NXP Semiconductors NV (NXPI) — Q2 2025 Earnings Call Transcript

Thank you, Michelle, and good morning, everyone. Thank you for joining our call today. With me on the call is Kurt Sievers, NXP's CEO; Rafael Sotomayor, NXP's President; 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 the specific end markets in which we operate, the sale of new and existing products and our expectations for the financial results for the third quarter of 2025. 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 second quarter 2025 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. Now I'd like to turn the call over to Kurt.

Thank you, Jeff, and good morning, everyone. We appreciate you joining our call today. I will review our Q2 performance and then I will discuss our guidance for the third quarter. Beginning with Q2, our revenue was $26 million better than the midpoint of our guidance. The revenue trends in all our focus end markets were above expectations, reflective of increasingly positive cyclical trends. Taken together, NXP delivered quarter 2 revenue of $2.93 billion, a decrease of 6% year-on-year. Non-GAAP operating margin in quarter 2 was 32%, 230 basis points below the year ago period and 20 basis points above the midpoint of our guidance. Year-on-year performance was a result of the lower revenue and the related gross profit fall-through, partially offset by $40 million lower operating expenses. From a channel perspective, distribution inventory was consistent with our guidance of 9 weeks, while still below our long-term target of 11 weeks. And during the quarter, we did not experience any material customer order pull-ins or pushouts, which could be associated with tariffs. From a direct sales perspective, we continue to support Western Tier 1 automotive customers with their desire to digest on-hand inventory. However, we do believe that for the most part, the Tier 1 are either approaching or already at normalized inventory levels. Now let me turn to our expectations for the third quarter. Our guidance for the third quarter reflects the combination of an emerging cyclical improvement in NXP's core end markets and the performance of our company-specific growth drivers. We are guiding quarter 3 revenue to $3.15 billion, down 3% versus the third quarter of 2024 and up 8% sequentially, a return to better than historic seasonal trends. At the midpoint, we expect the following trends in our business during quarter 3. Automotive is expected to be flat versus quarter 3 2024 and up in the mid-single-digit percent range versus quarter 2, 2025. Industrial & IoT is expected to be up in the mid-single-digit range year-on-year and up in the high single-digit range versus quarter 2, '25. Mobile is expected to be up in the low single-digit percent range year-on-year and up in the mid-20% range on a sequential basis. And finally, communication infrastructure and other is expected to be down in the upper 20% range versus quarter 3 2024 and flat versus quarter 2, 2025. Our guidance assumes channel inventory will remain at 9 weeks. However, if the cyclical recovery continues, we may stage additional products at our distribution partners to be competitive, and hence, we may selectively increase the inventory in the channel. With respect to direct sales, our automotive outlook assumes that we will come closer to shipping to natural end demand. In industrial & IoT, which is primarily served through distribution, we see globally a broad-based recovery across both core industrial and consumer IoT. So in summary, NXP's second quarter results and guidance for the third quarter reflect an increasingly positive view that a new up cycle is beginning to materialize. This is based on several signals we track regularly. These include continually growing customer backlog levels placed with our distribution partners, improved order signals from our direct customers, increased short-cycle orders, and increasing product shortages leading to customer escalations. At the same time, the tariff environment continues to create a level of uncertainty in the long-term planning of our customers. And yet, as of today, the direct impact of the current tariffs is immaterial to NXP's financials. So looking ahead, we will continue to manage what is in our direct control to drive solid profitability and earnings. This includes strengthening our competitive portfolio by leveraging the recently closed acquisition of TTTech Auto as well as the addition of Kinara and Aviva Links, which are still pending regulatory approval. Lastly, we are on track to align our wafer fabrication footprint, consistent with our hybrid manufacturing strategy. And now 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 Q2 and provided our revenue outlook for Q3, I will move to the financial highlights. Overall, our Q2 financial performance was good, with revenue and gross profit above the midpoint of our guidance range, while operating expenses were at the high end of our guidance due to the timing of tape-outs and project spend. Taken together, we delivered non-GAAP earnings per share of $2.72 or $0.06 better than the midpoint of guidance. Consistent with our guidance, the distribution channel inventory was 9 weeks. Now moving to the details of Q2. Total revenue was $2.93 billion, down 6% year-on-year and $26 million above the midpoint of our guidance range. We generated $1.65 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 56.5%, down 210 basis points year-on-year and 20 basis points above the midpoint of our guidance range due to higher revenue and slightly favorable manufacturing costs. Total non-GAAP operating expenses were $720 million or 24.6% of revenue, down $40 million year-on-year and $10 million above the midpoint of our guidance range. From a total operating profit perspective, non-GAAP operating profit was $935 million and non-GAAP operating margin was 32%, down 230 basis points year-on-year and 20 basis points above the midpoint of the guidance range. Non-GAAP interest expense was $85 million, while taxes for ongoing operations were $148 million or a 17.4% non-GAAP effective tax rate. Noncontrolling interest was $12 million and results from equity account investees associated with our joint venture manufacturing partnerships was $0. Taken together, the below-the-line items were $1 million unfavorable versus our guidance. Stock-based compensation, which is not included in our non-GAAP earnings was $117 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q2 was $11.48 billion, down $247 million sequentially as we repaid the $500 million tranche of debt due in May 2025 during the quarter. Our ending cash balance was $3.17 billion, down $818 million sequentially due to the cumulative effect of acquisition costs, debt reduction, capital returns, equity, and CapEx investments offset against the cash and additional liquidity generated during the quarter. The resulting net debt was $8.31 billion, and we exited the quarter with a trailing 12-month adjusted EBITDA of $4.75 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q2 was 1.8x and our 12-month adjusted EBITDA interest coverage ratio was 17.4x. During Q2, we paid $257 million in cash dividends and repurchased $204 million of our shares. Due to the capital requirements related to the TTTech Auto acquisition, the potential closure of Kinara and Aviva Links, and our long-term net debt leverage ratio targets, we paused the buyback during the quarter. We expect to resume the buyback in Q3, consistent with our long-term capital allocation policy. Turning to working capital metrics. Days of inventory was 158 days, a decrease of 11 days versus the previous quarter, with inventory dollars slightly up sequentially. Days receivables were 33 days, down 1 day sequentially and days payable were 60 days, down 2 days sequentially. Taken together, our cash conversion cycle improved to 131 days. Cash flow from operations was $779 million and net CapEx was $83 million or 3% of revenue, resulting in non-GAAP free cash flow of $696 million or 24% of revenue. During Q2, we paid $35 million towards the capacity access fees related to TSMC, which is included in our cash flow from operations. Additionally, we paid $50 million into VSMC and $16 million into ESMC, our two equity accounted foundry joint ventures under construction with the payments reflected in our cash flow from investing activities. Now turning to our expectations for the third quarter. As Kurt mentioned, we anticipate Q3 revenue to be $3.15 billion, plus or minus about $100 million. At the midpoint, this is down about 3% year-on-year and up 8% sequentially. We expect non-GAAP gross margin to be 57%, plus or minus 50 basis points. Operating expenses are expected to be about $735 million, plus or minus about $10 million or about 23% of revenue, consistent with our long-term financial model. The sequential increase is primarily driven by the acquisition of TTTech Auto and variable compensation. Taken together, we see non-GAAP operating margin to be 33.7% at the midpoint. Please note, our third quarter guidance does not incorporate the remaining two acquisitions, which continue to be under regulatory review. We estimate non-GAAP financial expense to be about $91 million. We expect non-GAAP tax rate to be 17.4% of profit before tax. Noncontrolling interest will be about $14 million and results from equity account investees about $1 million. For Q3, we suggest for modeling purposes, you use an average share count of 253.8 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $116 million. Taken together at the midpoint, this implies non-GAAP earnings per share of $3.10. Turning to uses of cash. We expect capital expenditures to be around 3% of revenue. We will make a $225 million capacity access fee and a $145 million equity investment into VSMC, as well as a $15 million equity investment into ESMC, which are two equity accounted foundry joint ventures under construction. Pending the regulatory approval for Aviva and Kinara acquisitions, we will result in a cash payment of $550 million. Now in closing, I would like to highlight a few focus areas for NXP. First, as Kurt mentioned, based on the signals we track, it appears to us we are in the early stages of a cyclical recovery. Second, we have started the consolidation of our legacy front-end 200-millimeter factories as part of our hybrid manufacturing strategy. This includes prebuilding a bridge stock for future customer requirements, which will result in higher inventory. We expect by year-end, this will be approximately 6 to 7 days of inventory, which we will hold in die form. As a result, our front-end utilizations have moved to the mid-70s range during Q2 from the low 70s range before. Lastly, we will continue to focus on what is in our control, driving solid profitability and earnings consistent with our long-term financial model. I would like to now turn it back to the operator for your questions.

Kurt, you went through some of the same signals this quarter as you did last quarter about the cyclical business turning and then, of course, some of the idiosyncratic NXP-specific drivers. I just wondered how you'd compare those signals quarter-to-quarter. Is your cyclical confidence rising quarter-over-quarter? Is it staying about the same? In general, just how are you feeling this quarter versus last?

Yes. Thanks, Ross. Clearly better. So it is indeed the same signals. That's actually the reason why we do this. We track these signals all the time. And there is clearly an improvement on all four of them over the past 90 days. That is exactly why I tried to highlight them because that drives our growing confidence that we are in the beginning of a new up cycle. So 90 days ago, I guess I really talked about a balance of uncertainty from tariffs and some early signals, which would signify the early innings of a new cycle. This time, I would say nothing really new on the tariffs. But clearly, those signals about the new up cycle have strengthened since 90 days ago. So a marked difference, Ross, versus one quarter ago.

Great. And then for Bill, just, I guess, two parts quickly on margins. One, how much does your gross margin get benefited from running the fabs a little hot in the consolidation? And then two, with those two pending deals on the OpEx side of things, how do you expect to manage that? If they close, does OpEx pop up in the fourth quarter? Or can you kind of offset that in other ways to keep that 23% intensity?

Sure, Ross. Related to Q2 results, delivering the 56.5%, it had very little impact. Related to the 57%, not much, I would say, because, again, you start the material and we're only building a couple of days and at the end of the year, it will be about 6 to 7 days. As you can see, we've been also focused on draining some of our internal inventory as well. So you have that net effect occurring there. Related to the acquisitions that are still pending, again, we have mechanisms in a way to try to absorb this as much as we can. If we do close in this quarter, which we do expect, we may be a bit higher. But remember, these two acquisitions are the smaller of the three. Just to remind you from a headcount size, I believe Kinara is around 60 and Aviva Links is around 100.

Kurt, I heard on the call the suggestion that you are in early stages of a cyclical recovery. So if we apply that to the Automotive segment, Q2 sales flattish year-on-year. I think Q3, you're also indicating to be flattish year-on-year. And that seems to be a somewhat more conservative tone that we hear from some of your analog peers who are more optimistic, right? They are seeing the year-on-year sales increase, especially in China. So how would you contrast the pace of recovery you are seeing in automotive versus your peers? And when do you expect your automotive sales to start growing year-on-year? Can that happen in Q4?

Yes, Vivek, well, I can't really contrast to our peers because I think we are the first one to have earnings. So I wouldn't really know what they have to say this quarter. We will probably all of us learn a little later. Now I still fully understand your question, and I would reformat this a little. Our Automotive business is accelerating massively from the second into the third quarter when you think about the sequential growth. So we just gave you actuals of the second quarter, which were 3% up quarter-on-quarter. And for the first time in a long time, by the way, flat year-on-year, as you rightfully said. And we said now mid-single digit up into the third quarter. So that is doubling in terms of sequential growth, Vivek. So therefore, I'd say there is a clear difference. Furthermore, the underlying inventory burn, which has held us back for quite a while, that is actually what is moderating or eventually going away through the quarter. So that was the Tier 1 inventories in the Western world, which we've talked about many quarters where we had to follow their desire to bring down their internal inventory quite materially. It appears that this is coming to an end through this upcoming quarter. So that is actually the real factor. China, since you also asked about China, China has been strong all along. And mind you that we are serving the automotive market in China predominantly through distribution, where we have been and continue to be below our inventory targets there with 9 weeks, significantly less than 11 weeks. So what really matters is this change in the Western Tier 1s. So what I tried to say is, Vivek, I don't think we should sugarcoat that the automotive macro is certainly mixed. S&P just came out with their latest SAAR forecast for this year, which they upped actually from 90 days ago to flat year-on-year, 90 million cars. When we talked 90 days ago, they were actually at 88 million cars. So the forecast has slightly gone up. I wouldn't celebrate this as a big thing. It's still flat. So our main improvement is that we come closer to shipping to natural end demand, Vivek. That's the key point because the inventory burn at the Tier 1s is going away. So that's how I would frame the automotive environment at this stage.

Great. And for my follow-up, just one or two related ones for Bill. So Bill, if you could give us just the contributions from the acquisitions. I think one has closed, two have not closed. So just how to kind of think about when they do close, what the contribution ranges might be? And then if I were to make a guess for Q4 and say, if NXP sales were to grow low to mid-single digits sequentially in Q4, what would that do to gross margins? And is there anything in mix that we should be thinking about as we kind of conceptually think about Q4 gross margins?

Okay. There was a number of questions, Vivek, which you did flow into your second question. Well done. Let me try to pass them. The first one was about the contribution of the acquisitions. We actually closed one acquisition in the second quarter, which is TTTech Automotive. And as we said before, their contribution from a revenue gross margin perspective is completely immaterial to our financial model all the way through '27. We did acquire them for the IP and know-how they have in software for safe processing in the software-defined vehicle, where it is a major, major contributor to our system solutions there. On the OpEx side, we do have to digest OpEx from them, and I think Bill talked about this in the prior quarters, both quarters before, that we do create space with our existing OpEx by actually deprioritizing less strategic parts in our portfolio in order to have enough room to swallow TTTech Auto's OpEx. And I think we also told you they come with 1,100 software engineers. Those are now indeed part of NXP. So the OpEx guide, which you get for quarter 3, Vivek, includes fully TTTech Automotive. It's fully in there, but we did create space for this by deprioritizing other elements. And all in all, and here, I speak for what Bill said earlier, we are on track in the second half of the calendar year '25 to be in our OpEx model or, say, 23% OpEx of revenue. That's what we're going to hit in the second half of calendar year '25. Now you talked also about Q4, and I think this gets pretty lengthy here. We don't really guide here for Q4, but you put something into my mouth. So from experience, I know I have to say something. Otherwise, you say I said it differently. We don't guide Q4, but I know you want to model something, Vivek. So I guess for Q4 revenue to start with, it is fair to orientate yourself on the long-term historical seasonality, which we have had from Q3 to Q4 or to be more specific, a flat to slightly up revenue development from Q3 into Q4. Now I want to remind you when saying this, that this is all sitting on 9 weeks of inventory. And in order to stay competitive in the channel, we may want to stage our what we call hero products, which are the products which have the best sell-through higher in the channel from an inventory perspective in order to be competitive against the competitive pressure in an upcycle situation. So I made that comment for quarter 3, and I want to be sure that you all understood what I said, the quarter 3 guide, which we gave you, the $3.15 billion sits at 9 weeks, but we may take it higher by putting more inventory in, and the same holds for Q4. And that would be, of course, over and above this historic seasonality of flat to slightly up, which I talked about earlier. And now the last part of your question was about the impact on gross margin, and that I give to you, Bill.

Sure. For the third quarter, regarding gross margin, the 57% forecast assumes that we maintain mid-70s utilization levels. While we're reducing inventory, we have also started to build up a few days of inventory. For the fourth quarter, we’re not providing specific guidance, but I advise modeling front-end utilization in the mid-70s based on typical revenue seasonality, which is usually flat to slightly increasing unless we see stronger business indicators that would prompt us to consider increasing it to the upper 70s. We have not made that decision yet, but we will monitor it closely until the next earnings period. Additionally, although you didn’t ask about it, I can refer you back to my comments from last quarter and our Analyst Day: for every $1 billion in additional revenue, we anticipate roughly 100 basis points of additional margin on a full-year basis. For instance, $12 billion in revenue is expected to yield around 57%, $13 billion around 58%, $14 billion around 59%, and so forth. However, there are timing factors and other elements that could cause these figures to fluctuate each quarter, which is why we provide a variance of plus or minus 50 basis points on a quarterly basis. These additional factors include increasing front-end utilization back to 85% or higher, product mix, replenishing our channel target of 11 weeks, ramping up new products, improved costs, typical low single-digit annual ASP growth, and, looking ahead to post-2027, reducing fixed costs through consolidation efforts as part of our hybrid manufacturing strategy. There are many moving parts, but we have the mechanisms in place and are confident in achieving our long-term margin targets of 57% to 63%.

I have a follow-up question regarding your channel inventory. Kurt, you mentioned that you expect to maintain 9 weeks of inventory. Your guidance is based on that, and there's a possibility for it to increase in Q3 and Q4, if I remember correctly. What factors are you waiting for before deciding to increase? What indicators would prompt that decision? And why isn't it being done right now? What are the variables that could lead to a higher inventory level? That's my first question.

Thank you, Francois. I didn't specify Q3 or Q4. What I meant is that it may happen in either of those quarters, depending on the circumstances. We are looking for further solidification this quarter, but it's possible we might see those four trends I mentioned earlier this quarter. These include the number of short-cycle orders, the growing backlog at our distribution partners, the increase in our direct customer order book, and supply escalations, which have almost doubled in the last 90 days. If this trend continues, as I noted in my prepared remarks, we might start to see some impact this quarter. It's important to understand that this isn't primarily about the $200 million in revenue, which is likely the difference between 9 and 11 weeks. It's more about the competitiveness of the right products on the distributors' shelves. That's what we are focused on. This may lead to an increase in inventory, but we don't view it as making revenue, since it's just shifting revenue from one place to another. It's about being competitive and driving our sell-through with the right products at the distributors. So that's the perspective to take. There is a possibility it could happen in Q3 and again in Q4, and that could eventually lead to an end.

Makes sense, Kurt. And maybe one for Bill. I mean on the inventory days, 11 days below is actually a big decrease in days. I mean, when you look in the history, so that's welcome. Still on the absolute number, it's still very relatively high. But how should we think about your own inventories in Q3 and Q4? Do you want to work it down more aggressively perhaps given the relative high level? It would be great to have your color here.

Absolutely, Francois. For Q2, we made some progress on reducing our internal DIO from 169 days last quarter to 158 days. Now approximately 5 days are linked to a future asset for sale, and the remaining is linked to reducing our inventory levels from a days perspective. For Q3 based on the combination of the inventory linked to the higher revenues and taking account of the start of our prebuilds of a couple of days, we expect to be at a similar level ending in Q3. Now please note, we are still holding about 14 days' worth of channel inventory on our balance sheet and by year-end, hold about 6 to 7 days of prebuild stock related to our manufacturing consolidation efforts. So overall, we're trying and continue to balance and hold a bit more internal inventory versus our long-term target of 110 days to ensure we improve supply in this new emerging up cycle from the lessons learned from the COVID supply crisis in the past. So we're trying to balance this as best as we can.

I guess digging a little bit deeper into auto, you talked about shipments tracking to natural end demand. I was hoping perhaps you could be a little more specific within your key growth drivers and the trends you're seeing there, both from a China and kind of non-China perspective to get a sense of the rate of recovery geographically?

Certainly. Thanks, C.J. I want to highlight a couple of points. First, as we update our projections annually, it seems that all our growth drivers, including those in the automotive sector, remain on track to meet the targets we provided during our Investor Day in November last year. It's also essential to consider our overall automotive situation compared to our peers. The revenue guidance we just shared for the third quarter is only 4% below the peak we reached in the automotive segment in the fourth quarter of calendar year '23, meaning we are quite close to that peak. We have performed remarkably well during what could be classified as a downturn, especially considering the significant declines the industry has faced. We want to exceed that peak due to our growth drivers, but I felt it was necessary to provide this perspective in response to Vivek's earlier question. Geographically, China continues to grow both quarter-on-quarter and year-on-year. There was a slight decline in quarter-on-quarter growth in China's automotive sector during the first quarter, which we previously discussed as a seasonal drop that occurs annually. However, we've seen considerable growth in the second quarter, which is expected to continue into the third quarter. The same growth pattern applies to Japan and the Asia Pacific region. A significant change that positively impacts our sequential growth in the entire automotive segment is that the inventory decline with Tier 1 customers, especially in Europe and somewhat in the U.S., is beginning to stabilize. This suggests that in this quarter, particularly in the latter part, we anticipate starting to ship according to end demand. This is vital because we can achieve growth without needing an improvement in the macroeconomic environment or restocking by our customers. This growth is driven solely by the moderation of inventory declines among our Tier 1 customers, which is the most significant factor we are experiencing right now, C.J.

Very helpful. And I guess a follow-up question for you, Bill. You spoke earlier to Vivek around the key drivers to gross margins. I was hoping perhaps you could speak to maybe the near term, the next 6 to 9 months within the kind of structure of 57% to 63% target model. Would you highlight any particular drivers outside of utilization and mix that could impact trends there or no?

Yes, I think Kurt mentioned it. We are still maintaining a 9-week timeline, and there is an opportunity to increase that to 11 weeks in specific areas, which will also assist with our inventory. We continue to see improved costs; as you may recall, we implement low single-digit price adjustments at the beginning of the year, and it takes time to feel the full impact over the year. This will provide a positive influence moving forward. We maintain focus on this, and looking at the medium term, this is why I outlined that general rule of thumb. That's our current status, along with the utilization I mentioned earlier.

Kurt, can you just give us a little more color on the visibility trends maybe through the end of the year or even into next year? You mentioned some shortages and escalations. Just any sort of quantitative metrics you can give us, say, now versus 3 months ago on how the rest of this year and next year is looking?

I'm feeling positive now because I jumped ahead a bit. The guidance for Q3 that you just heard differs from 90 days ago when we didn’t provide any guidance for the next quarter. I did mention earlier that for the fourth calendar quarter of this year, we're expecting flat to slightly up trends based on typical seasonality using a 9-week inventory distribution, though we might exceed that. I believe this trend is continuing as our inventory has depleted our company-specific growth drivers. I want to highlight the automotive sector, which makes up nearly 60% of our business and is performing exceptionally well. There's significant momentum in the software-defined vehicles sector, which is greatly boosting our revenue in the S32 processor families. We have a strong global position in this area and we see it expanding further. Our radar technology is also excelling due to increased ADAS levels. I believe that in the midterm, the presence of robotaxis will grow. Regarding electrification, while there may have been some hesitance in the Western market, it continues to make inroads. According to the latest S&P forecast, we expect a 15% increase in car units, specifically xEVs, compared to last year, leading to a 43% global penetration rate by year-end. What truly excites me, Chris, is China. A week before last, Rafael and I were in China, and I think Rafael can share how impressed we were by the rapid pace at which customers are translating design-ins into revenue.

Yes, thank you for the question. In China, the market is driven by original equipment manufacturers who are pushing innovation through software-defined vehicles, and the pace is incredibly rapid. The competition in China is fierce, not just in terms of pricing but also in product differentiation and innovation, which is quite exciting. We recently had a very productive week of meetings with both OEMs and Tier 1 suppliers, transitioning relationships and initiating projects related to software-defined architectures, battery management systems, and radar technologies. The opportunities in China are promising. Moreover, the influence of Tier 1 suppliers in China extends beyond the local market; they are significant for foreign OEMs targeting both Chinese and global markets. Therefore, our meetings with Tier 1 Chinese customers, who are at the forefront of innovation and competitiveness, were particularly important.

So just as a follow-up, I guess, on that same topic. I mean it sounds like auto, you're most optimistic on that. If we look at the next, I don't know, year, 1.5 years, Kurt, would you expect higher relative growth from your Automotive segment or your Industrial segment?

Well, Chris, two points. The one is, we are as optimistic on industrial. It was an auto question, so we answered on auto. That doesn't mean we are not optimistic on industrial. And the best way to answer your midterm question is we see absolutely no reason to not meet our November '24 3-year Wall Street guide of 8% to 12%, both in industrial & IoT as well as in auto. Since we will be certainly below this, this year, we clearly see the opportunity to catch up next year and the year after, which is greatly helped by the cycle and by the company-specific drivers. So it's also industrial. And maybe, Rafael, you speak a bit about early views on Edge AI capability of NXP in industrial.

Yes, we are already beginning to notice signs in the industrial sector for the next quarter that indicate normalization. This is the first and only time we will mention that the performance in Q2 for industrial and IoT was influenced by the consumer market. The changes we observe in Q3 indicate that growth is broad-based, with quarter-over-quarter improvements seen across all regions. Additionally, a significant portion of this growth is coming from the core industrial segment, not solely from consumer areas. The developments in industrial for NXP, particularly regarding MCUs and microprocessors, are starting to take shape. We are also beginning to secure engagements for next year that focus on higher performance and enhanced AI capabilities with our Tier 1 partners. Our industrial growth projections of 8% to 12% remain intact and are on track to continue.

If I look at last quarter and this quarter, obviously, one of the major changes is your confidence that you could actually up some of the weeks of just the inventory, and you're still kind of waiting mid-quarter here and you kind of addressed that already. But you made the remark 9 weeks to 11 weeks. Is 11 weeks the maximum that you guys would channel refill in this period of time? Or is there any circumstance in which you would go a little bit higher than that? Just walk me through why it would be 11 weeks? Is that just kind of the stated goal long term? Or what would change to make you maybe go a little bit higher than that given that you guys are clearly seeing a recovery?

Yes, Tom, it's a long-term goal we've set, roughly the same size we had before the COVID and supply crisis. We reassessed this based on the mix of our products, using a bottom-up approach rather than a top-down decision. We determined that 11 weeks is a reasonable target across our different segments. Once we reach that point, we aim to move on from this topic because it has become somewhat of an obsession for us. We were likely the only ones to maintain tight control over our channel inventory throughout this cycle, which has proven to be very beneficial. We want to return to normal, which for us means maintaining an 11-week inventory level, with a possibility of slight fluctuations to 12 weeks or down to 10, but our long-term target remains 11 weeks. This was even included in our Wall Street model we shared last November, indicating that the forecast is based on maintaining 11 weeks of inventory for the long haul.

Helpful, Kurt. And then obviously, you gave us a little sneak peek into Q4, so I can't help but pick a little bit there, too. But you're saying flat to slightly up. If you look at normal seasonality for your segments kind of into the December quarter, at least over the past 7, 8 years, it looks like auto is up low single digits. Industrial is actually up a bit more robustly in the fourth quarter. If you were to plug that in, you kind of get greater than 20% growth in the Industrial business. You're clearly pointing to some strength there, but any differences that we should be thinking about in the recovery between auto and industrial as the year closes? Or would you say the contributing factors to that flat to slightly up are relatively in line with what you've seen historically?

Tom, that's a stretch too far. Clearly, no segment guidance for Q4. What I did say, the flat to slightly up is indeed just mathematically our, I don't know, 9-year or so average historical seasonality across the entire company. And that's what we give for Q4, and it stays there. So I'm sorry, but we really can't go to a segment level at this stage.

In your prepared remarks, I think you talked about not seeing any material impact from the tariff environment or pull-ins. Can you maybe elaborate on what signals you're looking for and what makes you so sure that there's not really a meaningful impact yet? I think a few of your peers have commented your customers don't check a pull-in box when they place an order. So I'd be curious to hear if there's any changes in your customers' behavior and what you're seeing on the tariff front?

We have a pretty good view on this, Joshua, because we are very alert to it. And that has to do that we have been highly disciplined over a number of years now on inventory levels. So we didn't want to get into the trap of being a victim of pull-ins here at the very end of the down cycle or better at the beginning of the up cycle. The way we can do this is we have a lot of AI running on our order patterns, which tells you immediately if there is anything which falls out of the normal patterns. And when we see that, we go back to the customer and ask what is it? And if there is a clear request for this, which is a wish for a pull-in relative to tariffs, we typically don't support it because that is exactly what we want to avoid. We had very few of those situations. So I'm not talking fiction. Not much, though. And therefore, we can really make this statement. We also looked at it relative to liberation day if there was any correlation of any of these signals. And given our very application-specific business, Joshua, we have pretty smooth order trends. I mean this is not like everything is jumping around all the time. It is relatively smooth. So we would see those deviations. That's the basis I made this comment from. My comment to be very clear here was a firm comment for the past second quarter. So the numbers which we gave you had no pull-ins or pushouts. And the comment also holds for what we can see from today's perspective for the third calendar quarter. Now I don't know yet what the rest of the quarter is going to be in the end, but it doesn't appear at this stage that any of this would happen.

Got it. Kurt, you touched on this before, but I was wondering if you can maybe comment on behaviors from your auto customers, specifically related to their investment in software-defined vehicle. I mean it's a very challenging time still to be an auto OEM. Like are you seeing them sustain, accelerate, pull back on their investment in newer technologies and features like SDV and ones that enable?

Yes, what excites me is that the adoption of software-defined vehicles is clearly accelerating. OEMs worldwide are discovering that the SDV concept offers them significant competitive advantages. One major benefit is consumer value, as the vehicle does not age in the consumer's hands, which is a considerable advantage. Additionally, it enhances design versatility and reduces costs. I strongly believe that much of the cost disadvantage experienced by the Western car industry compared to Chinese competitors stems from the fact that China has embraced SDV concepts earlier, faster, and more successfully. Therefore, it is essential for the rest of the world to catch up in order to stay competitive with China in this domain. There is a clear acceleration occurring, and I understand this may seem disconnected from the tariff pressures and turmoil affecting the industry. However, everyone recognizes that this is the forward path. It's akin to how the industry approaches electrification of drivetrains; the knowledge exists, but now it's about how to effectively deliver it to consumers. The next significant development is SDVs, and a crucial player in this space is NXP. With our S32 family of products, enhanced ethernet connectivity, and TTTech Auto software, we are significantly ahead of the competition.

Kurt, this is indeed your last earnings call. Thank you for the help over the years.

Kurt, I wanted to revisit the TTTech in the guide. I know you said it was insignificant, but I mean, you had 1,100 employees and you paid $625 million for it. Is the revenue really $0? Like how big is the insignificant amount of revenue that's actually in Q3?

It is insignificant, Stacy, because we don't want them to repeat their previous actions to some extent. We need their expertise and knowledge in a sector they are familiar with, but we are shifting from a service model to becoming a key component of what we do for the SDV. That is why this is changing compared to what it may have been in the past, Stacy.

Okay. So it's like what, single-digit millions? Or is it double-digit? Like just help me size it. How big is it?

We don't give a number for it, Stacy, but it is really completely insignificant and immaterial to NXP's financials. On the revenue/gross margin as a consequence side, it is not insignificant at all from the OpEx side, which I called out because those 1,100 engineers, we, of course, want to have them, we pay them. So they are on the payroll. So that's really where the impact is.

Got it. Okay. So there's a business model change is what you're saying, okay, I understand.

Absolutely, absolutely, Stacy.

For my follow-up, I wanted to take a little bit on Q4. So it does sound like I get it that the guidance doesn't include fill in the channel, but it's certainly on the table. And you sort of gave a number for kind of typical seasonality for Q4. Are there plausible scenarios where you could be above seasonal in Q4 without filling up the channel further than it is right now?

Stacy, we don't guide Q4 at all.

I am not asking the guidance.

I understand you want to know if we can be above seasonality today. That's the question at hand.

What I'm asking is do you need to fill the channel to be above seasonal is what I'm asking?

No. That is fine with 9 weeks. However, the sell-through trends, Stacy, are very dynamic to the positive side. And that's why I made that comment even for quarter 3, Stacy. I mean, you asked for quarter 4. Honestly, I think the more burning question is for quarter 3 because already there, the dynamic is such that we might selectively put it a little higher. Now if that all continues the way it actually in all the past cycles has continued, of course, the dynamic holds or accelerates even into Q4.

I mean even though, I wonder a little bit, we read negative preannouncements from auto OEMs and like the end demand environment for auto doesn't seem fantastic. So it's just a normalization of inventory or like what?

I understand what you're saying. Recently, there have been a few less significant announcements. However, we need to consider the overall market. I mentioned that S&P has raised their car forecast for this year from 88 million to 90 million. That's a modest increase of 2 million cars. I want to clarify that it's not the SAAR that is driving our performance. Instead, it's showing slight improvement, and our growth is primarily due to an increase in content, thanks to developments like radar electrification and S32. Additionally, it's crucial to note that this growth results from a reduction or even halt in inventory depletion among Tier 1 suppliers in the Western world, which has been a significant challenge for about eight quarters. Once that issue is resolved, we can begin to supply to the natural end demand, leading to growth. Essentially, there isn't much we need to do; as long as the inventory depletion among Tier 1 suppliers stops, our growth will continue.

Got it. That's helpful. I apologize if I sound like a harpy.

No, that's all right, Stacy. And I think we are at time. So I want to thank you all for the attention. And I trust you got to feel that we have quite a change from 90 days ago relative to the sentiment on the up cycle, which starts to be clearly broad-based in industrial & IoT across geographies, across consumer IoT and core industrial and across direct and distribution channels. So it can't be broader than this. And also Auto, which was actually the best segment, if you will, in the second quarter because it was already flat year-on-year, is accelerating from a sequential perspective. But what excites us in auto is the design win traction on the one hand and the fact that this damp inventory burn at the Tier 1s starts to go away. Having said that, thank you very much all, and speak to you in the individual calls. Thank you. Bye-bye. Thank you.