NXP Semiconductors NV (NXPI) — Q3 2025 Earnings Call Transcript

Thank you, Towanda, and good morning, everyone. Welcome to our third quarter earnings call today. With me on the call is Rafael Sotomayor, NXP's President and CEO; and Bill Betz, our CFO. Also on the call with us is Kurt Sievers, who will act as a special adviser to Rafael through the end of 2025. 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 financial results for the fourth quarter of 2025. NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure of 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 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 Rafael.

Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the third quarter was solid. Our revenue exceeded guidance by $23 million. We experienced sequential growth driven by broad-based improvements across all regions and end markets. We maintained good profitability and controlled operating expenses, resulting in healthy fall-through. Turning to the specifics. NXP delivered third quarter revenue of $3.17 billion, a decline of 2% year-on-year and up 8% sequentially. Non-GAAP operating margin in the third quarter was about 34%, 170 basis points below the same period a year ago and 10 basis points above the midpoint of our guidance. The lower operating margin versus the same period last year was due to lower revenue and gross profit, partially helped by flat operating expenses. Taken together, we drove non-GAAP earnings per share of $3.11, $0.01 better than guidance. Distribution inventory was flat at 9 weeks, consistent with our guidance, while still below our long-term target of 11 weeks. From a direct sales perspective, we believe our shipments into the Tier 1 automotive supply chain have approached end demand. We estimate that aggregate inventory levels of NXP-specific products at our major Tier 1 partners are below NXP's manufacturing cycle time. We believe this reflects a continued cautious approach in the automotive supply chain due to the uncertain macro environment. Overall, during the quarter, we did not experience any material customer order pull-ins or pushouts. Now I will turn to our expectations for the fourth quarter. Our outlook reflects the continued strength of our company-specific growth drivers and signs of a steady cyclical recovery in our automotive and industrial markets. We do not yet anticipate direct customer inventory restocking as one might expect off the bottom of a cyclical trough. From a channel perspective, our guidance assumes distribution inventory may fluctuate between 9 and 10 weeks as we are selectively staging additional products in the channel to be competitive. We are guiding fourth quarter revenue to $3.3 billion, up 6% versus the fourth quarter of 2024 and up 4% sequentially. At the midpoint, we expect the following trends in our business during Q4. Automotive is expected to be up mid-single digits versus Q4 2024 and up in the low single-digit range versus Q3 2025. Industrial and IoT is expected to be up in the mid-20% range year-on-year and up 10% versus Q3 2025. Mobile is expected to be up in the mid-teens percent range year-on-year and up in the mid-single-digit range on a sequential basis. And finally, Communication Infrastructure and Other is expected to be down in the 20% range versus Q4 2024 and flat versus Q3 2025. In summary, NXP third quarter results and guidance for the fourth quarter reflect a growing confidence in the company-specific growth drivers and that our new upcycle is beginning to materialize. This is based on several signals we track regularly. These include continually growing customer backlog placed with our distribution partners, improved order signals from our direct customers, increased short-cycle orders, and a growing number of product shortages leading to customer escalations. At the same time, we do not yet see material customer restocking due to the uncertain macro environment. Now an update on our pending acquisitions of Kinara and Aviva Links. We have received all regulatory approvals. We have closed both Aviva Links and Kinara. We are extremely excited about the long-term benefits these acquisitions will bring to our customer engagements and market position. As we have previously shared, in the short term, these acquisitions will have an immaterial impact on the revenue and financial model of NXP. We do believe the revenue impact will be material in 2028 and beyond. The three recent acquisitions, TTTech Auto, Kinara and Aviva Links will enable NXP's vision to be the leader in intelligent edge systems in the automotive, industrial and IoT markets. As this is my first earnings call, I would like to assure you that the strategy we laid out during our November 2024 Investor Day stays firmly in place. This includes our product innovation focus in our financial and capital return model. For the last six months, I've traveled globally, engaging with our customers, suppliers and development teams. My key takeaway is that NXP's strategy is compelling. We are focused on the most important customers and thought leaders. Our highly differentiated product roadmaps position us well to achieve our long-term goals. I will continue to work closely with the cross-functional leaders throughout NXP to accelerate our innovation and time-to-market efforts. Overall, we remain focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. And now I would like to pass the call to Bill for a review of our financial performance.

Thank you, Rafael, and good morning to everyone on today's call. As Rafael has already covered the drivers of the revenue during Q3 and provided the revenue outlook for Q4, I would like to move to the financial highlights. Overall, Q3 financial performance was solid with revenue, gross profit and operating profit all above the midpoint of our guidance range, while operating expenses were a touch above the midpoint of our guidance due to slightly higher variable compensation. Taken together, we delivered non-GAAP earnings per share of $3.11 or $0.01 better than the midpoint of our guidance. Now moving to the details of Q3. Total revenue was $3.17 billion, down 2% year-on-year and $23 million 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%, down 120 basis points year-on-year and in line with the midpoint of our guidance range. Total non-GAAP operating expenses were $738 million or 23.3% of revenue, flat year-on-year. From a total operating profit perspective, non-GAAP operating profit was $1.07 billion, and non-GAAP operating margin was 33.8%, down 170 basis points year-on-year and 10 basis points above the midpoint of our guidance range. Non-GAAP interest expense was $91 million, while taxes for ongoing operations were $173 million or a 17.7% non-GAAP effective tax rate. Noncontrolling interest was $15 million and results from equity accounted investees related to our joint venture manufacturing partnerships was a $2 million loss. Taken together, the below-the-line items were $6 million unfavorable versus our guidance, primarily due to a slightly higher tax rate driven by improved profitability. Stock-based compensation, which is not included in our non-GAAP earnings, was $118 million. Now I'd like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $12.24 billion, up $757 million sequentially. We issued three new tranches of debt totaling $1.5 billion with a combined weighted cost of debt of 4.853%. During the quarter, we reduced our net commercial paper outstanding by $735 million. Additionally, we plan to retire two tranches of debt due in March and June of 2026, totaling $1.25 billion with a weighted cost of debt of 4.465%. Our ending cash balance was $3.95 billion, up $784 million sequentially due to the cumulative effect of commercial paper reduction, capital returns, equity and CapEx investments offset against the new debt and cash generated during the quarter. Resulting net debt was $8.28 billion with a trailing 12-month adjusted EBITDA of $4.65 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.8x, and our 12-month adjusted EBITDA interest coverage ratio was 15.9x. During Q3, we paid $256 million in cash dividends and repurchased $54 million of our shares, representing a 12-month total shareholder return of $2.05 billion or 106% of non-GAAP free cash flow. After the end of the quarter and through October 24, we bought an additional $100 million of our shares under a 10b5-1 program. Now turning to working capital metrics. Days of inventory was 161 days, an increase of 3 days versus the prior quarter, with inventory dollars up modestly due to prebuilds and wafer receipts from our foundry partners. Days receivables were 31 days, down 2 days sequentially, and days payable were 58 days, down 2 days sequentially as well. Taken together, our cash conversion cycle was 134 days. Cash flow from operations was $585 million, and net CapEx was $76 million or about 2% of revenue, resulting in non-GAAP free cash flow of $509 million or 16% of revenue. During Q3, we paid $225 million towards the capacity access fees related to VSMC, which is included in our cash flow from operations. Additionally, we paid $139 million into VSMC and $15 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 fourth quarter. As Rafael mentioned, we anticipate Q4 revenue to be $3.3 billion, plus or minus $100 million. At the midpoint, this is up about 6% year-on-year and up 4% sequentially, better than our view 90 days ago. We expect non-GAAP gross margin to be 57.5%, plus or minus 50 basis points. Operating expenses are expected to be about $757 million, plus or minus $10 million, or about 23% of revenue, consistent with our long-term financial model. Taken together, we see non-GAAP operating margin to be 34.6% at the midpoint, bringing NXP back into our long-term financial model. In addition, our guidance includes about two months of operating expenses for the close of Aviva Links and Kinara acquisitions. Now turning to the below-line items. We estimate non-GAAP financial expense to be about $103 million. We expect the non-GAAP tax rate to be 18% of profit before tax. Noncontrolling interest expense will be about $14 million, and start-up expenses related to our equity account investees will be about a $3 million loss. For Q4, we suggest for modeling purposes, you use an average share count of 254.3 million shares. We expect stock-based compensation, which is not included in our non-GAAP guidance, to be $118 million. Taken together at the midpoint, this implies a non-GAAP earnings per share of $3.28. Turning to the uses of cash. We expect capital expenditures to be around 3% of revenue below our 5% target as we execute our hybrid manufacturing strategy. This includes consolidating our 200-millimeter front-end manufacturing factories, investing in our 300-millimeter joint ventures with VSMC and ESMC. These investments will result in margin expansion, supply resilience and access to a competitive manufacturing cost structure. As shared at our Investor Day, we will continue to substantially invest in VSMC in Singapore during Q4, including a $250 million capacity access fee payment and a $350 million equity investment. When VSMC is fully loaded in 2028, it will drive a 200 basis point improvement in NXP's total gross margin. Additionally, we will make a $45 million equity investment into ESMC in Germany, enabling additional 300-millimeter supply resilience. Lastly, we will pay approximately $500 million for the closed acquisitions of both Aviva Links and Kinara. And furthermore, we have restarted our buybacks at the beginning of September, and we will continue to buy back stock consistent with our capital allocation strategy.

Congrats to both Kurt and Rafael. I guess my first question, a big picture one. Bill, you just mentioned that the guidance for the fourth quarter was better than you expected 90 days ago. But the details Rafael gave, while positive, didn't seem like much had really changed. So what specifically got better over the last 90 days, either by end market, inventory, region, etc.?

Yes, let me address that, Ross. We are guiding for a 4% sequential increase in Q4. Previously, we provided a conservative outlook for Q4, indicating we would be flat to slightly up. I can say that the risks we anticipated have not materialized, and the indicators of a soft recovery are still present. Our order book remains strong, and the backlog from our distribution partners is healthy. The slight improvement in our quarter-to-quarter guidance, above seasonal trends and pre-COVID levels, is driven by Industrial and IoT, where we are beginning to see signs of modest demand growth.

Great. I guess on that front, you mentioned the inventory staying in the 9 to 10-week level, not quite getting to the 11 that's your target. If you go from 9 to 11, any sort of rough dollar amount that, that contributes that we should think about? And is there any specific trigger that you're looking at to let that inventory get back to its normal level, whether it be in the fourth quarter, which it doesn't sound like or in, say, the first half of next year?

Yes, Ross, in the past we used to consider that one week of inventory equals about $100 million. I understand that perspective, but I think it's more important to focus on how we are strategically managing our channel inventory. Given the current environment, where visibility is limited and orders are arriving late, it's crucial to have the right product mix to remain competitive, especially compared to our rivals who have much higher inventory levels. We're not a catalog company, so it's essential for us to have the right products available. Currently, we are being selective and introducing additional products that we believe will sell well. This is why I mentioned that our inventory might fluctuate between 9 and 10 weeks. In today's environment, weeks of inventory are not fixed; with late-order arrivals, our situation is fluid. Regarding your inquiry about reaching 11 weeks, as our visibility and confidence improve, I can confirm that we still see the ideal level as moving toward 11 weeks, although it's uncertain whether that will occur in Q1 as business conditions improve.

My first question is regarding your comment, Rafael, where you mentioned that inventory levels in automotive are low and improving overall. However, you do not anticipate an increase in inventories in the direct channel. Given that you are down high single-digit percentages quarter-on-quarter for Q1, should I interpret your comment to mean that you are comfortable with the seasonal outlook, assuming there is no stockpiling and demand remains stable? Is that the correct way to understand it?

So you're asking about Q1?

Yes, Q1 like in a way, directionally based on what you just said, like are you comfortable with the seasonal trend?

Yes. Before I answer, I want to emphasize that we are optimistic about the setup heading into 2026. Looking at how we finished Q4, we are entering a phase of inventory normalization in the automotive sector, and we've noticed signs of improved demand in Industrial and IoT. We feel good about the situation. I won't provide guidance for Q1, but I think it would be reasonable to model seasonality using pre-COVID patterns, which typically reflect a high single-digit decline.

I appreciate the insight. Perhaps the next question is for Bill. Gross margin is expected to improve in the next quarter. I assume this could be due to the product mix, but I would like to hear your thoughts on it. More broadly, your inventory levels are still relatively high, with both days and dollars up. So I assume you're continuing to keep inventory levels elevated. How should we view the gross margin direction following Q4? Will you reduce inventory at the cost of gross margin, or do you believe you can maintain or even improve this level of gross margin? Some clarity on these variables would be very helpful.

Sure, Francois. As you could see, as you mentioned, we are guiding gross margins up approximately 50 basis points into Q4. And this is driven by the higher revenues, Francois, improved operational costs, and also, yes, higher utilizations, which is actually offset with unfavorable product mix. And then, of course, we have the normal plus or minus 50 basis points on what that mix tends to ultimately be in the quarter. For Q1 2026 and the full year of 2026, we are not guiding; however, please consider our normal seasonality that Rafael just talked about in revenues for Q1, along with our annual low single-digit price negotiations that typically impact us in the first quarter, and we always work to offset those throughout the year through cost reductions and operational efficiencies. So for full year 2026, I would say we expect to be in our long-term model of 57% to 63%, driven by a function of revenue levels, improved utilization, cost reductions offsetting the price gives and the normal product mix fluctuations in any given quarter. I would say, as stated before, please continue to use that rule of thumb for every $1 billion of revenue on a full year basis drives approximately 100 basis point improvement to gross margin. For example, I shared in the past, at $15 billion, we should be at 60%. And then remember, as I mentioned in my prepared remarks, beyond 2027, we also see another lift to our gross margins by approximately 200 basis points driven by our hybrid manufacturing strategy. And again, overall, I think we're very pleased with the trajectory of our gross margins and how we manage this. Related to your inventory question, you're right. In Q3, we finished inventory at 161 days. That was up 3 days. And we're staging inventory to support our growth into Q4. Proactively, we are holding more inventory to support the continued increase of late orders that Rafael talked about, which are coming in below lead times. And of course, the customer escalations have grown quarter-over-quarter, as Rafael shared in his prepared remarks. And as I mentioned last quarter, we started our prebuilds for the 200-millimeter consolidation plans, which by the end of the year will be worth about 6 to 7 days of our total NXP days of inventory. Also remember, we're holding approximately 14 days of inventory on our balance sheet versus our distribution partners, again, that assumes 9 weeks. And with the positive signals we are seeing and from lessons learned from the past, I'm quite comfortable and pleased with the internal inventory positioning. As we mentioned many times, we have long-lived inventory in die form, preventing obsolescence risk. So if you had me to call inventory into Q4, I would say similar levels from a days perspective, plus or minus 5 days is the best view I can give you at the moment into Q4.

I also wanted to touch on automotive customers' kind of view on inventories. And I guess, can you just talk to us a little bit about what those conversations are like? Understanding there's not much overlap between you and Nexperia at this point, I would think stuff like that is a reason to want to hold more inventory and kind of buffer yourself from these geopolitical issues. Just are you seeing any indications that, that is happening or will happen?

Yes. Joe, that's a great question. The situation with Nexperia demonstrates that the current level of inventory at the end customer is not enough to ensure business continuity. We haven't observed any restocking from our direct customers. However, if we look at the business dynamics in automotive, which are closely linked to inventory, there is a normalization taking place and we see it as a positive factor. Ideally, we would expect the next phase to involve restocking inventory, but that has not occurred yet. Conversations indicate that our customers are being quite cautious in managing their working capital, leading to no restocking at this time.

Yes. Maybe I'll add, Nexperia itself, just to add to it because I think your question, does it impact NXP in any way from a direct standpoint, the answer is no. And as Rafael said, we're still in the early phase and seeing customer escalations, the signals improved. The restocking has not happened nor has price increases that happened, which you typically see during a supply crisis. But those are other signals that we wait to see.

Okay. And is there any impact potentially on automotive production from all of that on the negative side that you could see if they have shortages of other components that it slows production?

Joe, we don't expect that to happen. The products currently associated with Nexperia could potentially serve as a second source. I believe the qualification process will likely be straightforward for OEMs. However, our current orders do not suggest any impact on automotive production.

My first one, I wanted to drill into gross margins a little more. So you are guiding it up sequentially, but it's flat year-over-year even on a pretty decent revenue increase. I guess that's mix, but I'm struggling to see where the mix issue is. It looks like your industrial mix is higher, auto looks about the same. Like what is going on with gross margin? It sounds like utilization, I'm not even sure they don't sound like they're lower year-over-year. Like why aren't we getting more gross margin leverage like on a year-over-year basis?

Yes, Stacy, as we approach Q4, our gross margins across different segments are aligning more closely with the corporate average. However, we are seeing a significant year-over-year decline in the communications and infrastructure sector. On the other hand, we are achieving record performance in our mobile division, although it is slightly below our overall margins. These two end markets are affecting our overall mix. In terms of utilization, we aim to maintain a level in the high 70s as we head into Q4. We currently have elevated inventory levels internally, which influences how we manage materials throughout our processes. Despite the unfavorable mix we are experiencing, these factors are helping to balance the situation.

I understand. The inventory also contributes to the depreciation, and the distribution aspect has a higher margin as well.

Yes, there's two sets of it. So remember, the distribution and what you'll see is actually our distribution sales will be up quarter-over-quarter, but let me remind you that a portion of that or a large portion of it is driven by our mobile business where we drive and use the distribution partners in that mobile end market. And so that's what's driving the increase from a quarter-over-quarter perspective.

Got it. For my follow-up, I just wanted to clarify. It sounds like there is some distribution fill into Q4. If I estimate half a week, is that roughly around $50 million of income impacting the Q4 guidance? I know you mentioned that you're comfortable with the seasonal outlook for Q1, but does the additional channel fill in Q4 affect how we might view Q1 seasonality? Are you assuming that you'll be introducing more into the channel in Q1 for the seasonal guidance?

There were several questions regarding that topic, Stacy. Let me address it. You made a comment about estimating where we will end up in the channel, mentioning $50 million. However, I wouldn't view it that way. We provided guidance of $3.3 billion. Currently, our visibility is limited, and orders are arriving late. Therefore, the inventory levels in the channel may fluctuate between 9 and 10 weeks, but it won't exceed 10 and could be as low as 9. I hesitate to apply a formulaic approach to predict revenue based on weeks of inventory in the channel due to the fluid nature of demand. We are introducing products that we are confident will sell well, so I don't see it...

The Industrial and IoT business seems very strong to close the year, kind of particularly versus where expectations were. You guys have been helpful in the past about kind of laying out where you're seeing that strength, whether it's the core industrial side or more on that IoT side. Could you give us a little bit of a feel of what's moving into your Q4?

Yes, Tom, let me take a moment to provide an overview. In our Industrial and IoT business, 60% of our focus is on core industrial while 40% pertains to consumer products. Notably, 80% of our revenue is generated through distribution channels, which highlights the overall picture. Within IoT, we have observed improvement in the end customer backlog through the channel, indicating strong demand growth. On the consumer side, we're experiencing advantages from specific company drivers. For example, a newly emerging category of wearables, such as smart glasses, is seeing high demand for high-performance, low-power processing, which aligns well with our product portfolio. We're also witnessing broad-based improvements in the core industrial segment across various regions and products. More specifically, we're seeing growth driven by energy storage systems and building automation. However, I want to clarify that we do not consider ourselves as key indicators for the Industrial and IoT sectors, and our observations may primarily reflect our individual company circumstances.

Helpful. And then a similar question just on the automotive side because it's useful to kind of see what's moving here is just on the S32 portfolio, like you've seen some really strong growth trends. And like part of the reason many think that you guys have handled this a lot better is just the growing portion of your business that is levered to processors. So maybe again, what happened in the quarter, maybe the processor business versus the rest of auto? And then into the fourth quarter, any kind of color on if there's a divergence there, how we should be thinking about just the entire auto business with those two pieces?

No, I think Tom, we are encouraged about the direction that the auto sector is heading. In Q3, we were only 3% below our previous peak, which is promising. Regarding what is driving our business performance, it continues to be what we refer to as accelerated growth drivers. These include the software-defined vehicle, which is part of the S32 portfolio you mentioned, along with radar and connectivity. If you ask me what is fueling this growth, it is indeed the ongoing shift to software-defined vehicles that is boosting our performance in the auto sector.

And Tom, if I could add, we'll provide a full year kind of update on where we're at with our accelerated growth drivers on our Q4 call. But directionally, I'd say we feel very good about how the accelerated growth drivers are playing out intra-quarter.

Best wishes to both Rafael and Kurt. So Rafael, let's say, if '26 plays out the way '25 did with China OEMs and EVs growing, but the rest of the world not growing or flattish, what does it mean for NXP? So in an overall flattish auto production environment, what kind of lift can content provide net of any pricing movements? Like can your autos be conceptually within your long-term model for next year?

So Vivek, I want to reframe how we view the drivers of our business. Car production is not the main driver for us; we are not tied to SAAR. When you look at production, it has remained stable for years, fluctuating just 1% here and there, averaging around 90 million a year. Content growth far surpasses SAAR growth. Production is quite stable, but we operate within a very complex supply chain. This complexity can lead to inventory surpluses or shortages, which introduce cyclical elements to our business. I see the normalization of inventory as very positive, especially when considering the content growth in the automotive sector. Thus, I'm reframing how we discuss this. Content growth and inventory normalization give us an optimistic outlook for our auto business in 2026.

And for my follow-up, Bill, on gross margins, is it just volume that takes you from the kind of the lower end of the 57% to 63% range right towards the middle of the range? Or are there any new products, any new kind of mixing up of your portfolio that can provide benefits on top of any volume benefit?

Absolutely. As we mentioned before, our new product launches contribute positively to the company, although they experience typical growing pains as they ramp up while other products decline. The mix of orders we receive and fulfill is crucial; we handle over 10,000 products every quarter. Consequently, we must adjust our approach, either accommodating changes or allowing certain products to fall through. This dynamic is one reason why gross margins improve. Additionally, our hybrid manufacturing strategy, particularly our shift towards 300-millimeter wafers and related investments, is expected to yield benefits beyond 2027. In the short term, we're effectively offsetting price reductions through internal cost efficiencies and productivity improvements, such as reducing test times. That's what we strive to do consistently, and our performance in gross margins during this recent cycle reflects that. As we lower our fixed costs, which are currently at 30%, we anticipate becoming less variable. In a few years, after completing our consolidation efforts, we expect to dip below 20%, which will further reduce that variability.

I wanted to revisit your comments on inventory levels, especially with your direct automotive customers. Can you tell us where those inventory levels currently stand? You mentioned the impact of increased inventory in the distribution channel. Could you explain what might happen if those direct auto customers decide they no longer need to restock?

So Chris, what we see right now that we are starting to shift to end demand. And I think that normalization and we can see it in our orders. And we did say indeed that we don't see the restocking. Now the specific question of what the levels are, I think we don't have visibility at a granular level per customer per Tier 1, that will be complex. But it's very clear to us that is way below our manufacturing cycle. And that's what I mean by is I think that is just eventually not a healthy level to be able to manage a sustainable business. I can't comment whether this will happen or not in the next few quarters or in even 2026. But that is a potential scenario of restocking is indeed a tailwind for our business that is something that will provide benefit for us.

Maybe I could add a little bit, Rafael. Chris, as you know, for about the last eight quarters, we've been undershipping into the Tier 1 supply chain and actual end production. So it's actually been a headwind to us. I'd say over the last two quarters and in our guidance into Q4, we started to see that headwind subside. And so we think the inventory levels at the Tier 1 are where they, the Tier 1 players, believe are normalized for the current environment. They are still very cautious on the macroeconomic outlook. And so as Rafael said, we've not seen that next lever of restocking occurring. But when you go from a headwind of undershipping to at least shipping to end demand, that's the new growth in the short term. Did you have a follow-up, Chris?

I do. I wanted to come to your comment on buybacks that you mentioned in your prepared remarks. Could you give us a little more detail on what the intention is going forward and what we should expect now that you're resuming the buybacks?

Yes. No change to our capital allocation strategy, Chris. As shared in our prepared remarks, we restarted our buybacks. As I mentioned, we have a lot of cash going out. And so we just wanted to make sure we had all the cash to continue to return and make all the investments we want to make inside NXP, but also balance that with healthy returns to our owners. And so if you look at the last 12 months, we returned 106% back to our owners, and we're going to continue to go do that.

I want to ask about the cyclical tailwinds compared to seasonality. Looking at December, it seems that industrial might be performing better than usual for this time of year. You mentioned a soft outlook for March, which seems typical. Many have noted a slowdown in the cyclical recovery. Your comments, Rafael, were quite optimistic, so I'm curious to know if you think the cyclical tailwind is diminishing when considering just seasonality. Also, could you give your perspective on the different markets?

Yes. Looking at the Q4 numbers, it's clear that industrial and IoT performed above typical seasonality. Automotive saw a slight improvement compared to seasonality and pre-COVID levels. The key factor driving this is that inventory digestion is nearly complete, which is significant for normalization. We are beginning to shift towards genuine end demand in automotive and are noticing company-specific drivers in industrial and IoT that are beneficial. Regarding potential changes in seasonality or whether we are entering an upcycle, we are cautious. While inventory digestion is indicative of an upcycle, we observe specific growth areas in industrial and positive signs of true demand in both industrial and IoT. This suggests the beginnings of a mild upcycle. Therefore, if you were to ask me today if I am more optimistic than last quarter, I would say yes, we are slightly more optimistic.

And then I wanted to ask you on mobile. I mean, if I have the numbers right, it might be a record. I'm just kind of curious the drivers behind that.

Blayne, in mobile, we're a specialty player there, mostly driven by the wallet and a little bit of custom analog that we do for a Tier 1 customer there. I see the moves of Q2 to Q3 and Q4. And I think you got to take Q3 and Q4 together, is purely, in my opinion, it's just a seasonal move and some strength in some of our customers.

Congrats to both Rafael and Kurt and good luck. I know it's still early in earnings season, but your comments and outlook on the Industrial & IoT segment, were certainly better than your peers who have mainly talked about decelerating trends. We've kind of touched on it a little bit, and I realize you're not going to comment on peers. But would you say the difference in what you're seeing versus peers is because of inventory management or more product cycle driven? And what gives you confidence in the sustainability of sort of the upcycle that you're starting to see signs of with orders still coming in late and with the lead time?

Yes, Josh, I can address NXP's situation regarding Industrial and IoT. This market has been one of the more challenging areas for us since 2022. As of the third quarter, our business is still 20% below our peak. However, I must remind you that we are not a bellwether for the Industrial and IoT sectors, so comparisons to our peers may not be entirely relevant. That said, we have managed inventory in a disciplined manner during the downturn. I believe we will continue to be disciplined as we navigate what we see as a mild upcycle. Additionally, we are experiencing some company-specific factors driving genuine demand, including a few key design wins in the core industrial sector that are contributing to our improvement. However, I'm uncertain how that would serve as an indicator for the broader industry.

Understood. Helpful color. And I was maybe also hoping that you could provide some color on the China auto market, what you saw there intra-quarter and your expectations into 4Q. I believe a good amount of that is actually served by the disty. So our inventory levels there lean as well?

Yes, I visited China a few months ago with Kurt, and we visited customers in China, Taiwan, and Japan. Specifically in China, the market continues to be strong and very dynamic. The auto industry there remains competitive, with a strong push for innovation and product development. Our inventory situation there is also lean, but the business is driving strong results. We have good customer traction, so we feel very optimistic about our position in China.

And Josh, if I could just add as a reminder, in the Asia market, specifically in China auto, we service the majority of that through our distribution channel. And it is in the Western markets in North America and Europe, where we do it on a direct basis. So our approach to channel management, which I'd say is probably best-in-class, we take a heavy hand there even in Asia with the channel.

First, I'm hoping you can remind us about the strategic purpose of the recent acquisitions? I think TTTech closed recently, but then you have the two new ones as well. Can you just frame that as it relates to the rest of the autos business? And then I have a follow-up.

Yes. William, these acquisitions are actually directly aligned with the strategic direction of bringing intelligent systems at the edge of industrial and automotive. If you look at TTTech as a company that is a software company that is going to help us accelerate our move of the system-defined vehicle and around S-32s and around a system approach. And so quite excited to have them. It's a capability that would have been very difficult to obtain organically. And it's a company that brings IP-specific also in functional safety at a system level. Aviva Links is a company that has a really, really, I would say, innovative technology on a SerDes technology that is a standard. So it's a standard SerDes. And that is critical to standardize sensors think of our radar, think of cameras, think of LiDAR around a core processor, which, in this case, will be our S32. So we're quite bullish on Aviva Links. And Kinara brings AI capabilities, especially GenAI capabilities, high performance, low power that is going to also accelerate our portfolio of intelligent into the edge.

And then as a follow-up, there's been some discussion about some elevated competitive dynamics in the infotainment part of your autos business. Can you remind us how big that is in your autos business and maybe update us on that competitive situation?

Will, I'll take that one. So if you think about IVI in vehicle infotainment, there's kind of two parts. There's the visualization what you see on the dashboards and there's the what you hear the audio portion. I'd say on IVI auto, we continue to be a dominant player there. On the visualization, our performance is maybe a little below some of our peers, but I think that's very well known at this time. And I think with that, Towanda, I think we're going to need to move back to Rafael for closing remarks, if we can.

Well, thank you, everyone, for joining us today and your thoughtful questions. This quarter marks both a leadership transition and a reaffirmation of NXP's consistent strategy, focus on profitable growth, disciplined execution and predictable returns. We are encouraged by the gradually increasing signs of a cyclical recovery across our automotive and Industrial and IoT end markets and by the continued strength of our company-specific growth drivers. Our priorities remain clear: deliver on our commitments and manage what is in our control and position NXP to continue to grow profitably. I want to express my gratitude to Kurt for his outstanding leadership and for the partnership we have built over many years. In his 30-year career at NXP, he has left a lasting legacy, navigating us through various challenges and positioning NXP as a leader in the markets we serve. I am truly humbled to follow in his footsteps. It is a privilege to lead this company and this team. I am excited about what we will achieve together. Thank you.