NXP Semiconductors NV (NXPI) — Q4 2025 Earnings Call Transcript

Thank you, Michelle, and good morning, everyone. Welcome to NXP Semiconductors earnings call today. With me on the call today is Rafael Sotomayor, 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. The 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 first quarter of 2026. 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 to the non-GAAP financial measures to the most directly comparable GAAP measures in our fourth quarter 2025 earnings press release, which will be furnished to the SEC on a Form 8-K and available from NXP's website in the Investor Relations section. Now I'd like to pass the call to Rafael.

Thank you, Jeff, and good morning. We appreciate you joining our call today. Our overall performance during the fourth quarter was solid, with all end markets performing either in line or better than expected. All regions were up on a year-on-year basis. Turning to the specifics, NXP delivered fourth quarter revenue of $3.34 billion, an increase of 7% year-on-year and up 5% sequentially. This was $35 million better than the midpoint of our guidance. Non-GAAP operating margin in the fourth quarter was about 35%, 40 basis points above the same period a year ago, and in line with the midpoint of our guidance. Taken together, we drove non-GAAP earnings per share of $3.35, $0.07 better than guidance. Distribution inventory will stay weak, consistent with our guidance. We remain disciplined on channel health, prioritizing sell-through of high-demand products rather than broad-based restocking. Now I would like to reflect on our performance in 2025. The year was a tale of two halves, with the first half of the year exhibiting weaker demand trends, while in the second half of the year, demand began to accelerate in support of our long-term revenue growth model. Looking at the specifics, automotive revenue was $7.1 billion, flat year-on-year due to slower inventory digestion at direct customers in the first half of 2025. With the inventory digestion behind us, the second half performance aligns with our 8% to 12% long-term growth outlook, reflecting the underlying strength of our auto portfolio. A few examples which underpin our optimism include our efforts in software-defined vehicles, where we have seen strong global adoption of NXP products. This includes design win rates for our S32 and family of 5-nanometer vehicle compute processors, the newly introduced S32K family of 60-nanometer processors, and continued adoption of automotive Ethernet products. These efforts are now material and global in nature, with most auto OEMs undertaking SDV platform initiatives. Additionally, early conversations with customers from the recently acquired technologies from TTTech Auto and Aviva Links are accelerating interest in NXP's SDV portfolio. The potential revenue contribution from these engagements should materialize beyond 2027. This multi-year SDV platform deepens customer commitment and supports mix improvement over time. Turning to the industrial and IoT end market, revenue was $2.3 billion, flat year-on-year. The second half growth was materially above our 8% to 12% long-term growth outlook across both core industrial and consumer IoT. Supporting our ambition to lead in intelligent systems at the edge, we continue to see strong customer engagements in the emerging market for physical AI. By combining the industry-leading i.MX family of industrial application processors with the recently acquired Kinara MPU, we can deliver complete and scalable AI platforms that accelerate deployment at the edge. A few examples of applications include medical imaging systems, camera-based workplace safety systems in the industrial market, logistics automation systems, and robotics. Customer interest has been exceptionally strong, and these engagements reinforce our vision of physical AI and the power of the NXP platform. These opportunities expand our addressable market, support sustainable growth and validate the unique competitive nature of our complete system portfolio. Looking at our mobile business, revenue in 2025 was solid at $1.6 billion, up 6% year-on-year. We saw stronger demand and content gains in the premium mobile market. Overall, NXP remains a specialty supplier in the mobile market with a unique and defensible franchise centered on secure mobile transactions. Finally, the revenue in the communications infrastructure market was $1.3 billion, down 24% year-on-year. As we have said in the past, we anticipate flat growth over the longer term as the digital networking and RF power business decelerate, which will be offset by growth in our secure card business, which includes our UCODE RFID tagging solutions. Now I will turn to our expectations for the first quarter. Our forecast for the first quarter is better than we anticipated 90 days ago. We expect all regions and all end markets to be up year-on-year. We're guiding first quarter revenue to $3.15 billion, up 11% versus the year ago period and seasonally down 6% sequentially. Compared to 90 days ago, the improvements reflect steady inventory normalization in auto Tier 1s, broadening order strength across both core industrial and consumer IoT, and program ramps in the premium mobile market consistent with seasonal patterns. Our guide does not assume broad-based restocking. At the midpoint, we expect the following trends in our business during Q1: Automotive is expected to be up in the mid-single-digit versus Q1 2025 and down in the mid-single-digit percent range versus Q4 2025. I would like to highlight that our first quarter revenue guidance only includes about $25 million or one month of revenue contribution from the MEMS sensor business. Industrial and IoT are expected to be up in the low 20% range year-on-year and down in the mid-single-digit range versus Q4 2025. Mobile is expected to be up in the mid-teen percent range year-on-year and down in the 20% range on a sequential basis. Finally, Communication Infrastructure and other is expected to be up in the mid-teen percent range versus Q1 2025 and up 10% versus Q4 2025. In summary, our first quarter outlook reflects early validation of the company-specific growth drivers we've been investing in, and we expect these trends to continue throughout 2026. We believe the NXP-specific secular drivers for our business are now outweighing the broader industry cyclical headwinds, which we have experienced over the last few years. Overall, we expect product mix and disciplined cost execution to continue to support our gross and operating margin framework. We're focused on disciplined investment and portfolio enhancements to drive profitable growth while maintaining control over the factors we can influence. Our capital allocation framework is unchanged: invest for growth, pursue targeted M&A to strengthen the portfolio and return excess cash through dividends and buybacks within our long-term model. 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, I will move to the financial highlights. Overall, our results reflect the strength of our strategic priorities in our end markets, our disciplined investment in manufacturing and product leadership, and our consistent commitment to generating long-term shareholder value. Q4 was solid with strong execution and results above the midpoint of guidance. Revenue, gross profit, and operating profit were all back into our long-term financial model. We delivered non-GAAP earnings per share of $3.35 or $0.07 better than the midpoint of guidance. Non-GAAP gross profit was $1.91 billion with a 57.4% non-GAAP gross margin, a slight miss versus guidance, driven by stronger-than-expected mobile revenue. Non-GAAP operating expenses were $756 million or 22.7% of revenue. The primary increase sequentially was driven by our two new acquisitions, where we continue to make space for our strategic investments offset by restructuring actions. Non-GAAP operating profit was $1.15 billion, and non-GAAP operating margin was 34.6%, up 80 basis points sequentially. Below the line, non-GAAP interest expense was $99 million, and taxes were $190 million. Noncontrolling interest was a $13 million expense and results from equity-accounted investees was a $1 million loss. Taken together, the below-the-line items were $4 million better than our guidance. While stock-based compensation, which is not in our non-GAAP earnings, was $100 million, $18 million lower than guidance, driven by the retirement of several executives. Turning to changes in cash, debt, and capital returns. Our balance sheet remains strong, giving us the flexibility to invest in our strategic priorities and hybrid manufacturing plans. We ended Q4 with $12.2 billion in total debt and $3.3 billion in cash, reflecting uses of cash for capital returns, acquisitions, joint venture investments, and CapEx offset by cash generation during the quarter. Net debt was $8.96 billion, and net debt to adjusted EBITDA was 1.9x, with adjusted EBITDA interest coverage ratio of 14.7x. In Q4, we returned $338 million through buybacks and $254 million in dividends. Over the last 10 years, we have returned over $23 billion to our shareholders or 95% of free cash flow and reduced our diluted share count by 27%. After Q4, we repurchased another $36 million under our 10b5-1 program. On January 5, we redeemed the $500 million March 2026 notes with our cash on hand. Now turning to working capital metrics. Days of inventory were 154 days, which included 7 days of prebuild. Receivables were 29 days; payables were 60 days. Taken together, our cash conversion cycle was 123 days. As revenue growth accelerates, we expect working capital efficiency, particularly days of inventory including prebuilds, to meaningfully improve throughout the year. From a cash usage perspective, we continue to advance our long-term manufacturing strategy, including contributions to both VSMC and ESMC. This will lead to long-term supply resiliency and strong gross margin expansion. Cash flow from operations was $891 million and net CapEx was $98 million, resulting in non-GAAP free cash flow of $793 million or 24% of revenue. We invested $195 million in long-term capacity access fees, made a $282 million equity payment to VSMC and a $44 million equity payment to ESMC. Taken together, we are about 50% through the investment cycle for both VSMC and ESMC, having invested about $1.7 billion of the $3.4 billion planned investments. We expect the majority of remaining investments will occur in 2026. Now turning to our expectations for Q1. We expect revenue of $3.15 billion, plus or minus $100 million, up 11% year-on-year and down 6% sequentially, which is better than our view 90 days ago. We expect non-GAAP gross margin of 57%, plus or minus 50 basis points. Operating expenses are expected to be $765 million, plus or minus $10 million, reflecting normal seasonal increases at the start of the year. We are committed to our long-term operating expense model of 23% of revenue, though there are seasonal variations with the first half of the year normally higher than the second half, resulting in non-GAAP operating margin of 32.7% at the midpoint. Below the line, we expect non-GAAP financial expense to be about $92 million and our non-GAAP tax rate to be 18%. Noncontrolling interest expense will be $11 million with our joint venture start-up losses of about $3 million. Stock-based compensation should be about $108 million, which is not included in our non-GAAP guidance. This implies Q1 non-GAAP earnings per share of $2.97 at the midpoint. Turning to the uses of cash in Q1. We expect capital expenditures to be approximately 3% of revenue, our capacity access fee payment of $190 million, and an equity investment into VSMC of $210 million. Before turning to your questions, I have a few housekeeping items to highlight. After thoughtful consideration, we have decided that our RF Power business no longer aligns with our long-term strategic direction. Consequently, we will stop new product development and have taken an approximately $90 million restructuring charge, which is reflected in our fourth quarter GAAP results. We will redirect and focus our R&D resources to accelerate and enhance our strategic priorities towards software-defined vehicles and physical AI. Yesterday, after the market closed, STMicroelectronics announced the closure of NXP's MEMS sensor business acquisition. This is a positive transaction for both parties. NXP received $900 million in gross proceeds with another $50 million to be received upon completion of certain closing conditions. We will recognize a one-time gain of approximately $630 million from the sale of the business, which is reflected in our first quarter's GAAP guidance. Next, we have made the decision to shift our geographic revenue reporting to headquarter-based region as opposed to a shift to basis. We believe reporting headquarter-based region better reflects how we manage the business internally and where customer engagements and design win awards occur. The 2025 change can be found in the posted IR presentation. Finally, based on the positive trends including current order rates and business signals we track, we are confident NXP will operate within its long-term financial model for the full year of 2026. In closing, we are well positioned to benefit from the powerful secular trends in our four focused end markets. We are confident about the strategic priorities and investments we are making across our entire portfolio and manufacturing footprint. With a strong balance sheet and a disciplined capital return philosophy, we are exceptionally well positioned to drive long-term value for our shareholders. Now I would like to turn it back to the operator for your questions.

I wanted to ask about the channel restock. So it looks like you guys went from 9 to 10 weeks. In your guidance, you're saying no additional restock kind of baked in. Could you talk about where you are with the channel today? What you saw in the last quarter? And is it the decision to just not go to 11 weeks overall? Or is it just we're going to wait a little bit until we take it to the 11 weeks that we talked about previously?

Thank you, Tom. Let me take that one. This is Rafael. Clearly, I mean, I would say that our channel strategy has shifted from what we before considered tight control to ensure that we stage the right product, the right product to satisfy demand. We are moving to our long-term target of 11 weeks. The reason we're doing that is that it is a reflection of an improving demand environment for us. We finished Q4 with about 10 weeks. We will move into our long-term plan and long-term target of 11 weeks into 2026. That's how we are going to manage our business in a steady state.

Got you. And then as a follow-up, just on the comms business. So you're deciding to move away from RF, but you had already kind of moved away from digital networking. You're guiding that business up 10%. Could you maybe walk through the moving pieces? Obviously, with digital networking coming down, you needed to see some real strength from maybe the SIS business. Just walk through what's contributing to that Q1 strength.

Yes, indeed, we did guide C&I about 10% sequentially in Q1. If you remember, C&I includes three distinct businesses: secure cards, digital networks, and RF Power. All of these three businesses can move differently quarter-to-quarter. And C&I, I think, right now is benefiting from the fact that, one, there is normalization in the digital networking business, but there's growth coming from secure card, and that strength will benefit C&I throughout 2026.

I guess starting with the cyclical side, can you maybe offer some more color on customer ordering trends over the past few months? And maybe what type of linearity you saw through the quarter and into 1Q?

Matt, are you asking about the kind of trends that we track internally? Is that what you're asking? We couldn't quite hear your question. We apologize.

Yes, that's exactly it. The trends that you track internally when you look at just customer ordering trends over those past few months and then linearity through the quarter into 1Q?

Yes. Linearity, we don't disclose, but I think Bill will take some of the other metrics we track.

Yes. No, no. Obviously, over the quarter and the last 90 days ago, all our internal signals that we talked about in the past have improved. So think about our backlog, our distribution backlog, and our customer escalations have increased. The short-term orders continue to increase as well, and we try to service as much as possible related to that. So across the board, we haven't seen anything like this in quite a while. We feel very confident about being in our long-term business model for 2026.

Maybe I'll just add one thing, Bill. If you kind of step back, Matt, look at kind of the trends in the second half of '25, they truly started to accelerate, and we're close to our growth rates that we presented at our Analyst Day. We believe that will continue as we progress through '26. So we're feeling pretty optimistic that we are off the trough of the business. Did you have a follow-up?

Yes, please. I guess on the auto side, I would love if you can offer some detail on the demand dynamics within your core auto business versus your accelerated growth drivers. And have you seen any impact to date from component price increases potentially pressuring unit demand there?

Yes. I think there are a few questions regarding auto. If you look at the auto sector, the reason we remain optimistic for Q4 is that our business has returned to year-on-year growth. The guidance we provided continues to show year-on-year growth, and the Q1 guidance indicates growth as well. Our view on content gain remains unchanged. You asked about pricing. Most VPAs have been completed with the pricing already incorporated into our Q1 guidance. We are anticipating low single-digit price declines, and this outlook applies not just to auto but across the business as a whole.

Just sticking on the auto side of things, it's been pretty much flat for a couple of two, three years in a row. And I know there's been a bunch of puts and takes on inventory and demand, et cetera. But I really wanted to dive into what you've seen over that period of time in your accelerated growth drivers. Is anything changing your thesis there? Are you more optimistic, less optimistic? Any sort of clarifications there, especially as we move forward, hopefully, the headwinds are done. And so I just want to judge the growth rate from those drivers going forward.

Yes. Thanks, Ross. I think what I said in the prepared remarks, right, auto and our business in general in 2025 was a story of two halves in the first half was all about inventory digestion, and it really masked the true dynamics of our business. For the full year, the auto accelerated drivers were slightly below model. Remember, the model stated that we were going to grow 8% to 12%, but they were still growing in a year where auto was flat. They were about 10%, and it was all led by our SDV efforts, our radar and our productivity. What you see right now in auto is that our auto exposure is shifting to more and more structural and less cyclical, driven by tying our roadmap towards secular trends and really transforming the architecture of autos. We feel quite optimistic. Our thesis is completely intact, and we feel stronger than ever that our roadmap is addressing the needs of the market.

Sure, the way to think about this is Bill, Ross. The way to think about the sensor's divestment: it runs around $300 million per year. And Rafael shared that we recognized $25 million in the first quarter. You guys can do the math of the impact that has on our year-over-year comparison in our auto end market. Related to the RF business, the RF business is probably going to track similar to what digital networking did. If you recall, our digital networking business, when we walked away from it, it lived quite long. So what we're actually doing is stopping investment in next-generation products. We project that this will probably stay with us for at least the next two years at the current rate. And I think, Jeff, if we had to break out 2025 as a percentage of comms infrastructure pieces, I don't have that at my fingertips, so we can't really share that, but maybe you can share how the three businesses fared in 2025 to get the size of it.

Sure. The secure cards business was just over 50%, and both the digital network and RF Power businesses were each about 25%.

Great. In the auto business, there's been a number of supply disruptions. We had Nexperia a few months ago causing issues. DDR4 now is causing some shortages. Is that impacting you guys in any way? Are you seeing either weaker demand because they're bottlenecked by those things? Or is there any desire for Tier 1s to start building inventory to react to any of those things?

Yes. I'm going to take that, Joe. The Nexperia is not a conversation; it's been a nonissue for NXP. The discussions on memory, there's always the chatter on memory, it's not just in auto, it's across our end markets. We have not seen memory impact the orders of our customers. Clearly, it's a conversation that our customers discuss with us as an area of concern for the second half of the year, but nothing has been reflected in orders.

Great. And then in your auto business, any difference by region? I guess there's been some concern about China demand. Just anything you're seeing regionally in your auto business.

No. We don't see anything particularly to comment on. I think the auto business, we believe it is going to be within model for 2026 for us. It's strong that the accelerated growth drivers are executing. So we expect our thesis to continue towards 2026.

I have a clarification question regarding your prepared remarks about your expectations for 2026. You mentioned that you anticipate operating within your target model this year. Given the ending results for 2025 and to achieve the 6% to 10% long-term compound annual growth rate, it seems that you would need to see growth higher than that in 2026 and 2027. Are you indicating that this year's growth falls within the 6% to 10% range, or are you suggesting that growth should align with that range over a three-year period encompassing 2026 and 2027?

I think, Josh, what we're saying is the long-term model is intact. I think it not to be a nit picky back that I think you know how to do math, and you can probably do the chains all on that. But we feel very strongly that after the inventory digestion in the first half of '25, things are starting to reaccelerate. So we'll leave it there. Did you have a follow-up?

Yes. Can you maybe provide some more puts and takes on gross margin for the first quarter, in particular, how are you thinking about utilization rates as we sort of enter a better cyclical period? I know there were some die bank builds that boosted utilization rates at the end of the year. Are those done? How should we think about utilization rates from here?

Yes, let me take that one. Gross margins are performing to our expectations into Q1. This is primarily driven by our annual low single-digit price concessions that Rafael shared, and that is offset only partially from our normal operational efficiencies that we regained back throughout the year. For modeling purposes, the best way to think about our gross margins is to use that rule of thumb I've provided in the past, for every $1 billion of revenue, we achieve approximately 100 basis point expansion gain to our gross margin on a full-year basis. That's the plus or minus normal mix changes that we share on a quarterly basis. We will continue to work on mixing up our portfolio through our new product introductions. We're also focused on our go-to-market for that long tail, which tends to be a richer mix. We also have the ability to improve our internal front-end utilizations. The front-end utilizations in Q4 were in the high 70s. In Q1, they will remain in the high 70s. If we get any inflationary costs that we can't offset internally, we will protect our gross margins and pass those on to our customers. We always do the normal blocking and tackling on improving our yields and test time reductions. Longer term, we're quite excited about our hybrid manufacturing strategy, especially when VSMC is fully loaded in 2028; it is on track. And beyond that, we expect our gross margins to be lifted by another 200 basis points at the company level. In general, we are very committed to improving our gross margins over the long-term. Related to inventory question, our prebuilds were seven days at the end of 2025. Our consolidation efforts in our manufacturing footprint are underway. I would expect the prebuild by the end of 2026 to be about 15 to 20 days. But including those prebuilds, we expect to take our net inventory days down throughout the year as we continue to focus on what's in our control and do the right thing operationally to give you some more color on where we plan to take internal inventory.

On the Industrial and IoT segment, Rafael, I was hoping you could help segment how much of that is industrial, how much of that is IoT? And off of easier compares, the growth rate is very high at the start of the year. But should we expect that this segment will also be in model for 2026? Just how are you looking at the potential growth scenarios for industrial and IoT this year?

Yes. Thank you, Vivek. So yes, very strong growth that we're seeing right now in industrial. The growth, you saw the industrial begin recovering in Q3 and continue into Q4. I think Q4 was 20% year-on-year growth. The growth is fairly broad-based, and there's not a single segment that is driving the growth. Just to give you an answer to the question specific, we have about 60% of our business there is core industrial, and 40% is in the consumer side. The growth is broad-based; we have notable traction on a few sockets in healthcare and smart glasses. We've seen strength in factory automation and energy storage. Very, very strong design wins with differentiated products in industrial and IoT. That strength, of course, in 2025 continues in 2026. You see the Q1 guide was also growing year-on-year by 20%. We feel very good about 2026 for industrial and IoT.

Got it. And for my follow-up, I would be remiss not to ask about the seasonality question as we look at Q2 and Q3. I ask that just because of all the kind of exits and things that you're considering this year. Based on historical patterns and normalizing for all your business divestitures, what would you consider normal seasonal trends in Q2, Q3? Are there any other things this year that we should take into account as we model your quarterly cadence this year?

Vivek, we're not going to give you guidance beyond Q1. One of the things you should take away is that things have improved since 90 days ago. Bill referred to the order patterns we have; visibility into Q1 improved as well. We have positive conversations with our customers, which gives us optimism for the second half of the year. We like the momentum; we like the strength that we closed in 2025. In Q4, the growth was broad-based. We like the momentum we enter 2026, and that momentum is also broad-based. The strength is increasingly structural rather than purely cyclical, and we feel good about the trajectory we're carrying here.

Yes. You talked about the acquisitions accelerating interest in your software-defined vehicle portfolio. I wonder if you could just expand upon that or just what are the particulars that the customers are excited about?

Yes. So the three acquisitions we discussed are really an injection of horsepower to accelerate our software-defined vehicle story. Deliverables are very important for us and for some customers, including the deliverable of software-defined architecture, where we will be delivering a system around Sonos towards the end of the year. The injection of TTTech Auto is accelerating our path into delivering a Sonos architecture and Sonos systems. They also brought middleware called MotionWise. That engagement is currently happening, and the customer interest is now quite high as they move into SDVs. On the industrial and IoT side, we talked about the strong interest levels that our customers are showing for physical AI and the capabilities of our NXP platform. The combination of the Kinara MPU and the i.MX family of products is really, really strong. The level of conversations has changed significantly, and we expect strong design wins in 2026. On the auto side, so I think this is an important question to give you perspective. The inventory correction is largely behind us. Q4, we returned year-on-year growth, and our guide in Q1 only includes one month of the sensor business. The sequential decline would have been very close to normal seasonality. Regionally, not a whole lot of differences. In Q1, you typically have normal seasonality due to the weight that China has in the market, but fundamentally our thesis hasn't changed. The shift to SDVs and advanced ADAS are multiyear platform transitions that will drive constant growth.

If I could follow-up on auto again and specifically the areas of accelerated growth drivers. Last year, you stated that those accelerated growth drivers were a bit below plan. It sounds like the message is that is now likely to improve as you go into this year. What's the reason for that? What was the reason that you believe it was below plan last year? The question is because going forward, it doesn't sound like you're assuming that SAAR improves. What's driving the change that gets those accelerated growth drivers back on track?

In 2025, the first half of the year was tough with a lot of inventory digestion. That period put a pause in some of the accelerated growth drivers because, for instance, some of the businesses like radar got caught up into inventory digestion. Electrification was also slowed down. The second half accelerated. Once the inventory digestion ended, everything we believed became true; the accelerated growth drivers started to grow. By the way, the accelerated growth drivers still grew in 2025. They just didn't grow at the target due to the challenges in the first half of the year. Now we see them back on track for 2026 within the model or even better. We see the traction in 2026 taking hold.

As I mentioned, the way to think about the sensor's divestment runs around $300 million per year, and Rafael shared that we recognized $25 million in the first quarter. You can do the math of the impact on our auto end market. The RF business likely will track similar to what digital networking did when we walked away from it. It will probably stay with us for at least the next two years of the current rate.

The secure cards business was just over 50%, and both the digital network and RF Power businesses were each about 25%.

Relative to everything you said about this year's cadence and being within model and obviously, kind of the inventory situation out there, is there any reason to believe that if you exclude the divestitures that automotive and industrial IoT would not be operating sort of at the upper end of your long-term target model for the year?

We're not going to guide 2026. Let me be very clear about that. We've given you guys as much as we're willing to do, but we're not guiding for '26.

Our capital allocation policy strategy has not changed. We are very comfortable buying back stock as long as we're below our net leverage ratio of 2x. In Q4, we were at 1.9x, suggesting there’s good opportunity to invest and buy back stock. We are committed to returning 100% of our excess free cash flow back to our owners.

Rafael, could you talk a little bit more about changing the way you report on geography, what some of the main reasons behind that are? I assume it's because things are changing so much as far as where your customers are taking design wins. But if you could elaborate on that, it would be great.

The reason for the reporting change now reflects how we manage the company internally, how we direct our resources, and direct our sales organization. A major handset maker receives products in Asia, in the U.S., but most of the decisions are being made in one place, namely, the U.S. It gives you an example of managing our sales force to go after design wins and address customers. This is how we manage internally, and I think it better reflects our business.

The majority of the investments, VSMC is ahead of schedule; think about it expected to start ramping in '27 and then be in full load in 2028. The majority of our investments will be out in 2026. ESMC, since that ramp occurs later, think about some payments going out this year, but then there'll still be a string of payments that go out from '27 to '29, which is much smaller in the aggregate.

Rafael, Bill, just a quick question on the auto side. Just wondering, as you look at software-defined vehicles, you mentioned a structural pick-up there in autos. How are you looking at that Auto segment revenue growth versus LVP? Should it grow like high single-digit above LVP? Or how should we look at it?

For next year, our algorithm works that we assumed over a multi-year period that SAAR would grow in the low single digits. The long-term math for auto is 8% to 12%. If you say flattish SAAR, you can back that out of that total rate and lower it. But we still see content per vehicle as the real accelerator of automotive growth. We use S&P for our take on SAAR, and they're looking at '26 at about 92.6 million cars, which is flattish year-on-year from '25, but we expect good acceleration of EVs and market share gains.

The inventory correction is largely behind us. Q4, we returned year-on-year growth, and we expect constant growth due to the shift to SDVs and advanced ADAS. Thank you, everyone, for joining us today and your thoughtful questions. This quarter reaffirms the continuity of our strategy and the durability of our model, focused on profitable growth, disciplined execution and predictable returns. With clear visibility into our company-specific growth drivers, we're confident in our ability to compound value through 2026 and beyond. Thank you.