallets and the initial stages of ultra-wideband adoption, both of which are progressing well. The variations from quarter to quarter are primarily due to supply issues. I previously mentioned significant supply constraints in the mobile sector in the third and fourth quarters of last year. I expected improvements, which we saw in the first quarter, although the situation is not entirely stable. The first quarter offered some catch-up in terms of supply, but it won't be ideal moving forward. As we indicated, there is a slight decline expected for the second quarter, and we continuously strive to balance our available supply across different segments whenever possible. Each quarter, in this dynamic environment, we need to assess where we can adjust resources between segments where technology and capacity can be allocated interchangeably. This is notably impacting the mobile segment in the second quarter, so it's important not to read too much into it. The changes reflect supply differences between the first and second quarters.

Very helpful. Thank you.

Great. Thanks for taking my question. Congrats on the strong results and outlook. I'd like to ask if you could remind us of your capacity expansion plans overall. What are you telling your customers in particular as to how you're going to recover from the current situation and meet their demand?

That's a significant question, Bill. What we communicate to our customers in more detail is regarding the 10% CapEx that you mentioned. I expect it to remain around 6% to 8% in the coming years due to the much higher revenue, which leads to a notable increase in CapEx to meet that demand. Additionally, we have long-term purchase agreements with foundry partners that ensure us consistent capacity moving forward. We observe this year, and especially next year, that we will see more strong capacity additions from our internal expansions. While we typically have faster capacity addition in the back end, it remains a continuous process. Our investments in the front end, particularly in mixed signal and analog processes, will positively impact us later this year and especially next year. We are collaborating with our foundry partners to gain more access to capacity, which is why we anticipate growth in revenue in the second half of this year compared to the first half, with steady increases each quarter. While we don’t usually provide full-year guidance, we feel confident about our supply situation and the continuous demand signals. In the mid-term, the industry will still face significant capacity constraints, particularly for trailing-edge technologies, such as those above 16 nanometers, especially around 28, 40, and 90 nanometers. The majority of CapEx has been directed towards leading-edge technologies, while the demand for the trailing-edge nodes, particularly from automotive and industrial sectors, remains very strong in the upcoming period.

That's very helpful. Appreciate it. One more if I can. How much of the year-over-year growth achieved in Q1 and guided for Q2 approximately comes from units versus pricing versus mix?

I think Bill hinted at this earlier. We are not breaking down price and units on a quarterly basis. As we mentioned last year, pricing had a very low single-digit impact on our revenue growth. You can expect similar information for the full calendar year 2022 at the beginning of next year.

Thank you for taking my question. I'm curious, when you mentioned moving forward and the passing through of additional costs while keeping gross margin stable, it seems there is a balance. As you look at the rest of the year, do you anticipate any increased costs in the future related to the back end?

Well, Bill can go into more detail, and I think he also in his prepared remarks hinted at how we see this. Blayne, yes, I unfortunately, given this inflationary environment, cannot exclude continued input cost increases. But our principal stance is that if that happens, we will raise prices to protect our gross margins accordingly. Now Bill, I'm not sure you want to add a little bit to this.

No, nothing more.

Great. And then I just want to ask, you said channel inventory is about a month below where they should be. When you look at sequential growth in over the year, it does broaden some seasonality in your core end markets. I was wondering if you thought that you would make any improvement in that gap in the channel inventory?

Yes, Blayne, I wish we could. This has been our target of two and a half months, which we have maintained over the years, and I still believe it's the right target. I strongly feel that not having this two and a half months is a disadvantage for us. I wish we could achieve that, but we are currently limited by supply. The more we ship into the channel, the quicker it is purchased, translating to immediate point of sale. This is not a forecast, but I see little possibility of us getting anywhere near our target within this year.

Thanks, Kurt.

Yes, thank you. Good morning. The question on cash return. Last quarter, you did return more than 100% of free cash flow. Could you give us an update on kind of what your thinking is here? Obviously, the cash flow is very strong in this environment? And what are the plans for that?

Sure. Again, no change in our policy, and we continue to execute our capital allocation strategy. As you mentioned, we returned 121%. If I just look at the trailing 12 months, I think we returned 185%. We'll continue to do so. We raised our dividend in Q1, as you all saw, and we also got approval for buybacks. Again, we've been very consistent here and we'll continue to execute that strategy.

Thank you. And as a follow-on, just another question on OpEx. You talked about the 5% increase for this quarter on the merit raise. Does that tend to flatten out as you go through the year? And just generally, are you comfortable with the level of spending that you're at right now? I know some others have spoken about just kind of difficulty in hiring and getting access to talent?

Yes, related to OpEx, we continue to do very well here. As you can see, we're operating below the 23% long-term model. Q1 finished at 21.9% of sales, better than what we guided at 22.4%. We also guided 22% of sales again, which incorporates that higher annual merit increases in project spend as we continue to manage and execute our portfolio to our strategy very well. I'm not going to guide the second half, but with all the different signals, we just provided on revenue and gross margin, we should be probably trending below our long-term model of 23%. So we're not going to get to 23% probably in the second half.

Got it. Thank you.

Thank you very much. Good morning, everybody. Kurt, there's obviously been a lot of conversation on this call about visibility and whatnot. But the one data point that really stood out to me was I think you mentioned 30% xEV penetration this year in the auto market in terms of units of production. That was quite a bit higher than what we were modeling despite the bullish trends in EVs. I wonder if you could give us a little context there. Is that supply constraints that are hitting ICE vehicles maybe more disproportionately than EVs? Is this new regulatory push? Is it infrastructure that's being built out more quickly for charging? I'm just trying to get an idea of why sort of a step-up or some bullishness on the xEV penetration? Thanks.

Yes. Thanks, Matt. The 30% I quoted, which is the integral sum of xEVs and premium ICE vehicles this year. To break it out, it's about 23% xEVs and 7% premium vehicles. I lumped them together into this 30% number because from a semi content perspective, they are in a similar ballpark, which is at least two to three, sometimes three times the average car. Sorry if that was not clear. The 30% is the sum of premium ICE and xEVs together. The principal holds, which you said because the xEVs, I think they were more like 19% last year and moving to 23% this year. This is a significant increase. I think next year, it's going to be another significant step up. But again, it is important to understand that concept of lumping into this also the premium ICE vehicles, because that number that 30% I quoted there is actually almost doubled from what it was between 2017 and '18, where it was more in the ballpark of 15%. There is an accelerated trend both to premium cars and to xEVs, and that's an enormously strong driver to semi content. The xEV trend, by the way, is clearly pulled by China and Europe. It is a little lower still in the U.S. and as you rightfully said, in Europe, that has a lot to do with legislation and tax incentives and stuff. In China, I think it has to do with an ideal situation for the industry because they don't have a lot of legacy from combustion engine cars. Many start-up companies there jump right away into xEVs.

Thank you for that, Kurt, and for clarifying the assumptions. As a follow-up, much of the discussion has centered around supply, demand, and visibility in the auto sector. Could you compare and contrast your visibility with customers in the auto industry versus what you are experiencing in industrial and comparable sectors? Thanks.

Yes. Auto is very hard to serve because of the supply constraints, but the transparency is actually very good. I mean it's a complicated supply chain. But I think we have now after exercising more than one and a half years very close and standing relationships with the Tier 1s and the OEMs when it comes to these supply challenges. I think the transparency is good, which is why I also probably radiated here a solid confidence that we know that we don’t over ship, because we have very clear visibility. In industrial and IoT, it is obviously more complicated because a solid part of the business there is going through the channel such that the channel inventory, which we discussed earlier, the one and a half months, which is stubbornly low, is probably the best indicator we have there. That doesn't exclude the fact that also in industrial and IoT, we are serving well-known, very big customers. I mean it doesn't harm to mention names like maybe Honeywell or Schneider or Siemens, I mean that kind of customers we, of course, also serve. They are the more direct customers where we have a similar visibility level as in automotive. I fear at the moment at least for NXP, the shortages in industrial are even worse than in automotive.

Hi, Good morning. Thanks so much for squeezing me. Kurt, in response to a question, you talked about your wafer processing capacity, potentially taking kind of a leg up in 2023. Can you help us quantify how much your capacity will increase there? And related to that, consistent with what you said at your Analyst Day, you mentioned that capital intensity in the business should revert lower in 2023. Throughout the call, you sounded really, really confident about the sustainability of demand here and how in some of the more mature nodes, you're kind of in the structural undersupply. Why not keep investing at a high level in '23 and beyond?

Yes. That is actually because the level we need to achieve, Toshiya, with our own wafer facilities will then be satisfied to the possibilities we have. That doesn't mean it closes all the gaps to demand, but it's as much as we can do with the four walls and the facilities we have. That does not mean, of course, that we would not continue to push very hard to get a higher supply from our foundry partners. In the end, within our hybrid manufacturing strategy, the share of external foundry supply to NXP is only going to grow. I think we are currently at a 55% to 45% level, so 55% external, 45% internal. I would forecast that this will not take that long. It's going to be more like 60-40, et cetera. If you think about revenue generation and customer satisfaction from that perspective, then the internal part on the mid-term is actually the smaller part of this. The bigger part is coming from the foundries. Of course, they keep investing and we keep getting more.

Got it. That's helpful. And then finally, as my follow-up, I think in your prepared remarks, you talked about supply issues in Q1 driving the very slight miss in communications. Can you sort of elaborate on that? And has that been resolved at this point? Thank you.

Yes, it's just the usual situation. Our LDMOS production in the RF communications sector is ongoing in those facilities, which are also catering to automotive and industrial clients, and they are fully utilized. To be honest, we were a bit over-ambitious. In the end, it was just a couple of million, but we had high expectations for what we could deliver to these communications customers. Fortunately, there was nothing significant to worry about as growth continued to be strong both year-on-year and quarter-on-quarter. We simply had overly ambitious output plans, but there was nothing exceptional about it. Now with that, I guess we get to the end of the call. So many thanks for attending this morning. In summary, I would say that we rigorously reviewed the quarter two guide given this uncertain situation out of China. I want to highlight again, we see this as a pure supply challenge. We feel confident with the forecast we have given you, that this is in line with what we will achieve. From a longer-term perspective, I think the anticipated strong growth for the year is materializing; second half ahead of first half. We see continued imbalance between supply and demand throughout the year, especially in our strategic segments of automotive and industrial, which have very secular growth trends. With that, many thanks, and I look forward to seeing some of you in-person later through the week. Thank you.