NXP Semiconductors NV (NXPI) — Q3 2023 Earnings Call Transcript

Thank you, Shannon, and good morning, everyone. Welcome to the NXP Semiconductors third quarter 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 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 fourth quarter of 2023. 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 third quarter 2023 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. Now I would like to turn the call over to Kurt.

Thank you very much, Jeff, and good morning, everyone. We appreciate you joining our call today. I will start with a review of our third quarter results, discuss our guidance for the fourth quarter and provide our early views of 2024. Now let me begin with third quarter. NXP delivered quarterly revenue of $3.43 billion, $34 million above the midpoint of guidance and essentially flat year-on-year. Revenue trends in our Mobile, Industrial & IoT, and Automotive end markets all performed in line or better than anticipated, while our Communication Infrastructure & Other end market was slightly below our expectations. Our distribution channel inventory during the third quarter declined slightly to a 1.5 months level, well below our long-term targets of 2.5 months. Non-GAAP operating margin in quarter three was 35%, 30 basis points below the midpoint of our guidance. This is primarily due to an unforecasted potential legal liability of approximately $14 million, which is reflected in SG&A. Non-GAAP operating margin was down 190 basis points versus the year-ago periods, primarily as a result of higher R&D investments and the noted potential legal expense. Now let me turn to the specific trends in our focused end markets. In Automotive, third quarter revenue was $1.89 billion, up 5% versus the year-ago periods and in line with the midpoint of our guidance. In Industrial & IoT, third quarter revenue was $607 million, down 15% versus the year-ago periods. So above the midpoint of our guidance. In Mobile, third quarter revenue was $377 million, down 8% versus the year-ago periods and above the high end of our guidance. In Communication Infrastructure & Other, third quarter revenue was $559 million, up 8% year-on-year, so slightly below the midpoint of our guidance. During the third quarter, from a geographic perspective, we experienced incremental improvement across most regions, with China solidly improving quarter-over-quarter. So our shipments to China are still down versus the year-ago period. From a channel perspective, sequential growth was led by improved sell-through in our distribution business. At the same time, our direct business sequentially declined, a reflection of NXP actively managing inventory digestion at our direct customers. Overall, our distribution business represented 57% of sales, up from 51% in the second quarter. And now I will turn to our expectations for the fourth quarter of 2023. We are guiding fourth quarter revenue to $3.4 billion. This is about 3% versus the year-ago period and represents a sequential decline of approximately 1% at the midpoint. We anticipate the following trends in our business. Automotive is expected to be up in the mid-single-digit percent range versus the fourth quarter of 2022 and flattish sequentially. Industrial & IoT is expected to be up in the high single-digits on a percentage basis versus both the fourth quarter of 2022 and the third quarter of 2023. Mobile is expected to be down in the mid-single-digit percent range versus the fourth quarter of 2022 and up in the low-single-digit range on a sequential basis. Finally, Communication Infrastructure & Other is expected to be down mid-single-digits on a percentage basis versus the fourth quarter of 2022 and down in the upper teens percent sequentially. Our guidance for the fourth quarter contemplates ending the fourth quarter at a 1.6 months of distribution channel inventory. Zooming out, the combination of our third quarter results and the midpoint of our fourth quarter guidance indicates the full year 2023 revenue will be flattish versus 2022 in a challenging and cyclical market environment. When we now turn to our early views on 2024, we continue to see an operating environment with a number of cross currents. Clearly, the macro environment remains weak, including subdued demand in China, geopolitical challenges, and elevated inflation, which is constraining demand. At the company level, lead times have normalized, and we anticipate a more neutral pricing environment going forward. And already since early this year, we have actively engaged with our large direct customers to drive a reduction in on-hand inventory where needed, rather than just blindly enforcing NCNR commitments. Furthermore, we have demonstrated over several quarters proactive management of our distribution channel, resulting in a very lean channel inventory position of 1.5 months at the end of quarter three versus our long-term target of 2.5 months. Through all of these proactive actions, we believe we will enter 2024 with a comparatively balanced customer inventory position with some remaining pockets of inventory digestion yet to occur. Hence, we will also begin to replenish the channel sometime in 2024. In terms of NXP's focused end markets for 2024, we are assuming global order production to be up 1% as anticipated by S&P. We assume the mixed shift towards semiconductor content-rich hybrid and battery electric vehicles continues and reaches about 40% of all cars produced in '24, up from 33% in 2023. This is very supportive of the NXP-specific content drivers such as radar systems, electrification solutions, and high-performance processors for software-defined vehicles. Turning to Core Industrial. We see the trends, including especially content growth to be pretty similar to Automotive. In our Consumer IoT and Mobile business, after over a year of weak demand, we see an incrementally improving environment. Finally, we do believe the weak demand in Communication Infrastructure & Other likely continues, as we have satiated pent-up demand in our secure cards business, anticipate a weak environment in mobile base station buildouts, and expect end-of-life in some of our network edge products. When putting it all together, netting the positives against the known headwinds, we continue to navigate a soft landing for the business and anticipate a return to year-on-year revenue growth throughout 2024. For the first quarter, we expect seasonality to return more to the typical pre-COVID seasonal patterns in a range of down mid to upper single digits sequentially. And now I would like to pass the call to you, Bill, for a review of our financial performance.

Well, 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 the revenue outlook for Q4, I will move to the financial highlights. Overall, our Q3 financial performance was good. Revenue and non-GAAP gross profit were modestly above the midpoint of guidance with solid gross profit fall-through. Now, moving to the details of Q3. Total revenue was $3.4 billion, $34 million above the midpoint of the guidance and essentially flat year-on-year. We generated $2.01 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58.5%, up 50 basis points year-on-year and 10 basis points above the midpoint of the guidance range driven by the fall-through on higher revenues. Total non-GAAP operating expenses were $803 million or 23.4% of revenue, up $73 million year-on-year and up $32 million from Q2. When compared to the midpoint of guidance, this is a miss of $18 million, where $14 million is due to a potential unforecasted legal liability and the remainder from higher variable compensation. From a total operating profit perspective, non-GAAP operating profit was $1.2 billion and non-GAAP operating margin was 35%. This was down 190 basis points year-on-year and slightly below the midpoint of the guidance range due to the previously noted potential legal liability, which created a 40 basis points headwind to non-GAAP operating margin. Non-GAAP interest expense was $65 million with non-GAAP income tax provision of $168 million reflecting a non-GAAP effective tax rate of 14.8%, which is favorable versus our guidance range of 16% to 17%. Non-controlling interest was $5 million and stock-based compensation, which is not included in the non-GAAP earnings was $103 million. Taken together, this resulted in a non-GAAP earnings per share of $3.70, $0.10 above the midpoint of the guidance. Now turning to the changes in our cash and debt. Total debt at the end of Q3 was $11.17 billion flat sequentially. The ending cash position was $4.04 billion, up $179 million sequentially due to the cumulative effect of capital returns, improved working capital metrics, flat CapEx investments, and positive cash generation during Q3. The resulting net debt was $7.13 billion and we exited the quarter with a trailing 12-month adjusted EBITDA of $5.38 billion. The ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.3 times and the 12-month adjusted EBITDA interest coverage ratio was 19.9 times. During Q3, we repurchased $306 million of our shares and paid $262 million in cash dividends. Taken together, we returned $568 million to our owners in the quarter, which represented 72% of non-GAAP free cash flow and 81% on a trailing 12-month period. Furthermore, subsequent to the end of Q3, we continued to execute our share repurchase program, buying an incremental $124 million or approximately 658,000 shares through Friday, November 3rd. Now turning to working capital metrics. Days of inventory was 134 days, a decrease of three days sequentially and distribution channel inventory was 1.5 months or approximately 45 days, down about four days from the second quarter. When combined, this represents approximately 179 days or a seven-day decline from the prior quarter. We continue to be laser-focused on tightly controlling our channel inventory levels while leveraging our balance sheet strength to hold product in die form for quick turnaround as demand materializes. Days receivable were 25 days down four days sequentially, and days payable were 60 days, a sequential decrease of three days. Taken together, the cash conversion cycle was 99 days, an improvement of four days versus the prior quarter. Cash flow from operations was $988 million and net CapEx was $200 million or approximately 6% of revenue, slightly better than our guidance of 7%, resulting in non-GAAP free cash flow of $788 million or 23% of Q3 revenue, which is up from 17% in the prior quarter. On a trailing 12-month basis, this represents a 20% non-GAAP free cash flow margin. Overall, we continue to be focused on driving non-GAAP free cash flow margin to greater than 25%, a level we have demonstrated in the past and a level we believe we can achieve in the future. Turning now to our expectations for the fourth quarter. As Kurt mentioned, we anticipate Q4 revenue to be $3.4 billion plus or minus $100 million. At the midpoint of our revenue outlook, this is up about 3% year-on-year and down about 1% versus Q3. Furthermore, given our manufacturing cycle times, the current demand environment, and our lean channel inventory, our guidance contemplates improving the channel inventory to a 1.6 month level for Q4. We expect non-GAAP gross margin to be flat sequentially at 58.5%, plus or minus 50 basis points, as we continue to balance mix and internal utilizations. However, we do see slightly higher input costs from our suppliers. As a result, we remain focused on mitigating these higher input costs through a combination of productivity and passing higher input costs along to our customers. Operating expenses are expected to be $785 million, plus or minus about $10 million. Taken together, non-GAAP operating margin will be 35.4% at the midpoint. We expect non-GAAP financial expense to be $69 million and the non-GAAP tax will be $180 million, or an effective non-GAAP tax rate of 15.9% of profit before tax. Non-controlling interest will be $6 million. For Q4, we suggest for modeling purposes, you use an average share count of 260 million shares and capital expenditures of 6% of revenue. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $106 million taken together at the midpoint, implies a non-GAAP earnings per share of $3.65. Now for 2024 non-GAAP modeling, we propose you assume the following. We expect to increase channel inventory sometime in 2024 to support anticipated growth, ensure proper customer stock levels, and to support our long-tail customers. We expect non-GAAP gross margin to remain at the high end of our long-term model, plus or minus the normal 50 basis points. Non-GAAP operating expenses, we plan to manage the business at or below 23% of sales. For capital expenditures, we expect to stay within the long-term model of 6% to 8% of sales. For stock-based compensation, which is not included in our non-GAAP results, we suggest using approximately $450 million. And for non-GAAP taxes, we expect a 17% rate versus the prior view of 18%. So, in closing, I would like to highlight what we shared last cycle. First, from a performance standpoint, as we navigate a soft landing through a challenging and cyclical demand environment, we will continue to be disciplined to manage what is in our control and stay within our long-term financial model. Second, operationally, the Q4 guidance assumes internal factory utilization will be in the low to mid 70s range, a level we expect to hold until internal inventory normalizes. And lastly, we plan to hold more cash on the balance sheet to enable greater flexibility. We also plan to retire the $1 billion March 2024 debt tranche when it comes due with our cash on hand, which will result in an improved gross debt leverage ratio below the current 2.1 times level today. Finally, we will remain active repurchasing our shares.

Hi, guys. Thanks for letting me ask a question. Congrats on navigating the choppy times. Kurt, for my first question, I just wanted to talk about the linearity of demand. It was very helpful that you gave the fourth quarter and so much detail on the first quarter in 2024. But in general, it seems like you're refilling the channel a little bit in your outer quarter guide and the channel was a big driver sequentially in the third quarter. So how are we to think about the channel directionally from here? Appreciating, of course, that it's already at the end of the range. What are the puts and takes in your decisions to seemingly slowly refill that?

Hey, thanks, Ross. Let me indeed first of all say that these fluctuations between 1.5 and 1.6 are partially beyond our control, to be honest. I mean, you know, it just ticked down a little in the third quarter. We think we are anyway sitting at the absolute minimum where it should be, so we felt it is appropriate to move it back to the 1.6 level. What I think is more important in the bigger context of that channel management is that over 1.5 years now, I would say, we have kept it intentionally very, very lean, always around this 1.5 or 1.6 level in the dropping environment. So in an environment where demand was weak and rather dropping. Going forward, as I said in my prepared remarks, we think the environment is more stable or up again, which is why we did say that at some point through next year, we will also start to refill the channel again. The speed of that and the magnitude will really depend on the environment. We will not go higher than the 2.4 or 2.5 level, which is our long-term target and has been our long-term target in the past. If there was a sharp rebound in China and we set the same last quarter, then of course, we would probably go back relatively quickly. But in a more stable environment, as we anticipate into next year, we will start to refill next year, Ross. Because we think that is important to make sure we hold competitiveness in the channel for our long-tail customers. So there will be a moment where it will be just important in a stable environment to have enough product on the shelf to remain competitive.

Thanks for that color. I guess as my follow up one for Bill on the gross margin side, you guys have done a great job keeping it at the high end of the range despite all the puts and takes on the end markets and the weakness overall. What are the puts and takes for next year? And you said that you'd stay at the high end of the range plus or minus fill through that period, also impressive. Is that just the structural new base for the company? How are you able to keep it at the 58% range versus the 55% to 58% that you had given at your last analyst meeting?

Sure. Let me discuss the recent quarters. Our internal utilization rates are currently in the low-to-mid 70s, but this headwind is being balanced by our distribution mix, which has a higher margin. This mix accounted for about 57% of our revenue this quarter, up from 51%. So, they are offsetting each other in the short term, and we anticipate this trend will continue into Q4. Looking ahead, there are several factors that could potentially increase our gross margin in the long run. We've previously mentioned that higher revenues against our fixed cost structure is one key factor. We expect to see ongoing productivity improvements, and eventually, increased demand from our internal factory operations, which will lead to higher utilization rates. Kurt mentioned that next year we are expecting neutral pricing. Furthermore, we aim to expand our long-tail customers in the mass market. Finally, our investments in research and development will support the introduction of new products. These are some of the strategies we believe will help us maintain and potentially exceed the current high end of our gross margin target. We view 58% not as a final goal but as a point we will continually strive to improve from as part of our overall company strategy.

Thank you.

Thanks for taking my question. Kurt, you mentioned you expect to grow through '24, but how do we square that with just, you know, 1% or so auto production growth that is lower than the mid-single-digit auto production growth that we saw in '23 when your overall sales were flat? So I guess the question is what content lift did you see in '23 and what are your assumptions for automotive content growth in '24?

Hey, thanks. Good morning, Vivek. Yeah, it's clearly that the revenue is driven and the demand is driven by content increase much more so than SAAR. At the same time, you are, of course, right, the latest SAAR update for this year, which I saw is actually almost 8% up over 2022, which is, by the way, every quarter that was taken up further. So kind of this year. And yes, indeed, also the forecast which we used from S&P for next year I think is just 1% up. So it's almost flat next year. Now, if you take NXP Automotive revenue, Vivek, if you take our Q4 guides, then this year's annual revenue growth of NXP will be like 9% or so. So 9% Automotive NXP in '23 over '22. With that number, I believe we are under-shipping demand and we are actually intentionally under-shipping demand because, as we've always said, we did not want to create this wave of inventory ahead of us, which will lead to a cliff drop down from. That's why since early in the year we have tried to make sure to not enforce NCNRs to an extent that it would not build excess inventory. And as we discussed with Ross just a minute ago, we kept the channel very lean. And mind you, also in Automotive 40% of our revenue goes through the channel. So the channel is a pretty significant part also of the Automotive business. So what I mean to say here, Vivek, is that we think we are through this inventory digestion at some point next year, which means the revenue growth in our Automotive business will return more to levels which are reflecting the true end demand. I can't tell you when exactly that's going to be next year, but maybe it's safe to assume that through the first half. We are still a little bit working ourselves through this inventory digestion, but in the second half, we should be clean from that. Including then the replenishment of the channel, and that's why I make that statement of growing year-on-year throughout the year, every quarter. By the way, that statement was relative to the whole company. We discussed it now for Automotive. But in principle, that whole pattern which I just explained is also true for entire NXP. And that's why we continue to be confident that we are properly managing that so-called soft landing. Since we have just anticipated this inventory issue relatively early, have proactively managed it, which means we do not run into this cliff and then resume into year-on-year growth as early as quarter one of next year.

Thank you, Kurt. For my follow-up, just on '24, thanks for giving us the high-level views. So Q1, you know, you mentioned normal seasonal. What is normal seasonal for your Automotive business sequentially in Q1? And if I kind of just expand that question overall to '24, in your presentation, you kept your '21 to '24 model, right? That suggests that even at the low end of that 8% to 12% CAGR. Your '24 sales should be in the neighborhood of 14 billion or so. Is that, you know, useful assumption as we think about overall '24? So just Q1 Autos and overall '24 sales. Thank you.

I think we've covered a lot of ground in this call, especially considering the surrounding turmoil and uncertainty from some of our peers. We've provided significant insights into next year. However, we prefer not to break down that insight by revenue segment on a quarterly basis, as it would complicate things further. As for our seasonal pattern for Q1 across the company, we're expecting a mid to upper single-digit sequential decline, which is consistent with our historical performance pre-COVID. There’s nothing unusual about this. In a typical pricing environment, with lead times back to normal, everything aligns. Regarding your question about the commitment we made during our investor day in November 2021 about our three-year growth target of 8% to 12%, we stand by that forecast. We are committed to achieving that growth range, similar to the rest of our model, including gross margin projections that align with the higher end of expectations. Our revenue will also fall within that 8% to 12% corridor, though it’s influenced by a few macroeconomic factors, particularly the timing of China's recovery, which is difficult to predict. Despite that uncertainty, we believe we will remain on track to meet that corridor.

Thank you, Kurt.

Great. Thank you so much for taking my questions. First, Kurt, I think it was in your comments, I'm not sure if it was restricted to your outlook of EVs specifically, but maybe more this electrified drivetrain sort of hybrids, maybe is what you were talking about. But it still seemed like a big jump to me next year. And, you know, would we consider the overall EV market, there's one North American OEM that's been growing very quickly, and there's one Chinese or maybe many, but one really big Chinese OEM that's been doing very well. But among the sort of traditional multinational OEMs, their EV sales have been really weak. And I wonder if your outlook for next year embeds a view that the multinationals are going to do better in this category, or if the companies that have had success only get bigger. And then I have a follow-up. Thank you.

Thanks, Will. I understand your point, and I'll clarify as much as I can. First, I mentioned the category known as xEVs, which includes both hybrid electric and fully battery electric vehicles. This term is used by S&P, so it's not something we created; it refers to vehicles that have either only an electric drivetrain or an electric drivetrain alongside a combustion engine. This is important for us because these vehicles require more semiconductors. We believe this category will continue to grow significantly. The latest forecast, as we're in November, suggests that 33% of the total car production, which is around 89 million units this year, will be xEVs. That percentage is expected to rise to 41%, representing a 29% year-on-year growth. In absolute numbers, this means there will be 29% more xEVs produced next year compared to this year. It's important to note that focusing solely on the US perspective can be misleading, as US car manufacturers are relatively small on a global scale. Europe is slightly better, but the main growth is driven by China, which is also leading the dynamics in the electric vehicle market. Thus, commentary and adjustments from US companies don’t necessarily reflect the global situation. To summarize, we firmly believe the xEV category will reach 41% of the global SAAR next year, which will be very beneficial for our semiconductor content growth. Additionally, beyond just electrification, these vehicles are typically equipped with more advanced electronics, including ADAS systems like our radar and the Software Defined Vehicle initiatives, which accelerate our revenue growth. We are confident in this outlook and do not foresee a significant slowdown in electric vehicle adoption.

It's really helpful. Thank you. And you sort of led me into the follow-up which is ultra-wideband. I think you were early to see this among other trends, but I'm hoping you can update us as to how you're seeing uptake in that product, both in automotive and handsets. Thanks so much.

On the handset side, there isn't much to report. We're still waiting for more activity in the Android market, which isn't related to ultra-wideband. However, we noted an increase in mobile, driven by Android, and given our low inventory in that space, we expect to benefit if the Android market picks up. In the automotive sector, we are performing very well. We're ahead of our projections for ultra-wideband, with about seven car platforms currently in production using our ultra-wideband automotive product. To my knowledge, around 18 out of 20 new platforms have been awarded to NXP, with only two smaller platforms not moving forward with us because they did not meet our security standards and would have impacted our margins. Overall, the momentum for ultra-wideband in the automotive sector is very strong.

Thank you.

Hi, guys. Thanks for taking my question. I wanted to go back to the channel inventory. Is the amount that you have to ship still $500 million? And would you still grow year-over-year in 2024 if you didn't decide to fill up the channel next year?

The answer is yes. The difference is actually a bit larger now because, to be precise, the $500 million was derived from a change from 1.6 months to 2.4 months. Since we are currently at 1.5 months, it’s likely more than $500 million, but that amount is not significant. So the answer is yes. Additionally, we do not require the $500 million for growth next year, as channel replenishment is something we will address to some extent next year. This cannot serve as a basis for our guidance for the coming year.

Thank you. For my follow-up, I wanted to ask about some of the geographical macro trends you mentioned. I found them a little confusing. It seemed like you believed China was improving, but you also mentioned that next year's guidance depends on China getting better. We aren't hearing from any of your competitors that China or anything else is improving. Can you provide more details on what you're observing by geography and what you think might be causing this discrepancy? Why do you see things improving in an overall market where you still seem cautious and your competitors certainly sound cautious?

Okay. So let me peel the onions, Stacy. First of all, maybe rely on a company level. The reason why we do comparably better if you look at the quarter, to our peers is, again, a soft landing navigation, which we have entered into already early this year and when you think about the channel already middle of last year. We have certainly shipped less over that period, Stacy. And you find that if you compare our growth rates, say, a three-year CAGR over the last three years versus some competitors, especially in auto, and you see that even more sharply if you look at this year's order growth, as I said earlier, which I think is 9%, we have undergrown competitors. And that undergrowth is still be that we ship less on inventory than we believe some of the peers have done. That, of course, also explains that going forward, we don't see this sharp decline. It's just a softer management through this cycle. Now we do it very, very intentionally because we believe this is very beneficial to our gross margin trajectory, which is not going to suffer that part from underloading factories too hard. So that's actually where the direction has been coming from. Now on the geographic side, Stacy, you have to ask this because I do know that what we just guided, especially in Industrial IoT, and that is largely relative to China is very different to what you heard from a lot of peers. So I just want to repeat, we have both sequentially and year-on-year, we just guided quarter four up by a high single-digit percentage which is in sharp contrast to what several of our competitors have said. We simply think this is because we saw and had our trough in Industrial IoT already in quarter one of this calendar year. If you look at the numbers, we had a sharp drop there. We have made absolutely sure we would not increase inventories from there. So we are very close to the pile of the demand. Since then, since Q1, we have been readily going up. And that was long messaging, which might have been a bit confusing around China. What I meant to say is we keep moving up incrementally quarter-to-quarter-to-quarter, while it's still down from a year-on-year perspective. So we are still waiting, and we don't put this in any of our numbers on the big rebound in China. So that's not there. But incrementally, sequentially, it keeps improving. It has improved the past couple of quarters, and it does improve again now in Q1 into quarter four. So that was the commentary on China. So it's cautiously positive. But again, it is simply because we had our trough there already in quarter one, and it was a tough trough. I mean you just do the math. It was really deep. We just did it much earlier than many others.

Got it. That's clear. Thank you guys.

Thank you for taking my question. Clearly, the automotive market in China has the potential for significant vertical integration within the chip supply chain. The volume in this market is substantial, and domestic competitors seem to have the capacity to invest in this area. My question is, how do you plan to maintain your business relationships with automotive brands in China, especially considering the likelihood of increased competition from local players in the long term?

Yes, Gary. First of all, it's our business. It has been our business and will continue to be our business to be competitive. So I come back to your specific point, but I mean in itself, it's nothing new. Our whole game, our whole priority in life is to be competitive wherever we play. So in China, indeed, so far, the competitors, which we do see in the automotive space, which you focus on, have been largely our Western competitors plus relates from Japan. So we have hardly seen any local competition. So that's absolutely right. Now over the past, I'd say, couple of quarters, local competition in China came more up in low-end microcontrollers. However, not in automotive. We haven't seen that entering into automotive at all. We also don't play that much in the low-end microcontroller space. So I mean, we've been seeing it, but it's not been a big event for us at all. Secondly, we do see a significant focus of local Chinese up-and-coming semiconductor companies on silicon carbide. I mean I just spent 1.5 weeks in China, and it was obvious that there was massive investment and a massive focus both in factory engineering and device engineering on silicon carbide in China. The good news, if you will, is that this doesn't really matter for us because that's one of the businesses we do not do. But I think it takes some of the focus away from the things we do. My personal take would be that probably going forward, we will see a start of more competition in the simpler analogic signal world in China, which would then probably also touch automotive. I don't say, Gary, we have it, yes, it's not like we are losing or being under pressure there today. But my take would be probably that's the one segment where local Chinese semiconductor competitors will also focus on going forward. But again, I mean we've seen this in Korea. We've seen this in Japan in the past. So it's not the first time that we are confronted with local competitors. Yes, we stay paralleled about it, and we'll make sure that we have made long-term strategies, which are on top of that.

Thanks for that detail, Kurt. If I follow up, I wanted to ask about your purchase commitments. They've been running just below $4 billion for the past year, which is consistent with your flattish revenue, but it seems counterintuitive to the market dynamics that we're in where seemingly, you'd have to put less of a commitment with your foundry partners. So maybe if you can just speak to the trends that you expect in your purchase commitments given the industry dynamics through '24?

Those are multiyear commitments. We have a commitment of approximately $3.9 billion, which is essential for supporting our growth over the next five years. This is primarily needed for third-party foundry wafers, which remain tight in supply, and we are fortunate to have these commitments to facilitate customer growth. Although lead times have normalized, we are still facing shortages in certain technology nodes, leading to complications. We have robust discussions with our customers to ensure they provide mid- to long-term forecasts, as we want to avoid a situation similar to the second half of 2020, where supplier capabilities may not meet demand. Therefore, these long-term agreements are crucial for our future revenue growth.

Thanks again.

Hey, guys, thanks for taking the question and good morning. So I wanted to ask about the Auto outlook for next year. If we sort of lay out the puts and takes, production growth will be lower, pricing neutral, it sounds like, but you mentioned that 2023, there was some element of digestion. I mean, as we stack up the content growth and sort of flat to up production and flat pricing, is there a reason, how should we think about 2024 Auto growth for your business compared to 2023? Is there a reason it should be less than '23? Thank you.

Hey, Josh, good question. As I mentioned to Vivek earlier, I’m not going to provide guidance on a segment level for 2024, but I can share some dynamics at play. Yes, the underlying growth rate next year will be less than this year. The penetration of xEV vehicles is improving, and we're expecting it to exceed 40 percent next year, which will provide support compared to this year. This will contribute to greater content from our current position. I agree with your comment about more neutral pricing; that's a reasonable assumption overall. In addition to our internal growth drivers, which are solid, the only other factor is the inventory digestion cycle returning to normal demand, which affects our revenue. Right now, we are intentionally undershipping demand, a strategy we've followed for a few quarters. It will likely take a couple more quarters, but it's reasonable to suggest that by mid-next year, we will have moved past this, allowing revenue growth in automotive and elsewhere to align more closely with real end demand. It's important to understand that looking solely at annual revenue growth in Automotive relative to SAAR can be misleading, considering the many factors involved, especially the inventory cycle.

Understood. I can at least try. I guess I could ask it another way. You guys used to give a metric about I think it was 70% of your Auto business was tied to SAAR and the balance sort of to more content growth drivers. Maybe you can help quantify that mix or maybe give some directional drivers of things like radar, BMS, the S32 platform as you think for the future.

That's not our model, Josh. That might be a model you made, but we haven't really said that. So what we do say and what fits also to your earlier question, is that we do see a continued strong content increase, which is independent of SAAR. And I think that is something which is probably in the 5% to 8% bracket. And that keeps going. Again, there is no reason that would be slowing next year. But again, it is overlaid by the inventory cycle.

Got it. Thank you.

Hi. Good morning. Thank you so much for taking the question. Kurt, I wanted to ask about the pricing environment in '24 you mentioned that you expect a relatively neutral environment. When we spoke at our conference a couple of months ago, I think at the time, you sort of hinted that expectation back then was for '24 pricing to be up a little bit more than what you saw in '21, but a little bit less than '22. So I guess there's been a slight change in how you think about pricing A) is that correct? And B) if so, is this more demand-driven? Or are you seeing lower input costs that's enabling you to keep pricing a little more flattish into '24?

Yes, Toshiya. It's slightly better, depending on your perspective regarding input costs. We're seeing a slight increase in input costs across the board, with some components rising significantly while others are beginning to decrease. Overall, there's a slight increase, but we're implementing productivity efforts that we need to pass on to our customers, landing us in a fairly neutral position. This is indeed a bit better than what we discussed at your conference recently. It's important to consider this in the context of the past couple of years; in 2021, we saw a 2% increase for the entire company, followed by 14% in 2022. We'll share this year's figure in the Q4 earnings, but it will be a solid number. Next year, we expect things to stabilize to a more neutral level. I want to clarify there will not be a reversion to pre-COVID pricing levels, which has been a common question from analysts and investors. The pricing will remain neutral next year, which we think is acceptable.

Great. That's very helpful. And then as my follow-up, you're guiding your comps and other business down, I guess, upper teens on a sequential basis in Q4. Is that primarily the base station business and the weakness in that market sort of catching up to you guys? Or is there something more to it? And is it fair to say that Q4 is the bottom for that market? Or could things stay relatively weak into the first half of next year? Thank you.

Yes. As we approach Q4, we are experiencing both weak demand for base stations and a decline in revenue from secure cards. Expectations for this year were primarily centered around India, which has shown stronger performance than anticipated. However, there is a noticeable decrease in pent-up demand for secure cards. We have previously mentioned that focusing on mobile demand in 2021 and 2022 led to a significant undersupply in our secure card business, and now that we've met much of that pent-up demand, it is starting to diminish. Combined with the subdued mobile base station environment, this explains the reduced outlook for the fourth quarter. Looking ahead to next year, as I noted in my earlier comments, the entire segment may not be positioned for a substantial turnaround, especially given that trends in the base station market are likely to persist into next year. Overall, we expect it to remain relatively weak. As we approach the conclusion of the call, I'd like to summarize our main points. Bill and I believe that the key theme this quarter is the contrasting messages coming from our peers. We are confident that the primary growth drivers in our essential businesses, particularly in Automotive and Industrial IoT, remain strong. However, this has been somewhat obscured by how effectively companies have managed their inventory cycles. We have aimed to handle this responsibly, which is reflected in our inventory numbers that have been kept quite lean over the past six quarters. Earlier this year, we also sought to adopt a similar approach with our direct customers by being flexible with non-cancelable and non-returnable orders and exploring alternative commercial solutions. This strategy has positioned us uniquely, as we believe we have slightly under-delivered on demand compared to our competitors, allowing us to navigate the current landscape with a less pronounced decline and achieve the soft landing we aimed for. Overall, the business is moving back toward a more typical pricing environment, with lead times stabilizing, providing optimism for sustained growth year-over-year as we progress into next year. We are already seeing year-on-year growth in Q4, and we expect this trend to continue. Thank you all for your attention today.

Thank you all. We'll call it here.